Managing tax risks

How prepared is India Inc.?

Highlights from the 2014 tax risk and controversy survey
India report
1 | Managing tax risks: How prepared is India Inc.?
Introduction 2
Tax risk and controversy 4
Reputational risk 8
BEPS and legislative risk 10
Enforcement risk 14
Operational risk 18
Content
This report is an accompaniment
to EYs global 2014 Tax risk and
controversy survey. It highlights the
thoughts and perceptions of tax and
fnance executives based in India on the
subject of tax risk and compares those
perceptions to global result. We hope
this report will be your guide for your
journey up the mountain and safely
down the other side. To receive other
reports in the series, please visit www.
ey.com/taxriskseries or connect with
your local EY Tax contact.
2 Managing tax risks: How prepared is India Inc.? |
The last decade witnessed an overhaul
of the global economy and governments
across the world adopting various measures
to deal with fscal pressures. Worldwide,
levels of tax enforcement continue to
increase, and tax risk and controversies
have taken centre stage for discussions in
board rooms. EY frst reported on evolution
of tax administration without borders
1

in 2009, as governments began taking a
more global and collaborative approach to
enforcement amid a fscal environment that
swung from stimulus to austerity before
stabilizing somewhere in between. EY
elaborated on this trend and its outcome
in the previous edition of its Tax risk and
controversy survey report, according to
which a convergence of trends has created
the ripest environment for tax controversy
in years.
2
It is for the frst time that the India issue
of EY Tax risk and controversy survey is
being published, capturing the thoughts,
expectations and experiences of 112
respondents. This report highlights the
most signifcant fndings of the survey and
sets the stage for a deeper exploration
of key topics. It brings to light the fact
that risks are growing due to increased
globalization and that managing tax risk
and controversy is more important today
than ever before for businesses around the
world. India is no exception.
According to the fndings of the survey,
Indian companies have witnessed more
aggressive tax audits in the last two years.
Many respondents reported that Indian tax
authorities are not very amenable to an
open and collaborative relationship with
them. They have experienced increased
risk or uncertainty due to tax legislations
or regulations during this period, which
has given rise to increased enforcement
and operational risks. Moreover, intense
media attention on tax matters has added
to reputational risks, a fall-out of which is
a defnite change in the tax administrator-
taxpayer relationship. In fact, India
has been identifed as one of the three
emerging markets (in addition to China and
Introduction
Brazil) in which companies are exposed to
high tax risks for companies.
An outcome of these developments is
that Indian companies are becoming more
tax risk averse. And yet, when it comes
to taking action to deal with these risks,
almost half of the organizations surveyed
indicated that they had not changed
their approach to addressing the tax
aspects of their businesses during the
last two years. For instance, more than
half the respondents revealed that they
had neither evaluated nor made changes
in their existing structures with regard
to OECD project on Base Erosion and
Proft Shifting (BEPS) or taken proactive
action on their BEPS agendas. Similarly,
despite reputational risks, less than 40%
of the Indian companies indicated that
they had changed the way in which they
communicated information relating to tax
to external stakeholders, e.g., investors.
It is apparent that given the rising
operational risks surrounding tax, Indian
companies now have to spend less time
on fnancial reporting and tax planning
and more time on managing routine
tax compliance-related activities and in
managing their tax disputes/ controversies.
However despite this, Indian organizations
do not make adequate use of technology
and rely on local personnel to manage
their tax audits and incoming data
requests. They also revealed that they
lack the resources to meet the demand for
increased reporting and transparency of
information, including the OECDs proposed
country-by-country reporting and transfer
pricing documentation requirements.
The following pages elaborate further on
the fndings of our survey on tax risks and
controversies, and compare the views
of Indian companies to the perceptions
of their counterparts around the world.
The survey makes it evident that on
most issues, Indian corporate sectors
thinking is aligned with that of their global
counterparts.
1 http://www.ey.com/GL/en/Services/Tax/ International-Tax/Tax-administration-without-
borders- --Introduction
2 2011-12 Tax risk and controversy survey, EY, 2011.
3 | Managing tax risks: How prepared is India Inc.?
4 Managing tax risks: How prepared is India Inc.? |
Tax risk and controversy
Gaining signifcance in
boardrooms agendas
Overall, an overwhelming 90% of the
companies surveyed agreed or strongly
agreed that tax risk and controversy
would become more important for them
in the next two years. Their global peers
are exposed to similar pressure, with 81%
of all companies and 78% of the largest
3

companies agreeing that tax risk and
related controversies are likely to become
more important for them in the following
two years.
Globalization bringing increasing
challenges with it
Most companies felt that over the past
two years, globalization has brought more
tax-related challenges for them 62%
organizations across regions felt that
globalization has brought with it increased
risks and uncertainty about tax legislation
and regulations; 35% were of the opinion
that it has led to greater Permanent
Establishment (PE) risk.
Perception shared by large
proportion of respondents in India
According to 69% of our Indian
respondents, tax risk and controversies
have increased with globalization. Not
only this, 31% global respondents and 44%
Indian participants were of the view that
globalization has increased the complexity
in effective tax management and PE risks
over the past two years. Tax reporting,
operational or data challenges and the
increased complexity of supply chains are
other risks they attributed to globalization.
Furthermore, the PE risk of 27% of Asia-
Pacifc businesses and of 41% of BRIC
respondents has also intensifed in the last
two years.
According to Indian companies, transfer
pricing and indirect taxes, including VAT,
GST and customs, are the top two leading
reasons of tax risks. At the third position,
it has been found that withholding taxes
are important sources of tax risks for Indian
respondents. This perception is in line with
that of global companies, according to
which their leading source of tax risks and
controversies remains transfer pricing, with
indirect taxes and permanent establishment
risk being the second and the third highest
sources, respectively.
These activities in particular, transfer
pricing are under unprecedented
scrutiny from an ever-growing list
of groups including the news media,
national policymakers, activist groups and
supranational organizations. Assertions of
tax avoidance by any one of those groups
often trigger reactions by the others. This
cycle has kept the issue of tax in
the headlines and at the forefront of
policy conversations.
Constant media attention giving
rise to reputational risk
Intense media interest has driven new
and signifcant concerns about tax-related
reputation risk. Stories and investigations
alleging tax avoidance are prevalent in
newspapers and TV programs around the
world. It is therefore not surprising that in
India, 61% of companies believe that they
are signifcantly (or somewhat signifcantly)
concerned about media coverage of taxes.
This concern is higher at the global level,
where 85% of the largest companies are
apprehensive about media coverage
of taxes.
of the surveyed Indian
companies believe tax risk and
controversy would become
important in the next two years
90%
3 (more than US$5 billion in revenues)
5 | Managing tax risks: How prepared is India Inc.?
as they strive to balance tax-related
competition by raising adequate revenue
to fund ongoing spending commitments.
As revealed by 69% of Indian companies,
they have experienced increased risks or
uncertainties around tax legislation or
regulations in the last two years.
Tax audits more aggressive
Dealing with policy and regulatory change
is only a part of the landscape. According
to 63% of Indian companies, tax audits
have become more aggressive in the last
two years. Other regions such as the Asia
Pacifc (52%) and BRIC (54%) hold a
similar view.
At the same time, many respondents
report that national tax authorities are less
amenable to an open and collaborative
relationship than earlier. Only 8% of our
Indian respondents felt tax administrations
are looking to develop more open and
collaborative relationships with companies.
Almost half (46%) of global companies
reported that APAs have become more
diffcult to negotiate and secure in some
markets.
India has had a more positive experience in
the context of APAs. In a welcome contrast,
only 17% of Indian companies found it
diffcult to negotiate APAs, an initiative
launched by the Indian Government in
July 2012.
Tax authorities are collaborating on and
sharing information with one another and
are increasing their focus on cross-border
transactions. India, in particular, has
witnessed an increase in the cross-border
focus of its tax authorities, with 76% of the
respondents confrming that this has been
their experience.
of Indian companies
experienced greater risk in tax
legislation in the last two years
69%
However, more tangibly, this intense
media focus has galvanized policymakers
into action. Globally, lawmakers react to
news stories by convening parliamentary
hearings, proposing legislation and
supporting the initiatives of the
Organisation for Economic Co-operation
and Development (OECD) to recommend 15
specifc areas for coordinated action taken
to protect the tax bases of countries.
India has not remained insulated from
the effect of these global developments.
According to our survey respondents,
they are feeling the impact since around
80% of Indian companies feel that tax
administrators are now challenging existing
structures due to changes in the law or in
their enforcement approach.
Some countries have already taken steps to
implement concepts related to Base Erosion
and Proft Shifting (BEPS) in the form of
new legislation, establishing working
groups to review existing frameworks and
formulate new ones, and in some cases,
suspending Advance Pricing Agreements
(APAs) or applying future BEPS concepts
to previously executed transactions. Even
if directionally consistent with the BEPS
project, these early actions may threaten
the coherence of the overall project, and
create greater uncertainty, risk and an
erosion of trust between tax authorities
and taxpayers.
Indian authorities are participating fully
in the BEPS debate and see it as an
opportunity to revisit existing tax principles
and explore whether these can be modifed
to address emerging complexities such
as transfer pricing, digital economies and
aggressive tax planning.
At the same time, governments continue to
implement day-to-day legislative changes.
Additional layers of complexity are added
of the Indian companies feel
tax administrators are now
challenging existing structures
80%
6
These mounting challenges are putting
more and more pressure on enterprises.
For example, more than half (51%) of the
Indian companies felt that the size of their
operations has increased in direct response
to the changing tax environment; 60% felt
that having insuffcient resources to cover
tax-related activities is a potential cause of
tax risk.
India Inc. treading cautiously
It was reported by 49% of Indian companies
that they have become more risk averse
and changed their approach to the tax
aspects of their businesses in the last two
years. According to 63% of them, they will
become more cautious in their approach
to tax planning in the following two years.
This is a much higher proportion, compared
to global companies, among which only
38% are likely to follow a more cautious
approach in the next two years.
Despite this state of fux, the day-to-day
business of tax work continues. Indeed, 45%
of the Indian companies surveyed indicated
they had not changed their approach
to addressing the tax aspects of their
businesses in the last two years. Among
America-based companies, the proportion
was sharply higher, with 70% of them
revealing that they had not changed their
approach.
Four major sources of tax risk identifed
by our survey
1. Reputational risk
An intense focus on taxation of
business and resultant reputational risk
has driven the following four areas of
concern and is also a key concern in
itself.
2. BEPS and legislation-related risk
Criticism of the share of tax paid by
companies around the world, including
complaints that such percentages
are often unfair, has largely driven
the second major area of risk facing
companies today the rapid increase
in new and potential legislation and
regulation. Much attention has been
focused on the OECD BEPS Action
Plan, but the unilateral actions taken
by individual governments may be an
even greater source of risk, with the
potential to create global tax chaos
that OECD and businesses both want
to avoid.
3. Enforcement-related risk
Whatever the outcome, tax
administrators have taken their cue
from the changing conditions and
political focus. This has given rise to
what our survey data indicates is the
third area of tax risk facing businesses
more aggressive and focused
tax enforcement, and a sense that
mutually constructive relationships
between taxpayers and authorities may
be becoming strained.
4. Operational risk
Our survey data also indicates that
as pressures continue to build, many
companies may lack the appropriate
resources to effectively manage the
frst three issues mentioned above.
This growing operational risk spans
people, processes and technology
and is the fourth and fnal area to be
examined in this report.
of Indian companies have
become more cautious in their
tax planning
63%
Managing tax risks: How prepared is India Inc.? |
7 | Managing tax risks: How prepared is India Inc.?
Reputational risk
With the global rise in social media, it has
become easier for groups scrutinizing tax
matters to reach people, social groups,
media houses in relation to growing
disparities in incomes around the world.
Newspapers, online publications and
television meticulously cover allegations of
impropriety. This has drawn the attention
of policy-makers and media houses to
the views of such groups. Their growing
support at the grassroot level has in turn
made news media and policymakers pay
more attention to their views. Where they
once primarily published research papers
and relied on press releases to level their
criticism, some activists have literally found
themselves sitting alongside corporate
CEOs and technical experts at the witness
table to give offcial testimony to legislative
bodies.
Tax-related reputational risk creates
signifcant tangible challenges for
companies, even when allegations may be
of dubious accuracy. A change in the tax
administrator-taxpayer relationship may be
one consequence. However, more than that,
consumer products and internet companies,
as well as commercial banks, have faced
organized boycotts of their products or
services; government contractors have had
diffcult conversations with their clients.
And sometimes, key shareholders have had
to be reassured.
The survey results indicate how rapidly
reputational risk has become a key
concern for companies. In India, 61% of
organizations are somewhat or signifcantly
concerned about media coverage of taxes.
The concern is higher among US and EMEIA
companies (84% and 72%, respectively)
and high even in the Asia Pacifc and BRIC
countries.
Despite this, less than 40% of Indian
companies have changed the way in which
they communicate information relating to
tax to external stakeholders such as the
investment community. Compared to this,
more than half of global companies are
of the opinion that they have developed
a more structured approach to managing
their public tax profles.
Regarding their interaction with media,
most companies feel that this is a no-win
proposition. Globally, 57% of companies do
not like to interact with media. Even in India,
51% agree or strongly agree that engaging
with the press is a no-win proposition.
However, many of them support voluntary
publishing of information on taxes paid and
economic and social contributions.
It is clear that companies need to act
deliberately and assertively to manage
this complex and sensitive issue, rather
than risk being in a situation where they
must react to reputational challenges by
taking a defensive posture. This means that
companies should ensure that their tax,
C-suite executives, board members and
audit committees agree about whether they
should voluntarily disclose additional tax-
and social contribution-related information
about them on an ongoing basis. These
stakeholders must also recognize the fact
that not all markets are the same; a policy
that is appropriate for one jurisdiction may
not be suitable for another.
23%
14%
16%
22%
35%
19%
51%
33%
45%
62%
33%
53%
21%
50%
31%
8%
19%
25%
5%
3%
8% 8%
13%
2%
India Americas Asia-Pac EMEIA
A signicant concern Somewhat of a concern Not a concern Dont know
Concern regarding media coverage of taxes companies are paying
2013
GLOBAL
2011
GLOBAL
8 Managing tax risks: How prepared is India Inc.? |
9 | Managing tax risks: How prepared is India Inc.?
10 Managing tax risks: How prepared is India Inc.? |
BEPS and legislative risk
In February 2013, the OECD released its
BEPS report (as requested/suggested by G8
and G20 countries). It refected the views
of some but not all the countries that
current international tax standards may
not have kept pace with changes in global
business practices, particularly as far
as intangible assets and e-commerce
are concerned.
This report was shortly followed by the
publication of the BEPS Action Plan, which
reiterated this aspect. It set out that, in
the OECDs view, gaps in interaction of the
domestic tax rules of various countries,
application of bilateral tax treaties to
multijurisdictional arrangements and the
rise of the digital economy have led to
weaknesses in the international tax system.
The Action Plan includes 15 action points,
each of which is linked to specifc output
that is to be issued in 2014 and 2015.
Many of these actions are already driving
change, and the global business community
is taking the BEPS project very seriously.
The OECDs focus on coordinated action
is important because unilateral action
may create double taxation and increase
controversies, both of which would be
adverse for the global economy.
India and OECD BEPS
The active involvement of non-OECD
members (including Brazil, China and India)
in the project is also of high importance.
Here too the OECD and industry have a
common interest in encouraging as many
countries as possible to participate in the
global dialogue on future international
tax standards.
OECD BEPS 15-point action plan:
1. Address the tax challenges of the digital economy
2. Neutralize the effect of hybrid mismatch
arrangements
3. Strengthen CFC rules
4. Limit base erosion through interest deductions
and other fnancial payments
5. Counter harmful tax practices more effectively,
taking into account transparency and substance
6. Prevent treaty abuse
7. Prevent artifcial avoidance of
PE status
8, 9, 10.
Ensure that transfer pricing outcomes are in line
with
value creation
Action 8: Intangibles
Action 9: Risks and capital
Action 10: Other high-risk transactions
11. Establish methodologies to collect and analyze
data on BEPS and action taken to address these
12. Require taxpayers to disclose their aggressive tax-
planning arrangements
13. Re-examine transfer pricing documentation
14. Make dispute resolution mechanisms more
effective
15. Develop a multilateral instrument to implement an
innovative approach to international tax matters
11 | Managing tax risks: How prepared is India Inc.?
Tax risks in emerging markets
China, India and Brazil (in this order) have
been identifed as the three emerging
markets that pose the highest tax risks for
companies. Around 68% of the companies
in India agree or strongly agree that
entering or operating in an emerging
market signifcantly increases levels of
tax and controversy risk a perception
shared by 58% of our global respondents,
45% of Asia-Pacifc companies and 60% of
companies in EMIEA.
Dealing with such rapid growth, many
emerging markets countries experience
very signifcant policy-related, legislative
and regulatory changes as they try to bring
their tax regimes up to more sophisticated
levels. And even then, their approach to
tax transactions may differ greatly in many
areas. Of course, it takes many years for a
tax regime that is unaccustomed to policing
cross-border commerce to adapt and
mature. Couple this with the fact that many
companies have very few or no dedicated
resources with a strong knowledge of tax
or cultural experience, and one is left with a
highly volatile mix that can fare up
without warning.
The OECD can play an invaluable role in
pressing for common approaches and
consistent standards to provide greater
certainty and reduce controversy. In fact,
according to the OECD, governments risk
global tax chaos as they chase dwindling
revenues from multinational companies,
unless they update their knowledge of
international tax regimes.
The pace of the BEPS project is equally if
not more important than its composition
of stakeholders. This pace is largely driven
by the G8 and G20 agenda and national-
level politics. Many businesses feel that the
BEPS agenda is overly ambitious and that
its timetable (with many key elements to
of Indian companies believe all
BEPS recommendations will be
adopted in the next fve years
2%
be completed by September 2014 and all
actions to be completed by 2015) is too fast
to allow careful consideration and input,
and that this may drive risk.
Protection of its own tax base is Indias
concern. It is therefore participating
actively in focus group discussions on the
15-point Action Plan. The changing needs
of its Government and businesses have
to be factored in its tax policy. The BEPS
project envisages proposing changes to
the OECD Model Convention, OECD TP
guidelines, as well as recommendations to
countries to amend their domestic tax
law provisions.
With so much change anticipated in a short
time, it is more than likely that there will
be uncertainty, leading to controversy and
dispute. The Action Plan also raises diffcult
issues, which cannot be solved without the
help of all stakeholders. If some of the views
held by stakeholders are not taken account
of, there is a risk of individual countries
proposing unilateral actions, thereby
further adding to the uncertainty.
There may be increased attempts to review
the global value chain of MNEs to assess
value creation in India. This will require
taxpayers to have stronger and improved
documentation to meet the demands of
the tax authorities, place an increased
burden on taxpayers and add to
administrative costs.
Uncertainty and concern about the
outcomes of the BEPS project permeated
the responses of the respondents of
our survey.
Despite this, when it comes to taking action
on the BEPS agenda, our survey revealed
that more than 51% of Indian businesses
have neither evaluated nor made changes
to their existing structures (with regard
to the OECD project) on base erosion and
proft shifting.
of Indian companies, agree or
strongly agree that entering
or operating in an emerging
market signifcantly increases
their levels of tax and
controversy risks
68%
12 Managing tax risks: How prepared is India Inc.? |
of Indian companies agree
or strongly agree that their
companies will be exposed to
double taxation over the next
three years
43%
of Indian companies expect
BEPS will be adopted with a few
recommendations of OECD at
the national level
32%
0% 10%
20% 40%
31%
35%
39%
49% 24%
20% 2%
2%
0%10%
39% 23%
24%
29%
20% 5% 14%
22%
5% 0% 8%
4%
4% 4%
1%
1%
1%
1%
16%
20% 30% 40% 50% 60% 70% 80% 90% 100%
2013 GLOBAL
2011 GLOBAL
India
Americas
Asia-Pac
EMEIA
Strongly agree Agree Neutral Disagree Strongly disagree Dont know/Not applicable
Extent to which respondenents believe "Entering into or operating in emerging
markets signicantly increases our levels of tax risk and controversy risk."
14%
29%
29%
18%
20%
Fear of double taxation
Uncoordinated and unilateral decisions may lead to double taxation of multinationals.
According to 43% of Indian companies, they agree or strongly agree that their companies
will be exposed to double taxation over the next three years. This is a concern shared by
almost 60% of the largest global companies.
Strongly agree Agree Neutral Disagree Strongly disagree Dont know
Fear of double taxation
11%
14%
12%
5%
13%
37%
29%
40%
33%
36%
33%
31%
35%
39%
29%
10%
14%
6%
13%
11%
2%
2%
3%
1%
8%
12%
5%
8%
9%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2013 Global
India
Americas
Asia-Pac
EMEIA
13
Increasing disclosure-related requirements
(whether in the BEPS Action Plan
or unilateral ones) are an additional
challenge foreseen by businesses; 93
percent of Indian companies believe that
in the next two years, disclosure and
transparency requirements will increase
worldwide. Almost all the respondents in
all the jurisdictions covered by the survey
believe that disclosure and transparency
requirements will increase around the world
in coming years.
Some disclosure-related requirements
within the BEPS Action Plan have already
been issued in discussion form, and the
business community is concerned about
the burden that will be placed on them to
comply with these, particularly with the
proposed country-by-country reporting
(CbCR) template, as are some governments
that naturally want to protect business from
unnecessary impediments to its growth.
The BEPS Action Plan is having a
galvanizing effect on the perceptions and
behavior of tax administrators. For instance,
almost 40% of Indian companies have
seen the increased focus of tax authorities
on issues related to the tax treatment of
intangibles in the past two years. One-third
of the companies reported the increased
focus of the tax authorities on the economic
and operational substance of foreign
entities in their groups.
Before any fnal BEPS recommendations
are issued let alone passed into national-
level legislation tax directors around the
world report that the pace, complexity and
volume of new legislation already strains
their limited resources. According to78%
of Indian companies, the volume and/or
complexity of legislations and regulations
that need to be complied with are leading to
new risks.
When it comes to taking action on the
BEPS agenda, only 10% Indian companies
reported that they have evaluated what
BEPS means for them and have made
changes to their existing tax structures;
51% have not evaluated their current
structures in any way in response to
BEPS. Only 4% have evaluated and made
changes in their structures.
OECD project on base erosion and prot shifting response of Indian
Companies on activities undertaken
We have evaluated how
transactions are initially recorded
in our ERP system(s)
Dont know
We have evaluated our
existing structures but not
made any change
We have evaluated and made
changes to existing structures
We have neither evaluated
nor made changes to
existing structures
51%
10%
12%
22%
4%
OECDs BEPS project
is probably one of its
most ambitious projects
with potentially most far
reaching impact. Engaging
the industry, regulators
and policy makers at the
same time, its various
action items are being
pushed at an unforeseen
pace, evidencing its political
mandate and support.
Action items focussed on
increased disclosure and
transparency are likely to
gather consensus sooner
than those that impinge
upon issues of share of
tax revenues between
countries. This will set
a new paradigm on the
level of compliance and
disclosure for MNCs. Tax
risk assessments and
audits will see use of
analytics and big data.
To allow for a conducive
global tax environment,
it would be important to
simultaneously address
potential risks of double
taxation and unilateral
enforcement by stressed
economies impacting global
businesses.
Jayesh Sanghvi
Tax Partner & National Leader -
International Tax Services, EY
| Managing tax risks: How prepared is India Inc.?
14 Managing tax risks: How prepared is India Inc.? |
Enforcement risk
Enforcement of tax law and regulations
has become more vigorous and aggressive.
Government defcits remain high. Tax
authorities globally are collaborating and
sharing more information with one another
and are increasing their focus on cross-
border transactions.
India has also seen an increased focus on
cross-border transactions and increased
aggressiveness in the attitude of the
authorities. The latter is driven by the need
to meet high revenue targets to bridge the
defcit. Moreover, apart from revenue-
related requirements, the global perception
that companies are not paying their fair
share of taxes seems to have affected the
approach adopted by Indian authorities.

Increase in tax audit making the
business environment challenging
According to 63% of Indian companies,
tax audits have become more aggressive
in the last two years. This was a view
shared by companies in the Asia Pacifc
(52%) and BRIC (54%). In addition, 58% of
global companies reported that they have
witnessed a growing trend toward more
stringent tax audits or assessments relating
to VAT or other indirect taxes. This fgure
increases to 72% in the case of Asia-Pacifc-
based companies and 74% for India and
other BRIC-based businesses.
Some changes, such as the General
Anti-Avoidance Rule (GAAR), are directly
incorporated in law and can be easily
identifed and managed, but other changes,
which may be more subjective, are viewed
by companies as being diffcult to identify
and manage while managing their taxes.
Worldwide, fewer multinationals felt that
tax authorities are seeking to develop
more open and collaborative relations with
taxpayers a 52% drop from 56% in 2011
to 27% in 2013.
Only 8% of Indian respondents felt that
tax administrations are building open and
collaborative relations with companies
vis--vis a signifcant 32% of companies in
Americas.
of the Indian companies report
that they feel tax audits have
become more aggressive in the
last two years
of the Indian respondents feel
that tax administrations are
building open and collaborative
relations with the companies
63%
8%
2013 GLOBAL, 26%
2011 Global, 56%
India, 8%
America, 32%
Asia Pac, 26%
EMEIA, 27%
0%
10%
20%
30%
40%
50%
60%
One or more tax administrations seeking to develop a more open and
collaborative relationship with your company
One or more tax administrations seeking to develop a more open and collaborative relationship
with your company
15 | Managing tax risks: How prepared is India Inc.?
The general view of our respondents was
that tax disputes tie up resources, are
costly for all involved, can irreparably
damage relationships and are in no ones
interest. In India, the total amount locked
up in Income Tax disputes at various
levels (as on December 2011) was around
INR4.3 lakh crores (INR4300 billion)
4
. As
far as transfer pricing is concerned, TP
adjustments during 201213 was around
INR70,000 crores (INR700 billion). The
future coherence of the BEPS Action Plan
is therefore as important to business as it
is to the OECD and to governments. There
is a direct correlation between the level of
collective action achieved and that of tax
disputes worldwide. Tax authorities typically
do not publish offcial statistics in relation
to tax disputes, but the health of the Mutual
Agreement Procedure (MAP) between
countries can be a useful indicator of the
well-being of their tax systems.
Around 55% of Indian companies reported
that they are actively pursuing a more open
and collaborative relationship with one or
more tax administrations. However, the
majority of these have seen mixed results.
In India, instances of taxpayers opting
for MAP to resolve their tax and transfer
pricing disputes have generally not been
high. Some of the tax treaties signed
The response to the
Indian APA program has
been enthusiastic. More
than 375 application
were fled by 31 March
2014. The Government
has already signed 5
unilateral APAs within 12
months of applications.
The APA team has
conducted close to 100
site visits across various
applicants and many
cases are in advanced
stages of discussion. The
APA process has emerged
as a clear alternative
to the traditional audit
exam / assessment
proceedings, which are
adversarial in nature and
more prone to fxed ideas
or mindset.
Vijay Iyer
National Transfer Pricing Leader,
EY
by India provide for suspension of tax
demand during pending MAP proceedings.
This has been one of the factors that has
been prompting companies with large tax
demands to pursue MAP simultaneously
with their domestic appeals. Resolution
of cases under MAP has been protracted
with an inventory of pending cases, which
reduces its effcacy as an alternative
dispute-resolution mechanism.
APA prospects brighter in India
compared to other countries
Since the introduction of Advance Pricing
Agreement (APA) mechanism in India
in July 2012, the experience of Indian
companies with regard to APA negotiations
has been fairly positive. The majority of our
respondents found that conclusion of APAs
was not diffcult and only 17% of our Indian
respondents reported that they found
tax authorities becoming diffcult with
respect to conclusion of APAs in the past
two years. Almost all the Indian companies
participating in our survey indicated that
they would increase their use of unilateral
or bilateral APAs in the next two years; 67%
of them showed a preference for unilateral
APAs.
4 Lok Sabha Unstarred Question No. 3734, answered on 27 April 2012
Use of unilateral or bilateral Advance Pricing Agreements in the next two years
42%
33%
47%
18%
46%
22%
67%
6%
9%
29%
11%
0%
18%
27%
5%
16%
18%
18%
15%
9%
12%
27%
5%
2013 Global
India
Americas
Asia-Pac
EMEIA
Yes - both unilateral and bilateral APAs Yes - unilateral APAs only
Yes - bilateral APAs only No - both unilateral and bilateral APAs Dont know
16 Managing tax risks: How prepared is India Inc.? |
The global experience seems different, with
55% of US respondents and 36% of Asia-
Pacifc businesses being of the opinion that
securing an APA has become a lot more
diffcult over the last two years.
In India, introduction of General Anti-
Avoidance Rules (GAAR) has resulted in
several concerns about its wide reach and
proper implementation. In India, GAAR will
be applicable from April 2016. However,
India Inc. has been urging the Government
to defer GAAR for some time till there is
increased clarity and understanding on its
implementation. In the global scenario,
26% of US companies felt that there is an
increase in application of GAAR by one or
more tax administrations; 12% of Asia-
Pacifc businesses and 13% of companies in
EMEIA indicated that application of GAAR
by tax administrations is increasing.
Cooperative compliance yet to
gain acceptance
The issue of cooperative compliance
agreements is not widely accepted by
Indian companies. More than half of the
companies (58%) were not sure if they
would want to enter cooperative compliance
agreements such as the US Compliance
Assurance Process (CAP) or Dutch
Horizontal Monitoring programs. Even at
global levels, only 18% of the companies
were completely open to the possibility
of entering cooperative compliance
agreements with tax administrations. One-
third of the global companies were open to
the possibility, but had some reservations.
Perception regarding the possibilty of entering into a cooperative compliance
agreement with one or more tax administrations?
18%
9%
29%
16%
17%
33%
18%
38%
18%
37%
12%
16%
18%
10%
10%
36%
58%
15%
55%
35%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2013 Global
India
Americas
Asia-Pac
EMEIA
We are completely open to the possibility
We are open to the possibility but have some reservations
We are not open to the possibility
Dont know
17 | Managing tax risks: How prepared is India Inc.?
18 Managing tax risks: How prepared is India Inc.? |
Operational risk
Many companies could be using outdated
tools to manage their taxes. They may
get the job done, but with less comfort
and perhaps more risk than is optimal.
When it comes to tax, the best tool kit
includes knowledgeable people, innovative
technologies and effective processes, and
where appropriate, the use of revenue
authority programs designed to increase
certainty and reduce incidences of disputes.
Companies are spending more time
managing tax risks and controversies than
before. According to our respondents, they
are spending slightly less time on fnancial
reporting and tax planning and more time
on managing routine compliance-related
issues and disputes/controversies. For
instance, Indian companies spend 28.9%
of their tax function time on routine
compliance, 28.4% on dealing with tax
controversies (including tax audits), but
only 17.8% on fnancial reporting and
planning.
The connection between tax and business
continues to grow strongly. Around 91%
of our respondents from Indian companies
believe that their tax functions have
signifcant or adequate involvement in the
general business strategy and planning
process; 60% feel that their companies
CEOs and/or boards of directors oversight
relating to tax risk and management of
controversy has increased over the past two
years, while only 2% reported that it has
decreased.
According to 77% of the companies, they
regularly provide briefngs or advice to their
CEOs and/or CFOs on how tax risks and tax
controversies are being managed.
Effective management of complex tax
issues relies on effective policies. Not
surprisingly, 51% of the companies reported
that they have been either creating or
refreshing their tax risk or tax controversy
policy in the last two years as a direct result
of the focus on taxes paid by multinational
companies.
Percentage time spent on overall tax function
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
32
29 29
33
18
28
21
10
17
20
26
11
34
22
1819
15
16
20
30
24
20
22
20
18
15
2121
20
15
2013
Global
2011
Global
India Americas Asia-Pac EMEIA
Routine tax compliance
Tax nancial reporting, including tax accounting and tax provision work
Tax controversy, including managing tax audits and any associated remediation work
Tax planning
Any other issues which have not already been listed
19 | Managing tax risks: How prepared is India Inc.?
According to 51% of our respondents, they
have increased the overall size of their
tax functions since 2011. They indicated
that this growth is their direct response to
the changing tax environment. However,
a large proportion (43%) revealed that
an inadequate number of resources who
are competent in tax functions may be
contributing to increased tax risks or
controversies. Effective deployment of such
resources may be even more important
than their overall number. Indirect taxes
and withholding taxes are both areas
of signifcant change and growth for
government policymakers. Both have a
direct impact on the corporate bottom line,
but our survey data indicates that there
may be lack of clarity about who manages
which functions in enterprises.
According to 50% of our respondents from
fnance or accounting departments, their
departments managed indirect taxes, but
48% of people in a tax role reported that
the tax function was in charge. This is
a signifcant divergence from what was
reported to be the second highest tax
risk for businesses. This may also be said
of withholding taxes. At best, it leads to
ineffcient use of resources; at worst, it
drives signifcant risk of trapped tax, new
disputes and fnancial penalties.
According to 73% of the Indian companies,
they each have a single, readily identifable
individual who has overall responsibility for
managing tax risk within their enterprises.
Getting the mix of people, processes and
technology right is important because
according to the companies, they are
juggling a signifcant volume of disputes.
For example, more than 40% of the
companies reported up to 25 disputes and
4% more than 100. Only 16% of the Indian
companies indicated that they were not
beset by disputes. It is not surprising then
that 73% of the companies we surveyed
have partial or complete visibility of open
tax audits and disputes around the world.
The good news is that companies appear to
know that the right tools can make all the
difference. According to almost half of the
Indian companies surveyed by us, lack of
processes or technology may contribute to
increased tax or controversy risk.
However, identifying a problem is
easier than solving it. Large numbers
of companies reported that they use
rudimentary technology or no technology
at all to manage their tax audits and
ever-increasing requests for information
and data from tax authorities; 44% of
Indian companies use no technology
or rely on local personnel to manage
tax audits and incoming data requests.
A similar proportion use internally
developed software templates (e.g., Excel
spreadsheets), while 6% use internally
developed software applications (e.g.,
Microsoft Access or other custom
programming; 10% use software provided
by external vendors, outsourcing,
Active Disputes of Indian Companies at all levels
1-10 disputes
No active
disputes
Dont know
101+
disputes
11-25
disputes
26-50
disputes
51-100
disputes
10%
34%
16%
26%
4%
8%
2%
say that insuffcient tax function
resources may be contributing
to increased tax risk or
controversy
of the companies have partial or
complete visibility over open
tax audits and disputes around
the world
43%
73%
20 Managing tax risks: How prepared is India Inc.? |
accountancy or providers of professional
services.
Out of the companies surveyed in India,
60% reported that their tax functions make
use of internally developed software
templates (e.g., Excel spreadsheets) and/
or technology/software tools to enable
and support tax modeling software, while
36% of the companies use no technology
or rely on local personnel to manage their
documents and workfow. Only around 2%
use software provided by external vendors
or providers of outsourcing, accountancy or
professional services.
These fgures are not very different at the
global level. The EY global survey reveals
similar statistics in countries where better
use of technology could improve responses
to tax-related information management.
Of course, even the best technology has
limited utility if it is not combined with
the correct resources, processes and
communications all of which companies
tell us they are struggling to deploy in the
face of so much change.
Companies also report that they lack the
resources to meet anticipated demands
for increased reporting and transparency
in dissemination of information, including
the OECDs proposed country-by-
country reporting and transfer pricing
documentation requirements.
Only 42% of our Indian respondents
believed that they have adequate reporting
systems in place to gather and provide the
required information. Overall, it seems
that as external pressures mount, the air is
becoming a little thinner in the tax function.
The rapidly developing tax risk landscape is
clearly driving more and more companies
to test their internal controls. According to
85% of the Indian companies we surveyed,
they have testing and review processes in
place as part of their control environments
within their tax functions. This is true of
79% of US companies, 66% of Asia-Pacifc
companies and 64% businesses in EMEIA.
Many companies are also taking the
opportunity to document their controls in
ways that exceed regulatory requirements.
According to 63% of Indian companies,
such a documentation for internal controls
is maintained only in jurisdictions where
it is mandatory. 22% reported that they
maintain documentation of internal controls
in all jurisdictions, whether or not it is
required.
According to 97% of Indian companies,
reduction in compliance risks has been
a signifcant driver in changing their
approach to documenting transactions for
tax purposes far ahead of improving their
internal data-sharing capabilities (46%). This
proportion is higher than global fgures. In
some countries, 89% of companies consider
reducing their compliance risk the most
signifcant driver of their approach to
documentation.
As previously noted, 63% of companies
in India and 78% of the largest global
enterprises surveyed agreed or strongly
agreed that tax risk and tax controversies
will become more important for their
companies in the next two years. However,
companies are also actively engaged in
other activities apart from managing tax
risks and controversies. Our survey data
reveals signifcant regional differences of
opinion as well as on companies focus on
these activities. For instance, 78% of the
largest companies we surveyed globally
agreed or strongly agreed that tax risk
and tax controversies will become more
important for their companies in the next
two years. However, global companies
indicated that managing strategic
business transactions as well as tax
audits and controversies were their two
leading priorities.
Among US companies, management of their
effective tax rate is their leading focus area,
but among our respondents from the Asia
Pacifc and EMEIA respondents, effective
tax rate management ranked fourth,
behind strategic business transactions,
managing tax audits and controversies, and
securing the effectiveness and effciency
of global tax compliance and reporting.
In India, the effectiveness and effciency
of global tax compliance and reporting
and management of the effective tax rate
are the leading focus areas, and both are
equally important.
of Indian companies say that
reduction in compliance risks
has been a signifcant driver
in changing their approach to
documenting transactions for
tax purposes
97%
21 | Managing tax risks: How prepared is India Inc.?
Conclusion Survey
methodology
India Inc. will need to equip itself for future tax risk
management models. Enterprises will have to fawlessly
execute well thought-out and well-resourced strategies,
and at the same time, remain fexible enough to deal with
the emerging tax environment.
Some of these short-term actions may include:
Assessing how companies will comply with new
transparency demands such as country-by-country
reporting and transfer pricing documentation
requirements without inviting unwarranted
challenges to previously taken positions as well as
without using so many resources that their oversight
of other tax areas is sacrifced
Determining your tax function readiness in terms of
the key components of the BEPS Action Plan
Assessing whether your companys current and
previous transactions will stand up to increased
business purpose requirements however arbitrary
those requirements may seem
Making sure your company has the right tools in
place, such as APAs, rulings or pre-fling agreements,
to manage impending changes
Making sure your company has enhanced visibility
and control of any active disputes or uncertain tax
positions in India and around the world
Making sure your company has the right resources in
place to deal with all required tasks
Our survey was conducted online between
November 2013 and January 2014. Two
separate online survey instruments
were used.
The respondents included 830 tax and
fnance executives, representing more than
20 industry sectors in 25 jurisdictions. From
India, 112 respondents participated in it.
Companies generating less than US$50
million to more than US$5 billion in annual
revenues responded to our survey; 34%
of the responses came from companies
generating more US$5 billion in
annual revenue
Our respondents included tax directors,
global heads of tax, CFOs, fnancial
controllers, functional tax heads
(international taxes, indirect tax or
employment taxes), fnancial directors, vice
presidents of fnance, vice presidents of tax
and other senior tax or fnance executives.
Data presented in this report may not add
up to 100% due to rounding off or non-
reporting of dont know and/or
no responses.
Ahmedabad
2
nd
foor, Shivalik Ishaan
Near C.N. Vidhyalaya
Ambawadi
Ahmedabad - 380 015
Tel: + 91 79 6608 3800
Fax: + 91 79 6608 3900
Bengaluru
6
th
, 12
th
& 13
th
foor
UB City, Canberra Block
No.24 Vittal Mallya Road
Bengaluru - 560 001
Tel: + 91 80 4027 5000
+ 91 80 6727 5000
Fax: + 91 80 2210 6000 (6
th
& 12
th
foor)
Fax: + 91 80 2224 0695 (13
th
foor)
1
st
Floor, Prestige Emerald
No. 4, Madras Bank Road
Lavelle Road Junction
Bengaluru - 560 001
Tel: + 91 80 6727 5000
Fax: + 91 80 2222 4112
Chandigarh
1
st
Floor, SCO: 166-167
Sector 9-C, Madhya Marg
Chandigarh - 160 009
Tel: + 91 172 671 7800
Fax: + 91 172 671 7888
Chennai
Tidel Park, 6
th
& 7
th
Floor
A Block (Module 601,701-702)
No.4, Rajiv Gandhi Salai, Taramani
Chennai - 600113
Tel: + 91 44 6654 8100
Fax: + 91 44 2254 0120
Hyderabad
Oval Offce, 18, iLabs Centre
Hitech City, Madhapur
Hyderabad - 500081
Tel: + 91 40 6736 2000
Fax: + 91 40 6736 2200
Kochi
9
th
Floor, ABAD Nucleus
NH-49, Maradu PO
Kochi - 682304
Tel: + 91 484 304 4000
Fax: + 91 484 270 5393
Kolkata
22 Camac Street
3
rd
foor, Block C
Kolkata - 700 016
Tel: + 91 33 6615 3400
Fax: + 91 33 2281 7750
Mumbai
14
th
Floor, The Ruby
29 Senapati Bapat Marg
Dadar (W), Mumbai - 400028
Tel: + 91 022 6192 0000
Fax: + 91 022 6192 1000
5
th
Floor, Block B-2
Nirlon Knowledge Park
Off. Western Express Highway
Goregaon (E)
Mumbai - 400 063
Tel: + 91 22 6192 0000
Fax: + 91 22 6192 3000
NCR
Golf View Corporate Tower B
Near DLF Golf Course
Sector 42
Gurgaon - 122002
Tel: + 91 124 464 4000
Fax: + 91 124 464 4050
Our offces
6
th
foor, HT House
18-20 Kasturba Gandhi Marg
New Delhi - 110 001
Tel: + 91 11 4363 3000
Fax: + 91 11 4363 3200
4
th
& 5
th
Floor, Plot No 2B, Tower 2,
Sector 126,
NOIDA 201 304
Gautam Budh Nagar, U.P. India
Tel: + 91 120 671 7000
Fax: + 91 120 671 7171
Pune
C-401, 4
th
foor
Panchshil Tech Park
Yerwada
(Near Don Bosco School)
Pune - 411 006
Tel: + 91 20 6603 6000
Fax: + 91 20 6601 5900
22 Managing tax risks: How prepared is India Inc.? |
Ernst & Young LLP
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and
advisory services. The insights and quality services we
deliver help build trust and confidence in the capital
markets and in economies the world over. We develop
outstanding leaders who team to deliver on our promises
to all of our stakeholders. In so doing, we play a critical
role in building a better working world for our people, for
our clients and for our communities.
EY refers to the global organization, and may refer to
one or more, of the 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. For more
information about our organization, please visit ey.com.
Ernst & Young LLP is one of the Indian client serving member firms of
EYGM Limited. For more information about our organization, please visit
www.ey.com/in.
Ernst & Young LLP is a Limited Liability Partnership, registered under the
Limited Liability Partnership Act, 2008 in India, having its registered office
at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016
2014 Ernst & Young LLP. Published in India.
All Rights Reserved.
EYIN1406-067
ED None
This publication contains information in summary form and is therefore
intended for general guidance only. It is not intended to be a substitute
for detailed research or the exercise of professional judgment. Neither
Ernst & Young LLP nor any other member of the global Ernst & Young
organization can accept any responsibility for loss occasioned to any
person acting or refraining from action as a result of any material in this
publication. On any specific matter, reference should be made to the
appropriate advisor.
Artwork by: JG
EY refers to the global organization, and/
or one or more of the independent member
firms of Ernst & Young Global Limited
Join India Tax Insights from EY on