Tax authority audits are too time consuming and too expensive; but co-operation welcome: KPMG International poll

Over 75 percent of respondents to a recent KPMG International poll say that they are involved in a tax examination or dispute with a revenue authority, with 43 percent reporting they feel the process takes too long and is too expensive. A further 26 percent say the auditor (s) may lack the requisite technical skill to deal with some of the transactions and/or issues and 20 percent say that the audit may focus disproportionately on immaterial or insignificant issues. A small but notable 11 percent indicate the process is too adversarial.

The poll was taken during a recent KPMG International webcast attended by 721 corporate tax executives, with a majority from the US and Canada, that focused on the evolving global trend and concept of “horizontal monitoring”. While the concept is also referred to as “enhanced relationships” or “co-operative compliance” depending on jurisdiction, all have the common goal of facilitating trust, dialogue and collaboration between a revenue authority and a corporate taxpayer. In today’s volatile tax environment such activity can facilitate efficient and cost effective ways of dealing with corporate tax audits. According to a May 2013 Organisation for Economic Co-operation and Development (OECD) report on co-operative compliance, 24 countries included in their analysis have established some form of co-operative compliance program1.

“With the majority of respondents to the poll also saying that they expect to see the same or increasing level of audit activity, the concept or use of a horizontal monitoring program by a tax authority is clearly going to be, or already is, welcomed by corporate taxpayers,” says Sharon Katz-Pearlman, Head of KPMG’s Global Tax Dispute Resolution and Controversy (GTDR&C) Services.

Only a small number of respondents to the poll (13 percent) comment that they are currently involved in a horizontal-type monitoring program. This is not surprising as only 13 countries, according to the OECD, have formal co-operative compliance models in place, and in certain of these countries, according to the OECD “the approach is offered to a specific class of taxpayers, generally defined by a set of objective criteria, such as size and complexity”2. However, the majority (80 percent) of respondents to the poll who are participating in a horizontal-type monitoring program indicate the overall experience has been somewhat positive to very positive.

According to the poll, 38 percent of respondents participating in a horizontal-type monitoring program cite reaching earlier certainty as an attractive attribute of a horizontal-type monitoring program; 30 percent cite more efficient use of resources and 23 percent cite limiting focus to significant/material processes but only 9 percent cite improved relationships with the tax administrators.

“The goal of a horizontal–type monitoring program is to make the tax audit process more efficient and productive and less adversarial, ideally leading to a smaller number of disputes,” says Ms. Katz-Pearlman. “Programs can truly enhance the ability to communicate with tax authorities but clearly there is work still to be done. Education, clarification and confirmation of programs by tax authorities with their corporate taxpayers is essential.”

As these programs continue to spread and build momentum globally taxpayers will need to decide if they want to pursue them. Based on the poll, 21 percent of respondents say they would participate in a program if given the opportunity and 10 percent say they will not. However, the majority, 39 percent, say that they are not sure if they would participate reinforcing the need for more detailed information about the various programs so taxpayers can make appropriate decisions going forward for their specific situations.
US Results

Poll results from US participants largely mirrored the overall results:

80 percent are involved in a tax examination or other dispute

44 percent say the process takes too long and is too expensive; 26 percent say the auditor (s) may lack the requisite technical skill to deal with some transactions or issues; 19 percent say that the audit may focus disproportionately on immaterial or insignificant issues; 12 percent indicate the process is too adversarial.

13 percent are involved in a horizontal-type monitoring program.

78 percent of respondents participating in a horizontal-type monitoring program say the experience has been somewhat positive to very positive.

38 percent cite reaching earlier certainty as an attractive attribute of a horizontal-type monitoring program; 31 percent cite more efficient use of resources; 24 percent cite limiting focus to significant/material processes; 8 percent cite improved relationships with tax administrators.

19 percent of respondents say they would participate in a program if given the opportunity; 12 percent say no; 43 percent of respondents say they are not sure.

Canada Results

Just under 70 percent are involved in a tax examination or other dispute

44 percent say the process takes too long and is too expensive; 26 percent say the auditor (s) may lack the requisite technical skill to deal with some transactions or issues; 20 percent say that the audit may focus disproportionately on immaterial or insignificant issues; 10 percent indicate the process is too adversarial.

6 percent are involved in a horizontal-type monitoring program.

83 percent of respondents participating in a horizontal-type monitoring program say the experience has been somewhat positive to very positive.

36 percent cite reaching earlier certainty as an attractive attribute of a horizontal-type monitoring program; 30 percent cite more efficient use of resources; 24 percent cite limiting focus to significant/material processes; 10 percent cite improved relationships with tax administrators.

28 percent of respondents say they would participate in a program if given the opportunity; 8 percent say no; 30 percent of respondents say they are not sure.