Macfarlanes LLP | Sophie Rhind | Victoria Braid | Jackelyn West | Gideon Sanitt
This article is an extract from Lexology Panoramic: Tax Controversy 2025. Click here for the full guide.
Global overview
As 2024 reaches the half-way mark, elections have been dominating the news. Indeed, around 1.5 billion people will be taking part in polls in elections across more than 50 countries. Those elections are resulting in potential changes to the status quo with, for example, President Macron calling a snap election in France in response to the success of right-wing parties during elections for the European parliament.
If there are changes, they are prompted by the same issues. The outbreak of the covid-19 pandemic may have retreated into memory, but the pandemic’s impact continues to be felt across the global fiscal landscape. The unprecedented levels of support were followed by difficult economic conditions across the world, with considerable inflationary pressures.
This has resulted in a keener focus on how tax policy and enforcement can be used to win votes as well as boost economic growth. The real-world squeeze on living standards has become a key political battleground, and tax rules are at the forefront of the political focus on ensuring the burden is seen to fall proportionately across different earners and entities. For example, suggestions of a wealth tax to pay for covid-19 costs have divided opinion and have, so far, found mixed support across jurisdictions. Initially dismissed windfall taxes are also gaining prominence having been introduced in, for example, Greece, Italy, Romania, Spain and the United Kingdom.
This all takes place against the backdrop of global tax reform, as Pillar 2 and the global minimum rate of tax starts to become a reality across OECD nations. These measures came into force in domestic legislation across the European Union and the United Kingdom from 1 January 2024, and a host of other nations are in the process of translating these rules into their domestic framework.
These measures go hand-in-hand with further pushes for transparency and global information sharing, including new EU directives that require greater tax transparency, the further growth of the common reporting standard and the introduction of new reporting measures regarding environmental, social and corporate governance (ESG) commitments (which inevitably include tax elements). Jurisdictions are also taking steps to ensure their own agencies and authorities can better share taxpayer information, as internal barriers are removed across jurisdictions, and more data than ever is available to tax authorities.
This global environment creates a difficult juggling act for governments, particularly for any new governments. On one hand, both incumbent and presumptive politicians have come out strongly in favour of robust tax compliance and enforcement – and most now have access to more information than they have ever had to spot patterns that they consider problematic. On the other hand, many are trying to make themselves attractive to inward investment by providing strong tax incentives, particularly in the green economy and research and development. These fault lines might split along party lines but, equally, they frequently highlight differences within parties.
In these circumstances, most parties are united in putting increased pressure on tax authorities to ensure the maximum amount of revenue can be raised from the available tax base. In UK terms, this is seen in the tax authority’s constant references to ‘reducing the tax gap’, namely, the difference between the total tax that should, in theory, be paid and the amount of tax that is actually paid. This growing assertiveness from tax authorities appears to be universal. For example, a large proportion of the firms included in this publication referred to the increasing complexity, size and cost of dealing with tax authorities as the number of investigations only grows. In addition to the increased costs to taxpayers, this more combative approach also appears to have led to delays across the board, as those authorities struggle to progress new cases while still dealing with a growing backlog.
This greater activity from tax authorities can be seen in the greater funding directed into teams dealing with suspected tax fraud. Prompted partly to investigate the historic amounts expended on covid-19 relief – global estimates run into the tens of trillions of dollars – this is now complemented by a wider focus on tougher enforcement and attempts to tackle tax fraud in all areas. This is also consistent with the increasing (and increasingly global) measures to combat economic crime more widely. A common reaction to the 2008 financial crisis was for tax authorities across the globe to become more assertive and to review, not just adherence to the letter of the law, but whether taxpayers are operating as good tax citizens. We would expect to see that type of scrutiny increase while public finances remain in real difficulty.
That approach means that measures to address aggressive tax avoidance will also be actively pursued. The difference between evasion and avoidance may often be confused. Tax evasion involves dishonesty and effectively not paying tax when a taxpayer knows that it is payable, whereas tax avoidance involves someone not paying tax because they held a reasonable belief they were not liable. It is not unknown – particularly following the financial crash in 2008 – for taxpayer behaviour that was accepted and, indeed, sometimes actively encouraged to stimulate investment in previous years to become the subject of sustained tax authority challenge.
The approach of tax authorities in the next few years – and the accompanying newspaper headlines – may help to shape the future tax landscape in the same way that it shaped the post-2008 tax agenda. For example, in the United Kingdom, the press has focused their attention on allegations from HMRC of carelessness aimed at high-profile individuals, while HMRC’s crackdown on the research and development sector (where they have been scrutinising claims robustly) is beginning to attract wider attention. A similar approach to focusing on specific sectors is reported in this publication, whether construction in Ireland, wealth management in Japan or property speculation in Taiwan.
In addition to traditional areas of concern, there are new issues for tax authorities across the world to grip. The treatment of cryptoassets is currently in a state of significant uncertainty, with different countries adopting different approaches but most (as these chapters show) are considering them with interest – some with transaction taxes, some with active overtures to encourage potential investment, others with scepticism and thinly veiled hostility. Not only is the tax treatment of cryptoassets high on the agenda of tax authorities but the authorities have also been quick to demonstrate that they can track these assets when they need to. We have already seen examples of revenue authorities seizing crypto assets (including non-fungible tokens) as part of ongoing fraud investigations. AI has become a hot topic in almost every field and the same is true for tax. There are recent examples of AI being mis-used in court proceedings and, as the capability for its misuse in the tax system grows, tax authorities will also consider with interest whether it can be harnessed to better police and scrutinise the tax system; the use of powerful new algorithms combined with the massive increase of available data should, if used appropriately, create real opportunities to improve tax administration.
In the here and now, a large number of firms are reporting a sustained growth in transfer pricing disputes. For businesses, they can pose real difficulties and costs; they often require numerous economic and accounting experts, the involvement of litigation specialists and the disclosure of highly sensitive business materials to tax authorities that do not necessarily have the best reputation for information security. However, these investigations into intragroup transactions are at the forefront of tax authorities’ attempts to preserve (and often expand) their tax base. In a global environment where individual countries are facing economic pressures, this is somewhat inevitable.
This can be seen in the continued focus of tax authorities on personal residence (and, in the United Kingdom in particular, a move away from the concept of domicile in favour of residence) but it will also be increasingly important for company executives and employees that operate from different jurisdictions. They and their companies will need to consider how their movements – and where they carry out their functions from – impact both their own tax position as well as their company’s tax status.
The potential for more bilateral disputes between nations is high. Such disputes, when conducted under typical mutual agreement provisions, on the face of it, largely exclude the underlying taxpayer from most of the process. More recently, however, taxpayers have been given the opportunity to influence how such debates take place and the issues that are raised. Companies and individuals will, of course, want to do what they can to avoid any need to trigger such action but, in the event of a dispute, will want to ensure that they have some control as to how that dispute plays out.
This could mean ensuring that senior executives understand (and follow) internal protocols for decision-making, while also putting pressure on companies to ensure that they have an appropriate approach to tax policy that is developed through a business’s ESG function. Cooperation between taxpayers and tax authorities has been encouraged for years but the growing emphasis on ESG – and the importance of tax to any commitment to wider aspirations of environmental and social responsibility – could see taxpayers needing to take greater efforts to justify their tax position. Whatever governments they may face in the future, there is likely to be an emphasis on taxpayers showing that they are good and productive tax citizens both at home and abroad.
This article first appeared on Lexology. You can find the original version here.
