Use of tax havens heightens scrutiny

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Companies doing deals in tax havens are facing tougher scrutiny from authorities, according to a survey by Ernst & Young, the professional advisory firm.

Deals involving low-tax jurisdictions were flagged for extra attention by about half of the 49 tax authorities across the world that participated in the survey. “Transactions with ‘tax haven’ jurisdictions ... are increasingly likely to be scrutinised and formal ‘watch lists’ are becoming more common,” it said.

In the past, governments have rarely been explicit about their focus on tax havens in deciding whether to challenge a multinational’s “transfer pricing” policy, which determines the allocation of taxable profits between different parts of a business.

Transfer pricing, which can lead to multi-billion pound challenges by tax authorities, has long been the most difficult tax issue faced by multinationals. It is becoming increasingly contentious as more countries introduce regulations and cash-strapped governments intensify efforts to ensure they receive an adequate share of revenues.

“There is no question there will be more controversy,” said John Hobster, partner of Ernst & Young.

Mr Hobster said businesses should be mindful of the growing risk of being taxed on the same profits in more than one jurisdiction. They should focus on minimising challenges from tax authorities and mitigating the risk of penalties.

The use of low-tax jurisdictions was subject to “potential misunderstanding by tax authorities”, requiring multinationals to demonstrate the arm’s length nature of their deals by showing that their allocation of taxable profits was justified by the location of staff and operations.

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