Tax Risk Management Services

USA - Notes on offshore trusts

2010-04-30T15:07:00.002-04:00

2010/04/19
1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.

Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.

Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.

An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.

NEUTERED TRUSTS

Asset Protection Trusts Neutered

by 2005 Bankruptcy Reform Act

The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.

Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.

Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.

FOREIGN ASSET PROTECTION TRUST CASES

The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.

*

In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.
*

Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”

SA - Dave King's House of Lords Judgment

2010-04-28T09:57:00.000-04:00

Judgments - King (Respondent) v Director of the Serious Fraud Office (Appellant) (On Appeal from the Court of Appeal Criminal Division)

HOUSE OF LORDS

SESSION 2008-09

[2009] UKHL 17

on appeal from:[2008] EWCA Crim 530

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)

Appellate Committee

Lord Phillips of Worth Matravers

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Lord Brown of Eaton-under-Heywood

Lord Mance

Counsel

Appellant:

Andrew Mitchell QC

Fiona Jackson

(Instructed by The Restraint and Confiscation Unit, Serious Fraud Office )

Respondent:

David Perry QC

Louis Mably

(Instructed by Kingsley Napley )

Hearing date:

9 FEBRUARY 2009

ON

WEDNESDAY 18 MARCH 2009

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

King (Respondent) v Director of the Serious Fraud Office (Appellant) (On appeal from the Court of Appeal Criminal Division)

[2009] UKHL 17

LORD PHILLIPS OF WORTH MATRAVERS

My Lords,

1. Mr King, the respondent to this appeal, is a British subject who has for 30 years been resident in South Africa. He has been charged by the Office of the National Prosecuting Authority of the Republic of South Africa (“the NPA”) with fraud on a very large scale. He was originally arrested in South Africa on 13 June 2002. He was served with an indictment on 29 April 2005, which was amended on 17 March 2006. He now faces 51 counts of fraud, 34 counts of contravening income tax legislation, 234 counts of contravening exchange control regulations, 2 counts of money laundering and 1 count of racketeering. His trial has been adjourned on a number of occasions. He has been granted bail and the return of his passport and has been permitted, on occasion, to travel outside South Africa.

2. This appeal arises out of a Letter of Request sent by the NPA to the United Kingdom Central Authority in London and to the Lord Advocate in Edinburgh dated 9 May 2006 seeking assistance in obtaining restraint orders over property of the respondent. The Letter of Request was referred to the appellant and, on 26 May 2006, the NPA wrote to the appellant varying the terms of the orders sought so as to make it clear that they covered property of a number of companies that were alleged to be “Alter Ego Entities” of the respondent.

3. The introduction to the Letter of Request requested assistance in seeking:

“(a) orders restraining Mr King from dealing with realisable property in (i) England and Wales, and (ii) Scotland, in order to make such property available to be recovered by means of an external confiscation order which will be sought, and (it is anticipated) on conviction granted, in criminal proceedings pending against Mr King in South Africa; and

(b) an order that Mr King swear an Affidavit setting out full details of all assets belonging to him and/or which he has the power, directly or indirectly to dispose of or deal with as his own, wherever located; and

(c) such other investigative assistance as may be appropriate in order to establish up to date factual information in relation to the assets, belonging to Mr King and/or which he has the power, directly or indirectly, to dispose of or deal with as his own, located in the UK.”

4. Paragraph 16 of the Letter of Request requested, inter alia, application for an order which

“(a) restrains Mr King from dealing with such realisable property (as defined in the relevant legislation, and including all property owned by Mr King or which he has the power, directly or indirectly, to deal with as if it were his own, including all assets held by the Alter Ego Entities) as is within the jurisdiction of the Court; and

(b) requires Mr King to swear an affidavit disclosing the full extent of his assets and those of the Alter Ego Entities, wherever situated, and…”

5. The Letter of Request set out in detail the basis on which the NPA contended that the property of the Alter Ego Entities represented property of the respondent. It set out a schedule of bank accounts of these companies which it stated were believed to be “held in England and Wales".

6. The Letter of Request explained that the purpose of the order sought was to make the restrained property available to be recovered by means of a confiscation order which would be sought in South Africa if and when the respondent was convicted.

7. The Letter of Request exhibited a draft order. This was in a standard form in common use in the Crown Court in proceedings arising out of prosecutions within this jurisdiction. This had been supplied to the NPA by the appellant.

8. On 31 May 2006 Judge Wadsworth QC, sitting in the Crown Court at Southwark, made an order pursuant to the Letter of Request. This order was in the terms of the draft order that had been exhibited to the Letter of Request. Its provisions included the following:

“DISPOSAL OF OR DEALING WITH ASSETS

5. The Defendants must not until further order of the court:

(1) remove from England and Wales any of their assets which are in England and Wales; or

(2) in any way dispose of, deal with or diminish the value of any of their assets whether they are in or outside England and Wales.

6. The prohibition against disposing or dealing with assets or diminishing their value includes the following assets in particular:

(a) the property within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if it has been sold;

(b) the property and assets of the businesses within the jurisdiction as set out in the Schedule annexed hereto marked ‘D’ or the proceeds of sale if any of them have been sold; and

(c) any money in the accounts within the jurisdiction as set out in the Schedule annexed hereto marked ‘D'.”

This has been described as “the Restraint Order".

9. The provisions of the order further included the following:

“PROVISION OF INFORMATION

Each Defendant shall serve a witness statement of all his assets wherever located certified by a statement of truth on the Serious Fraud Office within 31 days of the service of this Order as required by the Disclosure Order set out in Schedule C annexed to this Order.”

This has been described as “the Disclosure Order".

10. The order was made on an application without notice. The respondent applied unsuccessfully to Judge Wadsworth on 23 April 2007 to have it discharged. He then appealed to the Court of Appeal which, on 18 March 2008, allowed his appeal to the extent of substituting an order that related only to property in England and Wales: [2008] 1 WLR 2634. The appellant seeks to reverse the decision of the Court of Appeal.

11. The issue raised by this appeal is whether the Crown Court had jurisdiction to include within the ambit of the Restraint Order and the Disclosure Order property outside England and Wales.

12. Restraint orders, pursuant to requests from the NPA have also been made against the respondent in Guernsey on 9 June 2006 and in Scotland on 29 June 2006.

The statutory scheme

13. The power of the Crown Court to make a restraint order is derived from the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 (SI 2005/3181) (“the Order”), which was made under sections 444 and 459(2) of the Proceeds of Crime Act 2002 (“POCA”). POCA has replaced restraint and confiscatory regimes under the Criminal Justice Act 1988 (“the CJA 1988”) and the Drug Trafficking Act 1994 (“the DTA 1994”). A separate regime exists in relation to certain terrorist offences under the Terrorism Act 2000.

14. POCA deals primarily, as did the antecedent legislation, with orders arising out of criminal proceedings within the jurisdiction. Section 444 of POCA provides, however, that Her Majesty may, by Order in Council,

“(a) make provision for a prohibition on dealing with property which is the subject of an external request;

(b) make provision for the realisation of property for the purpose of giving effect to an external order.”

15. Section 447 of POCA deals with “interpretation” and provides:

“(1) An external request is a request by an overseas authority to prohibit dealing with relevant property which is identified in the request.

(2) An external order is an order which -

(a) is made by an overseas court where property is found or believed to have been obtained as a result of or in connection with criminal conduct, and

(b) is for the recovery of specified property or a specified sum of money…

(4) Property is all property wherever situated…

(7) Property is relevant property if there are reasonable grounds to believe that it may be needed to satisfy an external order which has been or which may be made.”

16. Part 2 of the Order is headed “Giving Effect in England and Wales to External Requests in Connection with Criminal Investigations or Proceedings and to External Orders Arising from such Proceedings". Relevant provisions in Chapter 1, which is headed “External Requests", are as follows.

17. Article 6 provides that the Secretary of State may refer an external request in connection with criminal proceedings or investigations in the country from which the request is made, and which concerns relevant property in England or Wales, to the Director of Public Prosecutions, the Director of Revenue and Customs Prosecutions or, where the request relates to an offence involving serious or complex fraud, to the appellant. Article 6(7) provides that where a request also concerns relevant property which is in Scotland or Northern Ireland, so much of the request as concerns such property shall be dealt with under Part 3 (Scotland) or, as the case may be, Part 4 (Northern Ireland). Article 8 provides that the Crown Court may make a restraint order if either of the two conditions in article 7 is satisfied.

18. The two conditions in article 7 are as follows:

“(2) The first condition is that -

(a) relevant property in England and Wales is identified in the external request;

(b) a criminal investigation has been started in the country from which the external request was made with regard to an offence, and

(c) there is reasonable cause to believe that the alleged offender named in the request has benefited from his criminal conduct.

(3) The second condition is that -

(a) relevant property in England and Wales is identified in the external request;

(b) proceedings for an offence have been started in the country from which the external request was made and not concluded, and

(c) there is reasonable cause to believe that the defendant named in the request has benefited from his criminal conduct.”

19. Article 7(4) provides that in determining whether the conditions are satisfied and whether the request is an external request within the meaning of the Act, the court must have regard to the definition in subsections (1), (4) to (8) and (11) of section 447 of POCA.

20. Article 8(1) provides that if either condition set out in article 7 is satisfied, “the Crown Court may make an order (‘a restraint order’) prohibiting any specified person from dealing with relevant property which is identified in the external request and specified in the order.”

21. Article 8(4) provides that if a restraint order is made, the court, “may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective.”

22. Article 8(6) provides: “Dealing with property includes removing it from England and Wales.”

23. Article 12 confers a power of seizure of any property which is specified in a restraint order to prevent its removal from England and Wales. Article 15 provides for the appointment of management receivers in respect of any property which is specified in the restraint order.

24. Chapter 2 of Part 2 of the Order confers on the Crown Court the power to give effect to external orders as defined in section 447(2) of the Act. Article 18 echoes article 6 in that it is a precondition to the exercise of the relevant powers that the external order “concerns relevant property in England or Wales". Chapters 2 and 3 provide for the order to be registered and then enforced. Enforcement is carried out by appointment of enforcement receivers, who are given powers to take possession of, to manage and to realise the property. These powers have to be exercised with a view to satisfying an external order that has been made against a defendant.

The decisions below.

25. Judge Wadsworth held, because the draft order exhibited to the Letter of Request had requested an order that “The Defendants must not…in any way dispose of, deal with or diminish the value of their assets whether they are in or outside England and Wales“ (emphasis added), that it was the intention of the NPA to seek a worldwide order. He held that he had jurisdiction to make the order because the condition imposed by article 7 of the Order, that relevant property in England and Wales should be identified in the request, was merely a “gateway” to the exercise of his jurisdiction. Once through the gateway, article 8 gave him the power to make an order prohibiting the respondent from dealing with relevant property identified in the external request. That was the respondent’s assets whether in or outside England and Wales, as specified in the draft order. The definition of property in section 447 as “all property wherever situated” confirmed that the request sufficiently identified the property to be covered by the order.

26. The Court of Appeal founded the relevant part of its decision on the natural meaning of articles 6, 7 and 8. It held that, read as a whole, the effect of these provisions was to provide a scheme for the making of an external order that was restricted to property in England and Wales.

Suggested aids to interpretation

27. Before turning to consider the words of the Order itself I propose to deal briefly with a number of extrinsic matters that the parties submitted were of assistance in interpreting it.

28. Mr Andrew Mitchell QC for the appellant drew attention to the aims of the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, to which the United Kingdom became a signatory in 1988. These include depriving persons engaged in illicit traffic of the proceeds of their criminal activities. He emphasised that in ratifying the European Convention on Mutual Assistance in Criminal Matters in 1991 the United Kingdom had undertaken to afford the widest measure of mutual assistance in proceedings in respect of offences. Furthermore, the United Kingdom had, a year later, ratified the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the proceeds from Crime, which required co-operation with the other Parties to the widest extent possible for the purposes of investigations and proceedings aimed at the confiscation of instrumentalities and proceeds.

29. Mr Mitchell submitted that these obligations had been recognised by Orders in Council made under the CJA 1988 and the DTA 1994. These enabled external restraint orders to be made on a world wide basis. It would, he submitted, be extraordinary to conclude that Parliament, when enacting POCA, intended to narrow the scope of the legislative powers to investigate and recover criminal assets.

30. The Orders made under those two Acts simply extended the scope of each Act to embrace the making of orders pursuant to external requests. Mr David Perry QC for the respondent challenged the submission that these Orders had extra-territorial effect. Your Lordships did not encourage the pursuit of a lengthy satellite argument on this issue for the Order made pursuant to POCA is very different from the earlier Orders. The Order does not simply apply the provisions of POCA to external requests. It sets out its own provisions. These in many respects mirror those of POCA but in some significant respects do not.

31. Mr Perry submitted that there was good reason why the scope of the Order should be restricted to property within the jurisdiction. If a country wishes assistance from other countries in preserving or recovering property that is related to criminal activity, it makes sense for its request to each of those other countries to be restricted to the provision of assistance in relation to property located within its own jurisdiction. If each country were requested to take steps to procure the preservation or recovery of property on a world wide basis, this would lead to a confusing, and possibly conflicting, overlap of international requests for assistance. Not only would such multiplication of activity be confusing, it would involve significant and unnecessary multiplication of effort and expense.

32. There is obvious force in these submissions. Mr Perry buttressed them by reliance upon the well-established canon of construction that requires clear language if an Act is to be given extra-territorial effect.

33. Mr Perry drew the attention of the House to a clear Home Office statement in the Explanatory Memorandum to the Order to the effect that the Order relates to property within the United Kingdom. While this is not a legitimate aid to the interpretation of the language that Parliament has used it does counter Mr Mitchell’s submission that it would be extraordinary to conclude that Parliament had intended to restrict the scope of the Order in this way.

The natural meaning of the Order

34. The peripheral matters that I have been considering lend support to what I find to be the clear meaning of the relevant provisions of the Order. The object of a restraint order is to preserve relevant property that may be needed to satisfy an order for the recovery of specified property or a specified sum of money - see the definitions in section 447 of POCA. Jurisdiction to make an external restraint order only arises where the external request “concerns relevant property in England or Wales” - article 6. The relevant property must be “identified in the external request” - article 7. The Crown Court may then make a restraint order which prohibits “dealing with relevant property which is identified in the external request” - article 8. The Order then makes provision for the seizure of any property which is specified in the Order to prevent its removal from England and Wales - article 12, and for a receiver to take possession of such property - article 16.

35. These provisions are echoed by those which relate to enforcing an external order. The order must concern relevant property in England or Wales - article 18. Enforcement takes place by appointment of a receiver in respect of realisable property where the external order is for the recovery of a specified sum of money and in respect of the property in question where the external order is for the recovery of specified property - article 27. The powers that article 28 permits the court to confer on the receiver include powers that are expressly to be exercised within the jurisdiction.

36. These provisions amount to a clear and coherent scheme. From first to last, the powers conferred by that part of the Order that relates to England and Wales can only be exercised in relation to property in England and Wales. Furthermore, no machinery is provided for exercise of those powers outside England and Wales. In this respect there is a significant distinction between POCA, which deals with domestic orders, and the Order, which deals with external orders. Section 74 of POCA provides that if the prosecutor believes that there is realisable property situated in a country outside the United Kingdom he can ask the Secretary of State to forward a request for assistance in restraining dealing with the property or in realising the property. Had it been intended that external restraint orders or external orders should take effect outside the jurisdiction the Order would surely have made provision similar to that in section 74 of the Act.

37. What is there that weighs against these conclusions? Mr Mitchell submitted that the requirement that the external request should concern relevant property in England and Wales was a gateway that gave access to a worldwide jurisdiction, but I can see no logic in this proposition. I can see no reason why the existence of property of the respondent in this jurisdiction should justify a request from South Africa for this country to attempt to procure, on South Africa’s behalf, a worldwide restraint on the respondent’s property. Mr Mitchell founded much of his submission in respect of the interpretation of the Order on the definition of property in section 447 as “all property wherever situated". Whether property bears that meaning must depend, however, on the context in which the word is used. Where the Order expressly or by implication refers to property in England and Wales it necessarily refers only to property there situated.

38. In summary, there is no reason not to give the provisions of the Order their natural meaning and good reason to give them such meaning. I would uphold the decision of the Court of Appeal as to the scope of the Restraint Order. Contrary to the view of Judge Wadsworth, I do not believe that the NPA had any intention that the Letter of Request should seek assistance in relation to property outside the United Kingdom. This dispute has arisen because the appellant supplied for their use an inappropriate form.

The Disclosure Order

39. The Disclosure Order was made pursuant to article 8(4) which provides that the court may make such order as it believes is appropriate for the purpose of ensuring that the restraint order is effective. It follows, as Mr Mitchell conceded before the Court of Appeal, that if the Restraint Order must be restricted to property within England and Wales there can be no justification for a worldwide Disclosure Order.

40. For these reasons I would dismiss this appeal.

LORD SCOTT OF FOSCOTE

My Lords,

41. I have had the advantage of reading in advance the opinion of my noble and learned friend Lord Phillips of Worth Matravers and am in complete agreement with the reasons he has given for dismissing this appeal. I, too, would do so.

LORD WALKER OF GESTINGTHORPE

My Lords,

42. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I would dismiss this appeal.

LORD BROWN OF EATON-UNDER-HEYWOOD

My Lords,

43. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Phillips of Worth Matravers. I am in full agreement with it, and for the reasons given by Lord Phillips I too would dismiss this appeal.

LORD MANCE

My Lords,

44. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Phillips of Worth Matravers. For the reasons he gives, with which I agree, I too would dismiss this appeal.

More Info - Denmark Beneficial Ownership tax decision

2010-04-27T00:25:00.000-04:00

Thorbjørn Henriksen Tax adviser at Copenhagen

Denmark's National Tax Tribunal on April 16 published its decision (SKM2010.268.LSR) in the first of a series of cases dealing with the beneficial ownership of dividends, interest, and royalties paid by Danish companies to nonresident holding companies.
Although this case was decided in favor of the taxpayer, the tribunal's reasoning suggests that the tax authorities could prevail in other cases with more typical fact patterns when a nonresident holding company has, as a practical matter, very narrow powers regarding the disposition of income received from a Danish company.

Background

Under Danish domestic tax law, nonresident companies are subject to withholding tax on dividends, interest, and royalties unless certain conditions are satisfied. The rate of withholding tax is 28 percent on dividends and 25 percent on interest and royalties. If the taxpayer is entitled to invoke the benefits of a tax treaty or the EU parent-subsidiary or interest and royalties directives, the withholding tax may be reduced or eliminated. To qualify for tax treaty protection, the taxpayer normally must be the beneficial owner of the relevant income.
The acquisition of many Danish companies by corporate investors and private equity funds in recent years has prompted the Danish tax authorities to examine the structuring and income flows resulting from such acquisitions and to significantly increase their focus on the issue of beneficial ownership. This has given rise to a number of cases involving substantial amounts in which the tax authorities have asserted that nonresident holding companies located within the EU or in treaty countries are not the beneficial owners of dividends, interest, and royalties paid to them by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and required the Danish companies to pay the withholding tax.

Facts

The case involved a consortium of private equity funds and other investors that had acquired a Danish company through a Luxembourg holding company. The legal structure may be summarized as follows:
The following transaction steps were scrutinized by the tax authorities:
• (1) HoldCo 1 distributed a dividend to LuxCo 2;
• (2) LuxCo 2 granted two loans to HoldCo 1;
• (3) HoldCo 1 subscribed for share capital in HoldCo 2; and
• (4) HoldCo 2 acquired shares in Target from third parties.

Steps 1 to 3 were executed on the same day and involved the same amount of money. Step 4, however, involved a higher amount because the purchase price for the shares was financed in part by third-party debt.
The tax authorities asserted that the dividends paid in Step 1 were subject to Danish withholding tax because LuxCo 2 was not the beneficial owner of the dividends under article 10 of the 1980 Denmark-Luxembourg tax treaty. The tax authorities relied on paragraphs 12, 12.1, and 12.2 of the commentary on article 10 of the 2003 OECD model treaty. According to the tax authorities, LuxCo 2 was not the beneficial owner because it did not carry out an active business and had no real power to act regarding the disposition of the dividends in question. On this basis, the tax authorities further argued that neither EU law nor the parent-subsidiary directive prevented Denmark from levying withholding tax on the dividends.
The taxpayer claimed that LuxCo 2 was the beneficial owner of the dividends. The taxpayer argued that a static interpretation should be made regarding the beneficial ownership concept; the applicable treaty was signed in 1980, and between 1977 and 2003 the OECD commentary significantly broadened the scope of circumstances in which a recipient of income can be regarded as not being the beneficial owner. However, the taxpayer claimed that LuxCo 2 should be considered the beneficial owner even under the 2003 commentary. The taxpayer's principal argument was that the dividends had not been redistributed but were used to finance the loans granted to HoldCo 1. Thus, it was immaterial whether LuxCo 2 had real power to act regarding the disposition of the dividends.
The taxpayer also referred to the prevailing opinion in Denmark that the Danish Supreme Court is expected to interpret the concept of beneficial owner in accordance with domestic law rather than to apply an autonomous tax treaty interpretation. The concept of beneficial owner is not used in domestic Danish tax law, so it was argued that a domestic law interpretation would mean that the "formal" owner of income normally should be recognized for tax purposes. That LuxCo 2 did not carry out an active business should be irrelevant because this was attributable to the nature of the company.
Article 1(2) of the EU parent-subsidiary directive, which authorizes member states to apply antiavoidance measures, requires that such measures be set forth in domestic tax law. Denmark does not have any specific antiavoidance rules on beneficial ownership, so Denmark would have to rely on the substance-over-form or assignment of income doctrines under Danish tax law. The taxpayer argued that the requirements for invoking these doctrines were not met in the case.
Tribunal's Decision

The majority of the National Tax Tribunal began by referring to paragraphs 12, 12.1, and 22 of the 2003 commentary on article 10. In particular, the tribunal emphasized that a conduit company could only be disregarded as the beneficial owner of dividends if the company had very narrow powers to act regarding the disposition of the dividends. However, narrow powers to act were not in themselves sufficient for a conduit company to be disregarded as a beneficial owner.
Since LuxCo 2 had not redistributed the dividends to its parent company, it could not be characterized as a conduit company regarding the dividends. Thus, LuxCo 2 was held to be the beneficial owner of the dividends under the Denmark-Luxembourg treaty. Moreover, the tax authorities were not entitled to deny the taxpayer access to the EU parent-subsidiary directive because the conditions for applying the substance-over-form and the assignment of income doctrines under Danish law were not met. The majority thus concluded that the taxpayer had not infringed on its withholding tax obligation. The minority of the tribunal, however, found in favor of the tax authorities on the grounds that it was immaterial whether the dividends were channeled to the parent company.

Conclusion

It should be emphasized that this case is not typical of the majority of cases, in which the income paid by a Danish company to a nonresident holding company is channeled to the ultimate shareholders. Based on the reasoning of the tribunal, it is not certain how such other cases will be decided. However, the emphasis placed on the 2003 OECD commentary suggests that new cases will be decided in the spirit of that commentary. Hence, a crucial issue will likely be the evaluation of the practical powers entrusted to a holding company in relation to income received from the Danish company. However, the decision does not give any indication of the National Tax Tribunal's position on the level of such powers that will be required to satisfy the beneficial ownership test.

More Info - Denmark Beneficial Ownership tax decision

2010-04-27T00:13:00.000-04:00

Danish National Tax Tribunal - Decision on Beneficial Ownership

2010-04-26T09:23:00.000-04:00

John Abrahamson Director International Tax at Sheltons. International Tax Lawyer in Structured Finance, Mergers and Acquisitions

Danish National Tax Tribunal - Decision on Beneficial Ownership

The Danish National Tax Tribunal issued a decision on 16 April 2010 on the beneficial ownership of dividends paid by a Danish company to its Luxembourg holding company.

Denmark can apply 28% withholding tax on dividends paid to non residents. This is eliminated if paid to a foreign parent company (at least 10% ownership of the Danish company), and a Double Tax Agreement (DTA) would require Denmark to reduce or eliminate withholding tax. DTAs generally require the foreign company to be the beneficial owner of dividends for treaty benefits to apply.

The authorities argued that the Luxembourg company was not the beneficial owner, as it did not carry out an active business, and had no real power over disposition of the dividends.

The Tribunal held that the Luxembourg company was the beneficial owner, principally because the dividends were not paid on to the foreign funds, but were loaned back to the Danish subsidiary.

The Tribunal advised that a conduit company may be disregarded as the beneficial owner if it has very narrow powers to act in respect of the disposition of the dividends. This would, however, not be the sole factor in a decision to disregard.

A future decision on the powers required to satisfy the beneficial ownership test is awaited.

USA - Vermont Captive Insurance

2010-04-21T09:15:00.000-04:00

Why Vermont?

No other state even comes close for captives -- and only Bermuda and the Cayman Islands have more captives than we do. Vermont is the undisputed on-shore leader with over twenty-five years of experience working with the captive insurance industry. Vermont is home to 44 of the Fortune 100 and 19 of the companies that make up the Dow 30 have Vermont captives.

What this means to you is that we're experienced in working with companies like yours.

We know how to do it -- and our record stands for itself.

Vermont Responds to Your Needs
Our laws and regulations keep pace with industry needs. Our legislature listens and is responsive. We keep our captive environment up to date and friendly. And in Vermont getting a meeting with a key state official only takes a phone call. Vermont has a team of regulatory and promotional professionals ready to respond to your needs.

What this means to you is a customized and personal approach to making sure Vermont meets all of your captive insurance needs.

Vermont's Infrastructure is Second to None Vermont's professional support services are the best in the world. As a leader in the industry, Vermont is home to the nation's top captive insurance providers. When you're looking for world leading management companies, highly specialized banking and investment services, accountants or expert law firms -- we've got them. When you're looking for a supportive and influential trade association -- we've got it.

What this means to you is Vermont has the complete package to maximize the benefits of your company's captive insurance needs with a team of experienced and proven professionals.

For more information go to www.vermontcaptive.com and contact www.TaxRiskManagement.com for assistance.

USA - Notes on offshore trusts

2010-04-19T13:20:00.000-04:00

2010/04/19

1. COOK ISLANDS 2. ASSET PROTECTION NEUTERED 3. FOREIGN ASSET PROTECTION TRUST CASES
COOK ISLANDS Offshore trusts are receiving far more media attention than they did in the past. And much of the media attention is negative. Floyd Norris, writing in the January 22, 2010 New York Times, shines the spotlight very brightly on the Cook Islands. The Cook Islands (in the South Pacific) have a population of about 20,000 (which, as Mr. Norris points out, is less than some apartment complexes in New York City). The islands are known mostly for tourism. They contract their national defense to New Zealand, which is four hours away by plane. Yet the Cook Islands have a thriving international trust business.

Mr. Norris acknowledges that a Cook Islands trust can provide some significant asset protection. He notes that under Cook Islands law foreign court orders are frequently disregarded, which can be very helpful for someone trying to keep assets away from creditors. There must be a local trustee, so anyone setting up a Cook Islands trust for asset protection purposes must surrender at least some control over the assets in the trust.

Mr. Norris notes, however, that over the years a number of "less than upstanding Americans" have taken advantage of the protection offered by Cook Islands law. He explains that the latest among them is Jamie L. Solow. Mr. Solow was recently convicted by a jury in West Palm Beach, Florida of securities fraud. U.S. District Judge Donald M. Middlebrooks of the United States District Court for the Southern District of Florida has ordered Mr. Solow to prison for failing to turn over assets from a Cook Islands trust. This case is yet another reminder that offshore trusts will not automatically result in foolproof asset protection. Judge Middlebrooks is not the first federal judge to order a defendant incarcerated for failure to turn over funds from an offshore trust. It is important to note that nearly all of the asset-moving activities in this particular case came after the Securities and Exchange Commission notified Mr. Solow that it intended to file suit. Many of the asset transfers occurred after the jury rendered its verdict. As I have explained in other posts, moving assets after you have a problem with creditors will usually be considered a fraudulent transfer.

An offshore trust can be an appropriate part of an asset protection plan. But the use of such trusts by "less than upstanding Americans" is putting these trusts in an increasingly unfavorable spotlight.

NEUTERED TRUSTS

Asset Protection Trusts Neutered

by 2005 Bankruptcy Reform Act

The 2005 changes to the Bankruptcy Code provide for what amounts to a 10-year clawback of transfers to self-settled trusts that are meant to hinder, delay, or defraud creditors. Since most FAPTs are set up for this very reason, such clawbacks may be automatic in many cases. At the very least, all transfers to an asset protection trust will be susceptible to being set aside for up to 10 years prior to the date that a bankruptcy petition is filed.

Some critics of foreign asset protection trusts might contend that this change was unnecessary, since foreign asset protection trusts had always failed in bankruptcy anyway. FAPTs may still be useful in very limited circumstances, such as for planning with international families or pre-immigration planning.

Caution that to avoid the stigma of the numerous cases where FAPTs have failed, some promoters have started giving them different names to try to disguise their character. Whether this disguise is meant for the court or their prospective customers is not clear.

FOREIGN ASSET PROTECTION TRUST CASES

The litigation history of the Foreign Asset Protection Trust is often intentionally or negligently misrepresented by promoters selling their cookie-cutter offshore trust structures. Follows are a list of the cases in chronological order (based on the date of the most important decision in the case), and a summary of their results. Additional and substantial information relating to each case is available by clicking on the links.

* In re Colburn, 145 B.R. 851 (Bkrpt E.D.Va. 1992), did not involve incarceration for contempt, but the bankruptcy debtor who did not disclose his interest in a Bahamas trust was denied his discharge and the court suggested that the debtor had engaged in fraud.

* Brown v. Higashi (Bkrpt Ak. 1995), involved an Alaska CPA who with his wife set up a Belize trust and then later was hit with a tort judgment. Although the case didn’t involve incarceration for contempt, it did consider whether the assets of the Belize trusts should have been included in the bankruptcy estate, and the court ruled that those assets were in fact included. The court included the following unflattering language about FAPTs: “The fact that the trusts were established in Belize, a country notorious for its anti-creditor policies, rather than Alaska or Washington, indicates an intent to hinder, delay or defraud on the part of the defendants.”

Why Malta?

2010-04-19T12:39:00.001-04:00

Prof D N Erasmus
2010/04/19

Apart from the basic information below, one of our associate Professors have done quite a bit of research into Malta. If you would like to participate in the Malta Tax Benefits lecture, please contact Professor D N Erasmus daniel@dnerasmus.com to book a seat. The lecture is in the process of being arranged.
Why MALTA?
Why register a company in Malta?

The benefits of registering a company in Malta are:

• the tax advantages (5% for non-resident shareholders).
• membership of the European Union.
• excellent telecommunications.
• legislative framework in line with EU directives.
• Malta has a robust yet flexible legal and regulatory framework, with all company law and regulations published in English.
• Operational costs are low, including regulatory, registrar, listing fees, cost of lease or rent, staff costs etc.
• English and Maltese are the official languages but Italian and French are widely spoken.
• Professional Investor Funds are exempt from Maltese capital gains and income taxes, so non-resident investors do not have to pay income tax in Malta.
• Malta has double taxation treaties with 60 countries including most EU and OECD member states.
• Malta can boast of a high standard of education and there are highly qualified specialist professionals from all fields.
By exploiting the tax advantages and other facilities in Malta, companies and individuals who are involved in international trade, could derive great benefits by relocating their trading activities to originate from Malta.

USA - Shulman acknowledges IRS has "changed the game" on compliance

2010-04-13T10:19:00.000-04:00

Erin Kelechava in Washington, DC
2010/04/13

"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."

Doug Shulman, Commissioner of the US Internal Revenue Service (IRS), spent much of his speech at Tax Executive Institute's mid-year meeting yesterday time reassuring the audience that he appreciated their concerns over new IRS compliance proposals.

Shulman referred to announcement 2010-9, released in January, as a big step towards fostering transparency in the tax system. The announcement describes changes to how corporate taxpayers will be required to report uncertain tax positions. These new reporting requirements are causing serious concern among large corporate taxpayers about the amount of information the IRS will now have about potential tax liabilities.

"While I believe our approach is reasonable, let me be clear – I also understand that it is a "game-changer" with respect to our relationships with and responsibility to our large corporate taxpayers," he said. "We are moving away from what I would describe as a contentious relationship where we spend too much of our time identifying issues, to one where we know the issues from the outset and spend our time engaging on appropriate issues."

The commissioner stressed that in developing the programme, the IRS tried to craft a proposal that provides the Service with the information it needs, without forcing taxpayers to divulge its opinions about the strengths and weaknesses of their uncertain tax positions.

He acknowledged that although "some friction in the system in healthy" , he also believes that the new proposals will allow both parties to assure that time is efficiently spent discussing the law rather than searching for facts, and would allow the examiners to prioritise issues, resulting in a more timely and less fraught resolution process.

The IRS chief also tried to provide some reassurance about litigation that is of serious concern to taxpayers. He said that the Service is maintaining its policy of restraint about tax accrual workpapers. This has been the subject of a recent case in the US Court of Appeals for the First Circuit, US v Textron.

Shulman also addressed concerns about the redundancy of information taxpayers file with the IRS. He announced that the IRS is planning to consider the reporting of uncertain tax positions as adequate disclosure for purposes of penalty provisions in other tax statutes.

In response to a question from the audience as to how the IRS would train its examiners to use the information contained in the new schedule of uncertain positions properly, Shulman was candid.

"This proposal has laid bare the distrust on both sides of the audit table," he said.

For the IRS' part, Shulman noted that "with more information comes more responsibility".

Changes to CAP and increased published guidance

Shulman also announced the expansion of the Compliance Assurance Program (CAP) initiative, which he referred to as "the most successful foray to date into enhancing transparency". The IRS is now trying to make the CAP pilot programme permanent, and is working on developing a pre-CAP process to allow taxpayers an easier path to enrolment in the programme.

The Service is also developing a CAP maintenance programme so that when issues arise between tax seasons, taxpayers that are involved in the program will be able to gain more benefit from the greater certainty that the program affords.

The commissioner said that the use of published guidance will be front and centre in the government's efforts to eliminate uncertainty. "We won't hesitate to go to Congress with issues that are ambiguous and require clarification," he said.

10 MOST FAMOUS TAX EVADERS OF ALL TIME

2010-04-06T02:23:00.000-04:00

As soon as you receive your first real paycheck, you experience the bittersweet moment when you understand income tax withdrawals. The more you make, the more the government takes out in taxes, but there’s nothing you can do about it, at least not legally. If you’re ever tempted to stiff the government on taxes, though, check out the stories of these 10 famous tax evaders. Let’s hope they convince you to keep it legal.

1. Judy Garland: Movie star Judy Garland played dreamy, optimistic characters in some of her best films, but she famously struggled with drugs, self image problems and depression. She was divorced four times, and after a failed suicide attempt, died of a drug overdose when she was only 47 years old. In addition to her prescription drug problem, the Wizard of Oz star and Golden Globe, Grammy and Special Tony Award-winning actress did not pay taxes between 1951 and 1952. She was audited by the IRS and had to pay hundreds of thousands of dollars in back taxes, during a time in which she was already struggling financially.

2. William Bud Abbott and Lou Costello: The iconic comedy stars Abbott and Costello were immensely popular in the 1940s and 50s and developed the now infamous act "Who’s on First?" They were featured on the radio, on TV and in movies, but due to overexposure in the 1950s, the public began to lose interest and their act suffered. Both men were ordered by the IRS to pay such a large amount of back taxes that they had to sell their homes and declare bankruptcy.

3. Tom Coughlin: The Wal-Mart family and their partners are known for being extremely wealthy, but the former vice chairman of Wal-Mart Stores Inc., Thomas Coughlin nearly went to prison for tax evasion and fraud. Coughlin, who had worked for Wal-Mart for 28 years, was sentenced to home detention and probation in 2008, plus fines and restitutions in 2006.

4. Annie Liebovitz: Photographer Annie Leibovitz has photographed celebrities, presidents and other public figures for distinguished magazines and publications, as well as for private clients, but in 2009, she went public with her surprising financial troubles. She apparently had a damaging spending problem, was sued for $15 million by a neighbor, and had to put up as collateral several of her houses and rights to photographs. Luxist.com reports that Leibovitz "was also late in paying $1.8 million in federal taxes in 2007 and 2008."

5. Pete Rose: Former baseball star and manager Pete Rose is also one of the most famous tax evaders of all time. He actually had to plead guilty to filing two false income returns. Rose neglected to tell the IRS of any income he received selling memorabilia and autographs or from horse racing. He spent July, 1990 – January 1991 in jail, and paid $366,041 in back taxes.

6. Wesley Snipes: Hollywood actor and producer Wesley Snipes is famous for starring in movies like Blade and U.S. Marshals, but he was slapped with a serious fraud charge in 2006. Along with Eddie Ray Kahn and Douglas P. Rosile, Snipes was charged with conspiring to defraud the United States, and Snipes alone was charged with six counts of willingly failing to file federal income tax returns. The charges involved claims going back 10 years. In 2008, he was sentenced to three years in prison, but he is still appealing the sentence and works freely around the world, though he is only out on bail.

7. Richard Hatch: Survivor star Richard Hatch won the first season of the reality TV show, earning him $1 million, plus another $10,000 for appearing on the reunion show. Hatch never reported the extra income to the IRS, or the $321,000 he received from appearing on a Boston radio show. In 2005, he was found guilty on 10 counts, and in 2006, he was found guilty of tax evasion. Hatch began serving his 51-month sentence in May 2006, but he was released three years later to home confinement.

8. Nicholas Cage: Movie star Nicholas Cage has an Academy Award and was once in the top blockbusters in the 1990s, but his career has been dwindling lately. The City of Angels, Con Air and It Could Happen to You star was the subject of an IRS investigation involving the sale of a home in Louisiana, as well as failed federal income taxes amounting to over $6.5 million. In October 2009, he sued his business manager for $20 million.

9. Sophia Loren: Italian movie star Sophia Loren is still considered one of the most beautiful actresses of all time. Loren appeared in movies like Houseboat, The Fall of the Roman Empire and Man of La Mancha, and is the second most awarded actress in movie history. In 1982, however, Loren was imprisoned for tax evasion, and she spent 18 days in jail. Remarkably, her time in prison never seemed to hurt her reputation, and she continues to be one of the most celebrated women in Hollywood.

10. Al Capone: Infamous gangster Al Capone was a successful bootlegger and liquor smuggler in the 1920s and 1930s. The Brooklyn-born, Chicago-based criminal used the cover of a used furniture salesman, but he ran one of the biggest crime rings in history and was wanted by the FBI for a number of crimes, including the 1929 St. Valentine’s Day Massacre. That same year, the Bureau of Prohibition began to shut down some of Capone’s breweries, and two years later, he was indicted for income tax evasion and was sentenced to eleven years in jail.

Provided by: http://www.careeroverview.com/blog/2010/10-most-famous-tax-evaders-of-all-time/

The Managerial Benefits of Tax Compliance: Perception by Small Business Taxpayers

2009-12-24T00:24:00.000-05:00

P.Lignier
2009/12/18

The results of the survey conducted by the doctoral candidate are interesting and point out why businesses are reluctant to put extra effort into being tax compliant. The results are contrary to what our experience is in focusing on a tax risk management process - there are clear benefits to taxpayer businesses.

eJournal of Tax Research (2009) vol. 7, no. 2, pp. 106-133

The Managerial Benefits of Tax Compliance:

Perception by Small Business Taxpayers

Philip Lignier ( Lecturer in Taxation, School of Accountancy, Queensland University of Technology. This paper is derived from my PhD thesis that I completed as a doctoral candidate at Atax, UNSW.

Email: philip.lignier@qut.edu.au)

Abstract

Research undertaken in 2006 – 2007 investigated the perception of managerial benefits of tax compliance by small business taxpayers. Survey data from a sample of 300 small business taxpayers and responses to semi-structured interviews of ownermanagers were examined. The study found that a majority of small business taxpayers recognised that tax compliance

activities led to better record keeping and to an improved knowledge of their financial affairs. However, there seemed to be a general reluctance by respondents to accept the idea that benefits could be derived as a result of complying with tax. The findings of this study are important as it is the first research that systematically investigated managerial benefits and their perception by small business taxpayers in Australia.

TWO QUOTES APPEAR BELOW:

“If we didn’t have tax, keeping records of our debtors would be the only thing
I would do. I would prepare accounts in-house only; […] there would be no
point in having an accountant.” TCE participant A

“If we didn’t have tax, I would probably do it all [the accounting] in house.
But I admit that I would be a bit concerned about the accuracy of the records
as nobody would check the work. At least the accountant does.” TCE
Participant E

SARS are sending information notices to Tannenbaum scheme participants - to commence audits

2009-11-30T07:42:00.000-05:00

TAXtalk
2009/11/25

SARS are sending out the first information notices to commence tax audits on Tannenbaum scheme participants. Be very careful of your constitutional rights in complying with SARS'request. THe are already participating as observers at the secret FICA inquiries taking place to gather as much information about the participants - not just Tannenbaum and Rees. How you approach this investigation will go a long way towards allowing to to claim any losses. SARS have already warned they will not allow the deduction of losses. If it was an investment - they may be right. If it was a loan, they may also be right. But there is one more possibility that may give you the deduction - but what you say now, and have said in the past will become part of the evidence to support or refute the deduction of the loss opportunity.

A closed seminar for parties affected by the Tannenbaum Scheme will be held (and their advisors are invited) to explore the opportunities for claiming a tax deduction.

The seminar will be held and broadcast on-line with an opportunity for delegates to ask questions. Interested participants are invited to contact Gilbert Ferreira on gilfer@me.com to book their seat.

SOUTH AFRICA: Barry Tannenbaum's Ponzi Scheme - Take care

2009-10-30T01:51:00.000-04:00

Prof D N Erasmus
2009/10/30

Further to an earlier post, the Tannenbaum Ponzi scheme is in the news with government announcing that 800 investors from 7 countries are involved, and that the estates of Dean Rees and Barry Tannenbaum are being sequestrated to ensure some of the monies can be clawed back. A more ominous risk resides beneath all of this. SARS is actively conducting desk audits on all the big investors and apparently are finding that some of them have not kept their tax affairs up to date. With a SARS hungry for money, it can be anticipated that a number of David King styled investigations will take place. In addition many of these participants are actively co-operating with the authorities on a voluntary basis, not knowing that the information they are divulging may be used in a second onslaught against them, as opposed to getting the money back from the fraudsters. Co-operating the CORRECT way with the authorities is the clever way to do this. But what is that correct way? Many would have missed this perfectly legitimate trick...So what is the correct way? Now that would be giving away my intellectual property - so if you are interested in learning more - please contact me on daniel@dnerasmus.com As to whether or not you were an investor in the scheme? Think that through carefully as well. MY EARLIER POSTING So if you read the BUSREP.CO.ZA article by a journalist quoting hungry for money SARS, in your panic you may make the wrong classification choices on how to treat your investment (or not?) in the Ponzi-scam by Barry Tannenbaum. If you classify it as an investment, you may have participated in a broader unlawful transaction breaking every rulebook in the Banks Act. On the other hand...and wouldn't you like to know? A Special Report of the likely tax consequences on the Barry Tannenbaum Ponzi Scam is available to order - currently being researched and written. One copy for the first 5 subscribers is available for a charitable contribution of R50,00 to the SPCA. The stray dogs and cats need it! Everyone after that - the research and tax direction to help you get the taxman to pay for your mess, will cost you R950,00 per report. Cheap, considering your losses may come down by your marginal tax rate.

BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009

By Roy Cokayne

Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.

Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.

However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.

Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.

Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.

Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.

I predicted this over a year ago

2009-10-30T01:49:00.001-04:00

Prof D N Erasmus
2009/10/29

The government is running low on money as tax collections are suffering. The former commissioner is now Minister of Finance. I predicted MAJOR cash flow problems over a year ago. The writing was on the wall of SARS Annual Report. See my prediction below:

Tuesday, July 22, 2008

THE TRUTH ABOUT SARS EFFICACY

OK. So let me get this right. SARS boasts the following results in 2007:

69 270 audits

This in practical terms means, for a two man team of auditors to conduct 4 (100hr) audits per month, they had 2886 persons dedicated to this task. These audits would earn roughly R1,03bn in salaries, excluding bonuses!

R6,6bn was raised in revised assessments from these audits.

What does this mean? What the short form table of results (in their annual report published on the SARS web site) does not tell you, is that R6,6bn was not collected. That is what was merely assessed through revised assessments. For each R1 spent, they earned R6,6. What’s wrong with that? You ask! Well, a little closer look at the following scant numbers published by SARS, prints the following picture. SARS collected 3.75% of its debt (R17,7bn collected) which we presume is mainly revised assessments (or the like), which is the same type of assessments’ as the R6,6bn – not collected yet. Except for that small 3.75%.

That tells us that 96,25% of the revised assessment debt due to them is bad, or potentially bad. Remember only 3.75% has been collected! Now applying this logic through to the boasted about R6,6bn assessments that their close to 70 000 audits have earned, means that only R247,5m is probably collectable (out of the total R6,6bn). Against a cost of just over R1bn! That’s not good business. They are spending over R1bn to collect R247,5m!

We don’t know all the reasons why 96,25% is not collected of the debt due to SARS, but guesses are out there that a lot of it is improper and hasty audits, giving rise to ‘funny’ numbers for SARS, which are simply not collectable.

Turning to their heightened criminal prosecutions. We see similar statistics emerging. 447 guilty verdicts out of 1909 prosecutions. That is a success factor of only 23,4%. The worst part of it is that 1462 individuals had to be dragged through the shameful process of criminal prosecution. Have you ever witnessed the criminal prosecution of a person? It’s not a nice experience, even if you are not convicted.
These statistics are horrendous. And show a lack of respect and application of Constitutional principles in SARS exercising their important duty of administering tax law and not merely being a monetary hitman!

When will someone start recognising the clear trend that is developing within SARS management, and demand that some of these questions be answered and prove, beyond a reasonable doubt, that my simple analysis is wrong!

Taking this to a positive conclusion for SARS. In light of the obvious bad business sense that prevails in its methodology in audits, they would be better of settling along the lines about to be proposed. Lets recap:

1. Of the R6,6bn, only R250m (rounded up) is collectable;
2. That translates to R3650 per taxpayer audited;
3. Each audit costs R15 000.

If SARS settles all its audits by simply asking for payment of an extra R18 650 from each audited taxpayer it would achieve two things:

1. It will be R15 000 better off per audit, covering its costs (which is not the case now);
2. It would be saving the taxpayer huge sums in tax advisor fees, justifying the R18 650 payment.

In fact, if Mr Gordhan really wanted to stretch the boundaries of being taxman entrepreneur of the decade, he should take his randomness technique of selecting taxpayers for audits, extract 70 000 taxpayers for audit and do the following:

1. Offer them the option of paying R18 650, no questions asked (like an insurance fee) and face no audit;
2. Save R15 000 out of the R18 650 (because he doesn’t need the SARS auditors to do anything);
3. Only audit those who justifiably should be audited after proper investigation;

The effect will be threefold:

1. An extra pot of tax guarantee money for less harassed taxpayers;
2. Less SARS auditors to pay, who are not turning out to be profitable;
3. More successful and focussed audits catching the real tax crooks – not chasing after political agenda’s and slanted random audits (like the one that will be planned against me after publishing this article!)

Watch this space!

Daylight Robbery

2009-10-22T02:48:00.001-04:00

Daniel N Erasmus
2009/10/22

Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.

Caius Servius rode his white stallion laden with military regalia, befitting his position as Lieutenant in the 3rd Division of the Britannica Legion. A small troop of soldiers marched behind him in precision formation along the cobbled roadway, paved by the Empire’s engineers. He was en route to several villages in the area.

The morning was still crisp and fresh. The beginnings of the warm morning sun flowed over the countryside stretching the shadows of the occasional coppice. The rolling green covered in a fine sparkling mist looked fresh. He admired the beautiful English landscape around him. It was a fine day.

In the distance he noticed the remnants of last night’s fireplace wisping away, twirling slowly into the fresh morning sky. A cottage in a small village. Next to a bubbling stream in the valley below him. He noticed a child running out of the door, chasing a few chickens. Next minute, what must have been his mother, clad in a large apron, charged out the door after him, wagging her finger furiously. The setting looked so beautiful, so peaceful. What a wonderful place to live.

He sighed as his thoughts drew back to the parchment rolled up in his saddlebag. A decree issued by the Governor for May. ‘Taxa omnes fenestras per quas lucem cotidianam iter facit’. A tax on every window through which daylight passed. It had been decreed that all those home dwellers who fit into the wording of the decree would pay the tax. Although it was primarily aimed at the wealthy with large dwellings containing many windows, it also affected all small home dwellers. The locals aptly referred it to as ‘daylight robbery’.

Caius was en route to execute his orders to collect the tax from the country folk. He was given charge of a small band of soldiers to assist in executing his orders as the tax collector anticipated rebellious behaviour. Quite so, he thought to himself. Most of the country dwellers would find it difficult to find the extra coinage to pay for this sudden tax. He pitied them.

Nevertheless, he had orders to execute and obey them he must.

His small party of men continued to wind their way down the hill towards the peaceful village.

On arrival at the entrance to the village he noticed that these folk must mostly be craftsmen of high standard. The village and its construction was immaculate. The dwellings were all neatly built in pristine condition. Everywhere there was evidence of superb craftsmanship, beautifully carved pillars, pole fencing, neatly trimmed awnings, stylish wagons, well kept implements. He was astonished!

Equally astonishing was the fact that there was not a soul or animal in sight. The village was dead quiet, as if everyone had disappeared. All the doors were shut closed. Then he noticed something extra-ordinary, every single cottage he passed had beautifully designed wooden shutters in front of what would previously have been the windows. All the windows had been closed up with these shutters.

He stopped for a moment and admired not only the craftsmanship, but also the ingenuity of these folk. Not one window allowed light to pass through it. They had heard of the ‘daylight robbery’ and had carefully planned a way around it, using their own brand of expertise. How clever. How ingenious. How creative. He chuckled to himself, shouted an order to his men, and continued marching through the village, on his way. At the end of the day, there was no tax to collect here.

A LESSON for us all from the past, tax planning should always result in creating something of sustainable nature, other than just saving tax. Like the shutters before the windows and the taxman should acknowledge this. Ingenuity of value is valuable. It is what helps us to advance and develop. It should always be encouraged and promoted. Sometimes the imposition of tax gives rise to such a seedbed.

IRS Commissioner on Tax Risk Management

2009-10-22T02:41:00.002-04:00

2009/10/21

EDITORIAL - The Commissioner of the IRS makes comments in his speech to the NACD corporate governance conference that reiterates the principles we teach through the International Tax Institute and apply at www.TaxRiskManagement.com to our corporate clients worldwide.

Prepared Remarks of IRS Commissioner Doug Shulman before the NACD Governance Conference

WASHINGTON -- Thank you for that warm introduction and welcome.

I realize that the IRS Commissioner has not customarily addressed the NACD’s corporate governance conference…but what I want to discuss with you this afternoon is the important role that boards of directors can play in overseeing tax risk and tax strategies of corporations. After all, taxes are one of the biggest expenses of a corporation, so how they are managed is very important to most corporations.

Clearly, corporate boards of directors play an incredibly important role in the vibrancy of businesses and our economy. Boards are a source of creative ideas, strategic thinking, and, importantly, governance and oversight. Boards hold management accountable, and in that role, understanding the risk posture of the company is critically important.

So today, I want to share with you some observations of what I have seen since I’ve taken the helm of the organization responsible for collecting 96% of all federal receipts – around $2.5 trillion.

To begin, I understand that many of you – actually most of you – are not tax experts and you were not installed on the board because of your tax expertise. You bring other critical skills, experiences and expertise to the boardroom.

And I also understand that even with all of your sophistication, expertise and experience in business and financial affairs, it’s difficult to understand the tax consequences of a complicated business transaction, such as a tax-free reorganization or a hedging transaction, let alone the corporation’s overall tax profile as it relates to federal, state and international taxes. That’s why you need to have strong tax departments and outside tax advisors. After all, you have finance experts to help you understand the economic value of hedging transactions, and you need tax experts to help you understand the myriad and complex tax issues facing your company.

Now, my motivation to create this dialogue with you is based in part on personal and professional experience. I moved from the business world where I interacted with boards… to FINRA, the largest independent securities regulator in the U.S. ….to the IRS, where I am focusing on major trends, such as the globalization of tax administration, and innovative ways to strengthen and improve our tax system. In all of these roles, I have seen the importance of board oversight of major areas of risk.

So, I know first hand that in the post-Sarbanes Oxley world, corporations have invested significant time and resources on compliance issues and internal controls. In the tax arena, some have instituted regular meetings between the Audit Committee and the tax director to ensure an open dialogue.

As I mentioned earlier, tax issues should remain on your radar screen – and for good reason. It’s one of the biggest expenses on your income statement. In addition, a number of public companies have reported material weaknesses in internal controls related to taxes. Tax strategies can also present a financial and restatement risk, and sometimes when the cases are high profile, a significant risk to corporate reputations. In today’s business climate, the general public has little tolerance for overly aggressive tax planning that can be viewed as corporations playing tax games.

So, although the complexity of the tax code may make your eyes glaze over, Board members – like you –are critically important to making sure that the tax system works well and is worthy of the confidence of the American people.

But how can you increase your oversight of tax compliance given the limited amount of time you have available and the competing business issues you face?

Well, you probably know or could figure out, that the IRS conducts risk assessments of its own when determining how to use its time and resources and whom to audit. Similarly, the board of directors can assess its corporation’s tax risk profile, internal controls, and relationship with its corporate tax department, to help determine the tax matters of which it should be aware.

Now, we recognize that many businesses are trying to get it right. Positions taken in tax returns may be well-grounded and taken in good faith. Other tax positions taken may be more aggressive and use elaborately structured transactions or arrangements to push tax planning up to the edge, or beyond acceptable bounds.

Enter FIN 48, which establishes the financial statement accounting for uncertain tax positions, including recognizing and measuring their effect on financial statements.

Under FIN 48, companies must identify their material uncertain tax positions. They must quantify the company’s maximum exposure and estimated likelihood of winning or losing the issue if challenged by the IRS. And they must record as a liability a specified amount of money relating to these uncertain tax positions. In other words, FIN 48 is a very significant window into tax risk, liability and management in your company.

FIN 48 paints a picture of tax risk by indicating how much money a corporation has to book in tax reserves to reflect the risk should one or more of its tax positions go south.

But let’s get behind the reserve numbers for a moment. What are they telling you – the board directors – beyond the dollars in the tax reserve?

They’re saying that the audit committee needs to know and influence what tax posture the tax planners are taking. They and you need to know whether that multi-million – or in some cases multi-billon-dollar bet – you and your company are making could be too aggressive and therefore risky.

So where does that bring us? What are the next steps?

Before I get to that, I want to be clear about what I “do” intend and “don’t” intend in this dialogue.

We don’t intend to second-guess legitimate and thoughtful business decision-making by corporate leaders. And we don’t expect that you will always agree with us on identifying and quantifying the risk of various tax positions. But we do want to engage corporate leaders about their roles and responsibilities in conducting appropriate assessment and oversight of tax risk.

I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process. For example you might want to:

- Set a threshold confidence level for taking a tax position…
- Discourage or eliminate opinion shopping by tax departments by having an independent tax firm, which has some direct dialogue with the board of directors, review major tax positions …
- Specifically address transfer pricing and the relative profit allocated to low-tax jurisdictions, and make sure they reflect real economic contributions made in those jurisdictions.

And diving down a little deeper, here are some questions you might ask of your tax director and your external auditors relating to FIN 48:

- What was the process for identifying uncertain tax positions and how do you know all material issues have been identified?
- How did you go about determining the maximum tax exposure relating to each uncertain tax position? What makes you comfortable that it accurately reflects your maximum exposure?
- How did you go about quantifying the likelihood of winning or losing uncertain tax positions? Do you plan to litigate the issue if the IRS challenges the position? Does the external auditor or tax advisor agree with the tax director’s assessment?
- Could the company be subject to potential penalties, such as for underpayment of tax, negligence or worse? If so, are they appropriately recorded, and perhaps more important, what does this say about how aggressive the company’s position is regarding those issues?

There are already some IRS programs in place that help provide greater certainty and can give a board more comfort that there won’t be second guessing down the road. For example, our compliance assurance program, or CAP where we agree on issues with the taxpayer before a corporate return is filed, envisions full disclosure by the taxpayer in exchange for real time tax certainty. And the Advance Pricing Agreement program, where we agree with a taxpayer on pricing methodology before a return is filed, provides certainty in the complex and uncertain area of transfer pricing.

Now, we’re not the only government thinking about the notion that corporate taxpayers that employ sound management and governance practices on tax matters are more likely to be compliant.

One example is Australia. The Australian Tax Office publishes a Governance Guide for Board Members and Directors that suggests useful questions – similar to the ones I just posed – that a corporate director can ask of management.

Some of the Australian Tax Office’s questions include: Is there a material difference between the losses reported for accounting purposes and the losses claimed for tax purposes? If so, can the difference be satisfactorily explained? Is the structure and financing for your business or a major transaction complicated, perhaps more complex than necessary to achieve the commercial objectives? These questions give you a flavor of what some other countries are thinking about and doing in the corporate governance area.

On a broader scale, the Organisation for Economic Co-operation and Development has charted a worldwide trend of increased boardroom attention to issues of taxation. A recent guidance document outlines good corporate governance principals in relation to tax, based on advice from governments around the world.

In summary, my main observation to share with you is this: Taxes are an important expense, and like any important expense, management responsible will try to control it. In the case of taxes, controlling it can expose the company to challenge, which can result in reputational damage and perhaps large, unexpected expenses. So you need to understand how management controls this expense and how it decides how aggressive to be. You also need to be certain that reporting is effective.

Tax expense in this sense is no different from other expenses. Manage it too loosely and you give up profit. Manage it too aggressively and there are bad consequences. You, the board, have to oversee how management manages it. That means some level of understanding, a set of policy principles and then a control system of reporting that assures you that the policy is being carried out.

My goal here today was to start a discussion about the board of directors’ role in overseeing tax risk. I encourage you to have the dialogue, and offer the IRS as a resource as you continue to evolve your thinking about this topic. At the end of the day, my proposition is that the board needs to have the tools, not to do tax planning, but to oversee tax strategies and risks.

I see my time is up today. I hope it was a good start and that this beneficial dialogue will continue and mature in the weeks and months ahead. Thank you.

Tax Snippets - Private Equity Taxation

2009-10-22T02:40:00.000-04:00

Tax Snippets
2009/10/21

EDITORIAL - A classic case of tax planning to reduce tax exposure. If the business is sold, the funds will generate Capital Gains Tax, and the dividend in the hands of the investor will also result in taxation. By borrowing money, the interest in the USA is tax deductible, and only the dividend is subject to tax in the hands of the investor. In commonwealth tax jurisdictions the interest would not be tax deductible in line with basic common law tax principles.

By far the most significant way of realizing on a successful investment by a fund was to dispose of it (sell it or bring it public) once the company had grown to sufficient size and become sufficiently valuable. In the early years of this decade, the tax laws were changed so that dividends were taxed at the same rate as were capital gains. Once this occurred, sophisticated fund sponsors and investment bankers determined that the fund could borrow money against the increasing value of the company, take the proceeds of that loan, and distribute it as a dividend to fund investors, resulting in no greater tax to such investors than if the company had been sold. If fund documents did not deal with dividends, the general partner would often receive a larger share of proceeds than had been intended by the drafters of the partnership agreement.

China Clarifies Tax Treatment of Equity-Based Incentive Compensation Submitted

2009-10-21T05:46:00.001-04:00

by Zsuzsanna Blau
2009/10/20

EDITORIAL - It seems that China is following other OECD country trends in the treatment of stock options - on accrual of an appreciated sum, or realization of growth in the stock.

In late August 2009, China’s State Administration of Taxation (SAT) has issued Guo Shui Han No. 461, the ‘Notice on Individual Income Tax Issues Concerning Stock Incentives’. The SAT, together with the Ministry of Finance had previously issued a number of tax circulars (such as Cai Shui [2005] No. 35, Guo Shui Han [2006] No. 902 and Cai Shui [2009] No. 5) concerning the individual income tax treatment of stock options, restricted stock and stock appreciation rights.
The new tax circular, Guo Shui Han No. 461, stipulates that an individual is taxed at the time he or she receives payment from his or her employer with respect to a stock appreciation right.

‘Stock appreciation right’ is the right to receive a cash payment based on the appreciation of stock. A company will pay the employee in cash equal to the difference between the grant price and market price of stock when employees exercise their stock appreciation right.

The taxable income of restricted stock is computed using a specific formula: taxable income equals (closing share price on share registration date plus closing share price on vesting date for current installment) divided by 2 times the number of shares vested in current installment minus total payment by employee times (number of shares vested in current installment divided by total number of shares received).

The tax treatment of restricted stock appears more favorable than that of stock options. However, the favorable computation formula is not applicable in the following situations–the stock appreciation rights, stock options, and restricted stock are awarded by a non-listed company; the incentive plan is adopted by a company before listing and employees receive incentive income after the company is listed; the company fails to file the required data with the tax authority in charge; or an individual is an employee of an affiliate of the listing company issuing stock and the listing company directly or indirectly owns less than 30 percent stock of the affiliate, or the affiliate is not a first-tier or second-tier subsidiary.

US-SACU Free Trade Agreement - Trade and Investment Development Cooperation Agreement

2009-10-21T05:44:00.000-04:00

bilateral.org
2009/10/17

What does this have to do with tax? If norms are agreed to between two states in a bilateral agreement, and these norms are transgressed by domestic tax legislation, the opportunity arises for the offended foreign investing party to approach their state to invoke diplomatic protection and hold the offending state that they are investing into responsible for any harm that they may have suffered. Even after they have exhausted normal court channels in the offending state and lost. The offending state is held responsible for its courts' actions, where the obligation transgressed by the offending state is contrary to international law norms - what is contained in the treaty. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.

The US began negotiating a free trade agreement with the Southern African Customs Union — composed of South Africa, Botswana, Namibia, Lesotho and Swaziland — in June 2003. The talks first got stalled in mid-2004, largely because of the US’ extreme and inflexbile demands regarding intellectual property rights. Around July-September 2005, officials started trying to reignite the process by chopping the FTA negotiating items into "bite size pieces". By early 2006, the process was looking like it would still go nowhere and in April that year it was suspended. From the start, the prospects of a US-SACU accord raised a lot of fears in the subregion, if past US free trade agreements are anything to go by. The demands put forward by the US — especially in terms of investment and intellectual property, including patents on drugs and seeds — would be quite radical for the SACU countries. While the talks were stalled, the US administration reportedly began looking into the possibility of negotiating bilaterals FTAs with individual sub-Saharan African countries. Washington also proposed that the US and SACU adopt a Trade and Investment Cooperation agreement — more than a TIFA, but less than an FTA — as step towards a full-fledged FTA. On 16 July 2008, the US Trade Representative and the SACU Trade Ministers signed a Trade and Investment Development Cooperation Agreement. The TIDCA is meant to be a stepping stone to a full FTA, so the process is still in motion.

State Responsibility in Taxation Matters

2009-10-12T03:22:00.003-04:00

Daniel N Erasmus, Adjunct Professor, Thomas Jefferson School of Law, USA
2009/10/11

State Responsibility in Taxation Matters

Hans Pijl in his interesting article, ‘State Responsibility in Taxation Matters’ states that international tax law is part of international law. The engagement of state responsibility in cases of breaches of tax-related treaties is an element of international tax law. The article gives an overview of the rules of state responsibility in international law.

The article takes further some of what I have taught on a 'rule of law' approach in applying international tax principles to facts in the greater international law arena.

In one interesting case, where US resident shareholders of a Barbados Co. invested into a company in South Africa, SARS (the tax authority) are refusing to refund overpaid tax, paid in error. The shareholders in the company are disinvesting, and SARS, by refusing to refund an overpayment of taxes (made by mistake by the company), will indirectly affect the US shareholders.

Once the company has exhausted its options in the court system in South Africa, assuming they do not win, the US shareholders may approach the State Department of the USA to exercise their discretion to invoke "diplomatic protection" on their behalf against the South African government and claim reparation and damages, for failure to repay the overpaid taxes (unjust enrichment) in terms on international law.

In another interesting case, APEH of Hungary are imposing harsh record keeping VAT provisions on marketing functions performed by a consumer product company to promote its product, applying old Hungarian tax rules that are contrary to EU law.

Under the international doctrine of "diplomatic protection", once this company has exhausted in Hungary its VAT dispute through the court system, and assuming it gets no positive result, its shareholders, at different levels, as there are a number of intermediate companies to the holding company, can approach the most sympathetic State to intervene on their behalf, and institute action against the State of Hungary for reparation and restitution for the VAT, penalties, interest and any other foreseeable damages caused, by virtue of the wrongful conduct of APEH enforcing the VAT provisions contrary to EU law.

Both South Africa and Hungary would be embarrassed having to face such an action, as the plaintiff would be another State.

For more information about this topic, or any international law and international tax law related issue, please do not hesitate to make contact with me at daniel@dnerasmus.com.
www.TaxRiskManagement.com

IRS ISSUES NEW E-MANUAL ON ADVANCE INTERNATIONAL TAXATION- SEE IT HERE

2009-10-12T02:58:00.001-04:00

Brian Dooley
2009/10/10

We have assembled the the new IRS E-Manual on International Taxation with the Hyper Links.

http://www.linkedin.com/news?viewArticle=&articleID=76829165&gid=1509927&articleURL=http%3A%2F%2Fwww.intltaxcounselors.com%2Fblog%2F%3Fp%3D1706&urlhash=r3jy&trk=news_discuss

21.8.1.11 Aliens

21.8.1.12 Dual-Status Aliens

21.8.1.13 Joint Returns with a Nonresident Alien Spouse

21.8.1.14 Manual Refunds to Nonresident Aliens That Include Interest

21.8.1.15 Community Property

21.8.1.16 Self-Employment Tax – U.S. Citizens and Aliens Living Abroad

21.8.1.17 Retirement Withholding: Survivor Benefit Annuities (SBA’s) – Survivor Benefit Plans (SBP’s)

21.8.1.18 VISA Holders – General

21.8.1.19 Totalization Agreements- Bilateral Social Security Agreements

21.8.1.20 General Organization for Social Insurance (GOSI)

21.8.1.21 Form 8288 and Form 8288-A

21.8.1.22 Withholding Tax on Foreign Partners – Form 8804

21.8.1.23 Withholding Certificates

21.8.1.24 Form 3520 and Form 3520-A

21.8.1.25 Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations

Exhibit 21.8.1-1 Housing Expense Limitation Chart

US How is the IRS Criminal Department Doing?

2009-10-12T02:50:00.002-04:00

Brian Dooley
2009/10/10

How is the IRS Criminal Department Doing? Not as much as one would think. About 80 Americans a year are convicted. Here is the report found by www.IRSWizard.net The USA is nearly 10 times larger than South Africa in population size and much bigger in terms of taxpayers and taxable income. The prosecutions reported in SA are 518 successful prosecution with a 99% success rate. (SARS Annual Report, 2008/2009)

How is the IRS Criminal Department Doing?

Published
by
Brian Dooley
on October 9, 2009
in IRS.Gov

How is the IRS Criminal Section Doing? Not as much as one would think. About 80 Americans a year are convicted. Here is the report found by www.IRSWizard.net

How to Interpret Criminal Investigation Data
Since actions on a specific investigation may cross fiscal years, the data shown in cases initiated may not always represent the same universe of cases shown in other actions within the same fiscal year.

The following statistics represent IRS Criminal Investigation’s investigative efforts involving promoters, clients and other individuals involved in abusive trust schemes.

FY 2009 FY 2008 FY 2007

Investigations Initiated 185 147 152

Prosecution Recommendations 105 106 104

Indictments/Informations 88 88 86

Sentenced 79 71 77

Incarceration Rate* 75.9% 81.7% 80.5%

Avg. Months to Serve 38 35 33

US Senator Carl Levin's speech on striking out offshore tax abuse

2009-10-09T04:24:00.000-04:00

Editorial comment by Prof Daniel N Erasmus
2009/10/08

Stop Tax Haven Abuse Act, S. 506 and S. 569, the Incorporation Transparency and Law Enforcement Assistance Act are being promoted by Senator Carl Levin as a measure to combat tax abuse. Tax avoidance or tax evasion? The term tax abuse seems aptly coined in an attempt to cover both. The first (avoidance) is not fraud, whereas the second is. Anti-tax avoidance measures are promulgated by jurisdictions world-wide. On the other hand blatant tax evasion, tax fraud, is a crime! Structuring one's affairs, not to pay too much tax, and around tax avoidance provisions, is lawful, and secrecy or privacy piercing measures should not deem these lawful activities to be unlawful. Otherwise, the rule of law will be eroded in the opposite direction of what the good Senator is proposing now. Tax evasion is where US and other residents hide money that should be taxable, in Swiss numbered bank accounts, without declaring that money to the IRS or other tax authorities. Obtaining dispositions from discretionary trusts set up in offshore jurisdictions, and declaring those receipts to tax authorities is not unlawful. Legitimate structures encourage savings, investment and healthy returns, which are taxed on withdrawal. That's not unlawful, nor should it be. But then, advising any client on an offshore discretionary trust would include peeking into the proposed legislation. If it is enacted in the US, others will follow suit. The speech of the Senator follows:

Keynote Address by Senator Carl Levin at the Conference on Increasing Transparency in Global Finance: A Development Imperative

Remarks as prepared for delivery

I’m pleased to be with you tonight to discuss an issue of great importance to me, and I know to you as well: the scourge of offshore tax abuse.

It is highly encouraging that you are meeting to discuss how illicit money arising from tax scams, corporate misconduct, foreign corruption, and other wrongdoing has hurt economic development, emerging civil societies, and the rule of law. It is also a pleasure to be introduced by so accomplished a scholar as Professor Fukuyama, who once famously proclaimed “the end of history.” I’d settle for the end of abusive tax havens.

We’re actually making some progress on doing that, but the battle is far from over.

Let me begin with something of a spy story. Now, maybe you wouldn’t expect somebody like me – who Time Magazine once described as “balding and … rumpled” – to be spinning James Bond-like tales of secret codes, smuggled diamonds, and sudden betrayals. But what’s been happening in the offshore tax haven world reads like the stuff of a novel. It involves billions of dollars in hidden assets, secret documents, clandestine meetings, and scheming in cities around the world. It involves conflict among some of the world’s richest nations. And in recent months, political events have caused a near earthquake in the offshore world that has shaken the marbled headquarters of some of the world’s richest private banks serving some of the world’s wealthiest people.

As many of you know, for the last ten years we have been investigating tax havens and offshore tax abuse at the Permanent Subcommittee on Investigations, which I chair. Our Subcommittee has jurisdiction and broad subpoena authority to investigate wrongdoing. Our probe, which has enjoyed bipartisan support, has yielded a series of hearings and reports over the years exposing how some financial institutions and professionals aid and abet tax evasion and help taxpayers dodge their tax obligations.

My interest in the offshore world was first triggered by our 1999 investigation of U.S. banks that were offering private banking services, including offshore shell companies and bank accounts, to some foreign heads of state and their relatives suspected of hiding their illicit funds. That was followed by a 2001 investigation into how small offshore banks were using major U.S. banks to move criminal proceeds deposited by drug traffickers and financial fraudsters, and a 2002 investigation of Enron that was using phony offshore transactions to inflate its revenues and minimize its taxes. Enron alone formed 440 shell companies in the Cayman Islands, and one small building in the Caymans, called the Ugland House, provides the mailing address for 12,000 shell companies. In 2003, we investigated how major U.S. accounting firms like KPMG were designing and marketing abusive tax shelters, including some with offshore transactions. In 2004, we investigated a bank in Washington, D.C., that formed offshore entities for Augusto Pinochet, former president of Chile, and the sitting president of Equatorial Guinea. In 2006, we presented six case studies of how U.S. taxpayers were using tax haven jurisdictions to hide assets and dodge their U.S. taxes.

Over the last year, we held dramatic hearings showing how two tax haven banks in particular, LGT Bank in Liechtenstein and UBS in Switzerland, used their bank secrecy laws to help wealthy U.S. residents conceal billions of dollars in assets in secret financial accounts which are supposed to be disclosed to the IRS, but which weren’t. Of course, these banks didn’t limit themselves to U.S. clients; they provided the same assistance to tax cheats in Germany, France, the United Kingdom, Canada, Australia, and many other jurisdictions.

Hiding assets offshore is blatantly unfair to the vast majority of taxpayers who comply with their civic obligations and have to shoulder the additional tax burden when others don’t pay what they owe. It deprives government treasuries of money needed to protect our citizens and provide the services that make our nations more secure and prosperous. In the United States alone, we’ve estimated that offshore tax abuse deprives the U.S. Treasury of approximately $100 billion in revenues each year.

Offshore tax cheating also undermines the justice of our tax systems, leading taxpayers to conclude that the systems favor those with the means to shield income from tax officials and building resentment, distrust, and anger. In other nations, and in particular developing nations where legal and societal frameworks are less robust and more vulnerable to abuse, I believe these problems can be even more damaging than in the United States, sending needed resources out of the country, draining government treasuries, and poisoning civil society.

But back to the spy story. It starts with Heinrich Kieber, a computer technician at LGT, with is owned by the Liechtenstein royal family. Mr. Kieber saw how LGT was helping taxpayers around the world hide income and assets, and decided to expose the wrongdoing. He provided names, account numbers, and account information to tax authorities in the United States and other nations and to my Subcommittee. He disclosed how LGT bankers developed code names for prized customers, used pay phones to conceal calls to clients, set up corporations and foundations to hide account ownership, and used elaborate means to move money in and out of accounts to conceal the audit trail. In 2008, when his information went public following high profile arrests in Germany, it snowballed into a worldwide scandal focused on how LGT was helping hundreds if not thousands of taxpayers evade payment of taxes.

For his trouble, Mr. Kieber is now in hiding. There is a warrant out for his arrest, and a $10 million bounty placed on his head by unknown individuals. In July of 2008, when he testified before my Subcommittee about LGT’s misconduct, we had to use complex security procedures to protect his new identity, including taking his testimony on videotape without showing his face to the world.

Mr. Kieber’s revelations shook the offshore world. He was followed by Bradley Birkenfeld, a former UBS banker who went to law enforcement officials with evidence that peeled back the curtain of secrecy hiding UBS’s years-long, flagrant violations of U.S. tax law. He told of UBS bankers who secretly visited U.S. clients to manage accounts hidden from the IRS, used encrypted computers to conceal client data, received counter-surveillance training to deflect U.S. inquiries, and opened accounts in the names of offshore corporations to conceal their true owners. He admitted helping one U.S. client hide $200 million in Swiss and Liechtenstein accounts, and another smuggle diamonds into the United States in a tube of toothpaste. Mr. Birkenfeld has since pleaded guilty to aiding and abetting U.S. tax evasion. UBS has admitted that Swiss accounts opened by U.S. taxpayers held more than $18 billion in assets and income hidden from the IRS.

The banking activities described in the Kieber and Birkenfeld revelations were so detailed, so brazen, and so startling that they fueled worldwide outrage at tax haven banks, the use of bank secrecy to facilitate tax evasion, and the complicity of offshore governments in the misconduct, producing what may be our best chance in decades to put a stop to offshore tax abuse.

That’s why, in our spy story, for the moment at least, the good guys are on the march. In the fight against tax havens, we have made more progress in the last year than the previous ten years combined. Let me outline some of the developments.

* Liechtenstein and Switzerland have reversed decades of resistance and agreed to enter into Tax Information Exchange Agreements in line with the model agreement developed by the Organization for Economic Cooperation and Development (OECD). Both countries have already initialed such agreements with the United States and other countries.
* UBS has entered into a deferred prosecution agreement with the United States in which it admitted conspiring with some clients to defraud the United States out of tax revenues, paid a $750 million fine, and agreed not to open any more U.S. client accounts without alerting the IRS. Think of it: UBS, the largest private bank in the world, has said that it will no longer offer hidden Swiss accounts to U.S. residents. When UBS first announced that radical change in policy at one of my Subcommittee hearings, it almost knocked me off my chair.

* In addition, as part of the deferred prosecution agreement, UBS and the Swiss Government broke decades of practice and turned over between 250 and 300 names of U.S. clients to the U.S. Justice Department. To settle a civil lawsuit brought by the U.S. Justice Department, UBS and the Swiss have also recently promised to turn over about 4,500 additional client names over the next year.

* As G-20 leaders signaled a new willingness to take action against uncooperative tax havens, the changes made by Liechtenstein and Switzerland set off a chain reaction in other bank-secrecy nations. Places like Luxembourg, Austria, Andorra, Monaco, and others also pledged for the first time to share tax information and cooperate with international tax enforcement.

* Last week, at a meeting in Mexico City, the OECD announced that all 87 countries in its Global Forum on Transparency and Information Exchange had agreed to adopt the OECD model agreement on tax information sharing. Essentially, those 87 nations – including some of the most notorious tax havens in the world – pledged to no longer allow bank secrecy laws to be used to carry out tax evasion.

* In the United States, indictments have begun to be filed against tax cheats and the lawyers, accountants, and others who helped them set up their secret Swiss accounts at UBS. We’ve been told that cases involving other tax haven banks may follow.

* In addition, U.S. tax officials have initiated a voluntary program allowing U.S. taxpayers with tax haven bank accounts to come clean, pay their back taxes, and avoid criminal prosecution. Hundreds of tax evaders are coming forward in a development that could restore a billion dollars or more in unpaid taxes to the U.S. Treasury.

Together, these events reflect an upheaval in the offshore tax haven world – a growing worldwide consensus that bank secrecy laws can no longer be relied upon to carry out tax evasion. This progress resulted from bank insiders willing to disclose offshore misconduct, law enforcement officers willing to pursue wrongdoing in the courts, and international leaders willing to demand change. It shows the power of Congressional oversight. And it shows that the scourge of offshore tax abuse is not an inevitable evil we have to live with, but misconduct that we can expose and hopefully eliminate.

Of course, the battle to end offshore tax abuse is far from over. And I am concerned that in our spy story, the good guys may declare victory and relax before the villains are vanquished. We need to take action now to ensure we get a happy ending.

Our first opportunity comes next week when the G20 summit meets in Pittsburgh to discuss financial reform, and tax havens are on the agenda. I recently urged the Obama Administration to work with our G20 partners to support the longstanding effort of the OECD to establish a system of international sanctions that can be taken against tax havens that don’t cooperate with international tax enforcement.

While 87 nations have now pledged to adopt the OECD’s model tax information exchange agreement, it is critical that the international community ensure that these pledges are followed by concrete actions – that tax havens not only sign tax sharing agreements but implement them. If words are not followed by deeds, the international community must have a way to respond.

In my letter, I highlight one possible tax haven sanction that our G-20 partners could consider, which would replicate the successful approach the United States has already pioneered to combat international money laundering. That approach allows the U.S. Treasury to take a series of increasingly tough steps against financial institutions or jurisdictions that pose money laundering concerns, including authority to bar U.S. financial institutions from doing business with the offending bank or jurisdiction and essentially locking them out of the U.S. financial system.

That same lock-out approach could be applied to tax haven banks or jurisdictions that fail to cooperate with international tax enforcement. The G-20 or a smaller subset like the G-7 nations could act as a group to bar their financial institutions from doing business with uncooperative tax haven banks or jurisdictions. Tax haven banks facing that type of united action would have a much harder time turning law enforcement away empty handed. And putting the necessary legal mechanism in place now to stop tax haven abuses in the future would give the international community a powerful new tool to use when the next offshore tax scandal hits.

Here in the United States, there are additional steps we can and should take to stop offshore tax abuse. As a legislator, my priority is to enact two pieces of legislation now before the Congress.

The first is the Stop Tax Haven Abuse Act, S. 506, which I and four colleagues have introduced in the Senate. Congressman Lloyd Doggett and some of his colleagues have introduced the bill in the House. President Obama cosponsored this legislation when he was a member of the Senate, and he endorsed its passage again earlier this year. This bill would enact a long list of measures to combat offshore tax abuse, including measures to enable the United States to take steps against offshore financial institutions or jurisdictions that impede U.S. tax enforcement as I just discussed. It would also simplify U.S. tax enforcement actions by allowing courts to presume that U.S. persons who form, send money to, or receive money from offshore entities control those entities; tighten reporting requirements for financial institutions that establish offshore accounts or entities for U.S. taxpayers; give law enforcement more time to pursue offshore tax cheats; and toughen penalties against those who aid or abet tax evasion. Passage of this legislation holds significant promise of reducing the current $100 billion drain on the U.S. treasury from offshore tax abuse each year.

The Senate Finance Committee and the House Ways and Means Committee have both said they would enact bills addressing offshore tax haven abuses this year. Everyone with an interest in this issue, at home and abroad, should urge the Committees to do just that and to include the key provisions of the Stop Tax Havens Abuse Act in the final product. We could sure use that revenue to help fund health care reform.

The second piece of legislation would take important steps to put our own house in order by ending a form of corporate secrecy in the United States. Today, our 50 states form nearly two million corporations and limited liability companies each year and, in almost every case, do so without requesting the names of the beneficial owners – the people behind the newly formed company’s activities. The failure to request beneficial ownership information creates U.S. corporations with hidden owners who can more easily engage in tax fraud, money laundering, or other misconduct. This corporate secrecy frustrates law enforcement. It also violates our international anti-money laundering commitments and undermines U.S. efforts to persuade offshore jurisdictions to identify the beneficial owners of the companies they form.

S. 569, the Incorporation Transparency and Law Enforcement Assistance Act, which I have introduced with Senators Grassley and McCaskill in this Congress and which was cosponsored by President Obama in the last Congress, would eliminate this weakness in U.S. law. Many groups – some represented in this room – have endorsed the bill, including the Federal Law Enforcement Officers Association, Fraternal Order of Police, Citizens for Tax Justice, and Global Financial Integrity which is helping sponsor this conference. Again, I hope all of you will help us get this bill enacted into law.

Another step we need to take is to support the efforts of the U.S. Justice Department and IRS to take abusive tax haven banks to court, stop their misconduct, and identify their clients. Some would like to shut down that enforcement effort; I want to strengthen it and expand it beyond the groundbreaking UBS case.

In addition, while recognizing the UBS case has been the most aggressive, innovative pursuit of a tax haven bank in U.S. history, we need to recognize that victory is far from complete. A 2004 document indicated that UBS had 52,000 U.S. clients with hidden Swiss accounts. UBS and the Swiss have agreed to disclose only about 5,000 client names. Clearly, some tax cheats will evade investigators, and we will have to rely on UBS and the Swiss government to give us the names of the worst offenders. Before we pop the champagne corks, we need to see how the UBS agreement plays out and how effective it is in identifying the tax offenders.

Next, while widespread adoption of the OECD model tax information sharing agreement is a breakthrough, we shouldn’t kid ourselves that it will solve the offshore tax abuse problem. For one thing, we have to see how many nations that are now promising to sign and implement these agreements actually do so. For another, and this is key, the model agreement has traditionally been interpreted as requiring a country to supply information only when a requesting jurisdiction has the name of a specific, suspect taxpayer. Most governments take the position that if the requesting jurisdiction doesn’t have the taxpayer’s name, no information can be shared, even if bank secrecy laws make obtaining that taxpayer’s name difficult or impossible.

That has to change. That restrictive interpretation has been a key barrier to effective use of international tax information exchange agreements, and it must be broadened. The first step has already been taken in the UBS case. Switzerland has agreed that, in response to a U.S. treaty request, UBS can supply the names of some of their U.S. clients as well as their account information. This concession by the Swiss is a major development that needs to be recognized and pressed worldwide, so that tax information exchange agreements can be used to obtain information not only in cases where the requesting jurisdiction has a specific taxpayer name, but also where the requesting jurisdiction identifies a specific entity that is facilitating tax evasion — such as a bank, attorney, or corporate administrator — and requests the names of that entity’s clients.

Finally, offshore tax abuse needs to be taken into account when developing international trade policy. Specifically, there ought to be a policy against rewarding trading partners that refuse to adopt the growing global consensus against tax evasion. The nation of Panama, for example, hopes to conclude a free trade agreement with the United States in the near future. But at the same time, after pledging in 2002 to negotiate a tax information exchange agreement with the United States, Panama is stonewalling. The United States should insist that Panama and other nations agree to tax information sharing before extending to them the advantages of a free-trade agreement.

We have the means to end offshore tax abuse if we have the political will to act. Offshore tax evasion currently deprives countries of billions of dollars in needed revenues, benefiting the wealthy few who have the resources to hide assets offshore while offloading their tax burden onto the backs of honest taxpayers. When that happens, tax haven abuse undercuts the tenets of fairness and shared sacrifice on which free societies rely.

Tax evaders reap enormous benefits from civil society — they enjoy the security our military and law enforcement agencies provide; they invest and prosper thanks to the rule of law and sanctity of contract which our regulators and court system enforce; and they build their economic future on the financial, communications, and transportation infrastructure that taxpayers finance. What we ask in return is that all members of society pay that share of their income that they owe, so that governments can continue to protect fundamental rights and provide basic services. If that social contract breaks down and some refuse to pay their share, the effects on civil society are caustic. Ending offshore tax abuse is about more than money; it is about protecting the principles upon which our economic and political systems are built.

As Justice Oliver Wendell Holmes famously said, “Taxes are the price we pay for civilization.” Those who seek to avoid their tax obligations are not just free loaders, they are weakening that civilization. But if we take the right steps, together across the globe, we can finally end the scourge of offshore tax abuse.

Thank you for listening, and thanks for the work you do to combat offshore abuse in all its forms.

USA Deductibility Ponzi scheme losses

2009-10-05T05:08:00.001-04:00

Natalie Bell Takacs
2009/10/05

In March 2009, the IRS issued Rev. Rul. 2009-9 and Rev. Proc. 2009-20, which provided guidance on the tax treatment of theft losses from Ponzi-type schemes. Although it is evident from the provisions of Rev. Proc. 2009-20 that it was intended to offer a 2008 theft loss deduction to victims of the Madoff scheme, its provisions apply to victims of all Ponzi-type thefts.

The content of Rev. Rul. 2009-9 and Rev. Proc. 2009-20 was covered in the May 2009 issue of The Tax Adviser ("IRS Issues Guidance on Losses from Ponzi Schemes," p. 334). This item will address some practical issues that practitioners may encounter in preparing returns for taxpayers who have been victims of the Madoff Ponzi scheme.

Determining Whether a Loss Is a Theft Loss

Regs. Sec. 1.165-8(d) states that theft is "deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery." Rev. Rul. 72-112 expands on this definition by defining "theft" as a taking of property that was illegal under the law of the jurisdiction in which it occurred and was done with criminal intent. Various IRS pronouncements and court cases have distinguished between theft losses and other types of losses (e.g., worthless securities, bad debt, gifts, etc.). These pronouncements and cases are the topic of other articles and thus will not be discussed in this item; however, it is important to note that the Madoff Ponzi scheme's unique nature may raise issues that have not been previously addressed. For example, certain funds used swap transactions to leverage their investments into the Madoff strategy. In addition to multiplying the amount of the fund's losses, the use of such Madoff derivatives presents some complex and ambiguous tax issues that remain unanswered, including whether the affected investors in the swap transactions will be eligible for an ordinary loss. To the extent that the losses from the swap transaction are considered ordinary under other Code provisions, taxpayers may concede that such losses are not theft losses; however, to the extent that the losses from the swap transaction are considered capital losses, taxpayers can be expected to advance arguments that such losses are theft losses.

Safe-Harbor Election

In Rev. Proc. 2009-20, the Service and Treasury acknowledge that whether and when investors meet the requirements for claiming a theft loss for an investment in a Ponzi scheme are highly factual determinations that taxpayers often cannot make with certainty in the year the loss is discovered. The revenue procedure goes on to indicate that the safe harbor's purpose is to provide a uniform manner for taxpayers to determine their theft losses, and it explicitly states that use of the safe harbor is optional (i.e., use of the safe harbor requires an election).

The revenue procedure permits taxpayers who choose to use the safe harbor to deduct either 75% or 95% of the loss in the discovery year. Section 4.04 of Rev. Proc. 2009-20 defines the discovery year as the year in which the indictment, information, or complaint establishing the qualified loss is filed. For the Madoff Ponzi scheme's victims, the discovery year is 2008.

The use of the safe harbor is limited to "qualified investors" as defined in Rev. Proc. 2009-20, [section]4.03. This section effectively precludes persons that had actual knowledge of the investment arrangement's fraudulent nature prior to its becoming known to the general public from using the safe harbor. It also limits the use of the safe harbor to investors that transferred cash or other property to the fraudulent arrangement, thus ruling out investors who invested in the fraudulent arrangement through a fund or other entity. Presumably, however, such indirect investors may claim a safe-harbor deduction if the fund or other entity makes the safe-harbor election.

Section 8.01 of Rev. Proc. 2009-20 explicitly states that taxpayers who do not use the safe harbor to claim a theft loss must establish that the loss was from theft, that the theft was discovered in the year the taxpayer claims the deduction, and that no claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery in the year in which the taxpayer claims the loss.

Despite Rev. Proc. 2009-20's stipulation of 2008 as the year in which a taxpayer can deduct Madoff theft losses under the safe harbor, it is not certain that a taxpayer who does not use the safe harbor could claim a Madoff theft loss deduction in 2008. It is possible that the Service could make an argument that the taxpayer must defer the loss to a future year because as of December 31, 2008, the trustee of the Madoff bankruptcy estate had not completed his investigation into Madoff's assets.

In addition, for taxpayers who invested with Madoff through another investment fund, the IRS could argue that as of December 31, 2008, such taxpayers had a realistic prospect of recovery in the form of lawsuits against third parties and that the amount of the potential third-party recovery could not be reasonably estimated. Thus, taxpayers for whom a 2008 theft loss is valuable must carefully consider whether it is necessary to use the safe harbor in order to ensure a 2008 theft loss deduction.

By making the safe-harbor election, however, taxpayers are precluded from the following:

* Deducting losses in excess of the 75%/95% amount in the discovery year;

* Filing returns or amended returns to exclude or recharacterize income reported with respect to the investment arrangement in tax years preceding the discovery year;

* Applying the claim-of-right provisions of Sec. 1341; or

* Applying the doctrine of equitable recoupment or the mitigation provisions in Secs. 1311-1314.

Although use of the safe harbor, which will result in a 2008 theft loss for victims of the Madoff Ponzi scheme, may be advantageous for many taxpayers, it is possible that certain victims of the Madoff Ponzi scheme may prefer to defer the loss to a future year. Perhaps the taxpayer realized a significant capital gain in 2008 and prior years (taxable at 15%) but expects a significant amount of ordinary income in the future that, under President Obama's proposed budget, would be taxed at a rate of 39.6%.

Third-Party Recovery

Section 5.02 of Rev. Proc. 2009-20 provides that an investor can deduct 95% of the qualified investment in the discovery year as long as the investor is not pursuing third-party recovery; however, the percentage is 75% for an investor who is pursuing third-party recovery. Taxpayers who compute the amount of their safe-harbor deduction using the 95% are required to sign a statement--under penalties of perjury--that they have not pursued and do not intend to pursue any potential third-party recovery.

Section 4.10 of Rev. Proc. 2009-20 defines the term "potential third-party recovery" as the amount of all actual or potential claims for recovery that are not attributable to potential insurance/Securities Investor Protection Corporation (SIPC) recovery and potential direct recovery (e.g., against the responsible group).

Unfortunately, Rev. Proc. 2009-20 does not define how to determine whether an investor is "pursuing" third-party recovery. By way of illustration, consider the following two examples:

Example 1--class action lawsuits: Investor X (who is not otherwise pursuing third-party recovery) is included in a class action suit. Does X's passive inclusion as a member of the class cause him to be considered as pursuing third-party recovery?

Funds that decide to make the safe-harbor election in particular will need to carefully consider whether to compute the amount of the theft loss deduction using 75 % or 95%. Investors can be expected to pressure funds that are not currently pursuing third-party recovery to calculate the loss using the 95% rate; however, such funds should carefully consider the impact of using the 95% rate on the safe-harbor election should they decide to pursue third-party recovery in the future.

Example 2--lawsuit against feeder funds: Y is an investor in Fund A, which holds a direct account with Bernard L. Madoff Investment Securities, LLC (BMIS). Although A is not pursuing third-party recovery, Y is pursuing recovery against A. A files its tax return using the safe harbor and reports a theft loss equal to 95% of its qualified investment.

Can Y deduct 95% of the theft loss reported on its Schedule K-1 issued by Fund A, or is Y required to reduce the amount of the deduction to 75% or some other amount? Unfortunately, Rev. Proc. 200920 does not address this issue.

Amending Returns to Eliminate Fictitious Income

Rev. Rul. 2009-9 concludes that the amount of a theft loss is increased by the amount of the fictitious income (e.g., amounts reported to the investor as income prior to the fraudulent arrangement's discovery) that is reinvested in the fraudulent arrangement.

It should be noted that this conclusion is very favorable to the investors because it is inconsistent with the holding in Kaplan, No. 8:05-cv-1236-T-24 EAJ (M.D. Fla. 2007). In Kaplan, the court denied taxpayers a theft loss deduction for income allegedly earned on purported investments in a Ponzi scheme because the taxpayers could not produce evidence that such income ever existed; thus, the taxpayers could not show that such income was unlawfully taken (a prerequisite to the theft loss deduction).

Prior to the issuance of Rev. Rul. 2009-9, it was uncertain whether taxpayers would be able to recover taxes for fictitious income amounts attributable to years for which the statute of limitation had closed.

For taxpayers who choose to use the safe harbor, the only permissible treatment for fictitious income is to include it as basis for determining the amount of the theft loss to be deducted in the discovery year. Taxpayers who do not use the safe harbor have the option of filing amended returns for open years to exclude fictitious income; however, such taxpayers must establish that the amounts sought to be excluded in fact were not income that was actually or constructively received by the taxpayer (Rev. Proc. 2009-20, [section]8.02).

Despite this additional burden, in certain circumstances taxpayers may be able to increase the value of their theft loss tax refunds by opting out of the safe harbor and filing amended returns for open years. Taxpayers that are considering filing such amended returns should be mindful of the statute of limitation and may find it necessary to file protective refund claims.

SIPC Recovery Issues

Both Rev. Proc. 2009-20 and Rev. Rul. 2009-9 require taxpayers to address the amount (if any) to be received from the SIPC. The amount (if any) to be received may be affected by whether an investor was a direct investor that had an account at BMIS or an indirect investor in a fund that had an account at the firm. It is generally believed that the $500,000 SIPC limit will be determined on a per account basis, which means that the amount of SIPC recovery to an investor in a fund with many partners will be limited; however, even if the claims of indirect investors are initially rejected by the SIPC, it is possible that litigation may subsequently be brought against the SIPC to require that claims by indirect investors be covered.

In addition, it generally is believed that the amount of the SIPC recovery is limited to the investor's net unrecovered investment and that the SIPC will not provide reimbursement for fictitious income.

Due to these complexities, tax preparers should refrain from calculating the amount of the SIPC recovery and should require that the client stipulate the amount, preferably based on the advice of the client's attorney.

Recordkeeping Issues

To use the safe-harbor provisions of Rev. Proc. 2009-20, a taxpayer must attach a statement--signed under penalties of perjury--to its tax returns stating that it has written documentation to support the amount of the loss; however, the revenue procedure does not specify the source, form, or required content of the documentation.

Many Madoff victims made their investments as early as 1992. Although the IRS does require taxpayers to maintain documentation to support their tax basis, in many instances the statements issued by BMIS indicated that all the positions in the account were liquidated as of the end of the year; thus, taxpayers may have discarded their records following the expiration of the three-year statute of limitation. For taxpayers that did not retain records, recreating the missing records may be next to impossible, especially given the large number of acquisitions/mergers that have occurred among financial institutions. Even the Service has indicated it may provide transcripts to taxpayers only for the past six years.

Madoff investors will likely have copies of recent BMIS statements; however, it is possible that the IRS could challenge whether the amounts reported on these statements represent the taxpayer's basis in its BMIS investment.

Partnership Allocation Issues

When a theft occurs at the partnership or other passthrough entity level, only the partnership or other passthrough entity may make the safe-harbor election. The partnership presumably will then allocate the safe-harbor theft loss amount to its partners and report the amount of the safe-harbor loss on the Schedule K-1 it issues to each partner.

The Code allows securities partnerships to use alternative methods to allocate realized gains and losses (see Bellamy, "Tax Allocations for Securities Partnerships," 34 The Tax Adviser 473 (August 2003)). Although all methods are required to preserve the character and other tax attributes of each item of gain or loss, which are determined under a consistently applied approach, the different methods can render different results. Thus, the allocation method used by the partnership can affect the amount of the Madoff theft loss allocated to the taxpayer.

Consider, for example, the following issue related to the allocation of the SIPC recovery amounts received by a partnership:

Example 3: Partnership ABCD is formed in 1997 and each partner contributes $250,000 for a 25% interest in the partnership. The $1 million is invested with BMIS in 1997. By 2007, fictitious income of $1 million had been reinvested, bringing the total value of the BMIS account to $2 million. At the end of 2007, Partner A withdraws his 25% interest from the partnership, leaving a balance of $1,500,000, consisting of a net unrecovered investment of $750,000 and fictitious income of $750,000. On January 1, 2008, Partner E invests $500,000 in the partnership, increasing the BMIS account balance to $2 million, consisting of a net unrecovered investment of $1,250,000 and fictitious income of $750,000. The partnership receives an SIPC recovery of $500,000, which constitutes 50% of its net unrecovered investment and allocates $125,000 to each partner. Under this methodology, the amount of the SIPC recovery allocated to Partner E constitutes 25% of her $500,000 net unrecovered investment, while the amount of the SIPC recovery allocated to Partners B, C, and D is 50% of their $250,000 net unrecovered investment.

If a partner reports items on his or her tax return that are not consistent with the items as reported on Schedule K-1 from a partnership, S corporation, estate, or trust, Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), must be attached to the partner's return. Form 8082 is required not only when the taxpayer disagrees with the amounts reported on the Schedule K-1 but also if the partnership has not filed a tax return or issued a Schedule K-1 by the time the individual must file his or her tax return (including extensions), as may be the case with a fund that, as a result of its Madoff and/or other losses and/or investor lawsuits, is unable to timely file its tax return.

Reportable Transaction Issues

Regs. Sec. 1.6011-4(a) requires every taxpayer that has participated in a reportable transaction and is required to file a tax return to attach to its return a disclosure on Form 8886, Reportable Transaction Disclosure Statement. The fact that a transaction is reportable does not affect the legal determination of whether the taxpayer's treatment of the transaction is proper.

Included among the categories of reportable transactions are loss transactions. A loss transaction is any transaction that results in the taxpayer's claiming a loss under Sec. 165 that surpasses the following thresholds specified in Regs. Sec. 1.6011-4(b)(5)(i):

* For corporations, $10 million in any single tax year or $20 million in any combination of tax years.

* For partnerships that have only corporations as partners (even if the losses do not flow through to the partners), $10 million in any single tax year or $20 million in any combination of tax years.

* For all other partnerships (even if the losses do not flow through to the partners), $2 million in any single tax year or $4 million in any combination of tax years.

* For individuals, S corporations, or trusts (whether or not any losses flow through to one or more shareholders or beneficiaries), $2 million in any single tax year or $4 million in any combination of tax years.

* For individuals or trusts (whether or not the loss flows through from an S corporation or partnership), $50,000 in any single tax year if the loss arises from a Sec. 988 transaction (relating to foreign currency).

In determining whether a transaction results in a loss that exceeds the threshold amounts, only losses claimed in the tax year that the transaction is entered into and the five succeeding tax years are combined.

The IRS was aware that many nonabusive transactions could result in Sec. 165 losses. To address this situation, the Service announced several exceptions to this definition. Section 4.03 of Rev. Proc. 2004-66 provides an exception for theft losses under Sec. 165(c)(3); however, because Rev. Rul. 2009-9 specifies that Ponzi-type losses are deductible under Sec. 165(c)(2), this exception is not available. Thus, to the extent that a Ponzi-type theft loss exceeds the applicable thresholds, the taxpayer may be required to report the loss on Form 8886.

Net Operating Loss Issues

Rev. Rul. 2009-9 explicitly states that Sec. 172(d)(4)(c) treats any deduction for theft losses allowable under Secs. 165(c) (2) or (3) as a business deduction and that a theft loss an individual sustains after December 31, 2007, is considered a loss from a "sole proprietorship" within the meaning of Sec. 172(b)(1)(F)(iii). Accordingly, an individual taxpayer may be eligible to elect either a three-, four-, or five-year net operating loss (NOL), provided the $15 million gross receipts test in Sec. 172(b)(1)(H)(iv) is satisfied.

When a theft loss results in a net operating loss, tax preparers should be careful to analyze whether to elect to forgo the NOL carryback and, if the NOL is to be carried back, whether to elect either a three-, four-, or five-year expanded carryback period.

Because tax rates may be different for different carryback years, in many instances it will be necessary for preparers to compute the value of the potential carryback for all four potential carryback years (two-, three-, four-, or five-year carryback). Because the Code requires consistent carryback treatment for both regular tax and alternative minimum tax (AMT) NOLs, preparers should compute not only the value of the regular tax carryback but also the value of the AMT carryback. It should be noted that the 90% of AMT income limitation was not lifted (as it was for the expanded carryback that was permitted for 2002 NOLs), so the carryforward and carryback of 2008 NOLs can offset only 90% of AMT income.

Timing Issues

As a result of the Madoff Ponzi scheme, tax refunds may constitute a significant portion of an investor's net worth. Understandably, such taxpayers may be anxious to file not only their tax returns for the discovery year but also the accompanying amended returns and/or tentative carryback claims to carry their theft losses back to prior years. In the case of fund investors, in many instances they will not receive their 2008 Schedule K-1s until September 15, 2009 (the extended due date for 2008 calendar-year partnerships, corporations, estates, and trusts). This may delay the receipt of the refund attributable to the overpayment of 2008 taxes.

Corporations may be entitled to an expedited refund using Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. However, a corporation must file Form 4466 before the sixteenth day of the third month after the end of the tax year. An extension of time to file the corporation's tax return does not extend the time for filing Form 4466.

Unfortunately, a quick refund is not available for individual taxpayers. Nonetheless, if the 2008 tax refund is attributable to the application of the taxpayer's 2007 overpayment and the Madoff-related tax refunds constitute almost the entire remaining net worth of an investor, the taxpayer may wish to contact the IRS to see if the Service would be willing to adjust the taxpayer's 2007 account to refund (versus apply) the 2007 overpayment.

In most instances, refunds attributable to the carryback of NOLs will be filed using either Form 1045, Application for Tentative Refund, or Form 1139, Corporate Application for Tentative Refund. Although Forms 1045 and 1139 ordinarily are due within 12 months after the tax year of the NOL, a taxpayer that seeks to make a timely Sec. 172(b)(1)(H) election using Form 1045, Form 1139, or an amended return must file the form within six months after the due date (excluding extensions) of the return for the tax year of the NOL (e.g., September 15, 2009, for calendar-year entities and October 15, 2009, for calendar-year individuals).

Sec. 6411(b), Regs. Sec. 1.6411-3(a), and Temp. Regs. Sec. 1.6411-3T(a) require the IRS to act on a claim for a tentative carryback refund within 90 days from the later of the date the application was filed or the last day of the month containing the last date prescribed by law (including extensions) for filing the return for the tax year of the NOL from which the carryback results. In the case of extended, calendar-year individual income tax returns for 2008 for which a tentative carryback claim is filed by October 31, 2009, the Service is not required to act on a claim until January 29, 2010.

If the amount of a taxpayer's refund exceeds $1 million and the taxpayer requests that the IRS electronically deposit this amount, the taxpayer must attach Form 8302, Electronic Deposit of Tax Refund of $1 Million or More, to its refund claim.

If the amount of a taxpayer's refund exceeds $2 million, Sec. 6405(a) provides that the IRS may not issue the refund until 30 days after it submits a report to the congressional Joint Committee on Taxation (JCT). The report must state the name of the person to whom the refund or credit is to be made, the amount, and a summary of the facts and the Service's decision. Although the JCT has oversight as opposed to approval authority, if the JCT disagrees with or questions the Service's position in the report, the Service's general policy is to delay processing the refund until the dispute is resolved.

Conclusion

Although the availability of the safe-harbor provisions of Rev. Proc. 2009-20 may be beneficial for many taxpayers, careful analysis will be required to determine the combination of tax strategies that will maximize the value of the theft losses incurred by a taxpayer.

Given the complexity and number of outstanding issues that must be addressed by tax preparers in preparing returns that contain theft loss deductions related to the Madoff Ponzi scheme, if the IRS wishes to achieve its stated objective of alleviating the compliance and administrative burdens on both taxpayers and the IRS, it should issue additional guidance--in particular for the investors of the Madoff feeder funds--in time for such guidance to be applied to the preparation of 2008 tax returns.

From Natalie Bell Takacs, CPA, M. Tax., Cohen & Company, Ltd., Mentor, OH

Bulletin: Tax Risk Management

2009-10-05T05:06:00.000-04:00

Marius van Blerck
2009/10/05

This is an excellent article looking at Tax Risk Management from an International perspective, published by the IBDF. Marius is a well recognized tax specialist having headed up the internal tax departments of a number of multi-national corporations - Standard Bank Ltd and Anglo-American Ltd.

Please click here to download the article.

A USA National Sales Tax is Coming?

2009-10-05T05:02:00.001-04:00

Washington
2009/10/04

The imposition of VAT on a national basis in the USA is being strongly reconsidered. This is a regressive form of taxation, that taxes consumption, and not the rich only.

[T]he administration should consider a tax on consumption, such as a value-added tax [VAT] system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

The center’s president and chief executive, John Podesta, who is an Obama adviser, said the administration should consider a tax on consumption, such as a value-added tax system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

“As progressives we need to debate the policy merits [of] a range of options, including designing a small and more progressive value-added tax,” Mr. Podesta said in a statement Tuesday.

The report, which will be released on Wednesday, said the administration can’t rely on taxing richer Americans and companies to reduce the deficit to sustainable levels by 2014 because those groups would see 40% tax increases.

Harnessing Your Creative Powers: Think Like a Genius

2009-10-05T04:56:00.002-04:00

Questia
2009/10/04

According to author Michael Michalko, "Even if you're not a genius, you can use the same strategies as Aristotle and Einstein to harness the power of your creative mind and better manage your future."

Harnessing Your Creative Powers:
Think Like a Genius

According to author Michael Michalko, "Even if you're not a genius, you can use the same strategies as Aristotle and Einstein to harness the power of your creative mind and better manage your future."

In The Futurist article "Thinking like a Genius: Eight Strategies Used by the Supercreative, from Aristotle and Leonardo to Einstein and Edison," he explains that "geniuses think productively, not reproductively.

"When confronted with a problem, they ask 'How many different ways can I look at it?'... and 'How many different ways can I solve it?' instead of 'What have I been taught by someone else on how to solve this?' They tend to come up with many different responses, some of which are unconventional and possibly unique."

Michalko notes, "Geniuses prepare themselves for chance. Whenever we attempt to do something and fail, we end up doing something else. That is the first principle of creative accident. We may ask ourselves why we have failed to do what we intended, which is a reasonable question. But the creative accident provokes a different question: What have we done? Answering that question in a novel, unexpected way is the essential creative act. It is not luck, but creative insight of the highest order."

And "Geniuses produce. A distinguishing characteristic of genius is immense productivity. Thomas Edison held 1,093 patents, still the record. He guaranteed productivity by giving himself and his assistants idea quotas. His own personal quota was one minor invention every 10 days and a major invention every six months. Bach wrote a cantata every week, even when he was sick or exhausted... T.S. Eliot's numerous drafts of "The Waste Land" constitute a jumble of good and bad passages that eventually was turned into a masterpiece."

Check out more thinking strategies of creative geniuses, keeping in mind Michalko's advice that "Recognizing and applying (them) could help make you more creative in your work and personal life."

Non-residents Mauritius tax opportunities

2009-10-05T04:51:00.002-04:00

Integritax (SAICA) revisited for Int'l Tax Planning LLM Course
2009/10/03

Non-residents 599. Mauritius tax opportunities August 1998 From a South African tax perspective, Mauritius has particular significance. Mauritius is in close proximity to Southern Africa, is a member of SADC and of Lomé, has strong ties with Africa and Asia and is a preferred location with the South African Reserve Bank.

In addition, it has a well-developed double taxation agreement (DTA) network - quite unusual for a country regarded by many as a tax haven.
The tax sparing article in the new South African-Mauritius DTA offers interesting planning opportunities for South African corporates. This article allows for a tax credit for Mauritian tax, at their standard rate of 35%, against the South African tax liability of a South African resident. What is interesting about this is that the actual rate of Mauritian tax paid is ignored for purposes of calculating the credit. Instead of a South African investor receiving a credit against its South African tax liability for Mauritian tax at the incentive rate of, say, 0,5%, he is given a credit at the normal tax rate in Mauritius, i.e. 35%. Without the tax sparing provision, the tax liability may simply be moved from the country of source to the country where the recipient resides. The tax sparing provision allows the recipient to retain the benefit of the incentive rate given to him in Mauritius. He is thus spared from paying a higher tax than the incentive tax rate, and it therefore remains an attractive option for him to invest in Mauritius.

An example illustrates the benefit. A South African company registers a branch as an offshore company (OC) in Mauritius. The effective rate of tax is 3%. It earns investment income from various sources. Assuming that such income is also taxable in South Africa (in terms of section 9C, for example, because the branch does not meet the requirements of being a "substantive business enterprise") the benefit of the Mauritian tax incentive would, in the absence of the tax sparing provisions, be lost. The tax sparing provisions in the SA-Mauritius treaty provides for a tax sparing credit equal to 35% of the Mauritian income which can be used to offset the SA tax liability in relation to such income.

The same would apply to any income liable to tax in terms of section 9D (being the anti-avoidance legislation taxing controlled foreign entities (CFE) and foreign trusts in certain circumstances).

It should he noted that an OC will no longer be able to select its own tax rate. Instead income will be taxed at an effective rate of 3%.

As an alternative to relying on the tax sparing provision, a South African company could incorporate a subsidiary as an OC in Mauritius to co-ordinate and manage its trading operations in African or Asian countries, which have DTAs with Mauritius. By extracting profits from the foreign trading companies into Mauritius by way of interest, royalties and management fees, the overall tax burden of the group may be substantially reduced. It is important that the Mauritius subsidiary has sufficient substance to fall outside the scope of the South African CFE legislation.

In the absence of a DTA between South Africa and the People’s Republic of China, only unilateral double taxation relief measures are available for transactions directly between these countries. By interposing Mauritius, which has DTAs with both South Africa and China, favourable withholding tax rates are available for extracting dividends, interest and royalties, while effective relief is given for Chinese capital gains tax. Similarly, Mauritius might be used effectively in international structures involving South Africa and India, even though South Africa itself has a treaty with India.

As with a number of other tax havens, Mauritius offers the more general benefits of no capital gains tax, no exchange controls and no VAT. It also has incentives for expatriates working in Mauritius. Unlike the more traditional tax havens, freeport facilities arc available to further enhance an international structure.

KPMG

IT Act:S 108

IT Act:S 9C

IT Act:S 9D

Non-residents tax-sparing clauses

2009-10-05T04:14:00.002-04:00

Integritax (SAICA) revisited for Int'l Tax Planning LLM Course
2009/10/03

Non-residents 650. Tax-sparing clauses December 1998 Tax-sparing is a concept encountered in numerous double taxation treaties, nearly always when one party to the treaty is a "developed country" and the other a "developing" or "emerging" one. Sometimes, however, the signatories agree to reciprocal sparing concessions.

Tax-sparing usually applies to categories of income such as dividends, interest and royalties; in other words, what would be called "passive investment income" in South Africa. In some cases, however, it is applied to "active" income as well.

Most tax treaties provide that residents of one country will be taxed on passive income arising in the other country at a particular rate. This rate usually varies between about 10% for interest and 15% for dividends, with royalties falling somewhere in that range. When a tax-sparing agreement forms part of the treaty, it is invariably accompanied by tax concessions in the form of credits offered by the "developing" or "emerging" country. If a resident of the "developed" country earns passive income from a source in the other country, which then grants a tax credit in respect of that income, the "developed" country undertakes to impose tax on its subject as if the subject had actually been taxed in the emerging country. That is, the credit is allowed twice; once in the "developed" country and once in the "developing" country. The incentive for taxpayers in the "developed" country to invest in the other country is obvious.

For example, say, a taxpayer resident in D, the "developed" country, earns royalties from a source in E, the "emerging" country, a country with which it has a double taxation treaty which contains a tax-sparing clause. The gross royalties amount to 10 000, which in F attract tax of 2 000. At the same time E gives the taxpayer a tax credit of 2 000 as part of an incentive package to encourage investment. D, in calculating the tax payable by the taxpayer, will arrive at the total tax owing and then deduct 2 000 as a credit as if it had actually been paid to E. In so doing, D is clearly encouraging its subjects to invest in F.

There are variations on this theme. For example, Germany (which has several tax-sparing agreements), allows a credit against the foreign income at the German tax rate, even though the actual tax rate in the other country may be less. To illustrate this by example:

R
Domestic income 80 000
Gross foreign royalty income
foreign tax paid 2 000) 10 000
Taxable income 90 000
Tax at 45% (the German corporate rate)
40 500
Less tax-sparing credit at 45%
(instead of the actual 2 000)
4 500
Tax payable 36 000

Section 788(5) of the Income and Corporate Taxation Act in the UK specifically provides for tax-sparing agreements in tax treaties.

Tax-sparing provisions appear in only two of South Africa’s double taxation agreements. The agreement with Mauritius operates in favour of Mauritius, while that with Romania benefits residents of both countries. (There is a sparing clause in the agreement with Israel, but it only applies to the now defunct Undistributed Profits Tax.) Perhaps the scarcity of this concept has to do with our strange position of being partly developed, partly emerging and partly developing.

Incidentally, South Africa now has over 40 tax treaties, almost as many as the Netherlands, which has historically been the world leader in offshore tax planning. Perhaps our potential as a tax haven will finally be recognised soon.

Deneys Reitz

IT Act:S 108

I truly enjoy your blog and the service you're providing to the tax industry.

2009-10-01T08:43:00.002-04:00

I truly enjoy your blog and the service you're providing to the tax industry. I would like to return the favor and pass on a link to a free whitepaper discussing the convergence of tax and finance, which was recently published in The Tax Executive (the journal of the Tax Executives Institute).

http://vertexinc.web101.hubspot.com/convergence-blogs-paper/?utm_campaign=Convergence-White-Paper&utm_source=Daniel-Erasmus

This paper discusses the changes in tax reporting and its growing similarities to financial reporting, which is increasing the demands of tax technology solutions. Having worked on the development of this white paper, I have witnessed the response to starting this conversation and I am now working to spread the word.

I hope you find value in this whitepaper and share it with your readers. A free webcast is also in the works to continue the dialogue. It will take place on October 6th and discuss convergence technology trends like:
· Moving beyond departmental to enterprise-class tax solutions

· Reducing the operational complexity of tax management

· Building strong relationships with the CFO and CIO

· Developing tighter integration of financial and tax data

· Delivering optimal strategic value

Thanks again for putting out such great content on your blog!

Sincerely,

Rob Patey
Interactive Communications Leader
Vertex Inc.
Where Taxation Meets Innovation

Prof. Daniel N. Erasmus

2009-09-09T08:51:00.002-04:00

We are proud to announce that our CEO, Daniel N. Erasmus has just been appointed an Adjunct Professor in International Tax Planning & Tax Risk Management at an American University. He has been invited to teach in his field of expertise this fall, in an American Bar Association approved LLM course, via the internet! His expertise and reputation has gained recognition in the US, as well as the fact that he has been on assignment for MNE's in Europe during the earlier part of this year.

Prof. Daniel Erasmus is available to consult to your business to show you how to minimize your tax risks both on a domestic and international tax level.

He has also recently become a proud father to his second son, Nicolas D. Erasmus.

We invite you to visit our revised website www.TaxRiskManagement.com.

Using family limited partnerships…in Guernsey

2009-09-08T10:42:00.000-04:00

By Marcel Cariou, Senior Associate, Mourant de Feu & Jeune (04/09/2009)

Enter the Family Limited Partnership (FLP). FLPs are attracting interest from tax advisers in the UK because they offer similar levels of flexibility of management and asset protection over subsequent generations as trusts, but allow lifetime gifts without the charges to IHT. Limited partnerships – a partnership of usually one general partner and multiple limited partners – have been around for many years and have long been used as tax-transparent investment vehicles. The general partner manages the investments, holds the assets on behalf of the partnership, and has unlimited liability for the losses of the limited partnership (although usually a limited company is used as general partner to provide continuity and to restrict losses). The limited partners contribute capital to the limited partnership in return for partnership interests which give them rights (subject to the overall distribution policy and any discretion of the general partner) to distributions of profits or capital growth. Limited partners have liability only to the extent of their capital contributions but may not have any part in the management of the partnership if they are to retain such limited liability.

Inheritance tax (IHT) rules in the UK have put increasing pressure on the use of trusts as a tool for family tax planning. Since 2006, trusts designed to benefit the children of a settlor have been subject to an immediate 20% IHT charge on the initial capital above the threshold of £325,000 and an ongoing charge of 6% on the value of the trust assets every 10 years.

Enter the Family Limited Partnership (FLP). FLPs are attracting interest from tax advisers in the UK because they offer similar levels of flexibility of management and asset protection over subsequent generations as trusts, but allow lifetime gifts without the charges to IHT. Limited partnerships – a partnership of usually one general partner and multiple limited partners – have been around for many years and have long been used as tax-transparent investment vehicles. The general partner manages the investments, holds the assets on behalf of the partnership, and has unlimited liability for the losses of the limited partnership (although usually a limited company is used as general partner to provide continuity and to restrict losses). The limited partners contribute capital to the limited partnership in return for partnership interests which give them rights (subject to the overall distribution policy and any discretion of the general partner) to distributions of profits or capital growth. Limited partners have liability only to the extent of their capital contributions but may not have any part in the management of the partnership if they are to retain such limited liability.

In an FLP, the family elder or donor usually controls the general partner and thereby directs the investment strategy and distribution policy. The limited partnership agreement can allow for the limited partnership to be wound up after a certain period, on the occurrence of a trigger event (such as the death of the donor), or provide for continuity of the general partner and the structure. The limited partnership agreement and the articles of incorporation of a corporate general partner can set out a family investment strategy and a management mechanism that can be maintained over multiple generations. The board of directors of the general partner can be constituted by family elders or by independents.

The children, as limited partners (whether as individuals, or through limited companies or trusts) will receive distributions. As a partnership is a contractual relationship, it can be tailored to fit the requirements of a particular family group. The general partner may be given discretion to distribute profits to one limited partner without benefiting others or to defer rights to profits until a certain date or trigger event. Transfers of partnership interests will usually be restricted to existing partners or other family members.

FLPs do not attract the initial nor the ongoing IHT charges levied on trusts and will remain clear of IHT charges if the donor remains alive for seven years from the time of making his contribution to the FLP. FLPs are tax transparent – that is, each partner is taxed individually depending on their residence/domicile on receipts from the FLP. There will be no Guernsey taxes levied save for on certain types of income which are sourced in Guernsey.

Guernsey's regulatory environment is such that an FLP will usually be outside the scope of Guernsey's collective investment scheme regulation and a Guernsey general partner will only require licensing if it takes a fee for managing the FLP. Long-standing experience and professional expertise in administering limited partnerships means Guernsey is ideally placed to serve the UK's growing demand for wealth planning schemes which use FLPs.

This article can only provide a general review of this area and is not intended to constitute legal advice. Legal advice should be taken with regard to individual circumstances. References to UK taxation are based on our understanding; we are not qualified to advise on UK tax law.

EB-5 USA Visa Requirements

2009-09-07T11:57:00.000-04:00

This relatively recent (1990) immigrant visa category seeks to favor entry of immigrants who are entering the United States for the purpose of engaging in a commercial enterprise that will involve creation of at least ten, full-time jobs.

The EB-5 investment visa may be distinguished from the other E investment visas, in that very strict conditions must be fullfilled in regard to employment and a minimal capital investment must be made under this category.

Although the minimum amount required to invest for the EB-5 is $1 million, this amount may be reduced to $500,000 in the event that the investment is made in a “targeted employment area”.

To qualify under the EB-5 category, the new commercial enterprise must:

(1) have been established by the investor;

(2) be one in which the person is in the process of investing at least $1 million, or $500,000 if in a “targeted employment area”;

(3) benefit the U.S. economy;

(4) create full-time employment for at least 10 U.S. workers;

(5) the immigrant investor must have a policy-making role in the business

Under EB-5, two or more individuals may join to make an EB-5 investment, provided that each investor has invested the required capital and each investment results in the creation of the requisite number of full-time positions.

1. Creation of a new commercial enterprise

There are basically three ways to demonstrate the creation of a new commercial enterprise. The business may be “new” (in whatever form, such as creation of a sole proprietorship, partnership, holding company, joint venture, corporation, business trust, etc.), or involve the purchase and restructuring of an existing business or expansion of an existing business. Investing in a troubled business may also qualify an investor for EB-5 classification.

Indeed, the primary criteria of the EB-5 immigrant visa is the creation of at least 10 new employment opportunities, and the means of such employment generation are important for the file, but secondary to job creation.

2. The capital investment

The investor must make an investment in capital. A contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the entrepreneur and the new business does not constitute a contribution of capital.

The amount of the investment must be equal to at least $1 million, unless the investment is made in certain “targeted employment areas” (generally, areas specified by the individual states where the unemployment rate is equal to or more than 150 percent of the national average). In the event of an investment in a “targeted employment area”, the minimum investment is decreased to $500,000.

3. Benefiting the U.S. Economy

This additional requirement, while it seems that it is obviously met if the business creates U.S. jobs, nonetheless must be demonstrated to the satisfaction of the immigration and naturalization service. Generally, this requires a showing that the new business provides goods or services to U.S. markets.

4. Job creation

To qualify for EB-5 status, the investment must create full-time employment for at least 10 U.S. persons, meaning U.S. nationals, lawful permanent residents or other immigrants lawfully authorized to be employed in the U.S.. The investor himself/herself does not count, nor does the investor’s spouse and children. Non-immigrants are also excluded.

These full-time jobs need not exist upon making the EB-5 petition. The investor may, for example, support a peitition with a comprehensive business plan demonstrating a need for at least 10 employees within the next two years. This business plan, to be worked out with legal counsel, would provide the approximate dates during the next two years when the employees would be hired.

Furthermore, for investment in an existing, troubled business, the job creation criteria are met when the investor shows that the number of existing employees will be maintained.

5. Role of the immigrant investor in the business

It is not sufficient for the investor to establish a business plan and investment and then absolve himself of involvment in the business. The EB-5 investor must either be involved in the managerial control of the commercial enterprise or manage it through policy formulation. This requirement is generally satisfied if the EB-5 investor is a corporate officer or board member, for example.

* *

The EB-5 process requires a great deal of preparation and foresight, and a sophisticated knowledge of immigration law and jurisprudence. Indeed, your immigration attorney would have to carve out a personalized solution which is consistent with caselaw in this domain of immigration law. Therefore, consideration of EB-5 status should be done in close cooperation with legal counsel.

* *

USA Midyear 2009 Tax Planning Letter

2009-08-26T05:30:00.001-04:00

Midyear Tax Planning Letter To Our Clients and Friends: Although this year is only about half over, we’ve already had one new tax law (a really big one), and more might be on the way (maybe not so big). Despite confusion created by never-ending legislative changes, the current federal income tax environment is still quite favorable. Now is the time to take advantage of the tax breaks that Congress has provided before they disappear. This letter presents just a few key tax planning ideas to consider this summer while you have time to think. Some of the ideas may apply to you, some to family members, and others to your business. Here goes.

Cash in on First-time Homebuyer Credit
Legislation enacted in 2008 created a temporary tax credit for so-called first-time homebuyers (basically, taxpayers who haven’t owned a principal residence in the last three years). Stimulus legislation enacted earlier this year extended the credit provision to cover qualified home purchases between 1/1/09 and 11/30/09 and made the maximum credit amounts a bit more generous. More importantly, the stimulus legislation also deleted a previous requirement to repay the credit over 15 years. For a qualified principal residence purchase between 1/1/09 and 11/30/09, the maximum credit equals the lesser of: (1) 10% of the purchase price of a principal residence, (2) $8,000, or (3) $4,000 for those who use married filing separate status. The credit can be used to offset your entire federal income tax bill, including any Alternative Minimum Tax (AMT). The credit is also refundable. After your tax bill has been reduced to zero, you are allowed to collect any leftover credit amount in cash.

Beware: The credit is phased out (reduced or completely eliminated) if your Modified Adjusted Gross Income (MAGI) is too high. Contact us for details about that and other qualification rules that are not covered here.

Collect Tax Breaks for Buying New Vehicle
Thanks to the following tax breaks that won’t be around forever and a buyer’s market, now might be a very good time to purchase a new vehicle.
Sales Tax Deduction. Stimulus legislation passed earlier this year created a new federal income tax deduction for state and local sales and excise taxes paid on new (not used) vehicles that are purchased (not leased) between 2/17/09 and 12/31/09. The write-off is limited to the amount of taxes on the first $49,500 of purchase price. You can claim the break whether you itemize or not, and it’s allowed even if you owe the AMT. An IRS spokesperson recently confirmed that you can claim the deduction on as many vehicles as you care to buy within the designated time frame. Qualifying vehicles include almost all passenger autos, pickups, and SUVs, as well as motorcycles and RVs. However, a phase-out rule can reduce or completely eliminate the break for higher-income taxpayers. Contact us for details.

Hybrid Vehicle Credit. A federal income tax credit is allowed for buying (not leasing) a qualifying new (not used) hybrid vehicle. The credit can be used to offset your 2009 federal income tax bill even if you owe the AMT, and high income won’t disqualify you. Credits for most qualifying vehicles range from around $1,500 to $3,000. However, credits are phased out once the manufacturer has sold over 60,000 hybrids in the U.S. Credits for Toyota and Lexus hybrids disappeared after 2007, and credits for Honda hybrids vanished after 2008. Credits for Ford and Mercury hybrids are being phased out right now. You’ll get a bigger credit for buying a Ford or Mercury hybrid before October 1. So far, full credits are still allowed for hybrids made by Chrysler, GM, Mazda, and Nissan.

Lean-burn Diesel Vehicle Credit. A federal income tax credit is also granted for buying (not leasing) a new (not used) qualifying lean-burn diesel vehicle. The credit will offset your 2009 federal income tax bill even if you owe the AMT and regardless of how high your income might be. Lean-burn diesel credits are subject to the same phase-out rule as hybrid credits. So, they will be reduced and eventually disallowed after a manufacturer has sold 60,000 units (not an issue so far). Right now, you can find Audi, BMW, Mercedes, and Volkswagen diesels that qualify. Credits range from $900 to $1,800.
Leverage Standard Deduction by Bunching Deductible Expenditures
Are your 2009 itemized deductions likely to be just under, or just over, the standard deduction amount? If so, consider the strategy of bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2009 standard deduction for married joint filers is $11,400; the magic number for single filers is $5,700; it’s $8,350 for heads of households. Examples of deductible items that can be bunched together every other year to lower your taxes include the interest due with your January home mortgage payment, charitable contributions, and state income and property tax payments. But, watch out for AMT as state income and property taxes are but deductible for AMT purposes.

Take Advantage of Generous But Temporary Business Tax Breaks
Several favorable business tax provisions have a limited shelf life that may dictate taking action between now and year-end. They include the following.
Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. For tax years beginning in 2009, the maximum Section 179 deduction is $250,000 (same as last year). For tax years beginning in 2010, however, the maximum deduction is scheduled to drop back to about $130,000 (depending on the inflation adjustment). Various limitations apply to the Section 179 deduction privilege, so please contact us if you want more information.

50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software acquired and placed in service by December 31 of this year. The first-year bonus depreciation break is scheduled to expire at year-end unless Congress takes further action. Contact us if you want more details about this generous, but temporary, tax break.

Longer Carryback Period for Net Operating Losses (NOLs). Stimulus legislation passed earlier this year allows qualifying small and medium-sized businesses to carry back Net Operating Losses (NOLs) generated in tax years beginning or ending in 2008 for up to five years (versus the two-year carryback rule that usually applies). Therefore, if your qualifying business uses a fiscal tax year (say one ending in October), you may still have time to take actions that will create or increase an NOL for the current tax year. That NOL can then be carried back for up to five years to recover taxes paid in those years.

Note: 50% first-year bonus depreciation deductions for qualifying assets placed in service between now and December 31 can create or increase an NOL. However, Section 179 deductions cannot. Please contact us for details on the interaction between asset additions and NOLs.

Conclusion
As we said at the beginning, this letter is intended to give you just a few ideas to get you thinking about tax planning moves for the rest of this year. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning strategy session. We are at your service!

Best regards,

TRM Services Team
+1 561 568 7115 or daniel@dnerasmus.com

IRS defeats Textron over accrual work papers

2009-08-19T02:31:00.003-04:00

By a 3-2 majority, the US Court of Appeals for the First Circuit ruled on Thursday that the Internal Revenue Service (IRS) can see tax accrual work papers prepared by Textron, an aerospace and defence company, to back up calculations made for its audited financial statements...
IRS defeats Textron over tax accrual work papers
International Tax Review

By a 3-2 majority, the US Court of Appeals for the First Circuit ruled on Thursday that the Internal Revenue Service (IRS) can see tax accrual work papers prepared by Textron, an aerospace and defence company, to back up calculations made for its audited financial statements.

The IRS had appealed a district court judgement, confirmed subsequently by the first circuit, that the papers, which related to sale-in lease-out (Silo) transactions, were privileged. The US tax authorities consider Silo transactions to be potential abusive tax shelters. Textron argued the papers had been prepared in case there was litigation and so qualified for attorney-client privilege.

"The work product privilege is aimed at protecting work done for litigation, not in preparing financial statements," Judge Michael Boudin wrote, in the majority opinion. "Textron's work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they will be carefully prepared, in their present form, even though not protected; and IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters."

Judge Juan Torruella, who dissented along with Judge Kermit Lipez, wrote: "This court should accept the district court's factual conclusion that Textron created these documents for the purpose of assessing its chances of prevailing in potential litigation over its tax return in order to assess risks and reserve funds. Under these facts, work-product protection should apply."

The court remanded the case for further proceedings.

The majority came up with the right verdict, said Linda Beale, a professor at Wayne State University.

"This is an important decision and one that was correctly decided," she blogged at ataxingmatter. "It is time the courts recognized the boundaries to work-product protection. Tax accrual workpapers do not merit protection. Textron should hand over the workpapers and determine to engage in less aggressive tax planning in the future."

Adler Pollock & Sheehan and Steptoe & Johnson represented Textron.

Worldwide - Alarm over new company tax weapon

2009-08-19T02:30:00.000-04:00

A NEW accounting standard will be added to the South African Revenue Service’s (SARS) armoury to collect taxes from companies . Companies will be required to account for all tax uncertainties in their financial statements, giving tax authorities the power to seize audit working papers. Tax analysts said at the weekend if the draft accounting standard were to be implemented in its current form, SARS “will use it without shame and unequivocally against taxpayers” to boost revenue collections.
Alarm over new company tax weapon
SANCHIA TEMKIN
Published: 2009/08/17 06:39:06 AM

A NEW accounting standard will be added to the South African Revenue Service’s (SARS) armoury to collect taxes from companies .

Companies will be required to account for all tax uncertainties in their financial statements, giving tax authorities the power to seize audit working papers.

Tax analysts said at the weekend if the draft accounting standard were to be implemented in its current form, SARS “will use it without shame and unequivocally against taxpayers” to boost revenue collections.

The International Accounting Standards Board recently released an exposure draft (ED 2009/2) on income taxes. The proposed accounting standard is intended to replace the existing standard on accounting for income tax (IAS12). Companies will be required to accurately reflect their liability for tax annually according to the exposure draft .

Marius van Blerck, group tax director at Standard bank , said the proposed accounting standard would apply to dozens of tax systems internationally. Van Blerck was speaking at a workshop on Friday hosted by the International Tax Institute in Johannesburg.

He pointed out a number of problematic provisions with the proposed accounting standard.

It requires tax assets and liabilities to be measured by using a probability-weighted average of all possible outcomes. This relates to all tax issues and not just disputes.

“It (the methodology) assumes disaggregation.” It assumed that it was possible to make accurate assumptions about the outcome of potential and actual disputes, on a case by case basis (instead of an aggregated basis), he said.

“I t requires extraordinary foresight (on the part of auditors).”

The most serious issue was that the exposure draft required companies to make disclosure of this information in their annual financial statements.

It was uncertain whether the authorities would accept the amounts presented to them, he said. Globally, tax authorities are under immense pressure to collect revenue and had initiated a number of steps against large companies to boost collections.

SARS was 12,2% (R20bn) behind on revenue collection, gross domestic product shrank 6,4% in the past quarter, and unemployment in the economy was growing.

Daniel Erasmus, chairman and CEO of TRM Services, said the disclosure element would confer more power on tax authorities.

The requirements could undermine a taxpayer’s due process rights by allowing tax authorities direct access to information that should be legally privileged.

“SARS would be able to ask for the working audit papers of a company — they would be able to seize a company’s documents.”

Erasmus said in the future companies would have to separate the responsibilities of audit partners and tax advisers by way of a tax risk-management programme.

Van Blerck expected the international accounting board to revise the exposure draft after a wide range of responses .

temkins@bdfm.co.za

Nature & Value of Tax Risk - Additional Notes to the FIN 48 in SA seminar

2009-08-14T06:46:00.001-04:00

IFRS have issued a draft income tax statement proposing the introduction of a process to determine tax liabilities more onerous than FIN 48. Is South Africa prepared? Here are some useful tips on making preparation for future more onerous tax positions...

Nature and value of tax risk

Tax risk is something you acquire by simply doing business. You choose to be exposed to it the moment you attempt to generate income. You can of course influence the extent of the tax risk, but the final value of tax risk is ultimately determined by internal and external factors to your business. You will determine the extent by how effective and efficient your management of tax risk is.

The quality of tax risk can range between a negative monetary and bad reputational exposure, to a positive ability to identify opportunities to reduce tax exposure, increasing the ability to procure greater profits. The internal factors that influence this are:

- the quality of your tax compliance staff and/or advice;

- how well you know the facts in your business that might drive tax exposure – this is the information you access “above the ledger line” on an inverted triangle. The apex is the accurate determination of taxable income. The "ledger line" appears half way between the base and apex of the triangle – it is difficult to believe, but the size of the area between that line and the base of the triangle is 75% area of the whole triangle. The area between the line and the apex only makes up 25% of the total area. It is this part of the taxpayer’s overall tax risk that is usually accounted for in tax compliance. The other 75% goes undetected until there is an audit by a Tax Authority – or a structured tax risk management plan is put into place;

- how effectively and efficiently you manage the “above the ledger line” information (the 75% undetected or uncovered area) that may cause tax exposure.

The external factors, in summary, are:

- the regular practical processing of new tax legislation and regulations that may impact on your business;

- being targeted by a Revenue Authority for a tax audit.

Unfortunately for most businesses, they do not care to manage the “above the ledger line” information (that 75% portion), until they have been forced to do so by an adversarial Tax Authority tax audit, threatening to expose them to exorbitant back-taxes not previously provided for.

Internationally, there is an increase in targeted business tax audits by specially organized Tax Authority task teams – showing increased improvements in tax exposures by taxpayers. Why is this? Take a look at the results of a recent tax risk survey:

- 83% of survey participants (taxpayers) stated they knew they were not 100% tax compliant;

COMMENT: SARS had a 72% success rate on its 69 000 tax audits in 2008;

- 79% do not have a documented tax strategy;

- 55% tax compliance managers do not communicate with the rest of the business to double-check the accuracy of “above the ledger account” information;

- 43% did not think their tax compliance information is from a 100% reliable source;

- Between 66% - 79% had not undergone tax audits by the Tax Authority in the last 2 years;

- 43% did not know whether or not tax issues and risks are discussed at board level.

Various conclusions can be drawn from these survey results. Any Tax Authority responsible for administering tax compliance amongst these taxpayers would be virtually guaranteed of arrear taxes, penalties and interest.

Over 200 taxpayers have participated in the survey.

A properly orchestrated tax risk management plan, as advocated in the book “7 Habitual Tax Mistakes” in conjunction with the retainer program offered by www.tax-Radar.com will go a long way towards managing and controlling previously undetected and unknown tax risks in any taxpayer business.

FIN 48 comes to SA? Are you ready with your tax risk management policies?

2009-08-13T04:50:00.000-04:00

COMMENTS ON A PROPOSED NEW STANDARD ON INCOME TAX ACCOUNTING EXPOSURE DRAFT ED/2009/02 (“The Exposure Draft”) Introduction The Exposure Draft dealing with Income Tax was published for public comment on 31 March 2009 by the International Accounting Standard Board (“the Board”). We hereby comment on question 7 and 16 as set out in the Exposure Draft.

COMMENTS ON A PROPOSED NEW STANDARD ON INCOME TAX ACCOUNTING EXPOSURE DRAFT ED/2009/02 (“The Exposure Draft”)

Introduction

The Exposure Draft dealing with Income Tax was published for public comment on 31 March 2009 by the International Accounting Standard Board (“the Board”).

We hereby comment on question 7 and 16 as set out in the Exposure Draft.

QUESTION 7 - MEASUREMENT OF CURRENT AND DEFERRED TAX ASSETS AND LIABILITIES

1. The proposed standard retains the basic approach to accounting for income tax, known as the temporary difference approach which objective is to recognise now the future tax consequences of past events and transactions, rather than waiting until tax is payable.

2. The Board considered FIN 48 (Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109) issued by the FASB. FIN 48 requires an entity to recognise tax benefits it has claimed only if it is more likely than not that the tax authorities will accept the claim. If a tax benefit meets the recognition threshold, the amount recognised is the maximum amount that is more likely than not to be accepted by the tax authorities.

3. Applying that reasoning, the Board concluded that an entity has a liability to pay more tax if the tax authority does not accept the amounts submitted.

4. It is therefore proposed that the uncertainty be included in the measurement of tax assets and liabilities. That is done by measuring current and deferred tax assets and liabilities using the probability-weighted average of all possible outcomes theory (herein referred to as the probability theory).

5. The proposed wording of the above amendment in the Draft International Financial Reporting Standard X Income Tax is set out as follows under the heading “Measurement” at paragraph 26:

“Uncertainty about whether the tax authorities will accept the amounts reported to them by the entity affects the amount of current tax and deferred tax. An entity shall measure current and deferred tax assets and liabilities using the probability-weighted average amount of all the possible outcomes, assuming that the tax authorities will examine the amounts reported to them and have full knowledge of all relevant information. Changes in the probability-weighted average amount of all possible outcomes shall be based on new information, not a new interpretation by the entity of previously available information.”

6. There are no examples of applying the probability theory included in the Exposure Draft but the following is clarified:

6.1. In applying the probability theory to measure the tax assets and liabilities it is assumed that tax authorities will examine the amounts reported to them by the entity and have full knowledge of all relevant information (at “Measurement” para 26 of the Exposure Draft).

6.2. No possible outcomes are ignored in the measurement (at BC60 of the Basis for Conclusions).

6.3. The tax assets and liabilities are not discounted amounts (at BC60 of the Basis for Conclusions).

6.4. The Board does not intend entities to seek out additional information for the purposes of applying the measurement. Rather it proposes only that entities do not ignore any known information that would have a material effect on the amounts recognised (at BC63 of the Basis for Conclusions).

6.5. In contrast with FIN 48, the Board believes that the use of the probability theory without a recognition threshold provides more relevant information than an approach that uses a probability based recognition threshold.

7. There is no definition of “material” as used in para BC63 and BC103 of the Exposure Draft Basis for Conclusions, explaining the New Standard on Income Tax.

Invitation to Comment

8. We hereby comment on question 7 which states as follows:

“Question 7 – Uncertain tax positions

IAS 12 was silent on how to account for uncertainty over whether the tax authority will accept the amounts reported to it. The exposure draft proposes that current and deferred tax assets and liabilities should be measured at the probability-weighted average of all possible outcomes, assuming that the tax authority examines the amounts reported to it by the entity and has full knowledge of all relevant information. (See paragraphs BC57 – BC63 of the Basis for Conclusions.)

Do you agree with the proposals? Why or why not?”

9. To place into context the comparability FIN 48, we provide a short summary:

“FASB Number 109, in the past, contained no guidance on accounting for income tax assets and liabilities, resulting in businesses taking inconsistent positions. According to commentators on FIN 48:

“FIN 48 is an attempt to reconcile the inconsistencies by prescribing a consistent recognition threshold and measurement of tax assets and liabilities. It also gives taxpayers a clearly defined set of criteria to use when recognizing and measuring uncertain tax situations for financial statements, as well as specifying additional disclosures regarding the uncertainty.”

The evaluation of a tax situation for FIN 48 purposes is based on a two-step process:

· The first step is recognition: The business determines whether it is more likely than not (which is a 50% or greater likelihood) that a tax situation would be upheld on examination, including resolution of any ensuing litigation process, based on the technical merits of the tax situation;

· The second step is measurement: The tax situation that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize on financial statements.

In asserting the more likely than not standard, all the facts and circumstances are taken into account. Additionally, the taxpayer must presume that the tax situation will be examined by the Revenue Service with full knowledge of all the facts, technical merits of the relevant tax law and their applicability to the facts and circumstances of the tax situation. The taxpayer may take into account any past administrative practices and precedents of the Revenue Service in its dealings with the business, when those practices and precedents are widely understood.

Finally, each tax situation must be evaluated without consideration of the possibility of offset or addition to other tax issues. The appropriate timing of claiming the benefits of a tax issue is when it becomes clear that the tax issue has a more likely than not chance of being upheld. If a previous tax issue does not meet the more likely than not standard, then it shall be adjusted in the first period after the effective date of FIN 48 (1 January 2007).

A business must classify the liability associated with an unrecognized tax issue as a current Liability to the extent the business anticipates payment of cash within one year or the operating cycle, if longer. The liability for an unrecognized tax issue shall not be combined with deferred tax liabilities or assets.

In addition to taking into account the benefit that a particular tax issue will create for a particular business, interest and penalties must also be computed in addition to the tax liability, where required by the relevant tax legislation. A tax liability will cease to be a liability during the first interim period in which any one of the following three requirements exist:

· the more likely than not recognition threshold is met by the reporting date;

· the tax issue is settled through negotiation or litigation;

· the statue of limitations for the Revenue Service (prescription) to examine a tax issue has expired, unless there has been fraud, misrepresentation or non-disclosure by the taxpayer.”

10. We do not agree with the Exposure Draft proposal for the reasons set out below.

11. The Disclosure is too Onerous

11.1. The Exposure Draft seems to suggest that all amounts affecting current and deferred tax assets and liabilities must be considered and taken into account irrespective of the amount concerned and irrespective of the likelihood of a dispute.

11.2. We further understand that there is no recognition threshold applicable to the disclosure.

11.3. In addition, all possible outcomes should be included in the analysis of the amount.

11.4. A simple example illustrating the amount of work involved for one item affecting the tax liability is as follows:

Assume a deduction giving rise to a tax benefit of R1 million is claimed.

A probability should be attached to all possible outcomes assuming the tax authority examines the amounts reported and has full knowledge of all relevant information. No possible outcomes should be ignored in the measurement.

Possible Outcomes Probability Risk in R

Tax benefit claimed is not challenged by the tax authority 50% 0

Tax benefit claimed is challenged by the tax authority

and the taxpayer wins the matter 20% 0

Tax benefit claimed is challenged by the tax authority

and the tax authority wins the matter 20% 200 000

Tax benefit claimed is challenged by the tax authority

and the matter is settled 50/50 5% 25 000

Tax benefit claimed is challenged by the tax authority

and the matter is settled 70/30 in favour of the tax authority 5% 35 000

100% 260 000

11.5. This could be a onerous task for the following reasons:

11.5.1. There is no threshold as in the application of FIN 48. The number of items in respect of which the analysis should be done is numerous. With no threshold, it means every single item having a tax effect should be considered. This goes against the principle of materiality employed during an audit process.

11.5.2. The number of possibilities to include in the analysis is endless.

11.5.3. The liability is contingent and it should be recognised even where the possibility of realizing is remote. This goes against general accepted accounting practice.

11.5.4. A tax dispute takes time to run its course and this impact on the accuracy of the disclosed contingent liability. It could take up to two years after submitting a tax return that an item is queried and another year before an assessment is eventually issued. It could be settled in ADR after six months or if taken all the way to the Court of Appeal, it may take up to five years. During this time, the time value of money (which according to the Exposure Draft should be ignored) could play a significant role on the amount of the liability.

11.5.5. The effect that prescription may have is difficult to take into account. Nothing is said about applying the statue of limitations which is expressly provided for in FIN 48.

12. Tax Authorities will take Advantage of the Disclosure

12.1. After implementing FIN 48 in the USA, the increase in tax accrual working papers was a major concern for USA taxpayers because it created a responsibility for taxpayers to look at tax risks and at the same time an opportunity for the tax authority to exploit the situation.

12.2. Although the eventual outcome of the US v. Textron CA No., 06-198T (“Textron”) judgment, a US case concerning the disclosure of working papers during an audit, was in favour of the taxpayer and the IRS agreed to exercise restraint in line with the judgment, the judgment is not binding on tax authorities world-wide. There is no guarantee that tax authorities worldwide will exercise a similar restraint.

12.3. The degree of disclosure in terms of the Exposure Draft is not clear, ie detailed workings as opposed to a consolidated number. The South African Revenue Service (“SARS”) is already querying details of tax provisions raised by companies. SARS audits will now focus their investigations on annual financial statement (“AFS”) tax disclosures. This will create far greater exposures, even in remote situations, which otherwise may never have materialized into a dispute or controversy.

12.4. In addition, tax liability numbers on the AFS of high risk taxpayers will significantly increase after implementation of the standard. This will trigger tax audits for these taxpayers, without any “friendly” disclosure or settlement process available to taxpayers, as is the case in the USA with FIN 48. There are developed tax uncertainty processes given by the IRS setting out the settlement procedures. None is guaranteed to taxpayers in other jurisdictions.

13. The meaning of “material”

13.1. What is “material” for accounting purposes as contemplated in para BC63 and BC103 of the Exposure Draft. “Material” is not defined. IASB have made certain findings on “relevance”. Is relevance material? If we assume it is, the IASB state:

“To be relevant, information must be capable of making a difference in the economic decisions of users by helping them evaluate the effect of the past and the present events on future net cash flows…or confirm or correct previous evaluations…Also, the information must be available when the users need it…”.

13.2. This means that any tax uncertainty after it has been through the compulsory internal tax review process (in that the information is available, and will influence future cash flows based on a probability analysis) could be material, as it satisfies all these criteria.

14. Attorney/Client Privilege

14.1. In many respects this disclosure requirement undermines the attorney/client privilege taxpayers are entitled to.

14.2. This issue was also considered in the Textron case. It still remains to be decided whether Textron waived confidentiality when it gave its internal documents to the auditors.

14.3. In the implementation of the Exposure Draft, it can be anticipated that SARS will argue that the internal documents given to the auditor will form part of their working papers and will not be subject to attorney/client priviledge. This will lead taxpayers to have to implement measures where any tax risk review documentation is not exposed to auditors, but kept in their posession of their qualified attorney in anticipation that this information may realistically be the subject of tax litigation with SARS, because it is anticipated that SARS will actively pursue any disclosures for the reasons stated above, leading to potential litigation.

15. Constitutional issues

15.1. Section 33 of the South African Constitution states that no person can be compelled to give self incrimenating evidence. Self incrimination includes being exposed to punitive penalties.

15.2. The Companies Act at section 285A read with 440FF, states that widely held companies must comply with generally excepted accounting standards in the preperation of their financial statements. This means that if the relevant taxpayers do not comply with the standard, the Companies Act imposes an administrative penalty, and if the transgression is not remedied, a criminal penalty on the offending party. It is therefore compulsory for widely held companies to comply with the Exposure Draft.

15.3. SARS will be able to access this information in one of two ways:

15.3.1. By approacing a third party auditor to present its working papers, in which case SARS is at liberty to pursue any administrative or criminal actions against the taxpayer; or

15.3.2. By approaching the taxpayer direct, and invoking the compulsary information machinery of the Income Tax Act, where the taxpayer may be able to rely on a ‘self incrimination’ defence, that enititles the taxpayer to any punitive penalty immunity, because the taxpayer was compelled to give the evidence to SARS.

15.4. The dicotomy of these two scenarios exposes the unfairness and uncertainty that will arise in the future.

15.5. The ‘hardliner’ defence in terms of the Income Tax Act will be that the party refusing to give the information to SARS, can “show good cause” why they refuse SARS’ request, because:

15.5.1. the opinions expressed in working papers are not information in the narrow sense, pertaining to a specific transaction at the time of its execution – but opinion or conjecture, a view formed, after the fact; or

15.5.2. the taxpayer would be able to raise the ‘self-incrimination’ reason as “good cause”.

However, both are unlikely to be followed as a defence by most.

Suggested Alternative Approach

16. We suggest the following alternative approach:

16.1. We suggest that a threshold for recognising the liability should apply in line with FIN 48. This will make the disclosure less onerous.

16.2. We suggest that disclosure in the AFS should be minimal to avoid exploitation by the tax authorities.

16.3. Procedures should be implemented where the tax accrual working papers for tax uncertainties are regarded as subject to attorney/client privilege. This will be difficult to impose on the legislatures of various governments.

QUESTION 16 – CLASSIFICATION OF INTEREST AND PENALTIES

The Facts

17. The Board decided to follow FIN 48 in that the classification of interest and penalties payable to tax authorities is a matter of accounting policy choice that should be disclosed.

18. Disclosure of the amount of interest and penalties is not required unless the amount is material in terms of paragraph 97 of IAS 1.

Invitation to Comment

19. We hereby comment on question 16 which states as follows:

“IAS 12 is silent on the classification of interest and penalties. The exposure draft proposes that the classification of interest and penalties should be a matter of accounting policy choice to be applied consistently and that the policy chosen should be disclosed. (See paragraph BC103 of the Basis of Conclusions.)

Do you agree with the proposals? Why or why not?

Suggested Alternative Approach

20. History in the USA shows that with FIN 48, about 42% of companies surveyed understated the interest and penalties component. The precise basis as to how this must apply, with reference to the probability thoery, must be carefully spelt out to ensure proper compliance.
What is stated with reference to Question 7 is repeated here, as well, and in particular in relation to what is ‘material’ enough to be disclosed.

A Review of the Development of an Internet Delivered LL.M Program in the United States

2009-07-28T02:55:00.000-04:00

- Professor William H Byrnes, IV

A Review of the Development of an Internet Delivered LL.M Program in the United States Professor William H Byrnes, IV
Alternative Methods Suggested by US Academics to Accomplish Goals

Professors Davis and Steinglass suggest that law professors employ complementary teaching methods to the Socratic method to ensure that every student is actively participating and thinking. Some of their suggested methods include such things as requesting students to write their thoughts out in class and bring written responses that will be shared in pairs or small groups in addition to organizing classes to including small group discussions in which students can speak more comfortably and develop ideas that can then be discussed in the larger group, to analyze cases through role playing, the assignment of problems and even creating on-line discussions that will assist students who are wary of speaking in public or of speaking extemporaneously and will address a broader range of subject matter than can be addressed in time-limited classes (Davis and Steinglass, 1997, at 275).

Thiemann suggests a substantially similar list of suggestions to Professors Davis and Steinglass above, adding to it:

(1) a review of actual case files;

(2) narrative story telling; and

(3) take home/midterm/paper options and practice exams.

She goes further to suggest that for the Socratic method to be useful, it must be reformed in three of its fundamental attributes.

First, students should be alerted to the class date of the intended questioning, allowing the student to prepare consistent as with preparing for a day in court (Thiemann, 1998, at 28).

Secondly, the questioning should 'seek to engage not only rational analysis, but also emotional responses' (Id, quoting Williams, 1993).

Finally, the professor should employ role-playing for case analysis[ 20].

Professor Hawkins-Leon states that a combination of the problem method and the Socratic method should be employed in core courses to achieve her stated goals.

There are many positive aspects to this combination approach as presented by Professor Hawkins-Leon[ 21].

*

Closely approximates the lawyer's approach to the law. Students must find their own answers to questions rather than merely read and memorize someone else's answer(s);

*

Provides training in planning and advising and teaches the skill of organization or issue-management (the organization of a cumbersome set of facts and issues);

*

Broadens the range of matters open to consideration by students because they are required to prepare answers to an established problem set;

*

Increases the effectiveness of instruction in comparison to the Socratic method;

*

Stimulates student interest in legal study, as students are likely to be more prepared for class participation since they have received the problem in advance and can therefore anticipate class discussion;

*

Allows the integration of relevant, non-legal source materials (such as economics and psychology), which may lead to a more enriched curriculum and allow students a greater breadth of inquiry. The disadvantage here is that law students often have a tendency to ignore the relevance of non-legal materials;

*

Allows and encourages testing of students' understanding of the assigned readings. The AALS 1942 Report stated that 'frequency of examination is...urged as a method for maximizing the efficiency of a teaching program.' In application, the problem method allows for frequent examination of students' performance -- a professor could require answers to various problems to be submitted in writing for review, written comment and grading.

However, the negative aspects are also expressed as presented by Professor Hawkins-Leon: (Idat 10).

*

The professor must devote more time to course preparation in order to draft problems and their answers. The creation of textbooks utilizing the problem method of instruction is of immeasurable assistance. Course books for some subjects already exist and some problem books have been created for use with a standard textbook. Students are also required to be more consistent in their class preparation and may have to spend more time preparing for class;

*

The problem method is more costly than the Socratic method because its usage is most effective in smaller classes. Research has shown that ideally no more than 40 students should be enrolled in a course taught by the problem method. This factor causes the problem method to be more costly than the Socratic method, which is ideal for large class sizes;

*

Professors are not as much at liberty to teach via lecture when the problem method is utilized;

*

Due to the in-depth discussion of individual problems, critics fear that less course material is covered when the problem method is utilized. Contrary to this concern the results of the 1966 AALS survey showed that professors utilizing the problem method covered more course material.

Professor Kerper's suggestion is to supplement the application of the IRAC method to case analysis with problem solving methods, including what she acronyms 'SOLVE'[ 22]. Her suggested problem solving method acronym involves: a Statement of the problem, Observing and organizing the problem through the identification of initial conditions, goals, resources and constraints, Learning by questioning all parts of the problem, to Visualize Possible Solutions and to Employ the Solution and Monitor Results[ 23].

Professor Donahoe suggests that students play out case studies, working both alone and in groups (Donahue 2000, at para. 64). The case studies may be in the form employed in most law exams: factual hypothetical, problem sets, or actual facts from an appellate case. The class time should be used to explore the various methods of researching and resolving the case study. When using an appellate case, the decision should serve as a comparative model answer after the classroom exploration.

EXTRACT from: A Review of the Development of an Internet Delivered LL.M Program in the United States
Professor William H Byrnes, IV

Transfer Pricing - Transfer Pricing Controversy in the Recession WEBINAR

2009-07-28T02:51:00.000-04:00

Click to the link below, or copy and paste the link in your browser...
Onesource Transfer Pricing - Transfer Pricing Controversy in the Recession

http://www-waa-akam.thomson-webcast.net/us/dispatching/?event_id=c48cce33f632cb0cec5442992ad6f01a&portal_id=922265711ab87af6ae8dad992a930031

US makes dent in the tax gap

2009-07-20T05:34:00.001-04:00

US makes dent in the tax gap International Tax Review The US Treasury has told the Senate Finance Committee that the federal tax gap has fallen from about $345 billion in 2005 to about $290 billion now. The reduction has come mainly from enforcement actions and other late payments, officials said. Senator Max Baucus, the chairman of the committee, asked the Treasury in May for an update to its September 2006 and August 2007 reports on the tax gap. The update covers how to reduce the federal tax gap and improve voluntary compliance. The Treasury said it would be able to review the issue, which describes the difference between the amount of taxes owed and collected, more frequently because of an increase in funding included in the Internal Revenue Service's 2009 budget. The report gives a comprehensive overview of efforts to close the tax gap, discussing many proposals outlined in the recent budget.
US makes dent in the tax gap
International Tax Review

The US Treasury has told the Senate Finance Committee that the federal tax gap has fallen from about $345 billion in 2005 to about $290 billion now. The reduction has come mainly from enforcement actions and other late payments, officials said.

Senator Max Baucus, the chairman of the committee, asked the Treasury in May for an update to its September 2006 and August 2007 reports on the tax gap.

The update covers how to reduce the federal tax gap and improve voluntary compliance. The Treasury said it would be able to review the issue, which describes the difference between the amount of taxes owed and collected, more frequently because of an increase in funding included in the Internal Revenue Service's 2009 budget.

The report gives a comprehensive overview of efforts to close the tax gap, discussing many proposals outlined in the recent budget.

The report repeated the seven components to the Treasury's strategy for minimising non-payment of taxes: reduce opportunities for evasion; make a multi-year commitment to research; continue improvements in information technology; improve compliance activities; enhance taxpayer service; reform and simplify the tax law and coordinate with partners and stakeholders.

Baucus said the report showed the IRS was working to identify problems, improve tax adminstration and set short-term compliance goals. "However, more specific long-term goals, measures and timelines for an improved rate of tax compliance and a reduction in the amount of lost tax revenues are necessary for the IRS to effectively focus its resources and evaluate its progress on an ongoing basis," he said.

President Obama has made addressing under-reporting of income earned or held through offshore accounts or entities a priority for his administration, developing an extensive plan to combat offshore tax evasion by US taxpayers that includes legislative proposals, efforts to increase exchange of tax information with other countries and increased enforcement.

The report said access to information from other countries is critically important to combating offshore tax evasion. And the authors of the report on to brag that the US has been a leader in increasing information exchange in tax matters, working through the OECD to establish standards on transparency and exchange of information for tax purposes, and strongly encouraging countries to adopt these standards.

Among the groups the report lists as important to establish good communication and information sharing links with are the Joint International Tax Shelter Information Centre (Jitsic) and the Leeds Castle Group, a larger body of tax administrations, which it said boasts many Asian members, who do not always join such discussion groups.

The update notes that the IRS and Treasury, working with Congress, are also pursuing a wide range of initiatives aimed at better voluntary compliance to help close the tax gap. Making the tax filing process easier and more taxpayer-friendly is high on the list. Aggressive enforcement activity is also seen as important, but the publication does note that "increased enforcement efforts require certain trade-offs." Acknowledging that any changes must be made sensitive to the demands placed on all taxpayers, not only those dodging the system.

"The Administration is committed to working closely with Congress to strike an appropriate balance to maximize revenue collection without imposing unreasonable compliance and enforcement burdens on the vast majority of individuals and businesses that fully and willingly pay what they owe," the report concludes.

USA - Take Special care with S Corporation payment to Shareholders - Loan, Distribution, or Wages?

2009-07-20T05:33:00.000-04:00

S Corporation payment to Shareholders - Loan, Distribution, or Wages? By Manendra Kothari Any salary to an S corporation shareholder-employee that is below a reasonable amount is a red flag to the IRS and subject to IRS scrutiny, especially when the salary is zero. The IRS not only attempt to collect total FICA tax and FUTA tax, but it may also collect penalties from the corporation for not filing its employment tax returns (Forms 940 and 941), for late deposit of the employment taxes, and also for failure to withhold income taxes on shareholder-employee’s salary. IRS may also impose penalty up to 20% for negligence, careless, reckless, or intentional disregard of the rules and regulations. Re-characterization of distributions and loans as salaries can seriously impact cash flow of Shareholder or an S Corporation.
S Corporation payment to Shareholders - Loan, Distribution, or Wages?

By Manendra Kothari

Any salary to an S corporation shareholder-employee that is below a reasonable amount is a red flag to the IRS and subject to IRS scrutiny, especially when the salary is zero. The IRS not only attempt to collect total FICA tax and FUTA tax, but it may also collect penalties from the corporation for not filing its employment tax returns (Forms 940 and 941), for late deposit of the employment taxes, and also for failure to withhold income taxes on shareholder-employee’s salary. IRS may also impose penalty up to 20% for negligence, careless, reckless, or intentional disregard of the rules and regulations. Re-characterization of distributions and loans as salaries can seriously impact cash flow of Shareholder or an S Corporation.

When S corporation officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

Any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Courts have consistently held that S corporation officer/shareholders who provide more than minor services to their corporation and receive or are entitled to receive payment for services are employees whose compensation is subject to federal employment taxes.

There is an exception for an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee.

What’s a Reasonable Salary?

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Some factors considered by the courts in determining reasonable compensation:

Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services?
Compensation agreements
The use of a formula to determine compensation

Medical Insurance Premiums treated as wages.

The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder-employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. Therefore, this additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder, but would not be included in Boxes 3 or 5 of Form W-2.

A 2-percent shareholder-employee is eligible for an AGI deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation.

We have considered the situation where an S corporation is paying reasonable compensation to its shareholder-employee. The motive and desired tax position of IRS and taxpayers might be opposite for a C Corporation. IRS always scrutinize paying more than reasonable compensation in case of a C Corporation, while paying less then reasonable compensation in case of an S Corporation.

USA UBS, DOJ Seek Stay in Tax Case By CARRICK MOLLENKAMP

2009-07-13T05:09:00.003-04:00

UBS, DOJ Seek Stay in Tax Case By CARRICK MOLLENKAMP UBS AG and the U.S. Justice Department jointly have asked a federal court to postpone a hearing scheduled for Monday in order to give the two sides a chance to negotiate a settlement and potentially allow UBS to avoid turning over thousands of client names to the Internal Revenue Service.
BUSINESS NEWS
UBS, DOJ Seek Stay in Tax Case
By CARRICK MOLLENKAMP

UBS AG and the U.S. Justice Department jointly have asked a federal court to postpone a hearing scheduled for Monday in order to give the two sides a chance to negotiate a settlement and potentially allow UBS to avoid turning over thousands of client names to the Internal Revenue Service.

In a filing Sunday morning, UBS and the Justice Department asked that the hearing in Miami be rescheduled for Aug. 3 and 4 if an agreement couldn't be reached. The move staves off what had been an increasing diplomatic fight between the U.S. and Swiss governments over whether Swiss privacy law allowed UBS to hand over the information.

The request for a stay gives UBS time to try and figure out how it can potentially deliver some information to the Justice Department and the IRS without turning over some 52,000 account holders that the IRS seeking as part of a months-long tax-evasion investigation.

That investigation, aided initially by a former UBS private banker, in February forced UBS to agree to a $780 million criminal settlement and an agreement to turn over more than 200 account holders. Those names were turned over because of allegations of tax fraud. Those allegations allowed UBS to hand over the information without violating Swiss privacy laws.

A parallel civil inquiry led by the IRS was aimed at forcing UBS to turn over the 52,000 names. The effort by the IRS to obtain that information had escalated into a diplomatic row and led the Swiss government to say in a court filing that it was prepared to seize any UBS data.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com

USA Tax Court: LLCs Not Subject to Limited Partnership Passive Loss Disallowance Rule

2009-07-13T05:08:00.000-04:00

Tax Court: LLCs Not Subject to Limited Partnership Passive Loss Disallowance Rule Section 469(h)(2) treats a limited partnership interest as presumptively passive for purposes of the passive loss rules, with the result that partnership losses cannot offset the limited partner's salary or investment income. In Garnett v. Commissioner, 132 T.C. No. 19 (June 30, 2009), the Tax Court held that LLC interests are not subject to § 469(h)(2), with the result that members of LLCs can deduct LLC losses if they can prove that they materially participated in the LLC under the general rule of § 469(h)(1),

The Wall Street Journal discusses the importance of the Garnett decision in Entrepreneurs Win Tax Case Versus IRS; Losses on Business Investments Can Be Deducted Against Salary, Other Income; An Appeal?, by Laura Sanders:

The IRS lost a key battle in its long-running fight to limit tax deductions that can be taken by investors in small businesses in a case that could have wide implications for entrepreneurs.

The Tax Court decision would allow investors in certain kinds of businesses to deduct losses against salary and investment income. Right now, investors often can only deduct losses in a business against future profits from that business, which in some cases prevents taxpayers from getting to use the deductions at all.

The case, which involved Nebraska farmers seeking to deduct losses from their chicken and pig operations, can still be appealed by the IRS, but makes loss deductions much easier to obtain for some investors. ...

The decision specifically applies to investors in limited-liability companies and limited-liability partnerships and benefits those who actively work in several businesses. One example would be a Microsoft engineer who owns a stake in a local restaurant and tends bar twice a week. His spouse, meanwhile, is a part owner of a money-losing gift shop, where she works a few hours a week. Under this decision, losses from the two businesses could offset salary or investment income earned by both.

The IRS has long taken the position that losses generated by businesses held within LLPs and LLCs can't generally be used to offset salary and investment income. The IRS position has had the effect of forcing investors in LLPs and LLCs to delay loss deductions, sometimes for years.

IRS Overlooks Hundreds of Big Overdue Accounts

2009-07-13T05:06:00.001-04:00

IRS Overlooks Hundreds of Big Overdue Accounts Washington, D.C. (July 9, 2009) By WebCPA Staff The Internal Revenue Service has shelved hundreds of balance-due accounts for taxpayers who owe more than $1 million. A new report from the Treasury Inspector General of Tax Administration found that as of Dec. 22, 2007, there were 2,454 individual taxpayers in the IRS’s potentially collectible inventory each owing over $1 million in taxes, interest and penalties. The IRS was actively pursuing 2,006 of the delinquent taxpayers for collection, but TIGTA identified 448 accounts totaling approximately $1.2 billion that were in a queue awaiting field assignment or had been shelved. Among the 448 accounts, 214 accounts were in a queue or in shelved status for more than a year. Using automated information systems and the IRS’s fiscal year 2007 collection rate to review a statistically valid sample of 155 accounts, TIGTA determined that $12.1 million might be collectible from 27 taxpayers who owed a total of approximately $110 million.

IRS Overlooks Hundreds of Big Overdue Accounts
Washington, D.C.
(July 9, 2009)
By WebCPA Staff

The Internal Revenue Service has shelved hundreds of balance-due accounts for taxpayers who owe more than $1 million.

A new report from the Treasury Inspector General of Tax Administration found that as of Dec. 22, 2007, there were 2,454 individual taxpayers in the IRS’s potentially collectible inventory each owing over $1 million in taxes, interest and penalties. The IRS was actively pursuing 2,006 of the delinquent taxpayers for collection, but TIGTA identified 448 accounts totaling approximately $1.2 billion that were in a queue awaiting field assignment or had been shelved.

Among the 448 accounts, 214 accounts were in a queue or in shelved status for more than a year. Using automated information systems and the IRS’s fiscal year 2007 collection rate to review a statistically valid sample of 155 accounts, TIGTA determined that $12.1 million might be collectible from 27 taxpayers who owed a total of approximately $110 million.
TIGTA determined that three factors contributed to the large dollar accounts lingering in the queue or shelved status. First, IRS officials were working to resolve a programming flaw that allowed accounts to remain in shelved status even when the taxpayer’s account reached a balance of $1 million or more. Second, TIGTA found erroneous codes that were preventing some accounts from appearing in the group managers’ inventory in the IRS’s Entity Case Management System. Third, the Entity system is currently programmed to identify and accelerate accounts with assessments of $1 million or more, but does not take into consideration the related interest and penalty accruals that continue to add to the total account balance owed until they are paid or otherwise satisfied.

TIGTA recommended that IRS officials make programming changes and explore the cost and benefits associated with changing the Entity acceleration criteria of $1 million to include penalties and interest accruals. In response, IRS officials agreed with the recommendations.

USA Treasury Department Releases Updated Tax Gap Report

2009-07-13T05:05:00.000-04:00

Treasury Department Releases Updated Tax Gap Report The Treasury Department yesterday delivered an Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance to Senate Finance Committee Chair Max Baucus:

Building on reports previously released, this report is intended to provide a comprehensive overview of efforts to close the tax gap. This report is also intended to serve as a baseline for further work and discussion. After briefly discussing the nature and scope of the tax gap, this report summarizes previous Treasury and IRS tax gap reports and identifies the areas of strategic priority detailed in those reports. This report then summarizes the achievements, ongoing efforts, and new initiatives for achieving progress in each of those areas of strategic priority, organized according to the components of the strategy to reduce the tax gap detailed in prior reports.

As this report will make clear, the IRS and Treasury, working with Congress, are pursuing a wide range of initiatives, including a series of legislative proposals included in the Administration’s FY 2010 budget. The Administration recognizes the particular value of those efforts and initiatives that improve voluntary compliance by making the tax filing process easier and more taxpayer-friendly. While aggressive enforcement activity can also help to narrow the tax gap, it is important to recognize that increased enforcement efforts require certain trade-offs. The Administration is committed to working closely with Congress to strike an appropriate balance to maximize revenue collection without imposing unreasonable compliance and enforcement burdens on the vast majority of individuals and businesses that fully and willingly pay what they owe.

Do Attorneys Do Their Clients Justice? An Empirical Study of Lawyers' Effects on Tax Court Litigation Outcomes

2009-07-06T06:33:00.000-04:00

- Leandra Lederman Indiana University-Bloomington - Maurer School of Law & Warren B. Hrung Federal Reserve Bank of New York

Do Attorneys Do Their Clients Justice? An Empirical Study of Lawyers' Effects on Tax Court Litigation Outcomes Leandra Lederman Indiana University-Bloomington - Maurer School of Law Warren B. Hrung Federal Reserve Bank of New York Wake Forest Law Review, Vol. 41, p. 1235, 2006 Indiana Legal Studies Research Paper No. 49 Abstract: Do attorneys really add value or can unrepresented parties achieve equivalent results? This fundamental question ordinarily is difficult to answer empirically. An equally important question both for attorneys and the justice system is whether attorneys prolong disputes or instead facilitate expeditious resolution of cases.

Fortunately, there is a federal court that provides an excellent laboratory in which to test and answer these questions. In the United States Tax Court (Tax Court), where most federal tax cases are litigated, the government always is represented by Internal Revenue Service attorneys but a large portion of the taxpayer litigants proceed pro se. In addition, the Tax Court is exceptional in that it maintains files on cases that settle. Furthermore, Tax Court disputes involve money, so case outcomes can be readily compared. These institutional characteristics provide the rare opportunity to isolate the effects of lawyers on outcomes in both settled and tried cases.

In order to assess the predicted and actual impacts of attorneys on case outcomes, the article identifies five distinct ways in which attorneys typically differ from unrepresented parties and explores how each of those characteristics may affect case outcomes. The article then exploits the opportunity afforded by the institutional features of the Tax Court; using a unique database of randomly selected cases, the study tests the impact of attorneys on financial outcomes in both tried and settled cases. It also tests the effects of attorneys on time to settlement and time to trial.

Interestingly, the study found that the presence of an attorney for the taxpayer significantly improved the taxpayer's financial outcome in tried cases, an effect that increased with the experience of the attorney. No such effect existed in settled cases. Although the latter result initially is surprising, it highlights the paramount importance of procedural expertise in formal trial proceedings, as opposed to negotiations with the opposing party. The study also found that the presence of an attorney for the taxpayer did not affect time elapsed to trial or settlement. Thus, the study found that taxpayers' attorneys, who generally are paid by the hour, neither prolonged disputes nor expedited their resolution but did significantly improve the financial outcomes of the cases they tried.

Keywords: lawyers, lawsuits, settlement, litigation, justice system, dispute resolution, judges, taxation, Tax Court, empirical study

New York State's 'Amazon Law' Draws a Bright-Line in the Sand

2009-07-02T21:58:00.000-04:00

New York State's 'Amazon Law' Draws a Bright-Line in the Sand

Source: Rachel M. Stephens

In the realm of sales and use tax nexus, the bright-line physical presence requirement established by National Bellas Hess and Quill has been the standard for determining whether certain business activities constitute more than the slightest presence in a jurisdiction, thereby requiring a seller to register to collect sales and use taxes on behalf of that jurisdiction.

On April 23, 2008, New York state amended its tax law, expanding the definition of a vendor required to collect and remit sales and use taxes. Effective June 1, 2008, under New York State Tax Law §1101(b)(8)(iv), a seller is considered to be a vendor if both of the following conditions are met:

1. The seller enters into an agreement or agreements with a New York state resident or residents under which, for a commission or other consideration, the resident representative directly or indirectly refers potential customers to the seller, whether by link on an Internet web site or otherwise. A resident representative would be indirectly referring potential customers to the seller where, for example, the resident representative refers potential customers to its own web site, or to another party’s web site which then directs the potential customer to the seller’s web site.
2. The cumulative gross receipts from sales by the seller to customers in New York state as a result of referrals to the seller by all of the seller’s resident representatives under the type of contract or agreement described above total more than $10,000 during the preceding four quarterly sales tax periods. NYS TSB-M-08(3)S

On April 25, 2008, two days after New York state amended its law, online retailer Amazon.com filed suit in New York Supreme Court asserting that the law violates the due process and equal protection clauses of the federal and state constitutions by: violating the commerce clause with its presumption that affiliates with New York residency will solicit business in New York and by specifically targeting the online retailer. In May 2008, online retailer Overstock.com filed a companion suit in New York State Supreme Court and the retailer ended its affiliate relationships with New York residents. On June 1, 2008, Amazon.com began collecting and remitting New York sales tax under protest.

Prior to the law change, both Amazon.com and Overstock.com utilized a network of affiliates to advertise by way of establishing links on the affiliates’ web sites that direct potential customers to the online retailers’ web sites or allow customers to purchase the online retailers’ products directly from the affiliates’ web sites. The affiliates are then paid a commission based on the percentage of revenue generated from the sales of products via the links.

New York Supreme Court rendered decisions on January 12, 2009, that upheld the new law and dismissed both suits with the reason of failure to state a cause of action.

The new law in New York has prompted additional states to introduce similar laws in an attempt to recover lost tax revenue resulting from an increase in online purchases from retailers without a sales tax collection responsibility in their jurisdictions. California, Connecticut, Minnesota, and Vermont are among several states that have bills modeled on New York’s “Amazon Law.” However, these bills are having a difficult time making their way out of state assemblies. During the California Assembly’s April 27, 2009, hearing, the Committee on Revenue and Taxation voted to remove Assembly Bill 178, nicknamed the Amazon Tax Bill, from the docket, providing online retailers in the state with relief for another year.

With states continually in search of methods to increase revenue, it is likely that more states will write bills targeted at online sellers and in response, we can expect more suits challenging the constitutionality of virtual physical presence.

Thomson Reuters offers as full range of corporate tax solutions. For more information on our Sales & Use Tax solutions, please visit our website.

About the Author
Rachel M. Stephens joined Thomson Reuters as manager of consulting and workflow processes in 2008. With more than 15 years of experience in state and local tax, she possesses expertise in sales and use tax including audit defense, nexus studies, voluntary disclosures, due diligence, and compliance. Prior to joining Thomson Reuters, Stephens was a tax manager at a multibillion dollar telecommunications corporation. In this capacity, she managed the sales and use tax responsibilities for the corporation’s non-regulated affiliates and supervised a staff of state and local tax professionals. Stephens graduated from St. John’s University with a B.S. in Accounting. She received her Masters in Taxation from St. John’s University Tobin College of Business.

Tax collectors worldwide to co-operate in revenue-raising to offset fiscal deficits

2009-06-26T07:33:00.000-04:00

Tax collectors worldwide to co-operate in revenue-raising to offset fiscal deficits

With governments facing soaring budget deficits as they seek to combat the global economic slump, tax authorities from around the world have agreed on a new cooperation plan to encourage tax compliance and counter tax evasion and abusive tax avoidance, with special focus on banks, wealthy individuals and offshore activities.

TAX COMMISSIONERS WORLDWIDE JOIN FORCES TO TACKLE FISCAL CHALLENGES POSED BY THE FINANCIAL AND ECONOMIC CRISIS

In his statement at the fifth meeting of the OECD’s Forum on Tax Administration, in Paris on 28-29 May 2009, the chair Pravin Gordhan, Finance Minister of South Africa noted that “The world faces an unprecedented global financial and economic crisis. The challenges posed are both economic and social. Governments need to find sustainable ways to finance the cost of exiting the crisis. To achieve this will require the engagement of all stakeholders: Governments, business and civil society. Revenue bodies have a key role to play in helping governments to achieve sustainable revenues.”

Building on the outcomes of the fourth meeting of the Forum on Tax Administration held in Cape Town, South Africa in January 2008, revenue bodies were pleased at the development of more trusting relationships with large business and their advisers but also agreed to work together to increase the effectiveness of tax administration and to fight tax evasion and abusive tax avoidance, with special focus on banks, wealthy individuals and offshore tax non compliance.

High net worth individuals pose significant challenges to revenue bodies and to the integrity of tax systems because of the complexity of their affairs. Though potentially big tax-payers, they are wealthy enough to engage in tax planning which may enable them to avoid significant parts of their tax obligations.

Recognising the increasingly global nature of tax non compliance the Forum on Tax Administration will act together at a global level to meet these challenges.

“Individuals who hide assets overseas can expect an increasing number of revenue bodies to cooperate and share information to ensure people pay their fair share to help fund governments worldwide,” said Douglas H. Shulman, Commissioner Internal Revenue Service U.S.A.

Two reports issued at the fifth meeting of the OECD’s Forum on Tax Administration, which brings together tax commissioners from 34 OECD and non-OECD countries, set out a roadmap for future cooperation:

*
‘Building Transparent Tax Compliance by Banks’ examines the role of banks in designing complex structured finance transactions that can be used to reduce tax payments through aggressive tax planning schemes for themselves or their clients.
*
‘Engaging with High Net Worth Individuals on Tax Compliance’ identifies risks and complexities associated with this group of taxpayers.

Banks pose a risk for tax administrations because they engage in tax avoidance on their own account provide schemes and shelters for others and fund aggressive tax planning.

“Banks can expect that revenue bodies will take an informed risk-based approach to managing their compliance and that this will increasingly include questions on how their corporate governance procedures deal with tax,” said Michael D’Ascenzo, Commissioner of Taxation, Australia.

Participants in the two-day meeting also discussed ways in which developed countries can help emerging economies to improve tax-collecting capacity and capabilities which will enhance the fiscal capacity of their governments.

“Tax plays a fundamental role in development through mobilising revenue, promoting growth, reducing inequalities and reinforcing governments’ legitimacy, as well as achieving a fair sharing of the costs and benefits of globalisation,” commented Pravin Gordhan.

Tax Commissioners also intend to prioritise offshore compliance issues, given the greater willingness of countries to engage in information sharing to counter tax abuses.

"We welcome the recent significant progress made in encouraging countries to adopt and in some cases, go beyond the OECD standards on exchange of information. We are very pleased at the developments reported by both OECD and non OECD countries in terms of strengthening their capacity for cooperation,” commented Dave Hartnett, Permanent Secretary for Tax, HM Revenue and Customs, United Kingdom.

In a communiqué, the tax commissioners said they would focus on examining how revenue authorities, banks and wealthy individuals interact on tax issues, with a view to finding ways to improve the collection of taxes due. Achieving good compliance requires finding the right balance between tax enforcement and taxpayer service,

For further information, journalists should contact Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration (Jeffrey.owens@oecd.org)

The press conference was held on Friday 29 May at 13.00 in Paris. See the webcast in English or French.

Further information on the conference: www.oecd.org/ctp/fta2009

Foreign Bank Account Reporting (FBAR) requirements - Due June 30

2009-06-25T19:06:00.002-04:00

Foreign Bank Account Reporting (FBAR) requirements - Due June 30

If you own or have authority over a foreign financial account, then you may be required to report the account yearly to the Internal Revenue Service. Each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if

1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

Definition of Terms:

A “United States person” includes a citizen or resident of the United States, or a person in and doing business in the United States. Whether a person is considered, for FBAR purposes, to be in, and doing business in the United States is determined based on an analysis of the facts and circumstances of each case.

A “foreign country” includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.

The “maximum value of account” is the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statements issued for the applicable year.

Reporting and Filing Information:

A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.

A foreign account holder must mail the Form TD F 90-22.1 so that it is received on or before June 30 of the following year to:

U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.

The FBAR is not to be filed with the filer’s Federal income tax return. Postmark dated June 30 is not considered to be filed on time. The Form must be received by June 30th.

The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.

Penalties:

IRS has announced that it intends to vigorously enforce penalties for non-comliance.

The maximum penalties for failure to file are as follows:

Civil Penalties:
$10,000 for non-willful noncompliance
$100,000 or 50% of the amount of underlying accounts balance at the time of the violation if determined to be willful

Criminal Penalties:
$250,000 fine and 5 years imprisonment
$500,000 fine and 10 years imprisonment if in tandem with any other US law

If you fail to file the form in time:

Taxpayers who failed to file FBARs but have properly reported and paid taxes on all taxable income will not be penalized if they properly file them and attach a statement explaining why the report or reports are late. They should do so without using the voluntary disclosure process. Rather, they should send copies of the delinquent reports, along with copies of tax returns for all relevant years, to the Philadelphia Offshore Identification Unit, a dedicated administrative office established by the IRS under the program.

Voluntary Disclosure:

Delinquent taxpayers may want to use the IRS’ Voluntary Disclosure program that runs until September 23, 2009 to catch up on past years’ failures to report accounts and/or related income and reduce certain penalties and risks of criminal prosecution by the IRS Criminal Investigation (CI) division. For qualifying voluntary disclosures, the Service will look back six years and require taxpayers to file or amend returns as necessary. Taxpayers under civil examination are not eligible to make a voluntary disclosure under the program, whether the examination relates to undisclosed foreign accounts or entities.

A United States person can own foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the IRS identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad

Manendra Kothari.

SOUTH AFRICA: CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE?

2009-06-23T05:48:00.000-04:00

An edited version of a longer article I wrote earlier.
CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE?

1. It often happens that SARS simply advances the threat of substance over form when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is relied upon as an alternative reason for issuing a revised assessment, where SARS’ other substantive reasons are weak.
2. This approach by SARS should be challenged on the following basis:
3. The SARS Internal Audit Manual describes the norm practiced by SARS in the implementation of audits and enquiries. The observance of these practices creates a self-imposed limitation which SARS should not deviate from, save in exceptional circumstances and with sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it fails to apply these norms to all taxpayers undergoing audits or enquiries.
4. To ensure that SARS complies with its duties comprehensively recorded in the SARS Internal Audit Manual, and in compliance with its duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in SARS’ letter of findings, with the conclusions.
5. What is the nature of the findings that are referred to? Findings based on physical evidence, in the form of information, documents or things extraneous to the tax returns. This would include the actual agreements signed by the parties.
6. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
7. SARS’ approach to the findings must adhere to their Practice Manual which states that SARS must produce ‘concrete evidence’. This entails solid, undisputed evidence as opposed to mere conjecture where accusations that are unsubstantiated by proof are made.
8. During the initial investigative stages, SARS have two ways forward:
a. SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded; or
b. SARS must cease the audit.
9. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.
10. If SARS contends that the transaction under investigation is a simulated one then, in terms of the judgment, SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 (the previous section before section 80A was introduced) of the Income Tax Act, 58 of 1962 in the alternative. SARS must be requested to make up their minds and decide whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of section 103, then they must abandon the substance over form attack.
11. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a sham.
12. A sham will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove. Usually, no concrete evidence supporting such a finding will be put forward by SARS.
13. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound to provide concrete evidence.
14. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different to what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, or inferences derived from conjecture or from other inferences. Oftentimes, SARS simply follows their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. This approach of SARS in arriving at its conclusions is clearly flawed in logic.
15. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. A syllogism is a statement of logical relationship. The typical syllogism has three parts:
a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.
16. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.
17. In both theories, the minor premise rests on ignoring the rights and obligations that flow from each of the agreements between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ allegation. It is only by following SARS’ contention (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.
18. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party, and the representatives of those parties together with their professional advisors, knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.
19. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax, rather than to establish the true nature of the transaction.
20. Taxpayers must ensure that SARS adheres to the principles explained above.

It pays to go on secondment Caroline Rogers and Hanneke Farrand*

2009-06-23T05:47:00.000-04:00

It pays to go on secondment Caroline Rogers and Hanneke Farrand* 18 June 2009 Both you and your employer get tax and exchange controls concessions.

As South African businesses grow in strength and expand to offshore jurisdictions, employees who have an intimate knowledge of their employer's business are essential to the successful implementation of such offshore business operations. The secondment of employees has an additional benefit to the employer, as the employees gain experience in, and knowledge of, the specific offshore market which they can bring back to the South African business. The focus of this article, however, is on another benefit of secondments, namely the concessions granted to both an employer and employee in respect of South African tax and exchange controls when such a secondment takes place.

South African tax
Foreign earnings exemption
South Africa taxes the world-wide income of South African residents. Therefore, an employee will be subject to tax in South Africa for services rendered offshore. However, there is relief available to the employee should he/she qualify for the foreign earnings exemption contained in section 10(1)(o)(ii) of the Income Tax Act, Act 58 of 1962 (the Act). In order to qualify for this exemption, the remuneration must be received for services rendered offshore and the employee must be outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months, and for a continuous period exceeding 60 full days during that period of 12 months.

Local pension fund
If the employee is nearing retirement age, a further concession granted is in respect of his/her South African pension fund. In terms of section 9(1)(g) of the Act, where an employee has been a member of a South African pension fund and has worked outside of South Africa during the last ten years prior to his/her retirement, there is a reduced tax liability on retirement.

Offshore pension fund
With respect to foreign pension funds, payments received by an employee as a result of contributions made to a registered foreign pension fund whilst working outside of South Africa, should be exempt from normal tax in South Africa if they are not deemed to be from a source within South Africa. In addition, these payments would not be required, in terms of South African exchange controls, to be remitted to South Africa.

Relocation allowance
In terms of section 10(1)(nB) of the Act, where an employer requires an employee to relocate in the course of his/her employment, payment/reimbursement of certain relocation costs (for example, transportation of the employee, his family and their belongings to their new location) will be exempt from tax, and the employee may also be paid a tax-free settling-in allowance. It would be beneficial to determine if the employee would be entitled to a further tax-free relocation allowance in terms of the laws of the jurisdiction to which he or she has been seconded.

Capital gains tax
If the employee decides to sell his primary residence in South Africa before he leaves to render services offshore, he may qualify for the primary residence exclusion. This exclusion exempts the first R1 500 000 of the capital gain or loss incurred as a result of the sale, from the seller's aggregate capital gain/loss. In order for this exclusion to apply, the residence has to be one in which the employee ordinarily resided and which was used mainly for domestic purposes. The Draft Taxation Law Amendment Bill No. 6 of 2009 proposes an amendment whereby no capital gains tax will be due on the sale of a primary residence which has a gross value of up to R2 000 000. If the primary residence is valued above the R2 000 000 threshold, the normal rules will still apply. However, the sale of the employee's primary residence may have implications for the tax residency of the individual and thereby cause the forfeiture of any relief available to the employee in terms of a double taxation agreement.

Double taxation agreement
The employee could obtain relief in respect of foreign tax imposed on his remuneration for services rendered offshore, if he qualifies for exemption in terms of a double taxation agreement between South Africa and the country in which he is rendering services. In terms of Article 15 of the Organisation for Economic Co-operation and Development Model Convention, remuneration derived by a resident (i.e. the employee) of a Contracting State (i.e. South Africa) in respect of an employment exercised in the other Contracting State (i.e. the offshore jurisdiction) will only be taxed in the first-mentioned State (i.e. South Africa), provided certain requirements are met. The employee must be present in the other State (i.e. the offshore jurisdiction) for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration must be paid by, or on behalf of, an employer who is not a resident of the other State (i.e. the offshore jurisdiction), and the remuneration must not be borne by a permanent establishment which the employer has in the other State (i.e. the offshore jurisdiction).

South African exchange controls
In terms of Exchange Control Regulation 6, individuals who become entitled to foreign currency are required to remit this money to South Africa within 30 days of accrual. However, the South African exchange control authorities allow an individual who renders services to a non-resident while physically abroad, to retain offshore the remuneration received for those services rendered outside of South Africa. The payment of remuneration must be directly associated with the services that were rendered by the individual while he was outside of South Africa, and this is determined by the South African exchange control authorities on a time spent basis. Split contracts that include a remuneration formula which apportions the employee's gross remuneration package, incentive bonus and leave entitlement on a time spent basis, are an effective way of ensuring that the remuneration paid for rendering services offshore is not in contravention of the Exchange Control Regulations. Split contracts are also useful in reducing the foreign tax liability of the employee if he renders services in two different offshore jurisdictions, by apportioning the remuneration received by the individual for the services rendered offshore, between the two jurisdictions.

Offshore remuneration
An important consideration for an employer is the amount to be paid to the relevant employee for the services rendered offshore. In this regard, it becomes necessary to calculate the amount of remuneration required to ensure the employee is not disadvantaged by his/her secondment as a result of differences in currency and the cost of the standard of living in the offshore jurisdictions. Employers therefore often include a Cost of Living Allowance ("COLA") in an employee's remuneration for services rendered offshore. A COLA may be determined by contacting relevant analysts in the offshore jurisdiction. However, this can be costly and time consuming. An alternative would be to utilise an online program that calculates the relevant COLA. We have found this to be an accurate and efficient way in which to determine the COLA. For example, the program that we use has the ability to calculate a COLA for over 10 000 cities worldwide. It can also determine the COLA necessary to ensure a specific employee's standard of living remains the same. The calculation of this type of COLA includes considerations such as the rental currently paid by the employee, the value of the car used by the employee, and so on.

Once the employee's remuneration has been calculated, the tax implications in the relevant jurisdiction must be considered. In our experience, the appointment of reputable tax consultants in the relevant jurisdictions is essential to ensuring accurate and reliable information regarding the tax implications and available exemptions in the offshore jurisdiction.

As can be seen from above, secondments provide a number of benefits to employers and employees. However, the secondment must be carefully implemented to ensure that the relevant benefits are available, and that the secondment falls within the parameters of the South African tax and exchange control provisions.

*Caroline Rogers is a tax associate and Hanneke Farrand a tax director at ENS

7 Tax Risks in the media in the USA

2009-06-23T05:35:00.002-04:00

The following press releases and aricles written about Daniel N. Erasmus' book - 7 Habitual Tax Mistakes

May 20, 2008 - CPA Magazine

Tax Guru's Book Explores Corporate Tax Risk

JUPITER, FL – “Tax compliance in most businesses only covers about 40 percent of the total tax risk in those businesses….the other 60 percent is hidden.”...more>>>

March 10, 2008 - SiloBreaker.com
Book Encourages Corporate Tax Risk Management

A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>

March 5, 2008 - Risk & Insurance
Seven Tips to Avoid Costly Tax Mistakes

The deadline for corporate tax returns is March 17, 2008. What better time than days away for advice on tax risk management? A properly structured and executed tax risk management process in a business can create minimal tax exposure and full regulatory compliance, while completely managing and avoiding costly tax mistakes....more>>>

March 3, 2008 - Smart Pros

Tax Guru's Book Explores Corporate Tax Risk

March 3, 2008 -- — Lexis Nexis has published a new book about corporate tax risk management, Managing 7 Habitual Tax Mistakes (A Tax Risk Management Handbook), written by tax attorney and author Daniel Erasmus...more>>>

March 3, 2008 - Web CPA
Book Encourages Corporate Tax Risk Management

A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>

26 February, 2008 - MASS MEDIA DISTRIBUTION NEWSWIRE

TAX GURU'S BOOK EXPLORES CORPORATE TAX MISTAKES THAT CAN BE AVOIDED, POSSIBLY SAVING $MILLIONS...more>>>

SOUTH AFRICA: Be careful how you classify your investment? for tax purposes into Barry Tannenbaum's Ponzi Scheme

2009-06-23T05:33:00.000-04:00

So if you read the BUSREP.CO.ZA article by a journalist quoting hungry for money SARS, in your panic you may make the wrong classification choices on how to treat your investment (or not?) in the Ponzi-scam by Barry Tannenbaum. If you clssify it as an investment, you may have participated in a broader unlawful transaction breaking every rulebook in the Banks Act. On the other hand...and wouldn't you like to know? A Special Report of the likely tax consequences on the Barry Tannenbaum Ponzi Scam is available to order - currently being researched and written. One copy for the first 5 subscribers is available for a charitable contribution of R50,00 to the SPCA. The stray dogs and cats need it! Everyone after that - the research and tax direction to help you get the taxman to pay for your mess, will cost you R950,00 per report. Cheap, considering your losses may come down by your marginal tax rate.
BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009

By Roy Cokayne

Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.

Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.

However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.

Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.

Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.

Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.

World-wide: A tax speech on TRM given to FD’s of a multinational in Europe

2009-06-23T05:32:00.000-04:00

The theme of the talk was: • no surprises when it comes to tax; • do not expect a tax manager to know everything; • be prepared for a tax audit; • make sure that you budget expenditure for the appropriate tax risk reviews; • calculate the total amount of payroll, corporate and other taxes you pay and you'll be surprised to see that it makes a substantial expense amount on your profit and loss statement; • play the game and know the rules;
A recent OECD report shows that in Europe tax authorities in the last tax year conducted verification audits to the value of US$ 45 billion. The total number of tax disputes outside Germany in Europe totals 1 million. Large tax units have also been created by various tax authorities to tax large businesses. The percentage collection of these LTU’s, out of the total additional tax collections, can be summarized as follows:

• 9.5% in Romania;
• 9.8% in Hungary;
• 14.3% in Italy;
• 71.2% in Germany;
• 46.7% in the United Kingdom;

Corporations in Europe can expect that tax authorities will “throw more mud than before to see what sticks”. In order for these corporations to ensure that most of the mud does “not stick”, more resources and management of the verification audits, which may become tax disputes, will have to be undertaken. Tax risk management processes will include frequent tax risk reviews prior to a tax audit taking place, and a process of lobbying and engaging on a regular basis with the LTU’s in the various countries. Many corporations are not doing this.

What is the crux of the problem?
EBITA and the ranking of tax. This appears to be one of the main problems. Earnings before interest, taxes and amortization. Senior managers are usually measured on their performance according to EBITA. Tax does not feature in this formula. This results in no real focus on managing tax risk as effectively as, for instance, sales and distribution. Unless, of course, there is a surprise tax authority visit - then it is too late. This causes a ranking problem with financial directors in that tax risk is not ranked as a high as a priority. This is a big mistake.

A further problem is that tax managers within these large corporations may be very well skilled in tax technical issues. However, they are not trained tax lawyers. They have little understanding of the rules of evidence. This means that concepts such as onus of proof, standard of proof and what evidence is ultimately acceptable in a court, throws these individuals off when tax authorities challenge them on the proof they produce at the time of an audit.

In order to give these tax managers the necessary confidence, and in order to prepare them properly for a tax audit, is absolutely essential that a tax review process takes place where the evidence at hand and available in the corporation is carefully scrutinized under the supervision of a tax trial lawyer, working with the tax manager before a tax audit – preparing that tax manager. This is not some process whereby the individual simply looks through a bunch of documents. It also entails going into the corporation and interviewing the personnel who operate in the various divisions of a business unit. It is then established what are the status of their archives and records. The tax risk management process prepares the tax manager for a tax audit.

The results are usually staggering. It is not unusual that in any given situation the tax risk that emerges in such a process is sometimes as much as three times more than any tax provision that was created. This does not mean that corporations should shy away from the process. Once a corporation knows what its potential tax risk will be, it is then able to put into play a specific staged plan of action to help root out the tax risks, and in most instances to drop the tax risks to less than the original provisioned amount. Unless corporations are aware of what these tax risks are, they cannot do anything to reduce them.

For more information on this topic, please look out for the various publications that are available for download on this site. Also look out for the various workshops that are on offer. In addition to this you can make contact with Daniel Erasmus at daniel@dnerasmus.com.

World-wide: Preparing for a tax audit

2009-06-23T05:29:00.001-04:00

If you missed the workshop on 9 June 2009, get a copy of the notes: For the Workshop program, see below: To buy the notes now copy and paste: http://www.etaxes.co.za/ebook_CustomerDetails.asp?ProdID=19
TRRBS #1 How to prepare for a Tax Audit
Part 1 of The Tax Risk Review Boardroom Series

This unique Tax Risk Management Boardroom Series has been designed specifically for any entity that may be subject to a tax audit (from SME's to all levels of senior management and tax executives or corporations), as well as the professionals who consult and assist these entities.

This series will go a long way towards helping you ensure your organization's future tax health.

Breakfast, Registration and Tea:
08:00am – 8:45am

This Workshop is divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.

Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape

Revisiting the rights of taxpayers, the procedural landscape, the onus and standard of proof

Revisit penalties, interest and suspension of payment provisions

Understand which tax mistakes you make red flag SARS

Be capable of drawing SARS into interaction at an administrative level - avoiding litigation

Plan for optimal communication and cooperation within your organization, ensuring a high degree of tax awareness in the business, from the ground up

Coffee Break – 10h00am – 10:30am

Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process

Compile a detailed tax risk matrix with excel summarizing the key tax risks

Determine the on and off the radar screen tax issues

Identify which business unit heads will be invited to the interview process

Review the questions to be asked in the interview process

Understanding the business unit process and the tax risks that may arise

Review all tax advice and opinion given in the last 3 years

Carefully record into minutes and revisit the results of the interview process

Obtain any other relevant facts

Revisit the tax risk matrix to amend in accordance with the new found facts

Session 3 - 11:30 am – 12:30 pm – Wrapping up the tax risk review process and compiling the tax risk review report for senior management

You will be taken through a comprehensive tax risk review sample report

You will be given insight into what must be inserted in the report and highlighted for senior management

You will be shown how the tax review report interacts with the tax risk management matrix

Who Should Attend?

Business owners

CEOs,

Managing Directors

CFOs

Financial Directors

Anyone involved in Financial Management

Senior Managers

Financial Directors

Accountants

Legal Professionals

Tax Managers

Directors

Risk Managers

Corporate Lawyers

To buy the notes now copy and paste:
http://www.etaxes.co.za/ebook_CustomerDetails.asp?ProdID=19

USA: MISREPORTING BY THE IRS: A SCARING TACTIC?

2009-06-23T05:28:00.000-04:00

Court and federal prosecutor data differ substantially from the information IRS publishes on federal criminal enforcement. Significant differences were found not only in the counts, but in the general patterns of prosecution, conviction and prison sentencing rates, as well as in recorded trends overtime.

TRAC's study covered the period of 1981 through 1995. Similar to the findings in the 1980 study, it found that in every year the IRS recorded sending to federal prosecutors fewer criminal referrals than the prosecutors say they received. Once the matter reached court, however, especially in recent years, the IRS has claimed credit for more work than the prosecutors said they achieved. In 1995, for example, the IRS data claims almost 50% more prosecutions than the Justice Department, and over twice the numbers of individuals sentenced to prison. IRS also recorded the completion of two times more tax prosecutions than the U.S. courts said the courts had handled from all federal investigative agencies. (The IRS is not the only agency that refers tax cases.) The discrepancies between the data from the IRS and that data from the prosecutors and the courts have grown steadily more serious during the last decade.

Prison sentences appear to be even more inflated in IRS tracking system than prosecutions. In 1995 IRS says that its Criminal Investigation Program sent 2,229 individuals to prison. During the same period federal prosecutors reported that IRS referrals resulted in 947 individuals being sentenced to prison terms. Focusing only on criminal prosecutions where tax fraud was the lead charge, IRS systems recorded 733 of these had a tax offense (Title 26) as the lead charge. The federal courts and federal prosecutors each recorded less than half that number (337 and 318, respectively) as sentenced to prison from all sources for tax fraud.

In addition, IRS has withheld the information that TRAC requested which might allow TRAC to carry out a systematic referral-by-referral examination of these discrepancies. Finally, IRS has taken a very insular stance stating that it was satisfied with its data and saw no need to compare it with other sources to check its reliability -- this despite studies spanning a twenty year period finding this IRS data system seriously flawed.

Property owned by foreigners in South Africa

2009-06-23T05:27:00.002-04:00

Some tax rules must be considered by foreigners owning immovable property in South Africa.
Any gain on the sale of the immovable property sold in SA by a foreigner is subject to Capital Gains Tax. This includes property held through a company or a trust if certain conditions are met.

On the sale, transfer duty is also payable.

Be careful to take these taxes into account when buying and selling property in South Africa.

For more information contact Daniel N Erasmus at daniel@dnerasmus.com

This is the continuation (PART 2) of an article posted on 3 June 2009... ... c. To insure that SARS complies with its duties as carefully spelt ou

2009-06-23T05:27:00.001-04:00

USA: TAX AUDITS OF LARGE CORPORATES ON THE DECLINE? Fewer large corporations are getting audited. Instead, the Internal Revenue Service is cracking down on smaller corporations, particularly for those with $50 million or less in assets. While big corporations are getting away with, audit rates for smaller corporations is up, allowing the IRS to claim that audits for all corporations is increasing.
...

The findings, contained in the latest data from the Transactional Records Access Clearinghouse (TRAC), makes disturbing reading. Tax audit rates of the largest companies are less than half what they were 20 years ago with the number of field audits and auditor hours aimed at the large corporations down 30 per cent and the total of additional taxes these entities are found to owe the government falling 20 per cent.

The IRS is focusing on smaller corporations, because it takes less time. So by implication, it would be more cost efficient. But a closer look at the numbers tells the opposite.

According to Traclinks, each revenue agent hour spent auditing the smallest corporations delivered an extra $682 in additional recommended taxes. By way of contrast, every revenue hour auditing corporations with more than $250 million in assets delivered $7,498 in additional taxes.

SOUTH AFRICA: Can SARS Simply Throw ‘SUBSTANCE OVER FORM’ Out There – PART 2

2009-06-23T05:26:00.001-04:00

This is the continuation (PART 2) of an article posted on 3 June 2009...
...

c. To insure that SARS complies with its duties as carefully spelt out above, and in compliance with is duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in the letter of findings, with the conclusions.

d. What is the nature of the findings that are referred to? Findings based on:

i. Physical evidence, in the form of information, documents or things extraneous to the tax returns;
ii. This would include the actual agreements signed by the parties;
iii. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
iv. None of SARS’ findings produce this evidence. The only evidence they produce is derived from an armchair analysis.
v. SARS’ approach to the findings are also in contravention of their Practice Manual that states SARS must produce ‘concrete evidence’. That means solid undisputed evidence. Not mere conjecture based on an armchair analysis, firing accusations that are unsubstantiated by solid evidence.
vi. SARS have two ways forward, and one of them is not to raise revised assessments, as their investigation is complete, and is now being driven by partial and biased conduct to get the revised assessment out before the date of prescription, in an improper manner. The two ways forward are:
- SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded;
- SARS must cease the audit.

3. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions it must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.

4. SARS tends to contend that the transaction under investigation is a simulated one, and now from the judgment it follows, that the SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 in the alternative. SARS must be requested to make up their minds and decide on whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of s 103, then they must abandon the substance over form attack.

5. In addition to this, to be able to come to a conclusion that a transaction is subject to the substance over form doctrine, SARS bears the initial onus of proof.

6. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a simulation.

7. Simulation will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove.

8. Usually, no concrete evidence supporting such a finding will be put forward by SARS.

9. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound by their own views to provide concrete evidence.

10. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different from what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, of inferences derived from conjecture, or from other inferences. SARS in this matter have typically followed their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. The latest new judgment in effect prevents SARS from doing so, in the absence of actual physical evidence. The approach of SARS in arriving at its conclusions is clearly flawed in logic.

11. SARS often tends not to follow a reasoned lined of logic, and often relies on conjecture and inferences to make their findings and reach their conclusions. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. None of these have been applied. A syllogism is a statement of logical relationship. The typical syllogism has three parts:

a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.

12. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.

13. In both theories, the minor premise rests on ignoring that the rights and obligations that flow from each of the agreements, between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ say so. It only by following SARS’ say so (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.

14. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party and the representatives of those parties together with their professional advisors knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.

15. Other that their armchair analysis of what the agreements mean, appropriately and usually just before the expiry of the prescription period giving SARS the last opportunity to extract more tax from this transaction.

16. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax. Rather than to establish the true nature of the transaction before attempting to collect more tax.

SOUTH AFRICA: Can SARS Simply Throw ‘SUBSTANCE OVER FORM’ Out There – PART 1

2009-06-23T05:25:00.000-04:00

SOUTH AFRICA: CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE – PART 1 1. It often happens that SARS simply ‘throws out there’ the threat of substance over form, when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is used as a ‘fall back’ additional reason for issuing a revised assessment, where their other substantive reasons are weak. 2. This modus operandi by SARS should be challenged, and can be achieved by applying the following measures:

a. The SARS Internal Audit Manual sets the internal SARS norm. The manual describes the norm practiced by SARS in the implementation of audits and enquiries. For SARS it creates a self-imposed limitation which SARS should not deviate from except for sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it does not apply these norms to all taxpayers undergoing audits or enquiries.
b. What follows are extensive extracts of these guidelines:

‘In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part.

…

SARS intends to give each taxpayer/group of taxpayers the attention which is necessary according to its tax importance and tax risk.

…

The object of an audit is in general the examination of [a] tax return of a taxpayer and/or the books and records on which the tax return is based.

…

The risk profiling team will manually select cases to be audited by screening the tax returns in order to determine the level of risk per case, and to establish which cases warrant an audit (desk or field) selection will be done under the guidance and ambit of the Manual Risk document.

The Audit Assignment

The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit.

The audit assignment is thus the link between the audit plan and the auditing process.

2. Stage 1: AUDIT PLANNING

… The team leader will have to prioritise each case assigned. All decisions taken at this stage of the audit process and all information and considerations on which decisions are based, are recorded in the audit file.

Pre-planning

Not as critical in our environment, although the following two components of pre-planning should still be relevant:

• An engagement letter informing the taxpayer of the audit, i.e. notice of the intention to audit, when, purpose, approximate duration, information required and other general aspects.
• Allocation of staff in respect of the specific engagement.

Collecting Information

Prior to the audit, information will have to be collected, on the taxpayer to be audited, as this will provide inside into the entity.

• Information on the taxpayer himself. Obtained from the existing tax files of the taxpayer. …
• Information from other sources (third parties) …
• Information on the business processes, administrative organisation and the internal control of the entity. …
• Information from minutes of meetings e.g. board of …
• Information from the file of the tax consultant and/or accountant/ external auditor of the taxpayer. …

The auditor should restrict the initial information collected to the potential issues of the relevant case, which will be of value to the audit of the risk areas identified.
…

Carrying out the preliminary analytical review

The purpose of this exercise is not to produce volumes of interesting, but ultimately useless information.

… The preliminary review may require that the auditor researches the tax laws and court cases that are relevant to particular issues to be examined in the audit of the entity. Notes on the research are incorporated into the audit working papers.’

Risk analysis based on the tax return

In determining which activities will be carried out to achieve the audit objectives, the team leader continually considers the relationship between the cost and the benefits of the audit …

3. Stage 2: THE IMPLEMENTATION OF THE AUDIT PROGRAMME …

The general rule is as follows:

• Where the auditor finds no or immaterial mistakes or errors, the audit in that particular area should be stopped.
• Where many material mistakes or errors are detected, the audit should be expanded in that particular area.
• If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated.

The auditor must consider whether advice or support from a well-informed colleague is necessary. Consultation with colleagues will ensure that the auditor is better informed when making decisions.

All decisions at this stage of the auditing process, as well as the information and considerations, on which they are based, are recorded in the audit file. Sampling techniques are encouraged while performing the audit.’

4. Stage 3: CONCLUSION

In this stage of the auditing process the auditor in charge reviews and summarises the findings of the audit and forms a conclusion based on these findings.

During the discussion with the taxpayer the auditor informs him of the conclusions reached on the tax return(s) and explains the decision. If the taxpayer does not agree with the judgement, the auditor listens to the reasons and considers whether these reasons may call for an adjustment of the conclusion. If it is decided that no adjustment is required, bearing in mind the outcome of previous consultation with colleagues, the auditor discusses the taxpayer’s reason and arguments with the audit manager.

Where compromises are reached, they are recorded in the file and included in the report. SARS and the taxpayer should sign the compromises.

After the concluding discussions with the taxpayer and the audit manager, the position of SARS is determined. There are two possibilities:

• No further action is required; or
• The results of the audit necessitate further action, which usually involves adjustment of the assessments as well as the levying of interest, penalties and additional tax.

In some instances this is not sufficient and it is necessary to extend the audit to the criminal domain. This calls for a change in the nature of the audit. The timely recognition of such a change, is an essential element of the auditing process. Refer to part 7 of the audit manual.

The audit report is completed and forwarded to the team leader who reviews, monitors and controls the completion and quality of the audits being performed. The team leader communicates the relevant findings to the research and analysis team and the risk evaluation committee.’

TO BE CONTINUED...in PART 2

West vs East Europe: The difference between accounting and tax principles

2009-06-23T05:24:00.002-04:00

Different purposes of tax and accounting systems Tax and accounting systems exist for different reasons. The tax system, through tax laws, exists for the purpose of collecting revenue for the community and sometimes for encouraging or discouraging certain kinds of activities, and as a means of making transfer payments. The end result of an application of tax laws is usually that taxpayers are required to pay money to fund public spending. On the other hand, the accounting system, through accounting concepts and standards, exists for financial reporting reasons (i.e. to contribute to the ability of users of financial reports, like investors, to allocate scarce economic resources, like investment funds). This difference was summarised by the United States Supreme Court in Thor Power Tool Co v Commissioner:

“The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Inland Revenue Service is to protect the public fisc. Consistently with its goal and responsibilities, financial accounting has as its foundation the principle of conservatism, with it’s corollary that “possible errors in measurement [should] be in the direction of understatement rather than overstatement of net income and net assets.” In view of the Treasury’s markedly different goal and responsibilities, understatement of income is not destined to be its guiding light. Given this diversity, even contrariety, of objectives, any presumptive equivalence between tax and financial accounting would be unacceptable.”

With these different purposes in mind, it can be argued that rules governing the calculation of profit or loss for income tax purposes (taxable income or tax loss) are necessarily different to those governing the calculation of profit or loss for financial reporting purposes. It might be said, for example, that taxation rules require greater precision because they may result in the compulsory extraction of money from the taxpayer.

Overseas Experience

In his overview of accounting and taxation in Europe, Hoogendoorn summarises the position as follows:

INDEPENDENCE DEPENDENCE
Czech Republic Belgium
Denmark Finland
Ireland France
Netherlands Germany
Norway Italy
Poland Sweden
United Kingdom Hungary & Romania

The countries with a strong link between accounting and taxation are listed under the heading ‘Dependence’, although legislation in 1996 removed the link for depreciation, inventory valuations, work in progress and warranty provisions in Sweden.

In recent times there has been a development towards more independence between accounting and taxation. This development is linked to the transition to a market economy for some Eastern European countries, as well as accounting harmonisation which interferes with the basic structure of dependence.

Some commentators argue that the link between taxation and accounting “pollutes” the capability of financial reports to give a ‘true and fair’ view of the economic and financial situation of businesses. The critics of the link say that “development of good accounting is hindered by tax concerns and the influence of the tax authorities who need consistent, well-specified and easy to verify rules instead of the more ‘true and fair’ rules.

A similar conclusion was reached by a 1987 OECD study which found that tax considerations were a major obstacle to greater comparability and harmonisation in accounting practices in member countries.

From a tax perspective, Johnson has argued against ‘Generally Accepted Accounting Principles’ (GAAP) as a tax base because, in many circumstances, corporations can under report their earnings without adverse non-tax consequences.9 He argues that reported GAAP income is sufficiently elastic that taxing it would cause the reporting income to shrivel, which would both reduce tax revenue and also damage the pricing mechanisms of the capital markets.
Also in countries where there is a strong link between accounting and taxation, companies are often allowed to undervalue assets.

On the other hand, for “practical reasons it is easier to work with only one accounting system, and it saves money for the companies to have only one system.”

The Review of Business Taxation found that most of the Group 1 countries it examined had a basic approach to determining taxable income whereby the starting point was accounting practice based on statutory accounts.

The review found that there were two essential differences in the treatment between countries. Firstly most countries had explicit recognition of accounting principles eg. section 446 (a) of the United States Internal Revenue Code. Secondly all countries had variations from accounting standards in their tax provisions. The extent of the adjustments necessary to reconcile the tax and accounting position varied considerably between the countries.

So it seems that the international experience is not uniform in the interface between tax and accounting. While many European countries have a closer link between tax and accounting than does Australia, the link is subject to specific legislation and tax concepts tend to predominate. There are commentators who argue that the dominance of tax detracts from the purpose of accounts of providing a ‘true and fair’ view; and there are commentators who argue that accounting standards are not sufficiently precise to form the basis of taxation.
In relation to the United Kingdom, Lamb concludes:

“Although many voices claim that greater tax conformity would reduce complexity, and thereby cost, it seems likely that the UK tax and accounting rule-making will continue to operate with relative autonomy. While the practices of tax and accounting profit measurement are undeniably interdependent, differences in profit calculations are inevitable as long as the rules remain out of phase and are expressed through independent institutions.”

A similar conclusion seems apt for the current position in Australia. Any substantial move towards convergence of tax and accounting treatments will require a meeting of minds between the accounting and tax professions and government.

Current use of accounting practice in the income tax law

In Australia there is no systematic connection between the income tax law and accounting concepts or standards. However, the two interrelate in various ways.
Timing of recognition of ordinary income and general deductions
Accounting practice has sometimes been drawn upon by the courts in interpreting income tax law, particularly in relation to the timing of recognition of income and outgoings under the ordinary income and general deduction rules.
In determining when ordinary income is ‘derived’, the courts have drawn upon business conceptions and the principles and practices of accountancy.

Hill and Heerey JJ recently summarised the position as follows:

“Perhaps the only relevance Ballarat Brewing has for the present case is that it adds to the quite substantial case law in which the High Court has made it clear that where the question at issue is the derivation of gross income that, being a matter for which the ITA Act makes no specific provision, the Court will have regard to the conceptions of business and the principles and practices of commercial accountancy. The case also makes it clear that the Court would be reluctant to apply to income tax a method of accounting which would produce a misleading result in the absence of a specific statutory provision which required that.

Before turning to the accounting evidence in the present case it is important to note that while the earlier cases, such as Carden, Arthur Murray and Henderson, may be thought to have suggested that business and accounting principles are to be applied by the Court in determining questions of derivation, some later cases, for example the Australian Gas Light Company case in this Court have made the point that accounting principles are not determinative, although they may be persuasive.

Certainly where the question is whether a loss or outgoing is incurred for the purposes of s 51(1) it is clear that accounting principles are not determinative, cf Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616. Indeed, in the latter case Barwick CJ expressed the view that the “prudence and commercial propriety of such a course [accruing annual or long leave] has little bearing on the question whether there is present in the year of income a loss or outgoing within the meaning of s 51(1) where a jurisprudential analysis prevails over a commercial view, that accounting and business practice will not always be irrelevant and may indeed provide useful assistance to the Court: Coles Myer Finance Ltd v Federal Commissioner of Taxation (1992-3) 176 CLR 640 at 666 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.

It is not necessary in the present case to decide if there is really a difference between the emphasis put on accounting practices in the early cases and the views expressed in the later cases. It suffices here to say that on either view of the law the business and accounting practices assist the Court in the working out of the principles behind the statutory language of “income derived.”

In determining when losses or outgoings are ‘incurred’, sometimes the courts have tended towards approaches that produce results like those found in accounting.

For example, in Coles Myer Finance Ltd v FC of T 93 ATC 4214; (1993) 25 ATR 524, the High Court referred to commercial and accounting principles in deciding that a deduction for discounts on certain debt instruments should be spread over 2 years (the period of the instruments).

Another example is the recognition by the courts that unreported insurance claims are presently existing liabilities of an insurer and that the provisions a general insurer makes in its accounts for them are an allowable deduction if they represent a reasonable actuarial estimate. This recognises provisions for ‘incurred but not reported’ claims, but not provisions for events that have not yet occurred.

Nevertheless, the courts have made it clear that the interpretation of tax law ultimately involves a jurisprudential analysis of relevant provisions. For example, expenses are not necessarily recognised for income tax purposes at the same time as they are for accounting purposes and the cost of trading stock must be ascertained from the meaning apparent from the statute rather than accounting (although the two may well coincide).

Hanlan and Nethercott have argued that “the merits of comparability between accounting practice and taxation law have been recognised by academics, courts of law and governments...[but] While Australian courts have endorsed the importance of accounting concepts, principles and practices, such factors are not determinative in reaching a decision. That is, accounting practice, while relevant must be used solely as an aid assisting in the interpretation of the Tax Act (1936) and (1977), and cannot be substituted for legal or jurisprudential analysis itself.”

On this basis the approach of the courts in interpreting the law will affect the extent of divergence between accounting and tax concepts. The less formalistic is the approach to judicial interpretation the more likely it is that the outcome will reflect the commercial substance of a matter.

Another observation that can be made is that the system of precedent applied in our system of law means that income tax law may not keep pace with developments in accounting concepts and standards. A court decision many years ago which drew upon accounting practice at that time may still represent the law now, even though the accounting practice upon which the decision was based may have changed.

WORLD: OECD influenced countries standardize their systems: Are you adapting your tax risk management systems in line with these developments?

2009-06-01T03:13:00.001-04:00

The OECD Tax Administration division, under the chairmanship of South African Tax Commissioner, Pravin Gordhan, has recently released an OECD report investigating the overlap of various tax administration systems in 43 countries, and the similarities are remarkable. What does this mean to Taxpayers?

The obvious advantage is that you can expect similar treatment in the 43 countries in the approach of tax administrators to verification audits and the follow up tax administration review procedures: both areas being the source of significant tax risk especially to large taxpayers in those countries. A recent review of 15 of those countries delivered a completed verification audit exposure only to large taxpayers of some $ 41 bn! That is significant.

Special processes should be implemented to manage the interaction with tax administrations, especially for large multi-national taxpayers. If you are interested in our blueprint at no cost to you, please email daniel@dnerasmus.com with the following in the SUBJECT HEADING - "Your OECD Blue Print Report".

For more information, visit the website of the OECD and download the report.

THE {TRM} TAX RISK MANAGEMENT BOARDROOM SERIES SOUTH AFRICA: A Tax Risk Review – Preparing for a tax audit EXCLUSIVE TO ONLY 8 PEOPLE

2009-06-01T03:05:00.002-04:00

This unique TRM Boardroom Series has been designed specifically for all levels of senior management and tax executives, and will go a long way towards helping you ensure your organisation’s future tax health.

Registration and Tea:
08:00am – 8:30am

The Boardroom workshops are divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.

Introduction to the Process – 08:30am to 08h45am

Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape

Revisiting the rights of taxpayers, the procedural landscape, the onus and standard of proof

Revisit penalties, interest and suspension of payment provisions

Understand which tax mistakes you make red flag SARS

Be capable of drawing SARS into interaction at an administrative level - avoiding litigation

Plan for optimal communication and cooperation within your organization, ensuring a high degree of tax awareness in the business, from the ground up

Coffee Break – 10h00am – 10:30am

Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process

Compile a detailed tax risk matrix with excel summarizing the key tax risks

Determine the on and off the radar screen tax issues

Identify which business unit heads will be invited to the interview process

Review the questions to be asked in the interview process

Understanding the business unit process and the tax risks that may arise

Review all tax advice and opinion given in the last 3 years

Carefully record into minutes and revisit the results of the interview process

Obtain any other relevant facts

Revisit the tax risk matrix to amend in accordance with the new found facts

Session 3 - 11:30 am – 12:30 am – Wrapping up the tax risk review process and compiling the tax risk review report for senior management

You will be taken through a comprehensive tax risk review sample report

You will be given insight into what must be inserted in the report and highlighted for senior management

You will be shown how the tax review report interacts with the tax risk management matrix

BOARDROOM LUNCH : 12:30 am – 13:30 am – Question and Answer session during lunch

TAX RISK REVIEW in preparation for a tax audit: the following key points will be covered

Step-by-step instructions how to plan the tax risk review in preparation for a tax audit

Why have a tax technician and trial specialist as part of the process

Who do you interview in the company?

How to handle various tax risks

The tax risk matrix and how to use it

A 'game plan' report at the conclusion of the tax review process and its importance

Concluding a tax review process in five days

The need for an outside facilitator

The legal landscape summary and its use
The reasoning behind the onus and standard of proof for each risk item

Building a future defense file

Running Spot Audits and Insuring your archives are up to date

What the final product should look like

Managing tax risks into the future.

THE SPEAKERS:

Kerry Watkin – Tax Risk Review Specialist
Workshop Presenter

Daniel Erasmus – Keynote address.

Daniel Erasmus is a well known specialist in tax both in South Africa and abroad. He leads a tax risk management practice with clients in South Africa, Africa, Europe and the USA. His tax risk review teams are currently on assignment in Europe, the USA and South Africa. They attend to complex risk review processes for major multi-national corporations. He is also the author of the book “7 Habitual Tax Mistakes” which will be given to you at the seminar. Daniel’s further credentials are available on the website www.taxriskmanagement.com

Kerry Watkin is a tax risk review team leader and has been involved in complex tax risk review processes with Daniel over the past few years. Her training and experience has brought her into direct contact with large multi-national corporations, their complex tax review problems and the innovative solutions provided through a methodology that has stood the test of time. After obtaining a BA and LLB at the University of Witwatersrand, Kerry Watkin’s legal career began at former 100-year old law firm Moss Morris where she completed her articles before joining their tax department headed by Daniel Erasmus. She has been part of Daniel’s team ever since. The firm’s diverse client base has equipped Kerry with skills in a variety of areas in the field of taxation. Kerry has also obtained a Higher Diploma in Tax Law and International Tax from the University of Johannesburg.

DETAILS:

BOARDROOM SESSION DATES:

• June 11th
• July 22nd
• August 13th
• September 17th
• November 9th
• December 10th

WHO SHOULD ATTEND THE TRM BOARDROOM SESSIONS?
CEOs,
Managing Directors
CFOs
Financial Directors
Anyone involved in Financial Management
Senior Managers
Financial Directors
Accountants
Legal Professionals
Tax Managers
Directors
Risk Managers
Corporate Lawyers

READ WHAT PREVIOUS DELEGATES HAVE TO SAY
http://www.dnerasmus.com

VENUE:
Regus, Sandton

TIME:
8:00 – 13:30 ( Half Day)

COST PER DELEGATE:
R2, 215.20 p/p excl VAT (R2, 525.33.00 incl Vat)

Book 4 weeks prior to the event date and get a
20% Discount on Early Bird Bookings !

BOOK NOW and RECEIVE A COMPLIMENTARY Subscription to TAXtalk Magazine, Comprehensive Tax Risk Management Seminar Notes, a Copy of the Lexisnexis tax handbook “Managing the 7 Habitual Tax Mistakes” PLUS the new Tax Risk Matrix.

Poland: VAT deduction on the purchases of fuel to vehicles

2009-06-01T03:03:00.000-04:00

Janina Fornalik from MDDP & Partners

On December 22 2008 the European Court of Justice (ECJ) handed down a ruling (case file C-414/07) stating that Polish VAT provisions placing restrictions on the deduction of VAT on the purchase of fuel to vehicles are contrary to the European Community regulations. The ruling was issued with regard to the dispute pending before the Polish regional administrative court in Cracow between the Polish tax authority (director of the tax chamber in Cracow) and Magoora. The Polish court decided to refer the questions to ECJ for a preliminary ruling with respect to the conformity of national law with the EU regulations.
Poland: VAT deduction on the purchases of fuel to vehicles
MDDP & Partners

The ECJ stated that the Polish law is in breach of the standstill clause stipulated in article 17(6) of the sixth EC directive, which allows the new member states to retain after the accession to EU, only those restrictions on the right to deduct input VAT which existed and were actually applied when the directive entered into force (i.e. in the case of Poland on the accession date). In other words, Poland was entitled to retain the restrictions binding before accession, i.e. until April 30 2004.

In fact Poland has introduced two amendments to the local regulations since joining the EU, changing the criteria determining the vehicles entitling input VAT deduction (on purchases/leasing of the car as well as on fuel used to the car): firstly as of May 1 2004 (when the new VAT act was entered into force), and secondly as of August 22 2005. In both cases the scope of the restrictions in input VAT deduction have been extended comparing to those in place before May 1 2004.

As a consequence of the infringement by the Polish regulations of the EU rules confirmed in the ECJ ruling, the Polish taxpayers are entitled to disregard the Polish VAT law and deduct input VAT incurred on purchases of fuel in those cases, where such a right would be permissible under the regulations binding before May 1 2004 as well as before August 22 2005, when the additional amendments were introduced to the Polish VAT act.

Moreover, the above ruling also provides grounds for the right to full deduction of input VAT on purchases of vehicles as well as on leasing fees, where such a deduction was allowed under the provisions binding before May 1 2004 and before August 22 2005.

Some of the Polish taxpayers have already applied for the refund of VAT not deducted previously after May 1 2004. The Polish tax authorities accept the right to recover VAT only with regard to the vehicles which would entitle for deduction based on the regulations in force before Poland's accession.

However, there are also grounds arising from the ECJ ruling to recover VAT incurred on the purchases of fuel used by all vehicles used for taxable activities, including passenger cars, irrespective of fulfillment of the criteria applicable before May 1 2004. This interpretation would lead to significant financial consequences for the state budget, and therefore, it not accepted by the Polish tax authorities. The taxpayers might, however, appeal against the negative decisions to the administrative court.

Also the proceedings before the Polish administrative court regarding the Magoora case analysed by ECJ will be finalised soon (the final court verdict is expected in April 2009) which would also provide basis for the future strategy to be taken by Polish taxpayers.

Nevertheless, the Polish automotive market has responded immediately to the business needs arising from the ECJ ruling and again the car producers offer cars fulfilling the criteria binding before May 1 2004.

Janina Fornalik (janina.fornalik@mddp.pl)

SOUTH AFRICA: Functus Officio: SARS cannot change its reasons

2009-06-01T03:02:00.000-04:00

Once SARS has issued revised assessments, unless it re-enters the S79 route in the Income Tax Act and complies with its jurisdictional facts to issue revised assessments again, it cannot change the reasons it gives for issuing the revised assessments in the first place. It cannot change its mind. It is married to its reasons for the revised assessments.

For this reason, it is important to get SARS to issue reasons for its revised assessment.

After the revised assessment has been issued, the regulation 3 option should also be exercised, to get the actual reasons SARS has issued the revised assessments.
If there is a difference between the reasons given in the letter of findings, and the reasons given after the revised assessment, under regulation 3, it is arguable that SARS acted arbitrarily or unfairly, in that the reasons do not match! Why do they not match? What has changed between the letter of findings and the revised assessment? If no proper justification can be given, it is arguable under PAJA that no adequate reasons exist for the decision taken by SARS to issue the revised assessments in the first place.

A similar situation may arise with the disallowance of the objection, and the grounds of assessment issued by SARS. Once again, the grounds of assessment should match the reasons given in the letter of findings, and at the time of the regulation 3 reasons past revised assessments. If not, why? What has changed entitling SARS past the time of the decision to issue the revised assessments to change its reasons. In terms of administrative law, it cannot. SARS is functus officio, unless it re-enters the whole S79 process again.

GLOBAL Tax Risk Management: An Analytical Approach

2009-06-01T02:59:00.002-04:00

1. Introduction The increasing significance of measuring and managing tax risk in any taxpaying corporation is underpinned by the introduction of SOX 404 (and now FIN 48, details are annexed to this document as annexure 1) in the USA. Both these developments emphasize the importance of transparent corporate governance. These developments are also being followed by changes taking place to IFRS world-wide. Many material discrepancies in corporations relate specifically to Tax Risk Management problems. Independent surveys conducted on SOX 404 have shown that on average 30% of the material discrepancy filings to the SEC are tax problems. Tax risk is one of the risk areas within a corporation that is difficult to quantify and manage unless a significant Tax Risk Management process has been effected in that organization. Many of the tax risks have nothing to do with the current financial year and in many instances relate to prior financial periods which may go back many years. What is more is that research has shown that the tax risks exposed do not just reside in the area of tax compliance but emanate from the areas of financial accounting, transactions and the operations of the corporation. The expertise offered by TRM Services is in the area of putting into place an effective process to expose, measure and manage the tax risk in any corporation in any jurisdiction worldwide. The Tax Risk Management process also relies on the input of key tax technical advisors in each of those jurisdictions to assist in making an effective determination as to the extent of the tax risk issue. Once that has been determined the most appropriate advice and recommendations can be made to senior management in the corporation as to the practical way forward to manage and resolve the tax risk. The balance of this document sets out the theoretical framework within which such a Tax Risk Management process will be implemented. Apart from executing many Tax Risk Management processes for a variety of multi-national corporations, TRM Services has also been involved in the development of Tax Risk Management from an academic point of view, in determining the driving principles, and in this regard have compiled an extensive guideline which can be followed in detail by any person introduced to the Tax Risk Management process so that they can understand what that process is, what it purports to achieve and the precise steps that need to be taken. It is this process that TRM Service assists in implementing.

“TAX RISK MANAGEMENT STRATEGY: An analytical approach”
by Daniel N. Erasmus

2. An introduction to the Tax Risk Management Process

In an ideal situation a taxpaying business would be entitled to claim all of its expenditure as tax deductions, and be entitled to certain additional tax allowances to benefit its bottom line. At the end of the day it will be able to rely on the fact that its real accounting profit (less the additional tax allowances for any capital expenditure) will be subject to a fair rate of taxation.

The certainty of its current tax liability must be determined accurately.

Difficult circumstances would arise if, in addition to its accurate current tax liability, and its deferred tax liability, the business faces the following unnecessary additional tax exposures:

- additional penalties for late payment
- interest (not tax deductible) for late payment
- arrears taxes, with penalties and interest, on undetermined tax liabilities.

To achieve a current tax status, where current tax liability is accurately determined, without any material weaknesses (SOX 404) or uncertain tax positions (Fin 48), current and future, the business would have to have achieved the following:

current incomes and expenses carefully analysed and the tax pack reviewed to ensure proper compliance, and identification of known interpretation problem areas;

determining and finalizing all outstanding tax on-the-radar screen issues as per the {TRM} process;

a thorough inquiry process involving key staff in the business to determine and finalize all tax off-the-radar screen issues;

Implementing and maintaining a process that ensures continued thorough compliance, through trained internal consultants and internal tax audit reviews on tax compliance issues.

The goals and objectives are as follows:

complete on-the-radar screen issues;

determine through inquiry and complete off-the-radar screen issues;

Implement the {TRM} maintenance system.

3. Define the Problem

An increase in tax predictability and accuracy, means integrated detailed internal process designed to identify all potential tax exposures.

The aim is to reduce the defects or material weaknesses in tax compliance.

The problem of defective tax compliance can best be illustrated by looking at the Revenue Service statistics for a participating OECD country:

2m business tax registrations;

Produced $17bn of taxes;

RS collected through audits an additional $1bn, or 6% of what was paid;

Translating to an average an additional 6% (without specific investigation into the affairs of the taxpayer) tax exposure;

For the largest taxpayer in that country it was $48m;

This translates to 6000 defects per a million.

The aim is to reduce the defects to 3 or 4 per million.
In extrapolating these statistics, the following table will give some indication of the potential exposure:

TAX % DEFECTIVE DEFECTS IN A MILLION R MILLION
$8 bn 6% 6000 $480 m

$1 bn 6% 6000 $60 m

$250 m 6% 6000 $20 m

The potential tax exposure of corporates in any tax jurisdiction can be determined by applying the following formula:

Amount of extra tax
Collected through audits
And investigations

___________________ X 100 = Average Potential
exposure %

Total business registrations

The overall aim is to reduce the defects in a million to 3 or 4, through the implementation of the {TRM} process.

4. Analyse the Problem

4.1 Operations Tax Unreliability

Why? Lack of Communication of new or unusual operations transactions
Why? Brainstorm session required
Why? For example: Multi-state transaction and sales or use tax
or VAT exemptions, and full compliance with onus & standard of proof requirements.

4.2 Compliance Tax Unreliability

Why? Unreliable information is recorded and transferred
Why? No internal tax audits
Why? Lack of communications from key staff
Why? Compliance recording mistakes and lack of supporting documentation.

4.3 Financial Accounting Tax Unreliability

Why? Brainstorm session required
Why? Lack of communication of new or unusual financial transactions
Why? For example: Take-on figures of provisions into Oracle or SAP; incorrect accounting treatment of transactions contra to agreements e.g. royalty collections and payments.

4.4 Transactions Tax Unreliability

Why? Brainstorm session required
Why? No Pre / Post audits
Why? For example: Structured finance structures; Mergers / acquisitions followed by asset stripping and dividend flow; Cross-border transactions, and transfer pricing.

5. Compliance

The most likely main cause is unreliable and unaudited source material, and lack of supporting records, that introduces the material weakness of an additional unpredictable extra tax exposure.

All income tax, VAT or use sales tax, PAYE or payroll tax will yield mistakes made in the financial reporting, transactions and operations divisions.

One of the best methods for exposing the tax unreliability in the tax compliance, transactions, financial reporting and operations divisions is through brainstorming sessions involving the appointed tax team.

A TRM Tax Survey verifies that contributors to the root causes are as follows:

Only 15% of the survey participants are certain they are 100% tax compliant;

79% have no tax strategy;

Between 50 and 60% do not have at least monthly communication with the transactions and operations divisions;

40% do not have their tax returns up-to-date;

66% to 80% have not had VAT or sales and use taxes or payroll taxes audits

Only 16% of the Boards discuss tax strategy and tax planning at their board meetings.

6. Prevent the Problem

This section focuses on various countermeasures required to reduce or eliminate the root causes.

The problem is the unpredictable nature of tax in the corporate taxpayer, especially as the tax authorities become increasingly more vigilant and aggressive in pursuing them.

A primary root cause is the insatiable appetite of the State to increase its ability to collect taxes to fund increasing State expenditure, the perception that taxpayers underpay taxes, and the calculated guess that only about 40% of tax risk is usually attended to by the tax compliance divisions of taxpayers. The other 60% tax risk resides in the transactions, operations and financial divisions of the taxpayer.

The following are some potential countermeasures to some of the root causes:

1. The insatiable appetite of the State for money:

Countermeasure 1. - State lobbying;
Countermeasure 2. - Change in government;
Countermeasure 3. - Moving the business to another jurisdiction.

2. Tax authorities negative perception:

Countermeasure 1. - Build relationship with tax officials;
Countermeasure 2. - Call for on-the-radar screen issues with a plan to resolve these;
Countermeasure 3. - Ensure timely returns, fair provisional tax payments, and meeting positively the key indicators set by the tax authorities as to compliancy levels.

3. Tax compliance division shortcomings with unreliable information and lack of supporting documentation (which requires countermeasures for each of the supporting financial, operations and transactions divisions):

- Financial countermeasures:

Countermeasure 1. - Ensure ‘fiddle proof’ transfer of accounting information to the tax packs;
Countermeasure 2. - Regular internal tax audits in the various key tax areas (VAT, PAYE, Income Tax, Customs + Excise), with external consultant supervision;
Countermeasure 3. - Analysis of all historical archives.

- Operations countermeasures:

Countermeasure 1. - Regular email, meeting and other communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Regular internal audits to review what is reported as being subject to tax provisions.

- Transactions countermeasures:

Countermeasure 1. - Regular communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Legal/tax audits of key major transactions over last 5 years to ensure proper compliance with planning of transactions, proper implementation and post implementation processes.

7. Communication

In the process of implementing the Tax Risk Management system, in order to minimize tax risk on an ongoing basis, it will be necessary to implement a communication system between the tax compliance division, the financial accounting divisions, the transaction division and the operations of the corporation. The communication process will require frequent documentation which attempts to highlight any tax risk that has developed in each of the mentioned divisions to the tax compliance division, through a systematic series of questionnaires generated by the tax compliance division.

The reliability of the information gathered from key personnel in the various divisions by means of these questionnaires will depend on the integrity of those key individuals which can be measured by paying attention to a number of personality traits of each individual:

a) Attitude to compliance;
b) Attention to detail;
c) Following directions;
d) Respect for policies;
e) Role awareness;
f) Practical thinking;
g) Consistency and reliability;
h) Meeting standards;
i) Personal accountability;
j) Systems judgment.

These subjective factors can be measured in each individual participating in the Tax Risk Management system by putting them through the Innermetrix© process which takes each individual no more than 15 minutes to complete. This process will provide the Financial Director, Chief Financial Officer and/or Tax Manager with a report setting out the strengths and weaknesses of each individual who participate in answering the questionnaires. For instance, if an individual scores high on a majority of these subjective indicators there is an assurance that he/she will take the process seriously and give accurate and complete information on a regular basis. If the score shows a weakness in a number of these subjective indicators, then management will have the opportunity through an initial training process to emphasize the significance of accurate and complete information, and they will also know which questionnaires that have been submitted to them need to be scrutinized with greater care to ensure that the participant has completed their task properly. For example, if a participant shows a weakness in many areas, the Tax Manager would always telephone that individual after the completion of each questionnaire to discuss the answers given. In this way the Tax Manager can ensure that the proper attention has been given to the questionnaire by that individual.

Through this management process the individuals showing any weaknesses will usually, through a process of interaction and teaching, improve those weaknesses and as such become more reliable in the information that they provide.

The Innermetrix© testing will be repeated 6 monthly so as to keep monitoring any changes in the strengths and weaknesses on these personality traits.

8. Methodology

As an experienced firm in implementing TRM strategies for a number of multi-national corporations, TRM Services are well positioned to take the methodology globally to corporations based in other tax jurisdictions. In doing so we do not presume to be tax specialists in those jurisdictions, but work very closely with associated firms through a global network, who have the required expertise to assist in giving opinions in those tax risk areas determined. The service we offer is to facilitate the whole TRM process from inception to completion. We act as the project champion, and ultimately will review the law, the facts and the conclusions so as to test the viability and quality of the technical advice against the actual position that the corporation finds itself in, with the guidance of specialists in the appropriate country. It is the same methodology that has been followed world-wide.

Annexure 1

The NEW FIN 48: Addressing Uncertain Tax Positions – All the more reason to introduce and develop a Tax Risk Management Strategy

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued the final interpretation amending FASB Statement of Financial Accounting Standards Number 109, “Accounting for Income Taxes.” Of particular importance, was FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The purpose of publishing the interpretations was to address the uncertainty in accounting for income tax assets and liabilities. Previously, FASB Number 109 contained no guidance on accounting for income tax benefits and liabilities, and therefore, resulted in corporations taking inconsistent positions. FIN 48 attempts to reconcile the inconsistencies by prescribing a consistent recognition threshold and measurement of tax attributes and liabilities. It also gives practitioners a clearly defined set of criteria to use when recognizing, derecognizing, and measuring uncertain tax positions for financial statements, as well as requiring additional disclosures regarding uncertainty.

Under FIN 48, the evaluation of a tax position is based on a two-step process. The first step is recognition: the enterprise determines whether it is more likely than not (which is a 50% or greater likelihood) that a tax position would be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: the tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize on financial statements.

In asserting the more likely than not standard, all the facts and circumstances are taken into account. Additionally, the practitioner must presume that the tax position will be examined by the relevant taxing authority with full knowledge of all the other materials, technical merits of the relevant tax law and their applicability to the facts and circumstances of the tax position. The practitioner may take into account any past administrative practices and precedents of the tax authority in its dealings with the corporation, when those practices and precedents are widely understood. Finally, each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions.

The appropriate timing of claiming the benefits of a tax position is when it becomes clear that the tax position has a more likely than not chance of being sustained. If a previously taken tax position does not meet the more likely than not standard then it shall be adjusted in the first period after the effective date of FIN 48 (January 1, 2007).

A corporation must classify the liability associated with an unrecognized tax benefit as a current liability to the extent the enterprise anticipates payment of cash within one year or the operating cycle, if longer. The liability for an unrecognized tax benefit shall not be combined with deferred tax liabilities or assets.

In addition to taking into account the benefit that a particular tax position will create for a particular corporation, interest and penalties must also be computed in addition to the tax liability, when the law requires the payment of interest or penalties on an underpayment of taxes. Tax liability will cease to be a liability during the first interim period in which any one of the following three conditions occurs: 1) The more likely than not recognition threshold is met by the reporting date; 2) The tax matter is ultimately settled through negotiation or litigation; or 3) The statue of limitations for the relevant taxing authority to examine has expired.

USA Foreign owned subsidiaries tax postponement

2009-06-01T02:58:00.000-04:00

- Greenberg Traurig LLP
The Obama Administration issued its long-awaited (and in some quarters, deeply dreaded) proposals for changes to U.S. international taxation. ... First the good news: The Proposals do not, as many feared, recommend an outright repeal of all “deferral” with respect to the U.S. federal income taxation imposed on U.S. taxpayers that own foreign corporations. At the moment, U.S.-owned foreign corporations are subject to the so-called “anti-deferral” tax regimes, contained in Subpart F of the Code (controlled foreign corporation or “CFC” rules) and in Code Section 1291 et. seq., (Passive Foreign Investment Corporation, or “PFIC” rules). The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact.

...The current tax rules operate such that, so long as the CFC or PFIC regimes do not apply, income earned by a foreign subsidiary is not taxed until the foreign earnings are actually distributed as a dividend to the U.S. shareholder. That basic tax regime, at least at the moment, appears to remain intact...

WORKHOP: Tax Risk Management For Executives

2009-06-01T02:53:00.002-04:00

World Tax Authorities have definitely got their act together by not only forming specialized assessment units to assess high net worth individuals, but by co-operating with each other through the OECD Tax Adminstration Forum, under the chairmanship of Pravin Gordhan. These specialized teams will all acquire specialized skills on areas of potential tax risk areas that need to be audited on an ongoing basis in order to address the tax gap problem that has developed in all countries.

“TRM for Executives is an absolute must for executives/ senior management who are faced with the responsibility of addressing issues of taxation in a corporation.

In my experience, as an example, when Tax Authorities perform an audit - with penalties, the valuation for the dispute could average out 3 times the original outstanding tax that was due - because corporates have simply not bothered to calclate and assess their tax risk. There is no incentive to do so as they are judged on the company's EBITA performance! “
- Daniel Erasmus

Overview of TRM for Executives:

1. The Tax Authorities' relationship

How to build a workable relationship with Tax Authorities

Negotiating and settling contentious tax problems

2. Your Tax Risk Profile

What is your potential tax gap problem?

What can you do to assess your tax risk?

Guidance on how to address and manage your tax risk going forward

Methodology for finalizing major tax risk problems

Managing the assessment and settlement of tax risk areas in a multi-national corporation

Your responsibility to address taxation issues in a corporation

How are you dealing with the variety of queries that are being addressed to your corporation from different tax offices around the country?

3. Tax Queries in your Company

Addressing corporation tax queries

Practical questions

Specific methodologies to follow in finalizing any major tax problems you have identified in your corporation

Identifying tax risk in your company

Satisfying your investors, shareholders, partners and the Tax Authority
_______________________________________________________

TRM for Executives SPOT ANALYSIS

If you can answer these questions with confidence, you DONT need to attend TRM for Executives!

Do you know how “Sarbanes – Oxley Act” affects Tax Risk Management?

Where do you think your greatest Tax Risk lies? ** (see below for answer!)

What is your...

Have you a documented tax policy/strategy?

Do you have a Tax department?

* How good is your Tax departments communication with the rest of your organisation?
* Do they understand what your organisations REAL Tax Risk is?

** If your answer to question 2 is not Reputation , you need to attend TRM for Executives!
_______________________________________________________

Key Speakers

* Daniel Erasmus
Well-known Tax Risk Management specialist and international tax attorney from TRM Services.

_______________________________________________________

Event Dates

Contact Gil Ferreira below OR

View the Boardroom Series Telenar and Webinar dates, world-wide on www.taxriskmanagement.com .
_______________________________________________________

Event Co-ordinator

Gil Ferreira

Tel: +27 (83) 296 4954

e-mail: daniel@taxriskmanagement.com

Tax Risk Management: Your Reputation Is Not Worth Risking

2009-06-01T02:52:00.000-04:00

- Deloittes

These days, risk and reputation issues are some of the biggest concerns on a tax director's mind. Changes in the regulatory and political climate mean that tax risk must be assessed in the context of wider risk management policies and in a way that facilitates communication and understanding to those outside the tax group. Governance and regulatory developments are forcing boards and audit committees to take notice of an organization's taxes. Tax risk management practice is comprised of a group of professionals who have experience in a broad array of tax solutions and have supplemented that with a very valuable focus on enterprise risk.
Goto http://jobfunctions.bnet.com/abstract.aspx?docid=953571&tag=content;col1 to access the full article written by Deloittes...

TRM Services has recently completed Tax Risk Management assignments in the USA, Hungary, Romania and South Africa.

They have a group of professionals with broad based experience to tackle and tax risk with well healed solutions, reducing enterprise risk and reputational risk.Some of our clients include some of the largest MNC's in the world.

Various articles on Tax Risk Management

2009-06-01T02:51:00.000-04:00

Set out below are links to various key articles on Tax Risk Management...

Lessons from SOX404 http://www.internationaltaxreview.com/?Page=17&ISS=22226&SID=641981

Tax Strategy "http://www.internationaltaxreview.com/?Page=17&ISS=22226&SID=641974">http://www.internationaltaxreview.com/?Page=17&ISS=22226&SID=641974

How to design effective tax processes http://www.internationaltaxreview.com/?Page=17&ISS=22226&SID=641977

Sand Castle Management

2009-06-01T02:47:00.002-04:00

- Jay Niblick

In a complex tax environment, whether you are facing a complex set of tax regulations or an unsophisticated yet difficult Revenue authority, the wrong talent in your tax department will end up costing your organization a tidy sum of money. Keeping the talent in your tax department well honed is one of the unknown tax risk areas often overlooked by organizations as they chase basic tax compliance in the old traditional areas (which according to a Deloitte study only contains up to 40% of the real tax risks in any organization. Developing your tax departments talent is one sure way of uping the game on your side to the next level. Read the article below for some more insight...

Sand Castle Management

The intellectual economy is upon us, and par for the course for our myopic society, too many corporations have their heads buried in the proverbial sand.

The competitive advantages of old are no longer the competitive advantages of today. Technology is more easily and quickly duplicated, and by offshore competitors who do it for less.

In the old industrial economy, a company’s greatest assets were their physical and natural resources. In the new intellectual economy, however, the biggest competitive advantage is a company’s human capital. More and more, what makes one company better than another today is not its production facility, its brand image or its secrete formula. It is the human capital behind these things that separates the winners from the losers. Our dependence on Drucker’s knowlege worker has never been higher.

Examples of the risks associated with mismanaging this human capital abound. Enron’s fall was not due to a lack of physical or financial resources but because of poor decisions made by key people. IBM lost its market share not because it was “out-manufactured” but because it stopped innovating. Daimler Chrysler failed to appreciate the importance of its engineers and the bleeding still hasn’t stopped, and General Motors was dethroned when it allowed the focus on processes and finances to block out focusing on innovation and the customer. Should I continue?

While many corporate leaders claim to be well aware of the importance of their human capital, all too often their practice fails to live up to their preaching. The reason for this is their habits. Today’s leaders grew up in an industrial economy. The management philosophies and business practices employed today were originally developed in the previous economy. That economy has left the building, so to speak. It is time to update management practices accordingly. New economies require new thinking. Ford’s assembly line was the antithesis of a people-centric focus, but they don’t seem to have changed with the times given the recently attempted downsizing of 75,000 employees.

As a result, even if they acknowledge the shift in importance of the human capital of their organization, too many executives habitually continue to think in old ways.

Think this is untrue of your organization? Confident your company has enlightened management practices in place? Here are three easy Litmus tests to see if your organization has shifted from an industrial mindset to an intellectual one:

If you list payroll on your P&L legers as an expense instead of an investment...you fail.

If your employee turnover rate is higher than the defect rate for any product you produce…you fail.

If your organization has a Chief Operations Officer and Chief Financial Officer, but no Chief People Officer…you fail.

If your company passed all three tests, buy more stock in your company. If it failed any of them, it still has some adjusting to do. If it failed all of them…it is time to radically adjust your approach to these items as a matter of urgency.

Your ongoing participation in the current economy, despite your lack of focus on Human Capital investment, is bound to drive you down the Enron, IBM, Daimler Chrysler, General Motors path. Except that you may not have the momentum of some of these giants to survive the journey .

These are not hollow thoughts of a group of overly empathetic humanists seeking to create warm fuzzy environments across the world. Substantial studies have shown a positive correlation between the ability of an organization to effectively manage its human capital and its ability to increase hard metrics like top and bottom line growth, shareholder value and market share.

To whit:

A Cornell University study of large publicly funded companies, for example, found that companies using “high performance” human resource practices have market values that range from between $16,000 and $40,000 per employee higher than firms that do not use such practices.

Another study of high tech start-ups showed that for firms going public with a high level of human resource value, the probability of survival is .79; for firms going public with low levels of human resource value, however, the probability is only .60.

More specifically, companies with aligned workforces are more likely than those with less aligned workforces (a) to develop and deliver high quality products, services, or solutions, (b) to develop and deliver new products, services, or solutions, (c) to satisfy customers or clients, (d) to effectively market products or services, (e) to achieve sales growth, (f) to operate profitably, and (g) to capture market share.

Over the past 10 years the average annual shareholder return of the publicly traded FORTUNE "100 Best" firms has been 50% higher than the S&P 500.

The moral of the story is this. Too many executives continue to substitute working hard for working smart. They do a whole lot of things, but they do them in areas that are no longer the most vital. They are breaking a sweat building sand castles to continue to hide their heads in. Organizations that fail to appreciate the significance of the shift from an industrial to an intellectual economy will be at a serious competitive disadvantage.

Competitors who do realize this fact will out innovate, out perform and out pace them; in which case the sand castles they have built will serve as the perfect vantage point from which they can watch the sun set on their business.

Innermetrix has developed a process to find the valuable Human Capital talent in your organization, develop its maximum potential and then keep it in place to operate optimally. Implementing the Innermetrix process will cost you a fraction of the additional returns your organization will generate. Take the next step to improving the ability for your corporation to generate optimal returns and investigate the Innermetrix process. Contact us today for a free consultation (questions@innermetrix.com).

The business of TRM Services has used the tools of Innermetrix to assess the suitability of candidates applying for consulting positions in tax - with great success. In fact, the shareholders in TRM were so impressed with the Innermetrix tools, they ended up investing in Innermetrix.