Trends in tax disputes: what should businesses be aware of?

Back in October, the global Freshfields Tax team published the Tax investigations and disputes across borders guide which, among other things, provided an overview of current trends in corporate tax disputes and gave some predictions for the future.

In our latest podcast, London Tax partner Sarah Bond, Düsseldorf Tax partner Philipp Redeker, and London Tax knowledge lawyer Laura Western explore these points in more detail. 

Highlights from the podcast discussion are summarised in this blog post.

Challenges to cross-border structures and arrangements

Many jurisdictions in the guide reported that cross-border structures and arrangements are increasingly coming under scrutiny, with transfer pricing one of the tools that tax authorities are using to bring challenges in this space. 

The increasing complexity of modern businesses and the hardening political environment are two of the international trends which are contributing to transfer pricing disputes becoming more likely, and more difficult to resolve, around the world. These headwinds are not expected to change in the foreseeable future, and transfer pricing disputes are accordingly becoming an ‘evergreen’ contentious tax trend.  There are also jurisdiction-specific themes for businesses to be aware of here, with a focus on intra-group financing in Germany (see this blog) and transactions involving intellectual property in the UK.

As explored further in the podcast, other tax provisions – including anti-hybrid mismatch rules and CFC rules – are also being used by tax authorities to challenge cross-border structures and arrangements. 

Such international tax disputes are further complicated by the methods available for resolving them. Transfer pricing disputes, for example, should be capable of resolution in most cases, but it is often the case that taxpayers will need to resort to the mutual agreement procedure (MAP) to relieve consequential double taxation – and  different approaches to the interpretation and application of the OECD’s Transfer Pricing Guidelines can make it difficult to achieve that outcome, especially in the absence of mandatory binding arbitration.  For disputes between EU Member States, the EU’s Directive on tax dispute resolution mechanisms can be helpful for taxpayers in this respect – giving them stronger rights and, by providing for an expert opinion as the standard form of arbitration, increasing the chance of a principle-based decision being reached.

Domestic tax disputes

There are also jurisdiction-specific trends in domestic tax disputes for businesses to be cognizant of.

In the UK, challenges using purpose-based anti-avoidance rules (including the loan relationships ‘unallowable purposes’ anti-avoidance provision) have been increasingly common over the past few years, with HMRC seemingly taking a broader view than they have historically about what constitutes tax-motivated arrangements. Partnerships with mixed members or salaried members – something which is common among professional services firms and private equity structures – are also coming under increased scrutiny in the UK.

In Germany, private equity structures are also a focus area for tax authorities.  Questions about the taxation of income received by managers (specifically, the extent to which such income should be subject to regular wage taxation as opposed to being taxed as capital income) are common. Audits into management participation programmes are also widespread, although can often be resolved quickly if good advice is sought early.

Approach of tax authorities

One of the overarching themes in the guide is that tax authorities are, generally speaking, adopting more aggressive approaches than they historically have done – both in terms of the position taken and the penalties imposed.  One element of this general trend is the increased use (or threat of use) by tax authorities of their criminal powers in disputes with corporate taxpayers (see this blog).

As explored further in the podcast, settlement nonetheless remains the most likely outcome of tax disputes, with tax authorities and taxpayers alike usually keen to reach a negotiated resolution wherever possible.  However, businesses should be aware that behind this ‘big picture’ observation lie a number of important jurisdictional differences (see this blog).

In our experience, litigation (or the prospect of litigation) is being considered more seriously by taxpayers in cases where a favourable settlement is not forthcoming. Such litigation can take a long time to reach a conclusion, though, particularly in relation to cross-border disputes in which the MAP is invoked (see this blog).

Predictions for the future

Looking ahead, we expect the increasingly hardline approach by tax authorities across the globe to continue – not least because of the difficult macroeconomic conditions at play. 

The ever-increasing range of tax transparency measures in force will result in tax authorities having access to more information about taxpayers than ever before, and we expect this in turn to contribute to growing numbers of tax disputes (see this blog) – a trend which may be accelerated by developments in technology allowing tax authorities to spot issues more easily and conduct large-scale document reviews more efficiently.

Finally, the first-wave of rules implementing the OECD’s Pillar Two reforms into domestic tax codes are due to come into force in January 2024, and related disputes – whilst still a number of years away in practice – are seemingly inevitable.

Our Trends in tax disputes: what should businesses be aware of? podcast is available here.