The Sky is the Limit by Knut Olsen

Expert Articles: Knut Olsen,  EIMF Maritime Academy

Below is an article written by Knut Olsen,  Managing Partner in Dr. K. Olsen Global Tax in Norway and one of the utmost experts in his field. Mr Olsen will be in Limassol, Cyprus for 2 days with the EIMF Maritime Academy, leading 2 very interesting workshops

1. Global Tax for Shipping, 1 November
2. Anti-Corruption In The Shipping Industry, 2 November

THE SKY IS NO LONGER THE LIMIT

A well-known saying states:

“The sky is the limit”

This saying is correct in most situations, but not when it comes to global tax risks for multinational corporations. The total tax risk for multinational groups has developed to become extremely high, leading to the sky no longer being the limit.

A few years ago, the Internal Revenue Service, USA, announced that it had successfully resolved a tax dispute with a US multinational corporation, which was the largest tax dispute in history. Under the settlement agreement, the company had to pay the IRS approximately $3.4 billion, and they were forced to abandon their claim for a refund of $1.8 billion in overpaid income tax.

We have seen several ‘billion-US-dollar’ adjustments or disputes since then, and such adjustments are more frequent and common today compared to earlier. Even more worrying, we have not seen the worst of it yet: tax authorities around the world have shown that they have the power, resources and willingness to challenge multinational corporations. They have highly qualified staff who are trained and skilled. Furthermore, each country needs to fight for and protect its own revenue.

The tax risks for multinational corporations have become increasingly high and may consequently rank as some of the greatest risks experienced by most multinational corporations. The diagram below shows just a few examples of the tax risks that corporations could face:

Tax risks 

Tax risks are accelerating fast worldwide for multinational corporations and they have never been higher and scarier, worsening by the day.

Furthermore, there is a risk that countries will require a larger share of the cake, or consider tax  to be ‘low-hanging fruit’, as some countries seem to wrongfully believe that all multinational corporations evade tax. The problem is that the cake is not big enough and corporations could face double taxation, heavy penalties, endless disputes with the tax authorities around the world, litigation, tax inspections that last for years, and finally, but equally important, damage to their reputation, even if they do their best to resolve the situation.

So why is the sky not the limit when it comes to global tax risks?

1. International taxation is over-complex and possibly the most complex area from a legal point of view.
2. As the diagrams shows, the tax environment contains a great variety of where tax risks can be found and each of these could create significant and unacceptably high risks.
3. One tax issue could trigger a domino effect; if a tax adjustment is made in one country, this could trigger adjustments in other countries as well.
4. The penalty regime in some countries are rigid, with maximum penalties of up to 400 % and the penalties are non-deductible. A multinational corporation could face such penalties in a number of countries.
5. The historical risk could be enormous as some countries can make tax adjustments and impose large penalties going back ten years in time.
6. A tax dispute with the tax authorities might be spread all over the newspapers and on social media, thus causing considerable damage to the reputation of the company concerned.
7. A recent international trend has seen the tax authorities forcing multinational corporations to make payments that reflect the level of economic activity generated by the company concerned within each country’s borders. Many multinational corporations will probably face similar scrutiny in the future.
8. The world is far more transparent, and the tax authorities are now sharing information and engaging in cross-border cooperation.
9. The compliance burden and duty to report cross-border issues will continue to increase rapidly. There is no mercy.
10. And even worse, several countries require full payment of all taxes, perhaps penalties and overdue interest fees, even if the tax in question is disputed, if an appeal has been submitted or even if there is ongoing litigation. It might take 5-10 years or even more before a tax dispute can be closed, and in the meantime, the corporation concerned may have to pay all the tax due in full.
11. Last, but definitely not least, all tax risks are cumulative. Multinational corporations are often located in more than 100 countries, which means that their companies do not only bear all the tax risks in just one country, but that every single tax risk enhances the risks that they are exposed to in every country in which they operate. All tax risks are cumulative and the total amount of tax to be paid could easily rise to above 100%.

Tax managers, top management and Board Members have a serious personal responsibility in this regard and they must be able to prove that they have taken due care and have dealt with these huge tax risks in a satisfactory way. Being a Board Member, top manager, head of tax or compliance officer has become a risky sport that not everyone is fully aware of. This is extremely serious, as multinational corporations would be putting their employees’ necks on the block if they ignored all their duties.

There are many ways of protecting companies, board members, managers and investors, but unfortunately, not every company take actions in order to prevent themselves, their managers or Board Members.

Unfortunately, the sky is no longer the limit when it comes to global tax risks.