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Due to reporting standards, businesses are experiencing TP 'compliance overload.'

TP directors argue that the OECD's pillar two project is the most efficient policy against harmful TP practices, citing "compliance overload" brought on by reporting requirements such as country-by-country reporting (CbCR) and Directive 2018/822 (DAC6).

"In a nutshell, there is increasing demand for tax transparency, and in addition, the requirement comes from other sources. It is tougher than ever to be a good compliance corporate taxpayer,” said Sanna Jäälinoja, group head of TP at Outokumpu. Some large companies are paying a high price for compliance and the administrative burden is a distraction from the core focus: creating shareholder value. This is leading many companies to expand their tax functions."

"We see a number of our clients increasing the size of their tax departments to deal with compliance, and compliance is just one thing – they are even expanding their tax teams to deal with controversy across the globe," Rachit Agarwal, TP director at DLA Piper, added.

Companies are expanding their tax departments by hiring more people, but tax transparency policies such as CbCR and DAC6 may continue to cause compliance issues, according to tax directors.

As greater tax transparency gains political support, taxpayers can expect increased pressure. The compliance burden may increase, and the reputational risks of exposing arrangements to public scrutiny are unlikely to diminish.

While the European Union (EU) is pushing to make CbCR public in order to increase corporate tax transparency, TP directors are questioning the effectiveness of the reporting requirement, which was designed to help tax administrations identify harmful TP practices and BEPS-related risks in the first place.

According to tax directors, the information requested by tax authorities is too broad, leaving businesses with a significant compliance burden and tax administrations with unnecessary data.

"Politically, it easy to call for greater transparency and submission of data but for the taxpayer the biggest issue is the additional compliance cost. Are you telling anything to tax authorities that they didn’t already know?"  Burberry's head of TP, Don Shackley, stated.

"There are increased standards for the quality of TP documentation post BEPS," Shackley said, "but it often feels like many tax officials would rather just write a letter full of questions without reading the TP documentation and accounts they have in their possession."

A similar challenge is DAC6, which requires taxpayers to report aggressive tax events to their jurisdiction. Due to the large amount of data processed, taxpayers have previously criticized the administrative burden imposed by DAC6.

"The scope of DAC6 – the scope of a reporting obligation is too wide, there is a lot of over information that you are receiving as a tax authority. It makes it hard to perform data analysis or case analysis for this information ," said Frederik Boulogne, a BDO tax lawyer and lecturer at the University of Amsterdam.

"What I’ve seen in the vast majority of cases where something had to be reported on a DAC6, what had to be reported was very unlikely to be seen as tax avoidance. This is an example of when a mandatory exchange of information by tax authorities in which the information produced is fairly usable ," Boulogne said.

"DAC6 has made producing information and sharing it an important task because penalties are so high," he continued, "but the information is not always valuable."

According to Jäälinoja, the broad scope of these tax transparency mechanisms has resulted in "compliance overload," with corporations being burdened by layers of documentation requirements atop other tax contribution reports.

Overburdened tax authorities are becoming more thorough in their investigations, resulting in a lack of trust between tax administrations and corporations.

A significant issue in tax transparency today is the compliance burden, which is compounded by a lack of trust between the taxpayer and the tax administration. Fear of being targeted by authorities has prompted many companies to invest in their TP teams, prompting tax directors to question the value of sharing such vast amounts of data. As tax transparency regulations become more stringent, tax authorities may face increased scrutiny.



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