Tax risk on the rise in Canada and globally

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1 Tax risk on the rise in Canada and globally Canadian tax governance survey Canadian tax governance survey 1

2 In Ernst & Young s fourth and most recent global Tax risk and controversy survey, we interviewed 541 corporate executives and 100 audit committee members across 18 geographic markets to gauge their views on a variety of issues. The results showed that tax risks are growing in both number and complexity and that companies need to plan a course of action to deal effectively with them. We recommended that businesses execute a five-step approach to manage their organization s tax risk and controversy. Here in Canada, we followed up the global report with a survey of Canadian executives 1 focusing on tax governance. Using our new Canada Community Panel online survey, we polled 120 companies across Canada 2 to examine how they manage their tax risk today. Our Canadian Tax governance survey reviews the level of tax risk awareness among all departments in organizations, highlights the business areas that cause concern when managing tax risk, identifies potential areas for improvement to minimize tax risk, and reveals organizations tax priorities and plans for Canadian tax governance survey

3 Top 10 findings Our Canadian survey revealed the following top 10 highlights: 1 Tax leaders still hold primary responsibility for executing tax risk management. But executive management, including the C-suite and board of directors, is now taking a more active role in setting tax governance guidelines and policies. This trend is evidenced by the Canada Revenue Agency s (CRA s) new Approach to Large Business Compliance (ALBC). The CRA is now asking to meet with executive management of taxpayer organizations to help them assess the entities tax risk profile. The CRA s actions are consistent with the findings of our global survey, which found that governments and tax authorities around the world increasingly expect corporate boards to understand their responsibilities respecting tax strategies and outcomes in order to fulfill their broader corporate governance responsibilities % of tax groups, 91% of finance departments, 79% of the C-suite and 60% of risk management committees are involved in managing tax risks in their organizations. In addition, 85% of respondents indicated that external advisors play a role in assisting them with tax risk management. 3 A surprising 56% of non-tax business unit leaders are unfamiliar with tax risk management policies. There is a lack of tax risk awareness among non-tax and financerelated departments, such as business operations and procurement, which do not appear to be sufficiently engaged in managing tax risk. 1 CEO, CFO and COO. 2 The majority of the 120 respondents in our survey reported expected global revenue of $1B or more. 3 Tax risk and controversy survey: a new era of global risk and uncertainty, page 45.

4 Top 10 findings (cont d) 4 Fully half of survey respondents only report tax risks as needed, or never. The other half of respondents who do practise routine or frequent tax risk reporting mostly do so either quarterly or annually. This is despite the fact that regular reporting is a healthy practice to promote periodic involvement of the board, audit committee and C-suite in tax risk management. 8 Cross-border transactions, intercompany transactions, business reorganizations and mergers and acquisitions are the top business activities that add to the tax risk profile % of respondents reveal a moderate to significant increase in boardroom discussions concerning tax risk transparency and reporting in % of participants plan to improve the existing tax risk policies and procedures within their organizations. 9 The tax function spends an average of only 7% of its time on tax risk management and reporting. That said, many controls and riskmitigation activities occur as part of the execution of other tax processes (e.g., planning, compliance, reporting and audit resolution). According to the survey results, only 15% of participants consider that all tax risks and opportunities are identified on a timely basis to support business decisions and improve results. 7 A greater variety of tax software tools are starting to develop a footprint in automating the tax provision process. Among the 44% of respondents who indicated plans to further automate their tax provisioning process, only 28% plan to do it using Microsoft Excel. 10 Cash tax savings, timely and accurate tax compliance and managing tax authority audits are respondents top three priorities for Cash seems to be king once again for many organizations. It remains to be seen whether this foreshadows an increase in planning activities in the near future Canadian tax governance survey

5 Improvement opportunities identified The four major tasks of the corporate tax function are embodied in the tax lifecycle planning, provision, compliance and controversy and leading companies adopt an approach to tax risk management as an integrated process across this entire lifecycle. The survey indicates that there are significant opportunities for improvement at each stage: In the tax planning process, about half of the respondents acknowledge there is room for improvement in transfer pricing and foreign tax planning activities. In the accounting and reporting process, 62% of the respondents recognize significant opportunities to improve risk management in the legal entity accounting process and 40% see an opportunity to improve the transfer pricing process. In the tax compliance process, improvement areas include foreign and domestic tax compliance, indirect tax compliance and transfer pricing documentation. In the tax audit response and controversy process, opportunities to improve fall mainly on domestic and transfer pricing controversy. Controversy Tax lifecycle Planning Global tax director Compliance Provision Table 1 Tax risk management improvement opportunities across the tax lifecycle Tax planning Tax accounting and reporting Transfer pricing 50% Foreign Domestic Indirect tax 48% 43% 41% SR&ED 15% % Legal entity 40% Transfer pricing 32% Consolidation 12% SR&ED Tax compliance Tax audit response and controversy Foreign Domestic Indirect tax Transfer pricing 40% SR&ED 11% 50% 47% 47% Domestic 56% Transfer pricing Foreign 42% 40% Indirect tax 32% SR&ED 17% Table 1 shows for each stage in the tax lifecycle where respondents acknowledge there are significant opportunities to improve tax risk management Canadian tax governance survey 5

6 Over 60% of respondents struggle with obtaining accurate legal entity financial information, a prerequisite to accurate compliance. This is also an area of focus for the CRA s new risk-based audit approach. The survey results suggest there is a need to urge businesses to pay more attention to tax risk management, particularly in transfer pricing and foreign tax compliance. As many tax administrations adopt more aggressive audit approaches toward large multinationals, we advise companies with global operations to stay informed of ongoing tax developments at home and abroad. Frequent and significant tax controversies between companies and the Canadian tax authorities are not uncommon, and we ve observed an increase in reported controversies in foreign tax audits and transfer pricing audits. Looking ahead Our Canadian Tax governance survey results indicate that tax risk management is on the minds of corporate Canada in a more meaningful way than ever before. No longer the sole domain of the tax function, it s finding its way onto the agendas of the finance department, the C-suite and risk management committees. In our view, there are several factors contributing to this trend, including the CRA s new risk-based ALBC, the growing global footprint of Canadian companies and the associated exposure to unfamiliar tax regimes, and the ever-increasing aggressiveness of tax authorities in Canada and abroad. Add to this the growing demands on tax functions to provide more information, to provide it more quickly and with increased accuracy, and you can see why tax risk management has become an enterprisewide issue. However, notwithstanding the increased attention that Canadian companies are paying to tax risk management, our survey results indicate that there is more work to be done. Areas requiring particular attention include increasing the awareness of tax risk in non-tax business units, managing foreign tax risk and improving reporting protocols to boards of directors, audit committees and the C-suite Canadian tax governance survey

7 Learn more For more information about how Canadian businesses are managing tax risk, please contact your Ernst & Young tax advisor or one of the following professionals: Vancouver Greg Noble Prairies Ryan Ball Toronto Tony Pampena Ottawa Fred O Riordan fred.oriordan@ca.ey.com Gary Zed gary.zed@ca.ey.com Montreal George Tsitouras george.tsitouras@ca.ey.com Atlantic Mike Wilson mike.j.wilson@ca.ey.com

8 Ernst & Young LLP Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit ey.com/ca Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. About Ernst & Young s Tax Services Ernst & Young s tax professionals across Canada provide you with deep technical knowledge, both global and local, combined with practical, commercial and industry experience. We offer a range of tax-saving services backed by in-depth industry knowledge. Our talented people, consistent methodologies and unwavering commitment to quality service help you build the strong compliance and reporting foundations and sustainable tax strategies that help your business achieve its potential. It s how we make a difference. For more information, visit ey.com/ca/tax. About Couzin Taylor Couzin Taylor LLP is a national firm of Canadian tax lawyers, allied with Ernst & Young LLP, specializing in tax litigation and tax counsel services. For more information, visit couzintaylor.com. ey.com/ca 2013 Ernst & Young LLP. All Rights Reserved. A member firm of Ernst & Young Global Limited. ED This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.