In 1972, Richard Nixon made an historic visit to China and deftly exploited the rivalry between that country and the Soviet Union to the ultimate advantage of the United States. Did he provide a lesson for CFOs?
While getting in touch with your inner Nixon may sound like curious advice, when it comes to global tax headaches it just might work. Specifically, it can be a way to survive a revenue row when your company is under scrutiny by the tax authorities of two different countries.
“If CFOs and tax managers can get two tax authorities in the same room at the same time, and put all the issues and treaty provisions on the table,” says Rich Walton, a tax-controversy specialist at law firm Buchalter Nemer, “they can play one agency off against the other.” That approach, he says, is far better than “fighting the issues piecemeal.”
Such foreign diplomacy is likely to come in handy over the next few years as the Internal Revenue Service and its counterparts in other countries ramp up their use of so-called simultaneous audits, a loose term coined by tax professionals to describe two separate exams, conducted by different governments, in which those governments share with each other some of the taxpayer’s information. At first glance, the prospect of governments teaming up on global tax investigations may seem like a nightmare, but such cross-border efforts offer some unexpected opportunities.
Although they’ve existed since the 1970s, simultaneous audits are increasingly common today as government tax agencies race to match the level of global coordination practiced by multinational companies and their tax advisers. Like the proverbial blind men trying to describe an elephant, “governments have a skewed perspective of a transaction if they rely only on domestic sources of information,” says Rocco Femia, a tax attorney with Miller & Chevalier.
More Scrutiny Ahead
The rules for exchanging taxpayer information with other countries are governed by treaties that, mercifully, contain substantial controls on such practices. The United States has treaties with about 60 trading-partner countries that include information-exchange provisions; those provisions are often used to assess transfer-pricing practices (by far the most common reason for countries exchanging corporate tax information) or uncertain tax positions. The United States is also pushing for more collaboration with other countries through such groups as the Joint International Tax Shelter Information Center (JITSIC), a Washington, D.C.-based global effort that targets abusive international tax-evasion schemes.
Two Birds with One Audit
At any given time, a company with “a big global footprint” — one that does business in 100 countries or more — could be juggling as many as 40 single-country audits, says Debbie Nolan, a member of Ernst & Young’s national tax practice, and former IRS commissioner for the agency’s Large and Mid-Size Business Division. Combine that audit load with U.S. state tax examinations and “companies are really challenged to manage global tax risk.”