The international business and tax field has changed a lot recently and the pace of change seems to accelerate. Additionally, the global economic recession and the consequent impact on profits, increases the pressure on taxpayers who bear the responsibility more than ever. Corporate risk and taxation have climbed up to the top of the list of corporate risks.
Because of the current economic climate, several countries (including Cyprus) have thought or have introduced measures to reduce the deficits in public budgets. Such measures include increases in VAT rates, increases in personal income tax and in specific sectors (such as banking taxes). Since it’s difficult to generate additional revenue through tax changes, several governments rely more than ever to faithful implementation of tax laws to reduce the deficits in their budgets. This led to an increased fiscal control on the tax authorities worldwide and more rigor in the conduct of the audit.
Especially for taxpayers engaged in international activities, the treatment of tax issues is usually not a purely domestic tax issue. In several cases, which continuously increase, tax authorities conducted tax audits in several jurisdictions where the members of Adhes Group are situated.
There is also a growing trend that the information obtained from tax audits are to be exchanged between tax authorities. All these developments justify a well-informed, proactive, coordinated and coherent approach by the taxpayer in the treatment of tax audits and tax inconsistencies as part of the management of tax risks. It is therefore important for companies to create greater certainty in perception regarding the tax risks. One possible way to achieve high-volume certainty is to change the dynamics of the relationship between tax advisers, taxpayers and tax authorities. In several countries (among them Cyprus), this relationship is characterized by mistrust, lack of honesty and lack of constructive dialogue. An interesting phenomenon which is supported and is increasingly used in some countries is that changing this dynamic is the perception about strengthening relationships. This is not a simple concept and what lies behind this is a real fundamental change in behavior, a removal from this relationship characterized by mistrust, towards a relationship characterized by trust. Regardless of this phenomenon, I fear that a strengthened relationship is still an utopia in Cyprus where companies dig their relationship with the tax authorities. Given this, the Cypriot taxpayers should be prepared for bigger and tighter fiscal control.
Differences in techniques to avoid tax risk are applied by multinational companies and an increasing number of companies are adopting proper policies and practices aiming on the provision of a well-founded model for creating safeguards against tax audits and disputes. Best management practices also include controls for certain minimum procedures and forms of financial and accounting matters, and they put in advance a wide variety of substantive issues and questions on antinomyof the prices in intra-group transactions. Companies also think some advantageous alternative dispute resolution, such as agreements on the intra-group transactions prices and negotiations with the Authority, in particular on a bilateral level. However, there is still no experience of such agreements in Cyprus.