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dragging on, and on, and on

Kitty Miv, Editor
14 November, 2018

According to a recent ruling by Estonia's Supreme Court, the country's tax agency can no longer chase up tax debts that are owed five years after enforcement proceedings are initiated. Well, it's a good job that tax debts aren't waived so quickly in many other jurisdictions, given the often protracted nature of tax audits and investigations.

It emerged just last week that the average length of tax inquiries into large businesses in the United Kingdom are now taking more than three years to settle, with each case taking around 39 months to resolve in 2017/18, up from 34 months in 2016/17, according to Pinsent Masons, the law firm. Of course, this isn't just hard luck for the tax authority. It's very unfortunate for the businesses facing these interminably long investigative proceedings too.

As Pinsent Masons pointed out, these matters are not only financially expensive but they also are a drain on human resources, drawing away a company's focus on its core activities.

Naturally, the larger the business, the longer an audit is likely to take. However, although tax litigation is a costly business for both sides, a more thorough audit is likely to benefit the tax agency most, in securing the most tax possible.

One study, from Syracuse University's Transactional Records Access Clearinghouse, released in 2016, pointed out that revenues collected from large company audits fell 64 percent when the number of hours spent by the US Internal Revenue Service fell by one third during 2010-2015.

For the IRS, whether to pursue every last cent was probably a matter of resources available – or lack thereof. But, given these figures, it's not difficult to see why some tax authorities, like a dog with a bone, are very reluctant to let go of tax audits.

Transfer pricing disputes are notorious for dragging on, and on, and on. In the time it can take to resolve a transfer pricing dispute, governments change hands, presidents and prime ministers come and go, tax codes change, and new technologies are invented. India, to cite one infamous example, has almost become synonymous with tax litigation.

Just look at Vodafone's never-ending battle with the Indian tax authorities relating to the group's takeover of local operator Hutchison Essar in 2007. Shortly thereafter, the tax authorities took issue with the way in which the acquisition was structured, and despite numerous court rulings in favor of the telecoms giant, the case remains unresolved.

However, it gets worse: mattress maker Tempur Sealy's long-running transfer pricing dispute with the US IRS and the Danish SKAT, finally settled last month, involved tax years as far back as 2001. So long ago, in fact, it was almost last century. The internet was a relatively novel technology back then. George W Bush was in the White House and BEPS was a mere glint in the OECD's eye.

All of which is an indication of just how complex international tax issues have become over the years. Sadly, there are few signs of a more harmonious relationship breaking out between tax authorities and large taxpayers. Indeed, anecdotal evidence from senior tax and finance staff at multinational companies suggests revenue agencies are becoming more aggressive post-BEPS, rather than more cooperative.

I suppose the moral of this story here for taxpayers is beware! Tax authorities have long memories.

Conversely, taxpayers can be more fickle, as evidenced perhaps by the results of the US mid-term elections. It was only last December when the Republican Party pushed through an estimated USD1.5 trillion in tax cuts in the form of the TCJA. Less than a year later and voters have handed control of the House of Representatives to the Democrats. It was something of a mixed result for both parties, however, with the Republicans managing to strengthen their grip on the Senate. All in all, it could make for rocky legislative times ahead.

Perhaps part of the problem for the Republicans was that a substantial chunk of these tax cuts went to corporations, which don't have the vote. And the impact of the tax reforms on people's income, either positive or negative, has been hotly debated since the TCJA began to take shape. Therefore, it's possible that the election result reflects an electorate unconvinced that the TJCA will make much of a difference to their take-home pay. The question of whether it has is one best left to the pollsters and political pundits.


About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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