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.
Monday, November 30, 2009
Friday, October 30, 2009
SOUTH AFRICA: Barry Tannenbaum's Ponzi Scheme - Take care
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.
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
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!
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!
Thursday, October 22, 2009
Daylight Robbery
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.
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
2009/10/21
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.
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.
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