The global law firm interviewed 150 companies from the Fortune 500 who confirmed they have up to $22.6bn (£17.3bn) of revenue subject to tax disputes. If the entire Fortune 500 is managing tax disputes in similar proportions, that equates to $75.3bn (£57.8bn) in dispute, or the equivalent of 7.5% of the profit made by the Fortune 500 in 2017.

Over half (60%) of tax leaders said that this represents an increase in tax disputes over the last five years, while 63% predict that the amount of tax under dispute will continue to rise over the next five years.

 Locating and isolating the source of corporate value is the single greatest challenge facing organisations and authorities, according to 72% of tax leaders who identified this as the leading cause of contention and the key driver for tax disputes.

 Mark Delaney, partner and head of Baker McKenzie's UK tax practice, said: ‘Transfer pricing is the most common source of disputes, with issues arising from conflicting valuations of assets and disagreement on the location and scope of value-generating activities.

‘The amorphous nature of value created by digitization is perhaps the most significant contributor to the high number of transfer pricing disputes we see today, and that are predicted over the coming five years.’

The majority (72%) of tax leaders say that current tax regimes are not fit for purpose. Baker McKenzie argues that tax authorities have been slow to respond to these changes and where tax structures were once led by national legislation, some authorities are now taking a piecemeal approach, applying concepts not yet incorporated into law and retroactively imposing them on past tax filings, leaving organizations reeling.

The report found that the complexity and volume of tax disputes is taking a toll on multinationals’ ability to manage them efficiently. More than half (57%) struggle to clearly articulate their tax calculations and liabilities and two thirds (64%) worry about their ability to meet the demands of global revenue authorities.

Timelines for resolving disputes are lengthening, owing to global divergences between regulatory regimes and the difficulty in unravelling the source of taxable value. Two thirds (67%) of tax leaders say it is taking longer than ever to solve cross-border disputes.

Negotiated settlements have grown in popularity with 85% of respondents citing it as an effective dispute resolution method, and signs that litigation is falling out of favour with multinationals. Baker McKenzie says complexity is creating a greater need for discussion, consideration and partnership between tax leaders and authorities.

George Clarke, a US tax partner at Baker McKenzie said: ‘The old rules-based system for resolving tax disputes has been abandoned as tax authorities and corporates become increasingly polarized. ‘Where once “fairness” was the guiding principle for determining taxable value, today, strategic planning is as important as technical skill during tax negotiations.’

The Shape of Water: Tax Disputes in the Age of Intangible Value is here

Report by Pat Sweet