EY Managing Tax Risk How Prepared in India Inc

7/27/2019 EY Managing Tax Risk How Prepared in India Inc

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Managing tax risksHow prepared is India Inc.?

Highlights from the 2014 tax risk and controversy survey

India report


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1 | Managing tax risks: How prepared is India Inc.?

Introduction 2

Tax risk and controversy 4

Reputational risk 8

BEPS and legislative risk 10

Enforcement risk 14

Operational risk 18

Content

This report is an accompaniment

to EYs global 2014 Tax risk and

controversy survey. It highlights the

thoughts and perceptions of tax and

nance executives based in India on the

subject of tax risk and compares those

perceptions to global result. We hopethis report will be your guide for your

journey up the mountain and safely

down the other side. To receive other

reports in the series, please visit www.

ey.com/taxriskseries or connect with

your local EY Tax contact.


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2Managing tax risks: How prepared is India Inc.? |

The last decade witnessed an overhaul

of the global economy and governments

across the world adopting various measures

to deal with scal pressures. Worldwide,

levels of tax enforcement continue to

increase, and tax risk and controversies

have taken centre stage for discussions in

board rooms. EY rst reported on evolution

of tax administration without borders1

in 2009, as governments began taking a

more global and collaborative approach to

enforcement amid a scal environment that

swung from stimulus to austerity before

stabilizing somewhere in between. EYelaborated on this trend and its outcome

in the previous edition of its Tax risk and

controversy survey report, according to

which a convergence of trends has created

the ripest environment for tax controversy

in years.2

It is for the rst time that the India issue

of EY Tax risk and controversy survey is

being published, capturing the thoughts,

expectations and experiences of 112

respondents. This report highlights the

most signicant ndings of the survey andsets the stage for a deeper exploration

of key topics. It brings to light the fact

that risks are growing due to increased

globalization and that managing tax risk

and controversy is more important today

than ever before for businesses around the

world. India is no exception.

According to the ndings of the survey,

Indian companies have witnessed more

aggressive tax audits in the last two years.

Many respondents reported that Indian tax

authorities are not very amenable to anopen and collaborative relationship with

them. They have experienced increased

risk or uncertainty due to tax legislations

or regulations during this period, which

has given rise to increased enforcement

and operational risks. Moreover, intense

media attention on tax matters has added

to reputational risks, a fall-out of which is

a denite change in the tax administrator-

taxpayer relationship. In fact, India

has been identied as one of the three

emerging markets (in addition to China and

IntroductionBrazil) in which companies are exposed to

high tax risks for companies.

An outcome of these developments is

that Indian companies are becoming more

tax risk averse. And yet, when it comes

to taking action to deal with these risks,

almost half of the organizations surveyed

indicated that they had not changed

their approach to addressing the tax

aspects of their businesses during the

last two years. For instance, more than

half the respondents revealed that they

had neither evaluated nor made changes

in their existing structures with regard

to OECD project on Base Erosion and

Prot Shifting (BEPS) or taken proactive

action on their BEPS agendas. Similarly,

despite reputational risks, less than 40%

of the Indian companies indicated that

they had changed the way in which they

communicated information relating to tax

to external stakeholders, e.g., investors.

It is apparent that given the rising

operational risks surrounding tax, Indian

companies now have to spend less timeon nancial reporting and tax planning

and more time on managing routine

tax compliance-related activities and in

managing their tax disputes/ controversies.

However despite this, Indian organizations

do not make adequate use of technology

and rely on local personnel to manage

their tax audits and incoming data

requests. They also revealed that they

lack the resources to meet the demand for

increased reporting and transparency of

information, including the OECDs proposedcountry-by-country reporting and transfer

pricing documentation requirements.

The following pages elaborate further on

the ndings of our survey on tax risks and

controversies, and compare the views

of Indian companies to the perceptions

of their counterparts around the world.

The survey makes it evident that on

most issues, Indian corporate sectors

thinking is aligned with that of their global

counterparts.

1 http://www.ey.com/GL/en/Services/Tax/ International-Tax/Tax-administration-without-

borders- --Introduction

2 2011-12 Tax risk and controversy survey, EY, 2011.


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Tax risk and controversyGaining signicance in

boardrooms agendas

Overall, an overwhelming 90% of the

companies surveyed agreed or strongly

agreed that tax risk and controversy

would become more important for them

in the next two years. Their global peers

are exposed to similar pressure, with 81%of all companies and 78% of the largest3

companies agreeing that tax risk and

related controversies are likely to become

more important for them in the following

two years.

Globalization bringing increasing

challenges with it

Most companies felt that over the past

two years, globalization has brought more

tax-related challenges for them 62%

organizations across regions felt that

globalization has brought with it increased

risks and uncertainty about tax legislation

and regulations; 35% were of the opinion

that it has led to greater Permanent

Establishment (PE) risk.

Perception shared by large

proportion of respondents in India

According to 69% of our Indianrespondents, tax risk and controversies

have increased with globalization. Not

only this, 31% global respondents and 44%

Indian participants were of the view that

globalization has increased the complexity

in effective tax management and PE risks

over the past two years. Tax reporting,

operational or data challenges and the

increased complexity of supply chains are

other risks they attributed to globalization.

Furthermore, the PE risk of 27% of Asia-

Pacic businesses and of 41% of BRIC

respondents has also intensied in the last

two years.

According to Indian companies, transfer

pricing and indirect taxes, including VAT,

GST and customs, are the top two leading

reasons of tax risks. At the third position,

it has been found that withholding taxes

are important sources of tax risks for Indianrespondents. This perception is in line with

that of global companies, according to

which their leading source of tax risks and

controversies remains transfer pricing, with

indirect taxes and permanent establishment

risk being the second and the third highest

sources, respectively.

These activities in particular, transfer

pricing are under unprecedented

scrutiny from an ever-growing list

of groups including the news media,

national policymakers, activist groups andsupranational organizations. Assertions of

tax avoidance by any one of those groups

often trigger reactions by the others. This

cycle has kept the issue of tax in

the headlines and at the forefront of

policy conversations.

Constant media attention giving

rise to reputational risk

Intense media interest has driven new

and signicant concerns about tax-related

reputation risk. Stories and investigations

alleging tax avoidance are prevalent in

newspapers and TV programs around the

world. It is therefore not surprising that in

India, 61% of companies believe that they

are signicantly (or somewhat signicantly)

concerned about media coverage of taxes.

This concern is higher at the global level,

where 85% of the largest companies are

apprehensive about media coverage

of taxes.

of the surveyed Indian

companies believe tax risk and

controversy would become

important in the next two years

90%

3 (more than US$5 billion in revenues)


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as they strive to balance tax-related

competition by raising adequate revenue

to fund ongoing spending commitments.

As revealed by 69% of Indian companies,

they have experienced increased risks or

uncertainties around tax legislation or

regulations in the last two years.

Tax audits more aggressive

Dealing with policy and regulatory change

is only a part of the landscape. Accordingto 63% of Indian companies, tax audits

have become more aggressive in the last

two years. Other regions such as the Asia

Pacic (52%) and BRIC (54%) hold a

similar view.

At the same time, many respondents

report that national tax authorities are less

amenable to an open and collaborative

relationship than earlier. Only 8% of our

Indian respondents felt tax administrations

are looking to develop more open and

collaborative relationships with companies.Almost half (46%) of global companies

reported that APAs have become more

difcult to negotiate and secure in some

markets.

India has had a more positive experience in

the context of APAs. In a welcome contrast,

only 17% of Indian companies found it

difcult to negotiate APAs, an initiative

launched by the Indian Government in

July 2012.

Tax authorities are collaborating on andsharing information with one another and

are increasing their focus on cross-border

transactions. India, in particular, has

witnessed an increase in the cross-border

focus of its tax authorities, with 76% of the

respondents conrming that this has been

their experience.

of Indian companies

experienced greater risk in tax

legislation in the last two years

69%

However, more tangibly, this intense

media focus has galvanized policymakers

into action. Globally, lawmakers react to

news stories by convening parliamentary

hearings, proposing legislation and

supporting the initiatives of the

Organisation for Economic Co-operation

and Development (OECD) to recommend 15

specic areas for coordinated action taken

to protect the tax bases of countries.

India has not remained insulated from

the effect of these global developments.According to our survey respondents,

they are feeling the impact since around

80% of Indian companies feel that tax

administrators are now challenging existing

structures due to changes in the law or in

their enforcement approach.

Some countries have already taken steps to

implement concepts related to Base Erosion

and Prot Shifting (BEPS) in the form of

new legislation, establishing working

groups to review existing frameworks and

formulate new ones, and in some cases,suspending Advance Pricing Agreements

(APAs) or applying future BEPS concepts

to previously executed transactions. Even

if directionally consistent with the BEPS

project, these early actions may threaten

the coherence of the overall project, and

create greater uncertainty, risk and an

erosion of trust between tax authorities

and taxpayers.

Indian authorities are participating fully

in the BEPS debate and see it as an

opportunity to revisit existing tax principlesand explore whether these can be modied

to address emerging complexities such

as transfer pricing, digital economies and

aggressive tax planning.

At the same time, governments continue to

implement day-to-day legislative changes.

Additional layers of complexity are added

of the Indian companies feel

tax administrators are now

challenging existing structures

80%


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6

These mounting challenges are putting

more and more pressure on enterprises.

For example, more than half (51%) of the

Indian companies felt that the size of their

operations has increased in direct response

to the changing tax environment; 60% felt

that having insufcient resources to cover

tax-related activities is a potential cause of

tax risk.

India Inc. treading cautiously

It was reported by 49% of Indian companies

that they have become more risk averse

and changed their approach to the tax

aspects of their businesses in the last two

years. According to 63% of them, they will

become more cautious in their approach

to tax planning in the following two years.

This is a much higher proportion, compared

to global companies, among which only

38% are likely to follow a more cautious

approach in the next two years.

Despite this state of ux, the day-to-daybusiness of tax work continues. Indeed, 45%

of the Indian companies surveyed indicated

they had not changed their approach

to addressing the tax aspects of their

businesses in the last two years. Among

America-based companies, the proportion

was sharply higher, with 70% of them

revealing that they had not changed their

approach.

Four major sources of tax risk identied

by our survey

1. Reputational risk

An intense focus on taxation of

business and resultant reputational risk

has driven the following four areas of

concern and is also a key concern in

itself.

2. BEPS and legislation-related risk

Criticism of the share of tax paid by

companies around the world, including

complaints that such percentages

are often unfair, has largely driven

the second major area of risk facing

companies today the rapid increase

in new and potential legislation and

regulation. Much attention has been

focused on the OECD BEPS Action

Plan, but the unilateral actions taken

by individual governments may be aneven greater source of risk, with the

potential to create global tax chaos

that OECD and businesses both want

to avoid.

3. Enforcement-related risk

Whatever the outcome, tax

administrators have taken their cue

from the changing conditions and

political focus. This has given rise to

what our survey data indicates is the

third area of tax risk facing businesses

more aggressive and focused

tax enforcement, and a sense that

mutually constructive relationships

between taxpayers and authorities may

be becoming strained.

4. Operational risk

Our survey data also indicates that

as pressures continue to build, many

companies may lack the appropriate

resources to effectively manage the

rst three issues mentioned above.

This growing operational risk spanspeople, processes and technology

and is the fourth and nal area to be

examined in this report.

of Indian companies have

become more cautious in their

tax planning63%

Managing tax risks: How prepared is India Inc.? |


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Reputational risk

With the global rise in social media, it has

become easier for groups scrutinizing tax

matters to reach people, social groups,

media houses in relation to growing

disparities in incomes around the world.

Newspapers, online publications andtelevision meticulously cover allegations of

impropriety. This has drawn the attention

of policy-makers and media houses to

the views of such groups. Their growing

support at the grassroot level has in turn

made news media and policymakers pay

more attention to their views. Where they

once primarily published research papers

and relied on press releases to level their

criticism, some activists have literally found

themselves sitting alongside corporate

CEOs and technical experts at the witness

table to give ofcial testimony to legislative

bodies.

Tax-related reputational risk creates

signicant tangible challenges for

companies, even when allegations may be

of dubious accuracy. A change in the tax

administrator-taxpayer relationship may be

one consequence. However, more than that,

consumer products and internet companies,

as well as commercial banks, have faced

organized boycotts of their products or

services; government contractors have had

difcult conversations with their clients.

And sometimes, key shareholders have had

to be reassured.

The survey results indicate how rapidly

reputational risk has become a key

concern for companies. In India, 61% of

organizations are somewhat or signicantly

concerned about media coverage of taxes.

The concern is higher among US and EMEIA

companies (84% and 72%, respectively)

and high even in the Asia Pacic and BRIC

countries.

Despite this, less than 40% of Indian

companies have changed the way in which

they communicate information relating to

tax to external stakeholders such as the

investment community. Compared to this,

more than half of global companies areof the opinion that they have developed

a more structured approach to managing

their public tax proles.

Regarding their interaction with media,

most companies feel that this is a no-win

proposition. Globally, 57% of companies do

not like to interact with media. Even in India,

51% agree or strongly agree that engaging

with the press is a no-win proposition.

However, many of them support voluntary

publishing of information on taxes paid and

economic and social contributions.

It is clear that companies need to act

deliberately and assertively to manage

this complex and sensitive issue, rather

than risk being in a situation where they

must react to reputational challenges by

taking a defensive posture. This means thatcompanies should ensure that their tax,

C-suite executives, board members and

audit committees agree about whether they

should voluntarily disclose additional tax-

and social contribution-related information

about them on an ongoing basis. These

stakeholders must also recognize the fact

that not all markets are the same; a policy

that is appropriate for one jurisdiction may

not be suitable for another.

23%14% 16%

22%

35%

19%

51%

33%45%

62% 33%53%

21%

50%31%

8%

19%

25%

5% 3% 8% 8%13%

2%

India Americas Asia-Pac EMEIA

A significant concern Somewhat of a concern Not a concern Dont know

Concern regarding media coverage of taxes companies are paying

2013

GLOBAL

2011

GLOBAL



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BEPS and legislative risk

In February 2013, the OECD released its

BEPS report (as requested/suggested by G8

and G20 countries). It reected the views

of some but not all the countries that

current international tax standards may

not have kept pace with changes in globalbusiness practices, particularly as far

as intangible assets and e-commerce

are concerned.

This report was shortly followed by the

publication of the BEPS Action Plan, which

reiterated this aspect. It set out that, in

the OECDs view, gaps in interaction of the

domestic tax rules of various countries,

application of bilateral tax treaties to

multijurisdictional arrangements and the

rise of the digital economy have led to

weaknesses in the international tax system.

The Action Plan includes 15 action points,

each of which is linked to specic output

that is to be issued in 2014 and 2015.

Many of these actions are already driving

change, and the global business community

is taking the BEPS project very seriously.

The OECDs focus on coordinated action

is important because unilateral action

may create double taxation and increase

controversies, both of which would be

adverse for the global economy.

India and OECD BEPS

The active involvement of non-OECD

members (including Brazil, China and India)

in the project is also of high importance.

Here too the OECD and industry have a

common interest in encouraging as many

countries as possible to participate in the

global dialogue on future international

tax standards.

OECD BEPS 15-point action plan:

1. Address the tax challenges of the digital economy

2. Neutralize the effect of hybrid mismatcharrangements

3. Strengthen CFC rules

4. Limit base erosion through interest deductions

and other nancial payments

5. Counter harmful tax practices more effectively,

taking into account transparency and substance

6. Prevent treaty abuse

7. Prevent articial avoidance of

PE status

8, 9, 10.

Ensure that transfer pricing outcomes are in line

with

value creation

Action 8: Intangibles

Action 9: Risks and capital

Action 10: Other high-risk transactions

11. Establish methodologies to collect and analyze

data on BEPS and action taken to address these

12. Require taxpayers to disclose their aggressive tax-

planning arrangements

13. Re-examine transfer pricing documentation

14. Make dispute resolution mechanisms more

effective

15. Develop a multilateral instrument to implement an

innovative approach to international tax matters


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Tax risks in emerging markets

China, India and Brazil (in this order) have

been identied as the three emerging

markets that pose the highest tax risks for

companies. Around 68% of the companies

in India agree or strongly agree that

entering or operating in an emerging

market signicantly increases levels of

tax and controversy risk a perception

shared by 58% of our global respondents,

45% of Asia-Pacic companies and 60% of

companies in EMIEA.

Dealing with such rapid growth, many

emerging markets countries experience

very signicant policy-related, legislative

and regulatory changes as they try to bring

their tax regimes up to more sophisticated

levels. And even then, their approach to

tax transactions may differ greatly in many

areas. Of course, it takes many years for a

tax regime that is unaccustomed to policing

cross-border commerce to adapt and

mature. Couple this with the fact that many

companies have very few or no dedicatedresources with a strong knowledge of tax

or cultural experience, and one is left with a

highly volatile mix that can are up

without warning.

The OECD can play an invaluable role in

pressing for common approaches and

consistent standards to provide greater

certainty and reduce controversy. In fact,

according to the OECD, governments risk

global tax chaos as they chase dwindling

revenues from multinational companies,

unless they update their knowledge ofinternational tax regimes.

The pace of the BEPS project is equally if

not more important than its composition

of stakeholders. This pace is largely driven

by the G8 and G20 agenda and national-

level politics. Many businesses feel that the

BEPS agenda is overly ambitious and that

its timetable (with many key elements to

of Indian companies believe all

BEPS recommendations will be

adopted in the next ve years

2%

be completed by September 2014 and all

actions to be completed by 2015) is too fast

to allow careful consideration and input,

and that this may drive risk.

Protection of its own tax base is Indias

concern. It is therefore participating

actively in focus group discussions on the

15-point Action Plan. The changing needs

of its Government and businesses have

to be factored in its tax policy. The BEPS

project envisages proposing changes to

the OECD Model Convention, OECD TPguidelines, as well as recommendations to

countries to amend their domestic tax

law provisions.

With so much change anticipated in a short

time, it is more than likely that there will

be uncertainty, leading to controversy and

dispute. The Action Plan also raises difcult

issues, which cannot be solved without the

help of all stakeholders. If some of the views

held by stakeholders are not taken account

of, there is a risk of individual countries

proposing unilateral actions, therebyfurther adding to the uncertainty.

There may be increased attempts to review

the global value chain of MNEs to assess

value creation in India. This will require

taxpayers to have stronger and improved

documentation to meet the demands of

the tax authorities, place an increased

burden on taxpayers and add to

administrative costs.

Uncertainty and concern about the

outcomes of the BEPS project permeated

the responses of the respondents of

our survey.

Despite this, when it comes to taking action

on the BEPS agenda, our survey revealed

that more than 51% of Indian businesses

have neither evaluated nor made changes

to their existing structures (with regard

to the OECD project) on base erosion and

prot shifting.

of Indian companies, agree or

strongly agree that entering

or operating in an emerging

market signicantly increases

their levels of tax and

controversy risks

68%


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of Indian companies agree

or strongly agree that their

companies will be exposed to

double taxation over the next

three years

43%

of Indian companies expect

BEPS will be adopted with a few

recommendations of OECD at

the national level

32%0% 10%

20% 40%

31%

35%

39%

49% 24%

20% 2%

2%

0%10%

39% 23%

24%

29%

20% 5% 14%

22%

5% 0% 8%

4%

4% 4%

1%

1%

1%

1%

16%

20% 30% 40% 50% 60% 70% 80% 90% 100%

2013 GLOBAL

2011 GLOBAL

India

Americas

Asia-Pac

EMEIA

Strongly agree Agree Neutral Disagree Strongly disagree Dont know/Not applicable

Extent to which respondenents believe "Entering into or operating in emerging

markets significantly increases our levels of tax risk and controversy risk."

14%

29%

29%

18%

20%

Fear of double taxation

Uncoordinated and unilateral decisions may lead to double taxation of multinationals.

According to 43% of Indian companies, they agree or strongly agree that their companies

will be exposed to double taxation over the next three years. This is a concern shared by

almost 60% of the largest global companies.

Stron l a ree A ree Neutral Disa ree Stron l disa ree Dont know

Fear of double taxation

11%

14%

12%

5%

13%

37%

29%

40%

33%

36%

33%

31%

35%

39%

29%

10%

14%

6%

13%

11%

2%

2%

3%

1%

8%

12%

5%

8%

9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2013 Global

India

Americas

Asia-Pac

EMEIA


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13

Increasing disclosure-related requirements

(whether in the BEPS Action Plan

or unilateral ones) are an additional

challenge foreseen by businesses; 93

percent of Indian companies believe that

in the next two years, disclosure and

transparency requirements will increase

worldwide. Almost all the respondents in

all the jurisdictions covered by the survey

believe that disclosure and transparency

requirements will increase around the world

in coming years.

Some disclosure-related requirements

within the BEPS Action Plan have already

been issued in discussion form, and the

business community is concerned about

the burden that will be placed on them to

comply with these, particularly with the

proposed country-by-country reporting

(CbCR) template, as are some governments

that naturally want to protect business from

unnecessary impediments to its growth.

The BEPS Action Plan is having a

galvanizing effect on the perceptions andbehavior of tax administrators. For instance,

almost 40% of Indian companies have

seen the increased focus of tax authorities

on issues related to the tax treatment of

intangibles in the past two years. One-third

of the companies reported the increased

focus of the tax authorities on the economic

and operational substance of foreign

entities in their groups.

Before any nal BEPS recommendations

are issued let alone passed into national-

level legislation tax directors around the

world report that the pace, complexity and

volume of new legislation already strains

their limited resources. According to78%

of Indian companies, the volume and/or

complexity of legislations and regulationsthat need to be complied with are leading to

new risks.

When it comes to taking action on the

BEPS agenda, only 10% Indian companies

reported that they have evaluated what

BEPS means for them and have made

changes to their existing tax structures;

51% have not evaluated their current

structures in any way in response to

BEPS. Only 4% have evaluated and made

changes in their structures.

OECD project on base erosion and profit shifting response of Indian

Companies on activities undertaken

We have evaluated how

transactions are initially recorded

in our ERP system(s)

Dont know

We have evaluated our

existing structures but not

made any changeWe have evaluated and made

changes to existing structures

We have neither evaluated

nor made changes to

existing structures

51%

10%

12%

22%

4%

OECDs BEPS projectis probably one of its

most ambitious projects

with potentially most farreaching impact. Engaging

the industry, regulatorsand policy makers at the

same time, its various

action items are beingpushed at an unforeseen

pace, evidencing its political

mandate and support.Action items focussed on

increased disclosure and

transparency are likely togather consensus sooner

than those that impinge

upon issues of share of

tax revenues betweencountries. This will seta new paradigm on the

level of compliance and

disclosure for MNCs. Taxrisk assessments and

audits will see use of

analytics and big data.To allow for a conducive

global tax environment,

it would be important tosimultaneously address

potential risks of double

taxation and unilateralenforcement by stressed

economies impacting global

businesses.

Jayesh Sanghvi

Tax Partner & National Leader -

International Tax Services, EY

| Managing tax risks: How prepared is India Inc.?


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Enforcement risk

Enforcement of tax law and regulations

has become more vigorous and aggressive.

Government decits remain high. Tax

authorities globally are collaborating and

sharing more information with one another

and are increasing their focus on cross-border transactions.

India has also seen an increased focus on

cross-border transactions and increased

aggressiveness in the attitude of the

authorities. The latter is driven by the need

to meet high revenue targets to bridge the

decit. Moreover, apart from revenue-

related requirements, the global perception

that companies are not paying their fair

share of taxes seems to have affected the

approach adopted by Indian authorities.

Increase in tax audit making the

business environment challenging

According to 63% of Indian companies,

tax audits have become more aggressive

in the last two years. This was a view

shared by companies in the Asia Pacic

(52%) and BRIC (54%). In addition, 58% of

global companies reported that they have

witnessed a growing trend toward more

stringent tax audits or assessments relating

to VAT or other indirect taxes. This gure

increases to 72% in the case of Asia-Pacic-based companies and 74% for India and

other BRIC-based businesses.

Some changes, such as the General

Anti-Avoidance Rule (GAAR), are directly

incorporated in law and can be easily

identied and managed, but other changes,

which may be more subjective, are viewed

by companies as being difcult to identify

and manage while managing their taxes.

Worldwide, fewer multinationals felt that

tax authorities are seeking to develop

more open and collaborative relations with

taxpayers a 52% drop from 56% in 2011

to 27% in 2013.

Only 8% of Indian respondents felt that

tax administrations are building open and

collaborative relations with companies

vis--vis a signicant 32% of companies in

Americas.

of the Indian companies report

that they feel tax audits have

become more aggressive in the

last two years

of the Indian respondents feel

that tax administrations are

building open and collaborative

relations with the companies

63%

8%2013 GLOBAL, 26%

2011 Global, 56%

India, 8%

America, 32%

Asia Pac, 26%EMEIA, 27%

0%

10%

20%

30%

40%

50%

60%

One or more tax administrations seeking to develop a more open and

collaborative relationship with your company

One or more tax administrations seeking to develop a more open and collaborative relationship

with your company


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The general view of our respondents was

that tax disputes tie up resources, are

costly for all involved, can irreparably

damage relationships and are in no ones

interest. In India, the total amount locked

up in Income Tax disputes at various

levels (as on December 2011) was around

INR4.3 lakh crores (INR4300 billion)4. As

far as transfer pricing is concerned, TP

adjustments during 201213 was around

INR70,000 crores (INR700 billion). The

future coherence of the BEPS Action Plan

is therefore as important to business as it

is to the OECD and to governments. There

is a direct correlation between the level of

collective action achieved and that of tax

disputes worldwide. Tax authorities typically

do not publish ofcial statistics in relation

to tax disputes, but the health of the Mutual

Agreement Procedure (MAP) between

countries can be a useful indicator of the

well-being of their tax systems.

Around 55% of Indian companies reported

that they are actively pursuing a more open

and collaborative relationship with one or

more tax administrations. However, the

majority of these have seen mixed results.

In India, instances of taxpayers opting

for MAP to resolve their tax and transfer

pricing disputes have generally not been

high. Some of the tax treaties signed

The response to the

Indian APA program has

been enthusiastic. More

than 375 application

were led by 31 March

2014. The Government

has already signed 5

unilateral APAs within 12

months of applications.

The APA team has

conducted close to 100

site visits across various

applicants and many

cases are in advanced

stages of discussion. The

APA process has emerged

as a clear alternativeto the traditional audit

exam / assessment

proceedings, which are

adversarial in nature and

more prone to xed ideas

or mindset.

Vijay Iyer

National Transfer Pricing Leader,

EY

by India provide for suspension of tax

demand during pending MAP proceedings.

This has been one of the factors that has

been prompting companies with large tax

demands to pursue MAP simultaneously

with their domestic appeals. Resolution

of cases under MAP has been protracted

with an inventory of pending cases, which

reduces its efcacy as an alternative

dispute-resolution mechanism.

APA prospects brighter in India

compared to other countries

Since the introduction of Advance Pricing

Agreement (APA) mechanism in India

in July 2012, the experience of Indian

companies with regard to APA negotiations

has been fairly positive. The majority of our

respondents found that conclusion of APAs

was not difcult and only 17% of our Indian

respondents reported that they found

tax authorities becoming difcult with

respect to conclusion of APAs in the pasttwo years. Almost all the Indian companies

participating in our survey indicated that

they would increase their use of unilateral

or bilateral APAs in the next two years; 67%

of them showed a preference for unilateral

APAs.

4 Lok Sabha Unstarred Question No. 3734, answered on 27 April 2012

Use of unilateral or bilateral Advance Pricing Agreements in the next two years

42%

33%

47%

18%

46%

22%

67%

6%

9%

29%

11%

0%

18%

27%

5%

16%

18%

18%

15%

9%

12%

27%

5%

2013 Global

India

Americas

Asia-Pac

EMEIA

Yes - both unilateral and bilateral APAs Yes - unilateral APAs only

Yes - bilateral APAs only No - both unilateral and bilateral APAs Dont know


17/24


The global experience seems different, with

55% of US respondents and 36% of Asia-

Pacic businesses being of the opinion that

securing an APA has become a lot more

difcult over the last two years.

In India, introduction of General Anti-

Avoidance Rules (GAAR) has resulted in

several concerns about its wide reach and

proper implementation. In India, GAAR will

be applicable from April 2016. However,

India Inc. has been urging the Government

to defer GAAR for some time till there isincreased clarity and understanding on its

implementation. In the global scenario,

26% of US companies felt that there is an

increase in application of GAAR by one or

more tax administrations; 12% of Asia-

Pacic businesses and 13% of companies in

EMEIA indicated that application of GAAR

by tax administrations is increasing.

Cooperative compliance yet to

gain acceptance

The issue of cooperative compliance

agreements is not widely accepted by

Indian companies. More than half of the

companies (58%) were not sure if they

would want to enter cooperative compliance

agreements such as the US Compliance

Assurance Process (CAP) or Dutch

Horizontal Monitoring programs. Even at

global levels, only 18% of the companies

were completely open to the possibilityof entering cooperative compliance

agreements with tax administrations. One-

third of the global companies were open to

the possibility, but had some reservations.

Perception regarding the possibilty of entering into a cooperative compliance

agreement with one or more tax administrations?

18%

9%

29%

16%

17%

33%

18%

38%

18%

37%

12%

16%

18%

10%

10%

36%

58%

15%

55%

35%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2013 Global

India

Americas

Asia-Pac

EMEIA

We are completely open to the possibility

We are open to the possibility but have some reservations

We are not open to the possibilityDont know


18/24



19/24


Operational risk

Many companies could be using outdated

tools to manage their taxes. They may

get the job done, but with less comfort

and perhaps more risk than is optimal.

When it comes to tax, the best tool kit

includes knowledgeable people, innovativetechnologies and effective processes, and

where appropriate, the use of revenue

authority programs designed to increase

certainty and reduce incidences of disputes.

Companies are spending more time

managing tax risks and controversies than

before. According to our respondents, they

are spending slightly less time on nancial

reporting and tax planning and more time

on managing routine compliance-related

issues and disputes/controversies. For

instance, Indian companies spend 28.9%of their tax function time on routine

compliance, 28.4% on dealing with tax

controversies (including tax audits), but

only 17.8% on nancial reporting and

planning.

The connection between tax and business

continues to grow strongly. Around 91%

of our respondents from Indian companies

believe that their tax functions have

signicant or adequate involvement in the

general business strategy and planningprocess; 60% feel that their companies

CEOs and/or boards of directors oversight

relating to tax risk and management of

controversy has increased over the past two

years, while only 2% reported that it has

decreased.

According to 77% of the companies, they

regularly provide briengs or advice to their

CEOs and/or CFOs on how tax risks and tax

controversies are being managed.

Effective management of complex tax

issues relies on effective policies. Not

surprisingly, 51% of the companies reported

that they have been either creating or

refreshing their tax risk or tax controversy

policy in the last two years as a direct result

of the focus on taxes paid by multinational

companies.

Percentage time spent on overall tax function

-

5.0

10.0

15.0

20.0

25.030.0

35.0

40.0

32

29 29

33

18

28

21

10

1720

26

11

34

221819

1516

20

3024

2022

201815

212120

15

2013

Global

2011

Global

India Americas Asia-Pac EMEIA

Routine tax compliance

Tax financial reporting, including tax accounting and tax provision work

Tax controversy, including managing tax audits and any associated remediation work

Tax planningAny other issues which have not already been listed


20/24


According to 51% of our respondents, they

have increased the overall size of their

tax functions since 2011. They indicated

that this growth is their direct response to

the changing tax environment. However,

a large proportion (43%) revealed that

an inadequate number of resources who

are competent in tax functions may be

contributing to increased tax risks or

controversies. Effective deployment of such

resources may be even more important

than their overall number. Indirect taxes

and withholding taxes are both areas

of signicant change and growth for

government policymakers. Both have a

direct impact on the corporate bottom line,

but our survey data indicates that there

may be lack of clarity about who manages

which functions in enterprises.

According to 50% of our respondents from

nance or accounting departments, their

departments managed indirect taxes, but

48% of people in a tax role reported that

the tax function was in charge. This is

a signicant divergence from what was

reported to be the second highest tax

risk for businesses. This may also be said

of withholding taxes. At best, it leads to

inefcient use of resources; at worst, it

drives signicant risk of trapped tax, new

disputes and nancial penalties.

According to 73% of the Indian companies,

they each have a single, readily identiable

individual who has overall responsibility for

managing tax risk within their enterprises.

Getting the mix of people, processes and

technology right is important because

according to the companies, they are

juggling a signicant volume of disputes.

For example, more than 40% of the

companies reported up to 25 disputes and

4% more than 100. Only 16% of the Indian

companies indicated that they were not

beset by disputes. It is not surprising then

that 73% of the companies we surveyed

have partial or complete visibility of open

tax audits and disputes around the world.

The good news is that companies appear to

know that the right tools can make all the

difference. According to almost half of the

Indian companies surveyed by us, lack of

processes or technology may contribute to

increased tax or controversy risk.

However, identifying a problem is

easier than solving it. Large numbers

of companies reported that they use

rudimentary technology or no technology

at all to manage their tax audits and

ever-increasing requests for informationand data from tax authorities; 44% of

Indian companies use no technology

or rely on local personnel to manage

tax audits and incoming data requests.

A similar proportion use internally

developed software templates (e.g., Excel

spreadsheets), while 6% use internally

developed software applications (e.g.,

Microsoft Access or other custom

programming; 10% use software provided

by external vendors, outsourcing,

Active Disputes of Indian Companies at all levels

1-10 disputes

No active

disputes

Dont know

101+

disputes

11-2526-50

dis utes

51-100

disputes10%

34%

16%

26%

4%

8%

2%

say that insufcient tax function

resources may be contributing

to increased tax risk or

controversy

of the companies have partial or

complete visibility over open

tax audits and disputes around

the world

43%

73%


21/24


accountancy or providers of professional

services.

Out of the companies surveyed in India,

60% reported that their tax functions make

use of internally developed software

templates (e.g., Excel spreadsheets) and/

or technology/software tools to enable

and support tax modeling software, while

36% of the companies use no technology

or rely on local personnel to manage their

documents and workow. Only around 2%

use software provided by external vendorsor providers of outsourcing, accountancy or

professional services.

These gures are not very different at the

global level. The EY global survey reveals

similar statistics in countries where better

use of technology could improve responses

to tax-related information management.

Of course, even the best technology has

limited utility if it is not combined with

the correct resources, processes and

communications all of which companies

tell us they are struggling to deploy in the

face of so much change.

Companies also report that they lack the

resources to meet anticipated demands

for increased reporting and transparency

in dissemination of information, including

the OECDs proposed country-by-

country reporting and transfer pricing

documentation requirements.

Only 42% of our Indian respondents

believed that they have adequate reporting

systems in place to gather and provide therequired information. Overall, it seems

that as external pressures mount, the air is

becoming a little thinner in the tax function.

The rapidly developing tax risk landscape is

clearly driving more and more companies

to test their internal controls. According to

85% of the Indian companies we surveyed,

they have testing and review processes in

place as part of their control environments

within their tax functions. This is true of

79% of US companies, 66% of Asia-Pacic

companies and 64% businesses in EMEIA.

Many companies are also taking the

opportunity to document their controls in

ways that exceed regulatory requirements.


such a documentation for internal controls

is maintained only in jurisdictions where

it is mandatory. 22% reported that they

maintain documentation of internal controls

in all jurisdictions, whether or not it is

required.


reduction in compliance risks has been

a signicant driver in changing their

approach to documenting transactions for

tax purposes far ahead of improving their

internal data-sharing capabilities (46%). Thisproportion is higher than global gures. In

some countries, 89% of companies consider

reducing their compliance risk the most

signicant driver of their approach to

documentation.

As previously noted, 63% of companies

in India and 78% of the largest global

enterprises surveyed agreed or strongly

agreed that tax risk and tax controversies

will become more important for their

companies in the next two years. However,

companies are also actively engaged inother activities apart from managing tax

risks and controversies. Our survey data

reveals signicant regional differences of

opinion as well as on companies focus on

these activities. For instance, 78% of the

largest companies we surveyed globally

agreed or strongly agreed that tax risk

and tax controversies will become more

important for their companies in the next

two years. However, global companies

indicated that managing strategic

business transactions as well as tax

audits and controversies were their two

leading priorities.

Among US companies, management of their

effective tax rate is their leading focus area,

but among our respondents from the Asia

Pacic and EMEIA respondents, effective

tax rate management ranked fourth,

behind strategic business transactions,

managing tax audits and controversies, and

securing the effectiveness and efciency

of global tax compliance and reporting.

In India, the effectiveness and efciencyof global tax compliance and reporting

and management of the effective tax rate

are the leading focus areas, and both are

equally important.

of Indian companies say that

reduction in compliance riskshas been a signicant driver

in changing their approach to

documenting transactions for

tax purposes

97%


22/24


Conclusion Survey

methodologyIndia Inc. will need to equip itself for future tax riskmanagement models. Enterprises will have to awlesslyexecute well thought-out and well-resourced strategies,

and at the same time, remain exible enough to deal with

the emerging tax environment.

Some of these short-term actions may include:

Assessing how companies will comply with new

transparency demands such as country-by-country

reporting and transfer pricing documentation

requirements without inviting unwarranted

challenges to previously taken positions as well as

without using so many resources that their oversight

of other tax areas is sacriced

Determining your tax function readiness in terms of

the key components of the BEPS Action Plan

Assessing whether your companys current and

previous transactions will stand up to increased

business purpose requirements however arbitrary

those requirements may seem

Making sure your company has the right tools in

place, such as APAs, rulings or pre-ling agreements,

to manage impending changes

Making sure your company has enhanced visibilityand control of any active disputes or uncertain tax

positions in India and around the world

Making sure your company has the right resources in

place to deal with all required tasks

Our survey was conducted online between

November 2013 and January 2014. Two

separate online survey instruments

were used.

The respondents included 830 tax and

nance executives, representing more than

20 industry sectors in 25 jurisdictions. From

India, 112 respondents participated in it.

Companies generating less than US$50

million to more than US$5 billion in annual

revenues responded to our survey; 34%

of the responses came from companies

generating more US$5 billion in

annual revenue

Our respondents included tax directors,

global heads of tax, CFOs, nancial

controllers, functional tax heads

(international taxes, indirect tax or

employment taxes), nancial directors, vice

presidents of nance, vice presidents of taxand other senior tax or nance executives.

Data presented in this report may not add

up to 100% due to rounding off or non-

reporting of dont know and/or

no responses.


23/24

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2ndoor, Shivalik Ishaan

Near C.N. Vidhyalaya

Ambawadi

Ahmedabad - 380 015

Tel: + 91 79 6608 3800

Fax: + 91 79 6608 3900

Bengaluru

6th, 12th& 13thoor

UB City, Canberra Block

No.24 Vittal Mallya Road

Bengaluru - 560 001

Tel: + 91 80 4027 5000

+ 91 80 6727 5000

Fax: + 91 80 2210 6000 (6th& 12thoor)

Fax: + 91 80 2224 0695 (13thoor)

1stFloor, Prestige Emerald

No. 4, Madras Bank Road

Lavelle Road Junction

Bengaluru - 560 001

Tel: + 91 80 6727 5000

Fax: + 91 80 2222 4112

Chandigarh

1stFloor, SCO: 166-167

Sector 9-C, Madhya Marg

Chandigarh - 160 009

Tel: + 91 172 671 7800

Fax: + 91 172 671 7888

Chennai

Tidel Park, 6th& 7thFloor

A Block (Module 601,701-702)

No.4, Rajiv Gandhi Salai, Taramani

Chennai - 600113

Tel: + 91 44 6654 8100

Fax: + 91 44 2254 0120

Hyderabad

Oval Ofce, 18, iLabs Centre

Hitech City, Madhapur

Hyderabad - 500081

Tel: + 91 40 6736 2000

Fax: + 91 40 6736 2200

Kochi

9thFloor, ABAD Nucleus

NH-49, Maradu PO

Kochi - 682304

Tel: + 91 484 304 4000

Fax: + 91 484 270 5393

Kolkata

22 Camac Street

3rdoor, Block C

Kolkata - 700 016

Tel: + 91 33 6615 3400

Fax: + 91 33 2281 7750

Mumbai

14thFloor, The Ruby

29 Senapati Bapat Marg

Dadar (W), Mumbai - 400028

Tel: + 91 022 6192 0000

Fax: + 91 022 6192 1000

5thFloor, Block B-2

Nirlon Knowledge Park

Off. Western Express Highway

Goregaon (E)Mumbai - 400 063

Tel: + 91 22 6192 0000

Fax: + 91 22 6192 3000

NCR

Golf View Corporate Tower B

Near DLF Golf Course

Sector 42

Gurgaon - 122002

Tel: + 91 124 464 4000

Fax: + 91 124 464 4050

Our ofces6thoor, HT House

18-20 Kasturba Gandhi Marg

New Delhi - 110 001

Tel: + 91 11 4363 3000

Fax: + 91 11 4363 3200

4th& 5thFloor, Plot No 2B, Tower 2,

Sector 126,

NOIDA 201 304

Gautam Budh Nagar, U.P. India

Tel: + 91 120 671 7000

Fax: + 91 120 671 7171

Pune

C-401, 4thoor

Panchshil Tech Park

Yerwada

(Near Don Bosco School)

Pune - 411 006

Tel: + 91 20 6603 6000

Fax: + 91 20 6601 5900



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