The global tax enforcement landscape is progressing rapidly, driven by regulatory changes, increasing cross-border collaboration, and shifts in funding for key tax authorities. Businesses operating in multiple jurisdictions face heightened scrutiny, more aggressive penalty regimes, and new compliance challenges. Recent developments have underscored the need for companies to reassess their tax strategies, ensure consistency across borders, and prepare for enhanced enforcement efforts.
The following key trends highlight the pressing concerns and strategies businesses should consider when navigating this complex and evolving environment.
Impact of Reduced Funding for the IRS: The US Internal Revenue Service’s (IRS’s) budget has faced significant cuts in recent years, creating uncertainty around its capacity to fulfill its strategic goals. Originally allocated $80 billion under the 2022 Inflation Reduction Act, the agency’s funding was reduced by $20 billion, with an additional $20 billion currently frozen. These constraints jeopardize plans for enforcement, hiring, and technological improvements. Practitioners emphasize that reduced funding hampers the IRS’s ability to address complex tax issues effectively, leaving its teams overwhelmed and vital taxpayer services under-resourced. The long-term implications depend on whether future administrations restore or further reduce the funding.
Increased Scrutiny and Penalties in Transfer Pricing Practices: Since 2022, the IRS has significantly increased enforcement efforts on transfer pricing, focusing heavily on penalties. The agency has shifted from viewing penalties as exceptions to now routinely applying them, even in cases where taxpayers provide robust documentation. This trend is mirrored in Canada, where the Canada Revenue Agency (CRA) has adopted a more aggressive approach, with penalties rising from 40% of cases in prior years to 70% in 2023. The ripple effects of these penalties, including higher compliance burdens and challenges in resolving disputes, have created broader implications for multinational corporations. As enforcement intensifies, businesses should anticipate and prepare for heightened scrutiny of their transfer pricing methodologies and economic substance practices.
Increased Global Collaboration on Exchange of Information: Governments are increasingly collaborating to exchange taxpayer information, resulting in more interconnected and far-reaching audits. Information shared with one tax authority, such as the CRA or IRS, can now be accessed and utilized by other jurisdictions, amplifying the need for businesses to maintain consistent compliance across borders. This enhanced flow of data, whether from audits or early payment agreements, allows tax authorities to build stronger cases and substantiate their positions more effectively. To mitigate risks, businesses must be strategic in responding to information requests, including assessing when to challenge disclosures based on trade or commercial secrecy.
As tax authorities continue to adapt their enforcement strategies and collaboration mechanisms, businesses must proactively address emerging challenges to remain compliant and mitigate risks. This includes preparing for increased penalties in transfer pricing, aligning financing structures with new regulatory standards, and managing the broader implications of global information exchange. By staying informed, maintaining consistent documentation, and strategically responding to evolving audit practices, businesses can better position themselves to navigate this dynamic tax environment.