September 18, 2017

FTSE100 sees cost of tax disputes jump 62% in the last year

UK’s major corporates set aside £2.7billion to cover the cost of tax litigation in 2016 Disputes with tax authorities an area of increasing global activity for law firms and general counsel.

LONDON – FTSE 100 companies have had to increase the funds they set aside to cover the cost of tax litigation by 62% in the last year, reveals Thomson Reuters legal business, the world’s leading source of intelligence for businesses and professionals.

Thomson Reuters says that legal liabilities* arising from disputes with tax authorities reported by FTSE 100 companies increased by over £1billion last year, rising to £2.69bn in 2016 from £1.66bn in 2015.

This significant rise reflects sustained pressure on tax authorities worldwide to increase tax revenues and to be seen to be taking a robust approach to ensure that all companies, particularly large, high profile businesses, are paying the right amount of tax.

Thomson Reuters says that this is an area of increasing global activity for lawyers, as the progressively complex operations of multinational companies come into conflict with the stricter interpretation and application of tax rules worldwide, with tax authorities also making greater use of technology to spot suspected tax underpayments.

For instance, HMRC is improving its methods of identifying companies it suspects of underpaying tax, by increasing the scope of its “Connect” database to collect and cross-reference more information from other government databases and external sources such as foreign tax authorities and banks.

Thomson Reuters says that in addition to the direct costs of tax litigation, disputes can result in other major costs for companies – such as lost revenue and a reduced share price – if the business' brand and reputation are damaged by any negative publicity.

For example, International Personal Finance, the FTSE 250 home credit business, saw its shares fall nearly 18% following an announcement that its Polish arm, Provident Polska, was to have its tax arrangements from 2008 challenged by the country’s tax authorities.

“UK corporates are braced for some major legal wrangles with tax authorities and with each case potentially worth millions of pounds, the stakes for both sides are very high,” says Raichel Hopkinson, Head of Practical Law Dispute Resolution at Thomson Reuters.

“As the FTSE100’s global operations become more far-reaching, intricate and diversified, the risk of becoming embroiled in a tax dispute is magnified.”

“Staying in line with the various rules and guidelines laid down by different tax authorities around the world is fraught with pitfalls, especially against a backdrop of increasing public and media scrutiny of corporate tax bills and shareholder pressure to drive corporate performance.”

“High legal liabilities coupled with the potential for a sharp fall in share prices and revenues if investor and customer perception turns sour, is putting leading corporates under intense pressure. In turn this is creating an increasing demand for specialist legal expertise and insight – both within in-house general counsel and from external law firms – to help corporates get to grips with their various tax obligations and help them mitigate the risks they face.”

Thomson Reuters says that pharmaceutical companies set aside the most for tax litigation in 2016, earmarking £1.72bn last year - 64% of the FTSE100 total.

Pharmaceutical companies typically face intense scrutiny from tax authorities over their transfer pricing arrangements – where an international business distributes its costs across the different countries in which it operates. If a company moves profits in order to take advantage of lower corporation tax rates in certain countries, tax authorities may launch an investigation.

“Tax authorities have long seen pharmaceutical companies’ tax arrangements as an area of contention, as the amounts of disputed tax involved in transfer pricing can be substantial,” explains Raichel Hopkinson.

*Provisions and contingent liabilities (that are probable and can be reasonably defined) that relate to disputes with tax authorities, reported within annual reports of FTSE100 companies.

Thomson Reuters

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