Tax risks have shifted away from compliance and ensuring that documents and returns are submitted on time to the consistency of underlying data, caution tax specialists.
Recent discussions highlighted that regulatory risks are no longer driven only by policy positions, but by “operational visibility and data integrity”. The focus is on a company’s ability to collate, interpret, and provide data quickly and consistently.
“Revenue authorities are becoming more technically capable. Information sharing between authorities is increasing, and technology is moving incredibly fast,” says Chris Cochrane, the founder and chief executive of fluid, a financial technology company.
According to Michael Hewson, founder and director of Graphene Economics, the shift is structural rather than cyclical. Growing regulatory scrutiny is exposing a much deeper business challenge: the struggle to govern, validate, and operationalise the data underpinning their tax positions, he said during a recent fluid Talk webinar hosted by fluid and Graphene Economics.
Cabrini McCarrick, transfer pricing partner at Regan van Rooy, said in an earlier webinar hosted by the tax advisory firm that it has noticed an increase in tax disputes across Africa. There are not only more disputes, but the quality of the disputes is also better.
“Audits are being driven by data and risk profiling. That is quite a change because the types of information requests and areas that are being challenged are smarter than before,” she says.
A real issue is the inconsistency in data. There are differences in the data found in financial statements, legal agreements, tax returns, and customs applications. “When your own information is used against you, you are not in a very good position,” says McCarrick.
One taxpayer, for example, received 11 separate information requests over five financial periods. April Nicholson, executive director at Graphene Economics, says teams change, systems change, and shared drives move.
“Now you’re trying to retrieve invoices, emails, general ledger records, and KPIs from seven years ago, while ensuring that everything submitted in request 1 still aligns with request 11.”
The issue is not necessarily that companies lack data. The problem is that they often cannot reproduce it consistently, quickly, or confidently, she adds.
“That challenge becomes even more serious when revenue authorities increasingly have better analytical capability than taxpayers themselves.”
McCarrick says tax authorities have access to more information than before through information sharing and data that is contained in required disclosure documentation.
“The simplest trigger is when officials have compared tax returns, financial statements, and other documentation and there are glaring discrepancies between them. When our own data is not telling a clear narrative, it will always start a list of questions to explain it.”
Related party policies (transfer pricing) is a real trigger. What enters transfer pricing documentation also impacts customs and excise, value-added tax, and permanent establishment positions.
“Sometimes, people do not focus sufficiently on what is in their transfer pricing documentation. That can lead to more exposure on wider taxes than they envision,” she warns.
Other triggers for closer scrutiny are high volumes of related party transactions, cross border flows, and withholding taxes.
Nothing willy-nilly
The tax landscape changed after Covid-19 when personal interaction made way for virtual data driven interaction. Hewson confirms that they regularly engage with revenue authorities virtually across multiple African countries.
“But alongside that change has come a lot more information, a lot more expectation, and much greater pressure on transfer pricing teams.”
McCarrick says the first step is a request for information for the tax authority. These requests are taking longer and are far more comprehensive than before.
A request for information is not just a “willy-nilly thing”. “It is because someone is investing in looking at your business for a specific reason. How you handle that initial request is absolutely critical,” cautions McCarrick.
Hewson says it is time to move from a reactive model to one where companies anticipate audits rather than simply respond to them. “It is about understanding what is happening in the current year, not just documenting the previous one.”
He adds that technology and artificial intelligence are expected to play an increasingly important role in enabling this shift from reactive to proactive.
Nicholson says technology can accelerate the process, but it cannot replace the underlying economic thinking. “You still need sound structures, governance, and transfer pricing expertise. Otherwise, it’s just rubbish in, rubbish out.”
McCarrick says if a taxpayer takes a certain tax position, they need to be able to substantiate it in a “constructive narrative that makes commercial sense”.
Tax disputes have moved beyond corporate tax. Employee taxes, permanent establishment, and transfer pricing are high-risk, high-value areas that hold high reputational risks.
Tax laws change and legal precedents should be incorporated into tax management.
Companies need to assess whether these changes are relevant for them. If they are whether they have implemented the changed legislation in their businesses.
McCarrick’s advice is to be “defence-ready” rather than being only reactive.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional tax advice.
