Thursday, May 29, 2008

An extract from the investor publication called Daily Wealth...

To qualify as a perfect income play, a company must
1) run a simple business,
2) be unable to expand its operation,
3) enjoy a huge "moat," and
4) pay very little (if any) taxes.

Here's how Westshore measured up:

First, Westshore's business couldn't be simpler. The railroad brings the coal to Westshore's Vancouver terminal. Westshore removes the coal from railroad hoppers, piles it up using a system of conveyor belts, and then reloads this coal onto ships. Westshore never owns the coal. It simply earns commissions from the coalmine it serves.

Simplicity is important because it's easy to identify the risks in a simple business. All businesses carry risk, but if you can identify them, you can make a more accurate assessment of a company's value.

Would you rather make a bid on a vast corporation with myriad operations and opaque accounting – say, Citigroup – or a coal terminal like Westshore? I always give more value to dividends from simple businesses than from complicated businesses.

Second, Westshore has no way to expand its business. The terminal sits on the head of a spit in the waters south of Vancouver. The railroad tracks run around the perimeter of the spit. Westshore piles up the coal in the center of the spit. There are two docks, a pair of gantry cranes, a parking lot... and just enough room for a couple of prefabricated cabins where management runs the operation.

It may sound odd to say we're looking for companies that can't expand, since most investors are drawn to growth. But we're not looking for growth. We're looking for income. Expansion is a distraction... and often a big waste of money.

Businesses that can't expand have the most focused management teams and pay the safest dividends. We want a company that pumps cash into its dividend, not its capital-expense budget.

Third, Westshore has a huge business moat, meaning there are significant barriers to competition. Westshore exports metallurgical coal. Forges use "met coal" to make steel. There is no substitute for Westshore's coal. The world will always need steel... And the coalmine has enough coal to last for another century. A couple of other terminals export coal from western Canada. But they're too small to make any dent in Westshore's revenues.

We want a business that enjoys a wide moat. Moats protect castles from invaders. In business, moats protect dividends.

Finally, Westshore is an income trust. As long as these companies pay out all their earnings to shareholders, they don't have to pay tax. Companies that don't pay tax have more money to return to shareholders.

Tuesday, May 27, 2008


By Sandra Platts, Managing Director of Kleinwort Benson in Guernsey

REGULATORY SOUNDNESS, EXCELLENT infrastructure and immediate access to a large range of innovative products make the island an ideal location for private banks aiming to provide bespoke wealth management solutions for sophisticated private investors.

Over the past four decades, Guernsey has established itself as a leading international finance centre for both institutional and private clients. High professional and regulatory standards and the excellent infrastructure put the island in the premier division of global finance hubs, attracting record levels of business from around the world. By the end of March 2007, total deposits held with Guernsey banks had reached a new all time high of £105.3 billion - up 14 per cent during the first three months of 2007 and a 23 per cent rise year on year.

As a centre of excellence for private banking, Guernsey attracts sophisticated investors seeking products that combine better capital protection with growth potential, using an absolute benchmark of positive returns to measure success. Guernsey's vibrant finance sector has steadily expanded and enhanced its service offering. The island's long-established fiduciary industry has provided corporate and trust services for more than 40 years. Private banks offer sophisticated wealth management solutions, while others specialise in providing banking services to the investment, fund administration and insurance sectors. Businesses are located so close to each other that a high volume and wide range of business can be carried out in a short space of time, making the island an ideal 'one-stop shop'.

Immediate access to a huge range of innovative products, combined with top-tier rankings for political stability and regulatory soundness, make Guernsey an ideal location for private banks aiming to provide bespoke wealth management programmes to high net worth individuals. Today's private banking clients are demanding and highly financially literate. Their requirements are increasingly diverse, and they look for a wealth solution that is tailored to their individual needs and can be easily adapted if professional or personal circumstances change.

While there is little debate amongst the investment community that diversification is of benefit to a portfolio, the recent market volatility has demonstrated that the traditional approach to asset management has not met the challenges of variable market conditions. Traditional diversification has been achieved through combining various proportions of well-established asset classes such as equities, bonds, cash and property, or by diversifying within asset classes. In equity portfolios, for instance, more stocks or new geographical regions have been added to the mix.

In an era of increasing globalisation, however, equity markets have become increasingly correlated, reducing the effectiveness of traditional diversification principles and increased the underlying risk. Bond and cash instruments have traditionally been a safer, less volatile asset class, but these investments carry their own risks: returns may not be high enough to counter the decaying effects of inflation on capital. "Our investment portfolios combine traditional asset classes, such as bonds and equities, with alternative asset classes such as UK property, commodities, funds of hedge funds and private equity. Due to little or no correlation of alternative asset classes with traditional asset classes, the volatility of the portfolio can be reduced without necessarily capping returns," explains Jim Gilligan, Head of Private Wealth Management in the Channel Islands. "We have recently seen substantial gains in commodities or private equity, for instance. Our diversified investment portfolios enable clients to benefit from these upswings, but also protect them from over-exposure to downswings in any particular sector."

Wealth management teams in Guernsey, Jersey and across the UK appreciate that each client has an individual appetite for risk and different personal and ethical preferences. For some investors, there may also be religious restrictions which require the selective picking of stocks, funds and other asset classes. Fund managers can create a diversified investment strategy for each client that aims to produce the best possible returns for their individual risk profile. Returns will usually be higher for each unit of volatility. A maximum total return strategy, for example, would target long term returns of cash+6 per cent with the volatility of a well-diversified equity portfolio. Risk-averse investors might opt for an absolute return solution which aims for returns of cash+2 per cent with the volatility of a short-to-medium term government bond. All portfolios are managed continuously. Each investment strategy is reviewed on a monthly basis and, if necessary, adapted. Guernsey's financial sector's specialist knowledge of investment products and markets enable them to offer a variety of wealth management options to meet the needs of high net worth clients. The ability to constantly create new and innovative solutions meeting the demands of increasingly sophisticated investors has made Guernsey a leading force in private banking in the world for many years.

Wednesday, May 21, 2008


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.”

Visit CPA Magazine online to see what they have to say about Daniel Erasmus and 7 Habitual Tax Mistakes.

Thursday, May 15, 2008


HISTORY CONFIRMS THAT St. Lucia long ago established itself in the arena of international commerce. Indeed, so significant was its strategic importance as an offshore location that the island changed hands 14 times and was fiercely fought over by the British and French from 1664 to 1814...

By Ryan Devaux
(General Manager, Bank of Saint Lucia International Limited British sovereignty was finally established in 1814 and continued until independence in 1979)

The focus of yesteryear's striving for an offshore presence was largely based on controlling and utilising the large natural harbour with which St, Lucia has been blessed.

The international focus today is on utilising St. Lucia's international financial services sector and taking advantage of the attractive suite of legislation in place to facilitate this business. While its significance as an offshore location may have longsince been established, St. Lucia is relatively new to the world of international financial services,

This late entrance, in 2000, has enabled a legislative framework that international regulators have commended, especially for the care with which each Act was created and for the fact that collectively the regulatory framework provides a synergy not commonly found in international service jurisdictions and meets the highest international regulatory standards.

The legislation and regulations are designed to attract high quality business and permit the efficient flow of transactions relating to this business; however, at the same time, they have been created to make it extremely difficult and, as a result, uninviting for any illegitimate business to find a home here.

Testimony to the stability and strength of the legislation is the fact that no alterations have had to be made to facilitate the recommendations and requirements of the OECD or FATF and St. Lucia has never been blacklisted by these institutions. St. Lucia's focus from the outset, and continuing today, has been on attracting quality business rather than purely volume-driven business.

As a result, the jurisdiction has not positioned itself as the lowest cost jurisdiction in the international financial services arena, but rather boasts of a competent and highly professional service sector committed to meeting and exceeding the service needs of international investors using our jurisdiction.

The jurisdiction has grown steadily and there is now a stable cadre of service providers who have enjoyed a healthy return on their investment. The jurisdiction is currently exploring opportunities to make it more attractive for other international service providers to make St. Lucia a jurisdiction of choice in their global toolkit, All international financial service providers must be licensed to offer their services, and they are continuously supervised to ensure that best practices arc adopted and that they conduct their business in a manner that preserves St. Lucia's solid reputation.

St. Lucia's international financial services sector provides for the following entities:
• International business companies (IBC's)
• International trusts
• International banks
• International mutual funds, and
• International insurance companies Pinnacle St. Lucia, one of the most technologically advanced online public registries in the world, offers efficiency and security and serves as the official registry for IBCs and the registration of trusts. Pinnacle allows end users to carry out searches, make inquiries of the registry and file documents directly with the IBC registry.

In the first quarter of 2008, the online registry will make files documents available to end users in portable document format (PDF), allowing full searches to be conducted entirely online.

St, Lucia's legislation provides for strict confidentiality of the ownership and directors of IBCs, and this information must reside with a local registered agent and is not public information unless the company elects to file this information. Access to this information can only obtained by pursuing the matter through the courts of St. Lucia.

IBCs are the most common legal vehicle being used in the jurisdiction. Important features associated with the St. Lucia IBC include the fact that they do not allow for bearer shares, there is no minimum capital requirement (providing the IBC is not engaging in a licensed activity such as insurance or banking) and they can be re-domiciled and continued in St. Lucia from other jurisdictions.

Every IBC must have a local registered agent and at least one shareholder and one director, The annual renewal fee for an IBC is US$300 regardless of the capital base and the renewal date is January 1st annually.

With regard to the incorporation fee, it is prorated quarterly in the year of incorporation or re-domiciliation such that the cost in the third and fourth quarters is US$150 and US$75 respectively.

This offers a strategic advantage for intermediaries interested in setting up or transferring significant volumes of business. International trusts are afforded strong asset protection provisions under the relevant Act. Highlights include a limitation period of two years from the date of settlement of the trust or disposition of the relevant asset and the need to post a US$25,000 deposit for security against costs in order to initiate legal action.

The settlor and trust instrument are confidential documents held by a registered agent and the Act provides for some control to be exercised by the settlor over the trust. In addition to the International Trust, practitioners also have the benefit of utilising a domestic trust which recognises the laws of England as the governing laws.

Some have argued that trust practitioners have the best of both worlds in St. Lucia! International banking law allows For Class A and Class B banks, with the former able to conduct business with third parties and the latter restricted to business with parties listed at the time of application.

Capital requirements start at US$1 million for Class A banks and US$250,000 for Class B banks. All international banks must be incorporated as an IBC and any IBC being established for the purpose of obtaining a banking license must first apply to the Minister of Finance for approval in principle to incorporate the IBC.

This is the first regulatory/due diligence hurdle and it is not easy to cross. As an IBC, the bank is required to have a registered agent and a registered office. All licencees must have at least two directors (natural persons), at least one of whom must be resident in St. Lucia. Each bank is required to have an audit conducted annually.

There are provisions in the Act that provide for confidentiality through the application process and then on to the Operations of successful licencees. International mutual funds are another option available in St. Lucia and service providers have the benefit of utilising private or public mutual funds, Public funds are required to obtain a mutual fund licence and the fund itself can be constituted as either an IBC or a unit trust established under the International Trusts Act.

The fund is required to have registered office or a registered trustee licensed under the Registered Agent and Trustee Licensing Act. The fund is required to have an administrator in St. Lucia and it must file an offering document, unless an exemption has been granted by the Minister.

The private mutual fund is designed to facilitate the "sophisticated investor" and can have up to 100 persons invested in the Fund with the minimum required investment of US$50,000. Private mutual funds are only required to register with the Director of the Financial Sector Supervision Unit.

It is advisable that the Director be advised as early as possible and preferably in advance of the start of private mutual fund business. This feature of the private mutual fund requirements is another example of how the jurisdiction seeks to facilitate business within our robust regulatory and legal framework.

For persons wishing to use St. Lucia as an administration location For funds, and there are benefits for doing so, the law requires that the administrator obtain either a general licence or a restricted licence which would be applicable to a specified pool of funds. The administrator must be an IBC and, as is the case with other licenced activities, requires that there must be no less than two directors (natural persons), one of whom must be resident. Both administrators and public Funds are required to file audited financial statements with the regulator.

Completing the St. Lucia offering is international insurance and included in that law is the recently passed incorporated cell legislation. Incorporated cell companies offer additional legal benefits that some of the other protected cell regimes do not offer, while at the same time providing for the flexibility that makes these types of vehicles attractive for a variety of structured solutions including risk mitigation, asset protection and investment diversification.

Captive insurance, reinsurance, life, and general insurance are all uses of the International Insurance Act and capital requirements range from US$50.000 to US$ 100,000.

Insurance companies must be registered as an IBC, but must first make a preliminary application to the Minister for approval to incorporate. This requirement is in place to ensure that only persons with the relevant experience are granted licences to operate, Director and audit requirements are in line with those highlighted previously for licensed IBC entities.

There are no foreign exchange controls in place in St. Lucia and IBCs are exempt from tax or may elect to pay tax at 1 per cent. This election is significant for purposes of utilising the CARICOM Double Tax Agreement to which St, Lucia is a signatory. By paying tax in St. Lucia, dividends can be remitted tax free to any CARICOM member country,

This has led to a significant benefit for St. Lucia with a lot of the regional expansion being structured through St. Lucia and could provide for benefits when layered with a treaty jurisdiction such as Barbados. In addition to income tax, IBCs are exempt from withholding taxes, capital gains tax and stamp duties.

The Money Laundering Prevention Act ensures that St. Lucia has kept pace with the international requirements for preventing money laundering, terrorist financing and being a facilitator of all the other nefarious activities that are so often incorrectly perceived to be associated with well-run jurisdictions such as St. Lucia. Looking forward, the International Partnership Act has been passed by Parliament and is expected to be brought into law as soon as the regulations for the Act are completed which is expected to be in the near term.

The International Partnership has been incorporated into the Mutual Fund Act and will serve as another avenue for establishing mutual fund business in St. Lucia. There are other benefits to St. Lucia such as the strong telecommunications infrastructure, ease of international accessibility, with St. Lucia offering two airports, and a well-educated workforce drawn from the population of approximately 170,000.

Testimony to the strength of our educational system is the fact that St. Lucia has the distinction of having produced two Nobel Laureates, the most of any country in the world on a per capita basis. And if all of this has not excited you, as I write this our annual Food and Rum festival is on, next mouth brings the Kalalu World Music festival, and then our world class Jazz festival in May.

The real estate market too has boomed and there are numerous world- class developments taking place that all make St. Lucia an excellent jurisdiction for direct investment and from which to structure and manage global wealth. We look forward to welcoming you here!

For more information about the international financial services sector in St. Lucia, please contact the author at, or visit


• Location: Caribbean Region.
• Time zone: GMT -4.
• Population: 170,650.
• Capital: Castries.
• Airport (s) : George Charles Airport, Castries (Regional) Hewanorra International Airport, Vieuw Fort (Long Haul).
• Language: English.
• Currency: East Caribbean Dollar.
• Political system: Constitutional Democracy within British Commonwealth.
• International dialling code: +1 758
• Legal system: International
• Financial Services, Common Law, Domestic Highbrid (Common/Civil).


• Personal income tax: Resident 30%.
• Corporate income tax: IBCs exempt or 3%.
• Exchange restrictions: None.
• Tax treaties: Caricom.


• Permitted currencies: Any.
• Minimum authorized capital: One Unit of Currency.
• Minimum share issue: One.


• Shelf companies: Yes.
• Timescale for new entities: 30 minutes – Online Registry.
• Incorporation fees :US$300.
• Annual fees: US$300, Pro-rated quarterly in year registration.


• Minimum number: One.
• Residency requirements: Not unless licensed as bank or insurance company.
• Corporate directors: Allowed.
• Meetings / frequency: Whenever required.


• Disclosure Bearer shares: Not Allowed.
• Minimum number: One.
• Public share registry: None.
• Meetings / frequency: Whenever required.


• Annual return: None.
• Audit requirements: Optional (unless licensed).


• Registered office: Yes.
• Domicile issues: None.
• Company naming restrictions: Not Many.

Why Is the Tax “Forest” Greater than the Trees? SOX 404

Many CPA’s that are employed by or serve publicly held companies have been overwhelmed by the internal controls development, implementation and documentation that are required to comply with SOX. This article will ask you to step back a second and take a quick look at what’s going on in the forest while you have been focused on the SOX “tree”.

There are nine additional “trees” at which I suggest you look:

1. The IRS is focusing on three initiatives – enforcement, enforcement and enforcement. Those perspectives were clearly communicated by the commissioners at the AICPA National Tax Conference.

2. SOX Rule 404 compliance is exposing tax accruals to significant process and content review and documentation.

3. SOX Rule 802 provides for “Criminal Penalties for Altering Workpapers”. (Contemporaneous documentation really does mean contemporaneous.)

4. Current SEC activity in regulations, comment letters, actions and speeches have indicated a need for enhanced documentation and transparency of tax accruals for registrants; including inquiries regarding that which we do not name – the tax cushion. Disclosure of positions taken and the alternatives considered are likened to inviting the IRS to a smorgasbord.

5. The new form – Schedule M3 – imposes a higher degree of disclosure of book and tax timing and permanent differences.

6. Interim reporting requirements necessitate the current, correct quarter reporting of the reversal of Financial Accounting Standard (“FAS”) 5 contingency reserves.

7. The American Jobs Creation Act of 2004 (“AJCA”) poses a variety of challenges. The short window of opportunity to repatriate and reinvest earnings of foreign subsidiaries creates a rush to document and analyze foreign subsidiary earnings and profits (“E&P”), Subpart F income and Foreign Tax Credits (“FTC”).

Those and other AJCA provisions may alter a company’s effective tax rate. While the FASB has finalized its two staff positions with respect to the AJCA implications for FAS 109, those positions have not passed the scrutiny of normal standards setting and the staff positions address just two of the specific aspects of the AJCA impact on tax accruals.

8. Many of the large CPA firms have reduced the tax consulting staff levels to reflect a shrinking consulting practice; resulting in limited trained, human capital to address tax matters.

9. The Circular 230 Regulations have gone to final form and those regulations influence how CPA’s approach their tax practice. I’m sure you can see other “trees” when you pull back from SOX implementation to look at the forest. As you consider the nine trees above, I think you will find the forest has grown while you were hard at work on SOX compliance.

So now what do you do? One first step is to understand the un-remitted earnings of foreign subsidiaries for which you have not provided taxes; pursuant to the Accounting Principles Board Opinion 23 (“APB 23”) exception for “permanent re-investment”.

Many companies have had to shortcut their E&P computations on Forms 5471 over the years due to short staffing and a low risk assessment of inaccuracy. You may wish to revisit that risk assessment now. The AJCA provides a significant tax benefit for repatriation and reinvestment of up to a half a billion dollars of un-remitted foreign earnings.

That AJCA provision results in an effective rate of 5.25% on the un-remitted earnings that are repatriated and reinvested domestically (assuming the other aspects of the law are followed). Many companies have not provided for the 5.25% tax pursuant to the APB 23 exception for permanent re-investment. While no tax provision can be somewhat worrisome, the cash benefit of the tax savings is very real.

A company that can maximize the limit could save a huge amount of cash, assuming the $500,000,000 of cash is available for repatriation. That cash savings could be as high as $148,750,000, less any withholding taxes net of the FTC. (That’s $500 million times the net of 35% - 5.25%).

That cash availability is a tough assumption; particularly since permanent re-investment of earnings often includes the investment in less liquid foreign assets like accounts receivable, inventory, intangibles and fixed assets. The attractiveness of the domestic tax savings is thus limited by the foreign liquidity. The impracticality of analyzing this information and making an informed decision about the repatriation and reinvestment of un-remitted foreign earnings in the fourth quarter of 2004 resulted in the FASB issuance of Staff Position No.109-2.

That position essentially says companies can have more time to make a decision. They must however disclose a summary of how the provision is expected to affect the company, the extent of un-remitted earnings that may be affected, and a number of other specifics. Auditors must apply their normal audit procedures to those disclosures.

If your company allowed the December 31, 2004 year end to pass by, some opportunities may have been missed as company specific tax matters may have created unique matching opportunities for the repatriation and reinvestment decisions; particularly if the reinvestments could have affected available bonus depreciation provisions. Gaining control over deferred tax asset valuation is a second issue that is important as a result of current environmental changes.

The AJCA provides a variety of changes to the taxation of international activities; some of which alter deferred tax assets. Those changes include the elimination of the extraterritorial income (ETI) exclusion. The US was required to eliminate that regime as an illegal export subsidy.

The AJCA deduction for qualified production activities was intended to mitigate the loss of the ETI exclusion and to encourage domestic production; and to hopefully to slow the pace of globalization. The calculation of that deduction is integrated with the ability to utilize net operating loss (“NOL”) carry-forwards, which give rise to deferred tax assets (See FASB SOP 109-1.)

FTC carry forward amounts can also be affected. Speaking of the FTC, its computation has been simplified and the carryback and carryforward periods were altered to a one-year carryback and a ten-year carryforward. The AJCA also repeals an FTC related alternative minimum tax (“AMT”) provision.

As tax provisions become more transparent, the valuation of deferred tax assets will be subjected to greater scrutiny. One important aspect of that scrutiny will be the identification and valuation of deferred tax assets that qualify for “Day One” recognition. As the bases for tax positions taken and the alternatives to those positions are disclosed, a higher standard for deferred tax asset recognition may develop.

Companies and their auditors are struggling with what level of confidence (likelihood of surviving an audit) is necessary to recognize deferred tax assets. Do not be surprised if that confidence level is a “should survive an audit” level. Transparency is the last issue I would like to mention.

The recent tax law changes are significant and those changes occur at a time when many eyes are on company tax provisions. The list of SEC activities above, in conjunction with PCAOB initiatives and SOX 404 implementation are all events or trends that are imposing a significantly greater degree of transparency on how companies plan, implement, document and report tax matters.

That transparency is a good thing for the investors. However, that transparency lays open all of the tax return and planning positions for the IRS to attack. Managing those conflicting stresses will be a significant challenge for the finance and tax departments of companies to which the transparency initiatives apply. For some companies, the attractiveness of public securities markets may be diminished. I recommend that you start the project planning immediately.

A proactive, project-oriented approach to adapting to the changes will yield substantial returns. Some of the changes require significant lead times and the analytical groundwork may uncover important surprises – both good and bad. With reduced availability of seasoned tax professionals, getting the projects on the books sooner will help ensure your company effectively responds to these changes.

So step back, take a break to get your breath, check out the forest, then get back to work!

Fostering cooperation between the IRS and corporate taxpayers

Some company executives are skeptical about engaging in a relationship of cooperation and trust with tax administrators . Rake explained that while there are several levels of cynicism or concern, two primary issues that may give pause are the political elements of taxation and the sheer complexity of the subject .

Among the political elements is tax competition among jurisdictions .

“There is absolutely no doubt that countries create tax opportunities to encourage investment and to tempt investment away . There’s absolutely no doubt that this gives rise to some legitimate opportunities for tax arbitrage .”

If taxation is viewed as a purely political issue and the world doesn’t have a level tax playing field, then there may be less of an incentive for corporations to engage, said Rake .

Mike Rake

For the FULL DISCUSSION go to ...

Top End Tax Risk Management - The Journey Continues

By Tax Commissioner Michael D'Ascenzo

I’ve been asked for my perspective on the progress we have made since starting the journey over two years ago which raised with CEOs, company directors and Boards the consideration of tax risks as part of good corporate governance1. Anecdotal evidence suggests that companies have made good progress in ensuring that tax risk management receives due attention within their corporate governance framework. Many corporate taxpayers are treating significant tax risks as...

Speech by Tax Commissioner Michael D'Ascenzo to the PricewaterhouseCoopers Boardroom Dinner, Brisbane, Wednesday 28 June 2006.

Article from:

I’ve been asked for my perspective on the progress we have made since starting the journey over two years ago which raised with CEOs, company directors and Boards the consideration of tax risks as part of good corporate governance

1. Anecdotal evidence suggests that companies have made good progress in ensuring that tax risk management receives due attention within their corporate governance framework. Many corporate taxpayers are treating significant tax risks as they would treat other major risks to their business and reputation.

In addition, there is a growing mutual commitment to work in a more open, collaborative and consultative manner with the Tax Office (on our part for example, through our program of regular consultation at senior levels with large corporate groups). Some of the more recent initiatives we have introduced, such as forward compliance arrangements and priority private rulings, will offer further opportunities for corporate taxpayers to manage their tax risk profile, providing more certainty for those who need it.

Increased corporate regulation and responsibility

The focus on corporate risks has been to a significant extent facilitated by a greater emphasis on broader corporate compliance and corporate social responsibility in general. For example, the introduction of Sarbanes-Oxley section 404 in the US has resulted in some corporations having to restate their earnings downward by significant amounts and in at least one case, because of errors in their income-tax accounting, which were found to constitute a material weakness. These errors, one company said, were discovered in part through "rigorous reviews of financial controls as part of its Sarbanes-Oxley 404 certification process"

2. In Australia, the focus on corporate governance has taken the form of corporate law amendments (referred to as “CLERP 9”) and the Australian Stock Exchange (ASX) Corporate Governance Principles. Specifically, Principle 7 requires risk management policies to be formalised and the Board (or appropriate risk committee) to oversee the establishment and implementation of the risk management system.

In addition, the Australian Prudential Regulation Authority (APRA), which regulates companies operating in the financial services industry, recently released new prudential standards on governance for authorised deposit taking institutions and for life and general insurance companies. Furthermore, a recent international survey of tax directors conducted by KPMG showed that 80% of executives from 120 multinationals said they were “finding it of great or increasing importance to communicate with investors and shareholders about tax matters” – this is a significant increase from the previous result of 69%.

3. These developments have translated into a more rigorous approach to tax risk management within the broader focus on corporate governance. The general consensus is that tax risk management should be managed like any other business risk with reference to the corporate law, and the principles and standards referred to above.
This requires amongst other things, a rigorous analysis, consideration and communication of the tax risks within a corporate group, allowing the corporate group to consider and calibrate its appetite for tax risk. The approach to tax risk management has been varied As to be expected, we have witnessed a range of postures in relation to the level of tax risk a corporate group is prepared to bear.
At one level, through our one-on-one dialogue with the Top 100 groups, we see some groups wanting to positively engage with the Tax Office on what they are doing to manage tax risk, including frank and comprehensive discussions about their risks and their overall risk profile.

Two groups have even entered into discussions with us on forward compliance arrangements to manage their tax risks into the future. Others continue to apply for tax rulings to gain clarity on our view of the law in relation to major transactions and in recent times we have seen an increase in ruling applications.

We will continue to evaluate the reasons why private large business taxpayers are requesting private rulings on particular transactions or financial instruments, to see if there is more we can do to minimise downside risks for compliant taxpayers. For example, we might be able to issue public rulings to cover the tax position in relation to common but significant transactions. In addition, we want to create an environment where taxpayers who seek to take reasonable positions on the application of the law can feel comfortable about doing so without needing a ruling from the Tax Office.

The current law provides protection from culpability penalties if a taxpayer exercises reasonable care and has a reasonably arguable position (unless general anti-avoidance or transfer pricing provisions apply). In addition, recent legislative changes reduce the rate of interest payable for shortfalls that arise from the 2004-2005 and future income years. The design of the law is intended to minimise the downside risks for taxpayers who act reasonably.

We have also noticed that some groups continue to accept moderate to high levels of tax risk by entering into significant arrangements, undertaking valuations or calculations or shifting functions or assets between their global related parties in order to minimise or at very least manage their Australian or global tax exposures.

The tax structuring and outcomes in these cases are sufficiently problematic to require consideration by the Tax Office. Yet another response is from some groups who prefer to accept the highest level of risk by continuing to have very low or zero effective tax rates with little apparent commercial justification, continuing to pay very little tax on healthy profits, reducing their accounting profits to a very low level of taxable income or loss, converting very healthy capital gains into reduced gains or losses and exhibiting an apparent refusal to positively interact with the Tax Office and the tax system. Our response to those who choose to take this higher risk approach has been and will remain quite simple – that is, they can expect a higher degree of scrutiny from the Tax Office.

Tax Office risk management

The Tax Office is simply not resourced to do chase after every dollar, and our objective is practical compliance with the tax laws. Therefore, we must make appropriate choices as to where we can best apply our compliance resources – in a sense, we also adopt a risk management approach to our compliance activities. We target our compliance work to the highest risk areas through monitoring developments in the large business segment and the use of analysis techniques such as risk profiling.

Verification of large business compliance is relatively intensive, reflecting the nature of large business transactions and the factual and legal complexities associated with many of these arrangements. Our compliance activities are increasingly undertaken as transactions occur or as tax payments are made reflecting both the risks in the large business segment and the increasing sophistication of our intelligence and analysis tools.

For example, we are making enquiries about the nature and tax outcome of major new transactions and financial statement disclosures to the market as they come to our attention.

Understanding payments and refunds allows us to monitor both economic and compliance trends.

For example, when there is a significant boom in commodity exports or capital acquisitions, we examine tax payments or refunds at various levels to check the alignment between trade trends and tax outcomes.
We also compare tax payments by and refunds to corporate groups against previous or expected amounts, and following it up with the taxpayer where there are significant unexplained variances.

Taxpayer risk profiling Tax risk identification in the large business segment is based on taxpayer profiling. Using a range of both financial and tax-specific indicators and our knowledge of a taxpayer’s activities, we profile all large businesses, comparing their business performance with their tax outcomes.
Quantitative indicators for each group are compared with those of their market peers, along with issues identified by specialist areas within the Tax Office and intelligence gathering generally.

This analysis identifies both: across-the-board patterns, trends and risks, and specific cases in which tax outcomes seem inconsistent with business performance. Profiling involves the use of risk engine analysis that examines taxpayer-reported information, data from ASIC, our own intelligence and publicly available information as well as data on changes to consolidated groups and GST groups against risk filters to identify potential compliance risks.

The process uses established economic and financial analysis tools to understand the taxpayer’s business drivers and to identify income tax and GST outcomes that are outside the expectations for the business and its industry peers. The risk engine analysis is used to assess taxpayers to make a relative determination of risk.

This is fine tuned by taking into account: intelligence from Tax Office industry segments on the latest industry tax risks, and the compliance and tax risk management behaviour of the particular taxpayer risks arising out of the implementation of new tax law, and other relevant intelligence, including historical information on aggressive postures taken by the taxpayer’s tax adviser.

We also use data from a variety of sources including tax return disclosures, ASIC disclosures, Austrac data, information on major restructures, acquisitions and divestments, media reports, intelligence received as well as data on changes to consolidated groups.

Given the reduced periods of review following the Review of Self Assessment, we are updating our profiles more frequently so we can quickly identify and respond to emerging risks. The risk filters are also periodically reviewed for their effectiveness and changed as necessary to reflect learnings from our compliance activities. Part of our risk identification work also includes flagging which taxpayers have had large refunds.

We do this because we have detected significant tax risks in some cases where there has been a large refund. We also undertake research programs where we seek to further enhance our understanding of issues impacting on compliance in the large business segment. For example we are currently examining economic, trade and profit trends to see if they are playing out as expected in the tax system.

In particular, this is focused on establishing if the profits from the energy and resources boom are translating into consistent income tax and GST outcomes. Our research also includes a focus on whether the increase in banking profits and the increased trade with jurisdictions such as China are also translating into appropriate tax outcomes. Where our research agenda identifies taxpayers where their tax outcomes do not follow the trends in profits and trade, we flag these cases as being a potential compliance risk.

Our model is one where we run various tax performance ratios over the tax disclosures we receive from large business taxpayers. So in effect we profile each of our 1900 large businesses and compare the tax performance of large businesses over time. This enables us to understand which groups have high, medium or low effective tax rates and the trend over time. Generally speaking, if a large business has very high effective tax rates, appropriate capital gains tax on significant divestments and minimal differences between accounting profits and taxable income these taxpayers are rated as a low risk. At the other extreme, where we see low effective tax rates, low capital gains tax outcomes on profitable divestments or significant differences between accounting profits and taxable income, these taxpayers are rated a high risk.

This profiling capability also allows us to identify cases with other unusual tax outcomes. As an example, when we analysed the 2005 year lodgments, we were able to identify a number of groups, which had a significant reduction in effective tax rates over and above the previous year which in some cases appears to be an unusual outcome during a period of economic prosperity.

This profiling drives our annual compliance program and is always being updated. Increasingly, these profiles are being used to discuss tax risks with the Top 100 groups. They are also increasingly being discussed at the commencement of a risk review or audit. Compliance risks Earlier this month, the IRS Commissioner Mark Everson, testified before the US Senate Committee on Finance on compliance concerns relating to large and mid-size businesses

4. Some of his compliance concerns were in relation to the transfer of intangibles offshore and cost contribution arrangements, abusive foreign tax credit transactions, abusive hybrid instrument transactions, transfer pricing, research and development claims, tax shelters and book to tax adjustments.

Our taxpayer profiles also focus on identifying these types of tax risks which need to be considered as part of the tax risk management frameworks for large businesses. We will continue to identify cases with these tax risks for reviews and audits. The tax profile of some large businesses suggests that more attention may need to be given in tax risk management to the tax outcomes of divestments and international transactions.

Similarly, the valuations used to calculate capital gains tax outcomes on divestments remain an area that will need to withstand objective scrutiny. The transfer pricing policies and tax outcomes of businesses with significant international related party dealings and low profit or tax outcomes will also remain an area of potential scrutiny.

The journey continues

To continue on with the journey of fostering a strong culture of tax risk management in corporate Australia, we will remain open and transparent in our own risk management decisions, providing you with choices as to the risk profile you want to take. We will again be releasing our annual Compliance Program, as well as the next version of our ‘Large business and tax compliance’ booklet in August.
By publishing our intentions, providing our view of the law in public rulings and giving guidance on what constitutes practical compliance, we are deliberately seeking to influence greater voluntary compliance behaviour by publishing what will attract our attention and, by implication, how to avoid that attention.

The ‘Large business and tax compliance’ booklet will also contain updated models for the risk assessment of large businesses and for the first time, will show the steps in a review or audit so that large taxpayers can see what is expected of both of us in this process. We have been welcoming of feedback on the development of this publication and have consulted extensively with the Corporate Tax Association, the Corporate Consultative Committee and senior leaders of major accounting and legal firms.

I mentioned earlier that we have introduced forward compliance arrangements. Currently, we are working on finalising two pilot forward compliance agreements – one in the finance sector and the other in the energy sector. By entering into a forward arrangement, large businesses can reduce their risk of audit, demonstrate reasonable care, access remissions to administrative penalties (where applicable) and interest charges in the event of tax shortfalls, and have a level of confidence that tax risk has been effectively mitigated.

By developing an arrangement with features such as continuous disclosure, we aim to provide an environment less likely to produce tax surprises. However, a word of caution – entry into a forward agreement requires a significant investment from both parties, so it may not be for everyone.

Therefore, we will hasten slowly, learning from these pilots and share the results with you. In relation to our priority private rulings program, as at 14 June 2006, we have ruled on 31 significant arrangements and overall feedback about the program has been very positive. However, the success of the program requires early notification and engagement of experts from both the corporate group and the Tax Office, with all facts on the table and open discussion of the issues. An important feature is a jointly developed plan to progress the private ruling in agreed timeframes. It is helpful if we are notified of potential applications as early as possible to help us plan our work, even it is not absolutely certain that the transaction will proceed.

So far we have been able to achieve an average turnaround time of 42 days from the date we received the application. Within that timeframe we have been able to finalise the application within 16 days once all the information is received. This performance is often in the context of complex multi-million dollar transactions which often take the relevant companies many months to plan and implement. All this shows that the private (binding and reviewable) rulings system can work to provide certainty to taxpayers who choose it. Sometimes the ‘system’ is criticised because the taxpayer does not like the answer.

I think ‘working together’ requires from taxpayers a more impartial response to situations where we agree to disagree. The strength of the ‘rule of law’ approach we take to tax administration is that it promotes certainty and consistency for taxpayers. Under the rule of law taxpayers have extensive rights of objection and appeal. Ultimately, the courts are there to resolve disputes, and a strength of Australia’s private ruling regime is that it provides taxpayers with an early opportunity for this.

We will continue to enhance our understanding of business and engage in active dialogue with large taxpayers. The Tax Office has engaged a range of external experts, such as economists and valuers, on a case by case basis, to improve ATO understanding of business.

“Knowing the industry” workshops have also been introduced on a trial basis in various sites, including for example a recent workshop on the mining industry. Plans are underway for a Large Market Symposium in August. This symposium will provide a platform for a robust and productive exchange of views and informal networking, and if successful will be repeated on an annual basis.

It is another opportunity for us to better understand the needs and expectations of corporate taxpayers, and the economic and commercial drivers of activities in the large market. It is also an opportunity for large taxpayers to help us co-design our strategies for the future, and to play a role in the care and management of Australia’s tax system. We are also in the process of implementing a half a billion dollar change program which will integrate our IT systems and foster a re-engineering of our operating models to make it easier for taxpayers to deal with us.

The scale of the change is substantial. The roll out of our client relationship management system is the 5th largest in the world, and we are about to roll out the largest professional case management system in the world. The new system will eventually replace our current plethora of case management systems and will allow our people to see the total picture of a taxpayer’s dealings with us - across all tax types and in real time.

The introduction of our enterprise-wide case management system should also improve our project management of large cases. In addition, our use of analytics and data-mining will become more sophisticated, improving our ability to differentiate between those that are trying to do the right thing, and those that are game playing. Conclusion It is fair to say that tax risk management is now a familiar concept in corporate Australia.

However, the journey continues. The Tax Office is committed to consulting and collaborating with large business to co-design solutions that will contribute to an environment that fosters economic growth within the parameters of the tax law.
This includes co-designing sensible administrative approaches that facilitate practical compliance with the tax law and which reduce compliance cost for business.

It also includes bringing to the attention of Government (usually through Treasury) matters where the tax laws are not operating in accordance with their policy intent or which produce unintended consequences or unexpected and significant compliance costs. This is so whether the law in its current state benefits the revenue or taxpayers.

That is, the aim is to ensure that the tax system works in accordance with its legislative intent. These are our aspirations.

1 However, the form of the risk management system and the level of risk tolerance or aversion are strategic matters for the company decide.

2 ConAgra Foods Inc media release, `ConAgra Foods Reports Preliminary Third-Quarter Results', 24 March 2005, available at:

3 KPMG media release, June 2006, available at:

4 Written testimony available at:,,id=158644,00.html.

Wednesday, May 7, 2008

SEC Filing 10-Q material weaknesses under SOX 404 reported

05/06/2008 10-Q for CHORDIANT SOFTWARE INC (CIK - 1042134 /SIC - 7372)


We may encounter unexpected delays in maintaining the requisite internal controls over financial reporting and we expect to incur additional expenses and diversion of management’s time as a result of performing future system and process evaluation, testing and remediation required to comply with future management assessment and auditor attestation requirements.

In connection with the Company’s compliance with Section 404 under SOX for the fiscal years ended September 30, 2006 and 2005, we identified certain material weaknesses. In future periods, we will continue to document our internal controls to allow management to report on, and our independent registered public accounting firm to attest to, our internal control, over financial reporting as required by Section 404 of SOX, within the time frame required by Section 404. We may encounter unexpected delays in implementing those requirements, therefore, we cannot be certain about the timely completion of our evaluation, testing and remediation actions or the impact that these activities will have on our operations. We also expect to incur additional expenses and diversion of management’s time as a result of performing the system and process evaluation, testing and remediation required to comply with management’s assessment and auditor attestation requirements. If we are not able to timely comply with the requirements set forth in Section 404 in future periods, we might be subject to sanctions or investigation by the regulatory authorities. Any such action could adversely affect our business or financial results.


Effective October 1, 2007, the Company adopted FIN No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”. FIN 48 prescribes a recognition threshold and measurement guidance for the financial statement reporting of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 also provides guidance related to recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition matters related to uncertain tax positions. FIN 48 utilizes a two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS 109. Step one, recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including the resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The cumulative effect of adopting FIN 48, if any, is recorded as an adjustment to the opening balance of retained earnings as of the adoption date.

The net income tax liabilities recognized under FIN 48 did not materially differ from the net assets recognized before adoption, and, therefore, the Company did not record an adjustment to retained earnings related to the adoption of FIN 48. At the adoption date of October 1, 2007, the Company had $0.8 million of unrecognized tax benefits related to tax positions taken in prior periods, $0.2 million of which would affect our effective tax rate if recognized. There were no material changes to the amount of unrecognized tax benefits during the first six months of fiscal 2008.

The Company recognized accrued interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes. The Company had less than $0.1 million accrued for interest and penalties as of March 31, 2008.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. With few exceptions, all U.S. federal, state and United Kingdom tax years between 1995 and 2007 remain open to examination due to net operating loss carryforwards and credit carryforwards. Tax years 2002 and later remain open to examination in the Netherlands, tax years 2003 and later remain open to examination in Canada and years 2004 and later remain open to examination in Germany.

An audit of the 2005 tax year is currently in process in the Netherlands. The Company does not expect resolution of this audit to have a material impact on our financial statements and the Company does not expect a significant increase or decrease in unrecognized tax benefits over the next 12 months.

The Company provides a valuation allowance for deferred tax assets when it is more likely than not that the net deferred tax assets will not be realized. Based on a number of factors, including the lack of a history of profits prior to 2007 and the fact that the market in which we compete is intensely competitive and characterized by rapidly changing technology, the Company believes that there is sufficient uncertainty regarding the realization of deferred tax assets such that a full valuation allowance has been provided. At March 31, 2008, the Company had approximately $127.6 million and $18.9 million of net operating loss carryforwards for federal and state purposes, respectively, and net operating loss carryforwards of approximately $34.5 million in the United Kingdom. As a result of an IRC Section 382 study completed during fiscal 2008, it was determined that $19.6 million of net operating loss carryforwards resulting from the acquisition of Prime Response will expire unutilized. The $127.6 million in total federal net operating loss carryforwards is presented net of these Section 382 limitations. Upon being realized, the remaining $13.8 million of the Prime Response federal net operating loss carryforwards would reduce goodwill and intangibles recorded at the date of acquisition before reducing the tax provision. Approximately $3.5 million of additional net operating loss carryforwards are related to stock option deductions which, if utilized, would be accounted for as an addition to equity rather than as a reduction of the provision for income taxes. The net operating loss carryforwards are available to offset future federal and state taxable income and expire in years from 2008 through 2026. At March 31, 2008, there are approximately $3.5 million of federal research and development credits and alternative minimum tax credits that expire in years 2011 through 2027. At March 31, 2008, there were also California state credits of approximately $3.5 million that do not expire.

FULL REPORT at javascript:opennew('','CHORDIANT%20SOFTWARE%20INC','');

Tuesday, May 6, 2008

Six Sigma & Tax Risk Management towards a winning process

Jay Arthur of Six Sigma Simplified says:

There's always a process. ...Most are created on-demand in an ad-hoc fashion rather than with some clarity and vision. Most are then improved using trial-and-error, gut feel and common sense. A few succeed, but too many fail.

If you watch great golfers like Tiger Woods or Annika Sorenstam, you soon discover that they follow a process for every shot. They pick a target and have a simple routine for the setup and then the shot. Their preshot routine never varies. If they get interrupted, they step back and start over from the beginning. The lesson is clear: winning demands a commitment to process.

There's always a price to pay for not having a process and improving the process along the way. The price of establishing one at the start is far less than the cost of trying to add one late in a project. It's up to you. Are you going to let some pretense of being "creative" stand in the way of your success? Or are you going to embrace the freedom that process brings?


The NEW book published by Lexis Nexis '7 Habitual Tax Mistakes' sets out a step by step practical process towards eliminating business tax risk effectively, using some of the well known Six Sigma techniques. Go to or for a FREE extract.

Thursday, May 1, 2008

MFRI, INC. FORM 10-K ....... Tax Risk FIN 48 Exposure

What follows is an extract from the 10-K form posted to the SEC for MFRI Inc, showing a tax exposure of over $ 700 000 to the IRS. It is estimated that the tax gap in the USA is close to $ 350bn, much of which the IRS could collect if they had sufficient staff and budget to do so. In an efficient system an IRS agent would be looking out for this type of exposure, conducting a field audit and looking to collect what is apparently due to them by the own admission of the company under FIN 48.


In the first quarter of 2007, the Company adopted FIN 48. The total amount of unrecognized tax liability as of February 1, 2007 was approximately $573,700, all of which would impact the effective tax rate if recognized. A decrease of $504,500 was recorded to retained earnings as of February 1, 2007 upon the adoption of FIN 48 (“Accounting for Uncertainty in Income Taxes”). During 2007, the liability for income taxes associated with uncertain tax positions as described in FIN 48 increased by $130,400 for a total of $704,100 at January 31, 2008. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet. Included in the total unrecognized tax liability were estimated accrued interest of $33,700 and penalties of $44,100. The Company’s policy is to include interest and penalties in income tax expense."

For the full report: