Canadian companies are experiencing the global tax [r]Evolution

Increased scrutiny and demands for transparency have lead corporate taxation to be the top concern of corporations around the world. Canadian corporations are also feeling the growing focus on tax. According to a Deloitte multinational survey on corporate taxation released in September, almost 80% of Canadian tax managers, finance managers and executives surveyed agreed that there has been an increased media and political interest in tax in the country. The current environment has emboldened tax authorities, leading to more aggressive assessments resulting in unprecedented incidences of potential double taxation where more than one country is seeking to tax the same income. In addition, with the support of the G20, the Organisation for Economic Co-operation and Development (OECD) is engaged in its Base Erosion and Profit Shifting (BEPS) initiative with a view towards curtailing international tax planning. Some countries are not waiting for the completion of the BEPS initiative and are making uncoordinated, unilateral changes to their laws, increasing the potential for double taxation. As a result, Canadian companies are experiencing this global tax [r]Evolution.

Increasingly aggressive audits
Companies are experiencing increasingly aggressive tax audits in many countries. In this area, Canada seems to be leading the way with 86% of Canadian tax managers, finance managers and executives surveyed reporting that Canadian tax authorities are being increasingly aggressive. In comparison, only 63% of global respondents felt the same way about their own countries. This may be partly due to other jurisdictions always having had tax authorities that are seen as aggressive but is also likely due to the mounting attention Canadian companies are facing at home. This finding is reflective of the reputation Canada’s tax authorities are developing for being aggressive about corporate tax.

Priority vs preparedness – the reality
The report also indicates that people are more concerned than their actions reflect. In Canada, while almost 80% of respondents felt that their tax burden would increase substantially as a result of the OECD BEPS recommendations, just over half of respondents said that their organizations have assessed the impact of BEPS, according to the Deloitte survey. This response is somewhat surprising given the current global environment. Companies should be assessing the impact on their business, identifying areas of increased risk, estimating any resulting impact to their effective tax rate and, after having completed their assessment and weighed the alternatives, establishing a game plan. While some companies may be waiting for actual legislative change before addressing the issue, we think that a more strategic approach is warranted.

Lloyd’s Risk Index 2013, which was answered by CEOs globally, shows that the issue has been elevated to the highest concern of organizations around the world. CEOs ranked the risk of high taxation as the top priority, up from the 13th spot two years before. Despite multinational companies and their CEOs reporting growing concerns about corporate taxation, however, readiness levels have not kept pace. While the Lloyd’s Risk Index reported in 2011 that firms ranked their preparedness for the risk of high taxation ahead of the actual risk, the 2013 study showed that, though the risk had climbed, preparedness had actually decreased. In 2013, while CEOs in North America and Europe ranked high taxation as their number one risk, in North America preparedness for this risk was ranked 37 and in Europe preparedness was ranked 21. Similarly, CEOs in the Asia-Pacific region, who ranked high taxation their number two concern, ranked their preparedness for the risk at 30. Part of the drop in preparedness since 2011 could likely be attributed to companies sensing that the risk of high taxation is greater than they originally thought and consequently, not feeling as confident about their approach to the risk as they did previously.

Next steps for CEOs
These studies illustrate the need for companies to be prepared for the changing corporate tax landscape. CEOs and their teams should act on their concerns about tax risks with steps to address the issue. At Deloitte, we have developed assessment and data analytic tools to assist our clients in conducting impact assessments and establishing a game plan. Learn more, or speak with one of our Tax leaders.