Tax collectors worldwide to co-operate in revenue-raising to offset fiscal deficits
With governments facing soaring budget deficits as they seek to combat the global economic slump, tax authorities from around the world have agreed on a new cooperation plan to encourage tax compliance and counter tax evasion and abusive tax avoidance, with special focus on banks, wealthy individuals and offshore activities.
TAX COMMISSIONERS WORLDWIDE JOIN FORCES TO TACKLE FISCAL CHALLENGES POSED BY THE FINANCIAL AND ECONOMIC CRISIS
In his statement at the fifth meeting of the OECD’s Forum on Tax Administration, in Paris on 28-29 May 2009, the chair Pravin Gordhan, Finance Minister of South Africa noted that “The world faces an unprecedented global financial and economic crisis. The challenges posed are both economic and social. Governments need to find sustainable ways to finance the cost of exiting the crisis. To achieve this will require the engagement of all stakeholders: Governments, business and civil society. Revenue bodies have a key role to play in helping governments to achieve sustainable revenues.”
Building on the outcomes of the fourth meeting of the Forum on Tax Administration held in Cape Town, South Africa in January 2008, revenue bodies were pleased at the development of more trusting relationships with large business and their advisers but also agreed to work together to increase the effectiveness of tax administration and to fight tax evasion and abusive tax avoidance, with special focus on banks, wealthy individuals and offshore tax non compliance.
High net worth individuals pose significant challenges to revenue bodies and to the integrity of tax systems because of the complexity of their affairs. Though potentially big tax-payers, they are wealthy enough to engage in tax planning which may enable them to avoid significant parts of their tax obligations.
Recognising the increasingly global nature of tax non compliance the Forum on Tax Administration will act together at a global level to meet these challenges.
“Individuals who hide assets overseas can expect an increasing number of revenue bodies to cooperate and share information to ensure people pay their fair share to help fund governments worldwide,” said Douglas H. Shulman, Commissioner Internal Revenue Service U.S.A.
Two reports issued at the fifth meeting of the OECD’s Forum on Tax Administration, which brings together tax commissioners from 34 OECD and non-OECD countries, set out a roadmap for future cooperation:
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‘Building Transparent Tax Compliance by Banks’ examines the role of banks in designing complex structured finance transactions that can be used to reduce tax payments through aggressive tax planning schemes for themselves or their clients.
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‘Engaging with High Net Worth Individuals on Tax Compliance’ identifies risks and complexities associated with this group of taxpayers.
Banks pose a risk for tax administrations because they engage in tax avoidance on their own account provide schemes and shelters for others and fund aggressive tax planning.
“Banks can expect that revenue bodies will take an informed risk-based approach to managing their compliance and that this will increasingly include questions on how their corporate governance procedures deal with tax,” said Michael D’Ascenzo, Commissioner of Taxation, Australia.
Participants in the two-day meeting also discussed ways in which developed countries can help emerging economies to improve tax-collecting capacity and capabilities which will enhance the fiscal capacity of their governments.
“Tax plays a fundamental role in development through mobilising revenue, promoting growth, reducing inequalities and reinforcing governments’ legitimacy, as well as achieving a fair sharing of the costs and benefits of globalisation,” commented Pravin Gordhan.
Tax Commissioners also intend to prioritise offshore compliance issues, given the greater willingness of countries to engage in information sharing to counter tax abuses.
"We welcome the recent significant progress made in encouraging countries to adopt and in some cases, go beyond the OECD standards on exchange of information. We are very pleased at the developments reported by both OECD and non OECD countries in terms of strengthening their capacity for cooperation,” commented Dave Hartnett, Permanent Secretary for Tax, HM Revenue and Customs, United Kingdom.
In a communiqué, the tax commissioners said they would focus on examining how revenue authorities, banks and wealthy individuals interact on tax issues, with a view to finding ways to improve the collection of taxes due. Achieving good compliance requires finding the right balance between tax enforcement and taxpayer service,
For further information, journalists should contact Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration (Jeffrey.owens@oecd.org)
The press conference was held on Friday 29 May at 13.00 in Paris. See the webcast in English or French.
Further information on the conference: www.oecd.org/ctp/fta2009
Friday, June 26, 2009
Thursday, June 25, 2009
Foreign Bank Account Reporting (FBAR) requirements - Due June 30
Foreign Bank Account Reporting (FBAR) requirements - Due June 30
If you own or have authority over a foreign financial account, then you may be required to report the account yearly to the Internal Revenue Service. Each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if
1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Definition of Terms:
A “United States person” includes a citizen or resident of the United States, or a person in and doing business in the United States. Whether a person is considered, for FBAR purposes, to be in, and doing business in the United States is determined based on an analysis of the facts and circumstances of each case.
A “foreign country” includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).
A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.
The “maximum value of account” is the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statements issued for the applicable year.
Reporting and Filing Information:
A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.
A foreign account holder must mail the Form TD F 90-22.1 so that it is received on or before June 30 of the following year to:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.
The FBAR is not to be filed with the filer’s Federal income tax return. Postmark dated June 30 is not considered to be filed on time. The Form must be received by June 30th.
The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.
Penalties:
IRS has announced that it intends to vigorously enforce penalties for non-comliance.
The maximum penalties for failure to file are as follows:
Civil Penalties:
$10,000 for non-willful noncompliance
$100,000 or 50% of the amount of underlying accounts balance at the time of the violation if determined to be willful
Criminal Penalties:
$250,000 fine and 5 years imprisonment
$500,000 fine and 10 years imprisonment if in tandem with any other US law
If you fail to file the form in time:
Taxpayers who failed to file FBARs but have properly reported and paid taxes on all taxable income will not be penalized if they properly file them and attach a statement explaining why the report or reports are late. They should do so without using the voluntary disclosure process. Rather, they should send copies of the delinquent reports, along with copies of tax returns for all relevant years, to the Philadelphia Offshore Identification Unit, a dedicated administrative office established by the IRS under the program.
Voluntary Disclosure:
Delinquent taxpayers may want to use the IRS’ Voluntary Disclosure program that runs until September 23, 2009 to catch up on past years’ failures to report accounts and/or related income and reduce certain penalties and risks of criminal prosecution by the IRS Criminal Investigation (CI) division. For qualifying voluntary disclosures, the Service will look back six years and require taxpayers to file or amend returns as necessary. Taxpayers under civil examination are not eligible to make a voluntary disclosure under the program, whether the examination relates to undisclosed foreign accounts or entities.
A United States person can own foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the IRS identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad
Manendra Kothari.
If you own or have authority over a foreign financial account, then you may be required to report the account yearly to the Internal Revenue Service. Each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if
1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Definition of Terms:
A “United States person” includes a citizen or resident of the United States, or a person in and doing business in the United States. Whether a person is considered, for FBAR purposes, to be in, and doing business in the United States is determined based on an analysis of the facts and circumstances of each case.
A “foreign country” includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).
A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.
The “maximum value of account” is the largest amount of currency and non-monetary assets that appear on any quarterly or more frequent account statements issued for the applicable year.
Reporting and Filing Information:
A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.
A foreign account holder must mail the Form TD F 90-22.1 so that it is received on or before June 30 of the following year to:
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.
The FBAR is not to be filed with the filer’s Federal income tax return. Postmark dated June 30 is not considered to be filed on time. The Form must be received by June 30th.
The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.
Penalties:
IRS has announced that it intends to vigorously enforce penalties for non-comliance.
The maximum penalties for failure to file are as follows:
Civil Penalties:
$10,000 for non-willful noncompliance
$100,000 or 50% of the amount of underlying accounts balance at the time of the violation if determined to be willful
Criminal Penalties:
$250,000 fine and 5 years imprisonment
$500,000 fine and 10 years imprisonment if in tandem with any other US law
If you fail to file the form in time:
Taxpayers who failed to file FBARs but have properly reported and paid taxes on all taxable income will not be penalized if they properly file them and attach a statement explaining why the report or reports are late. They should do so without using the voluntary disclosure process. Rather, they should send copies of the delinquent reports, along with copies of tax returns for all relevant years, to the Philadelphia Offshore Identification Unit, a dedicated administrative office established by the IRS under the program.
Voluntary Disclosure:
Delinquent taxpayers may want to use the IRS’ Voluntary Disclosure program that runs until September 23, 2009 to catch up on past years’ failures to report accounts and/or related income and reduce certain penalties and risks of criminal prosecution by the IRS Criminal Investigation (CI) division. For qualifying voluntary disclosures, the Service will look back six years and require taxpayers to file or amend returns as necessary. Taxpayers under civil examination are not eligible to make a voluntary disclosure under the program, whether the examination relates to undisclosed foreign accounts or entities.
A United States person can own foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the IRS identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad
Manendra Kothari.
Tuesday, June 23, 2009
SOUTH AFRICA: CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE?
An edited version of a longer article I wrote earlier.
CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE?
1. It often happens that SARS simply advances the threat of substance over form when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is relied upon as an alternative reason for issuing a revised assessment, where SARS’ other substantive reasons are weak.
2. This approach by SARS should be challenged on the following basis:
3. The SARS Internal Audit Manual describes the norm practiced by SARS in the implementation of audits and enquiries. The observance of these practices creates a self-imposed limitation which SARS should not deviate from, save in exceptional circumstances and with sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it fails to apply these norms to all taxpayers undergoing audits or enquiries.
4. To ensure that SARS complies with its duties comprehensively recorded in the SARS Internal Audit Manual, and in compliance with its duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in SARS’ letter of findings, with the conclusions.
5. What is the nature of the findings that are referred to? Findings based on physical evidence, in the form of information, documents or things extraneous to the tax returns. This would include the actual agreements signed by the parties.
6. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
7. SARS’ approach to the findings must adhere to their Practice Manual which states that SARS must produce ‘concrete evidence’. This entails solid, undisputed evidence as opposed to mere conjecture where accusations that are unsubstantiated by proof are made.
8. During the initial investigative stages, SARS have two ways forward:
a. SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded; or
b. SARS must cease the audit.
9. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.
10. If SARS contends that the transaction under investigation is a simulated one then, in terms of the judgment, SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 (the previous section before section 80A was introduced) of the Income Tax Act, 58 of 1962 in the alternative. SARS must be requested to make up their minds and decide whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of section 103, then they must abandon the substance over form attack.
11. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a sham.
12. A sham will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove. Usually, no concrete evidence supporting such a finding will be put forward by SARS.
13. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound to provide concrete evidence.
14. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different to what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, or inferences derived from conjecture or from other inferences. Oftentimes, SARS simply follows their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. This approach of SARS in arriving at its conclusions is clearly flawed in logic.
15. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. A syllogism is a statement of logical relationship. The typical syllogism has three parts:
a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.
16. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.
17. In both theories, the minor premise rests on ignoring the rights and obligations that flow from each of the agreements between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ allegation. It is only by following SARS’ contention (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.
18. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party, and the representatives of those parties together with their professional advisors, knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.
19. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax, rather than to establish the true nature of the transaction.
20. Taxpayers must ensure that SARS adheres to the principles explained above.
CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE?
1. It often happens that SARS simply advances the threat of substance over form when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is relied upon as an alternative reason for issuing a revised assessment, where SARS’ other substantive reasons are weak.
2. This approach by SARS should be challenged on the following basis:
3. The SARS Internal Audit Manual describes the norm practiced by SARS in the implementation of audits and enquiries. The observance of these practices creates a self-imposed limitation which SARS should not deviate from, save in exceptional circumstances and with sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it fails to apply these norms to all taxpayers undergoing audits or enquiries.
4. To ensure that SARS complies with its duties comprehensively recorded in the SARS Internal Audit Manual, and in compliance with its duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in SARS’ letter of findings, with the conclusions.
5. What is the nature of the findings that are referred to? Findings based on physical evidence, in the form of information, documents or things extraneous to the tax returns. This would include the actual agreements signed by the parties.
6. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
7. SARS’ approach to the findings must adhere to their Practice Manual which states that SARS must produce ‘concrete evidence’. This entails solid, undisputed evidence as opposed to mere conjecture where accusations that are unsubstantiated by proof are made.
8. During the initial investigative stages, SARS have two ways forward:
a. SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded; or
b. SARS must cease the audit.
9. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.
10. If SARS contends that the transaction under investigation is a simulated one then, in terms of the judgment, SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 (the previous section before section 80A was introduced) of the Income Tax Act, 58 of 1962 in the alternative. SARS must be requested to make up their minds and decide whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of section 103, then they must abandon the substance over form attack.
11. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a sham.
12. A sham will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove. Usually, no concrete evidence supporting such a finding will be put forward by SARS.
13. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound to provide concrete evidence.
14. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different to what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, or inferences derived from conjecture or from other inferences. Oftentimes, SARS simply follows their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. This approach of SARS in arriving at its conclusions is clearly flawed in logic.
15. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. A syllogism is a statement of logical relationship. The typical syllogism has three parts:
a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.
16. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.
17. In both theories, the minor premise rests on ignoring the rights and obligations that flow from each of the agreements between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ allegation. It is only by following SARS’ contention (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.
18. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party, and the representatives of those parties together with their professional advisors, knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.
19. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax, rather than to establish the true nature of the transaction.
20. Taxpayers must ensure that SARS adheres to the principles explained above.
It pays to go on secondment Caroline Rogers and Hanneke Farrand*
It pays to go on secondment Caroline Rogers and Hanneke Farrand* 18 June 2009 Both you and your employer get tax and exchange controls concessions.
As South African businesses grow in strength and expand to offshore jurisdictions, employees who have an intimate knowledge of their employer's business are essential to the successful implementation of such offshore business operations. The secondment of employees has an additional benefit to the employer, as the employees gain experience in, and knowledge of, the specific offshore market which they can bring back to the South African business. The focus of this article, however, is on another benefit of secondments, namely the concessions granted to both an employer and employee in respect of South African tax and exchange controls when such a secondment takes place.
South African tax
Foreign earnings exemption
South Africa taxes the world-wide income of South African residents. Therefore, an employee will be subject to tax in South Africa for services rendered offshore. However, there is relief available to the employee should he/she qualify for the foreign earnings exemption contained in section 10(1)(o)(ii) of the Income Tax Act, Act 58 of 1962 (the Act). In order to qualify for this exemption, the remuneration must be received for services rendered offshore and the employee must be outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months, and for a continuous period exceeding 60 full days during that period of 12 months.
Local pension fund
If the employee is nearing retirement age, a further concession granted is in respect of his/her South African pension fund. In terms of section 9(1)(g) of the Act, where an employee has been a member of a South African pension fund and has worked outside of South Africa during the last ten years prior to his/her retirement, there is a reduced tax liability on retirement.
Offshore pension fund
With respect to foreign pension funds, payments received by an employee as a result of contributions made to a registered foreign pension fund whilst working outside of South Africa, should be exempt from normal tax in South Africa if they are not deemed to be from a source within South Africa. In addition, these payments would not be required, in terms of South African exchange controls, to be remitted to South Africa.
Relocation allowance
In terms of section 10(1)(nB) of the Act, where an employer requires an employee to relocate in the course of his/her employment, payment/reimbursement of certain relocation costs (for example, transportation of the employee, his family and their belongings to their new location) will be exempt from tax, and the employee may also be paid a tax-free settling-in allowance. It would be beneficial to determine if the employee would be entitled to a further tax-free relocation allowance in terms of the laws of the jurisdiction to which he or she has been seconded.
Capital gains tax
If the employee decides to sell his primary residence in South Africa before he leaves to render services offshore, he may qualify for the primary residence exclusion. This exclusion exempts the first R1 500 000 of the capital gain or loss incurred as a result of the sale, from the seller's aggregate capital gain/loss. In order for this exclusion to apply, the residence has to be one in which the employee ordinarily resided and which was used mainly for domestic purposes. The Draft Taxation Law Amendment Bill No. 6 of 2009 proposes an amendment whereby no capital gains tax will be due on the sale of a primary residence which has a gross value of up to R2 000 000. If the primary residence is valued above the R2 000 000 threshold, the normal rules will still apply. However, the sale of the employee's primary residence may have implications for the tax residency of the individual and thereby cause the forfeiture of any relief available to the employee in terms of a double taxation agreement.
Double taxation agreement
The employee could obtain relief in respect of foreign tax imposed on his remuneration for services rendered offshore, if he qualifies for exemption in terms of a double taxation agreement between South Africa and the country in which he is rendering services. In terms of Article 15 of the Organisation for Economic Co-operation and Development Model Convention, remuneration derived by a resident (i.e. the employee) of a Contracting State (i.e. South Africa) in respect of an employment exercised in the other Contracting State (i.e. the offshore jurisdiction) will only be taxed in the first-mentioned State (i.e. South Africa), provided certain requirements are met. The employee must be present in the other State (i.e. the offshore jurisdiction) for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration must be paid by, or on behalf of, an employer who is not a resident of the other State (i.e. the offshore jurisdiction), and the remuneration must not be borne by a permanent establishment which the employer has in the other State (i.e. the offshore jurisdiction).
South African exchange controls
In terms of Exchange Control Regulation 6, individuals who become entitled to foreign currency are required to remit this money to South Africa within 30 days of accrual. However, the South African exchange control authorities allow an individual who renders services to a non-resident while physically abroad, to retain offshore the remuneration received for those services rendered outside of South Africa. The payment of remuneration must be directly associated with the services that were rendered by the individual while he was outside of South Africa, and this is determined by the South African exchange control authorities on a time spent basis. Split contracts that include a remuneration formula which apportions the employee's gross remuneration package, incentive bonus and leave entitlement on a time spent basis, are an effective way of ensuring that the remuneration paid for rendering services offshore is not in contravention of the Exchange Control Regulations. Split contracts are also useful in reducing the foreign tax liability of the employee if he renders services in two different offshore jurisdictions, by apportioning the remuneration received by the individual for the services rendered offshore, between the two jurisdictions.
Offshore remuneration
An important consideration for an employer is the amount to be paid to the relevant employee for the services rendered offshore. In this regard, it becomes necessary to calculate the amount of remuneration required to ensure the employee is not disadvantaged by his/her secondment as a result of differences in currency and the cost of the standard of living in the offshore jurisdictions. Employers therefore often include a Cost of Living Allowance ("COLA") in an employee's remuneration for services rendered offshore. A COLA may be determined by contacting relevant analysts in the offshore jurisdiction. However, this can be costly and time consuming. An alternative would be to utilise an online program that calculates the relevant COLA. We have found this to be an accurate and efficient way in which to determine the COLA. For example, the program that we use has the ability to calculate a COLA for over 10 000 cities worldwide. It can also determine the COLA necessary to ensure a specific employee's standard of living remains the same. The calculation of this type of COLA includes considerations such as the rental currently paid by the employee, the value of the car used by the employee, and so on.
Once the employee's remuneration has been calculated, the tax implications in the relevant jurisdiction must be considered. In our experience, the appointment of reputable tax consultants in the relevant jurisdictions is essential to ensuring accurate and reliable information regarding the tax implications and available exemptions in the offshore jurisdiction.
As can be seen from above, secondments provide a number of benefits to employers and employees. However, the secondment must be carefully implemented to ensure that the relevant benefits are available, and that the secondment falls within the parameters of the South African tax and exchange control provisions.
*Caroline Rogers is a tax associate and Hanneke Farrand a tax director at ENS
As South African businesses grow in strength and expand to offshore jurisdictions, employees who have an intimate knowledge of their employer's business are essential to the successful implementation of such offshore business operations. The secondment of employees has an additional benefit to the employer, as the employees gain experience in, and knowledge of, the specific offshore market which they can bring back to the South African business. The focus of this article, however, is on another benefit of secondments, namely the concessions granted to both an employer and employee in respect of South African tax and exchange controls when such a secondment takes place.
South African tax
Foreign earnings exemption
South Africa taxes the world-wide income of South African residents. Therefore, an employee will be subject to tax in South Africa for services rendered offshore. However, there is relief available to the employee should he/she qualify for the foreign earnings exemption contained in section 10(1)(o)(ii) of the Income Tax Act, Act 58 of 1962 (the Act). In order to qualify for this exemption, the remuneration must be received for services rendered offshore and the employee must be outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months, and for a continuous period exceeding 60 full days during that period of 12 months.
Local pension fund
If the employee is nearing retirement age, a further concession granted is in respect of his/her South African pension fund. In terms of section 9(1)(g) of the Act, where an employee has been a member of a South African pension fund and has worked outside of South Africa during the last ten years prior to his/her retirement, there is a reduced tax liability on retirement.
Offshore pension fund
With respect to foreign pension funds, payments received by an employee as a result of contributions made to a registered foreign pension fund whilst working outside of South Africa, should be exempt from normal tax in South Africa if they are not deemed to be from a source within South Africa. In addition, these payments would not be required, in terms of South African exchange controls, to be remitted to South Africa.
Relocation allowance
In terms of section 10(1)(nB) of the Act, where an employer requires an employee to relocate in the course of his/her employment, payment/reimbursement of certain relocation costs (for example, transportation of the employee, his family and their belongings to their new location) will be exempt from tax, and the employee may also be paid a tax-free settling-in allowance. It would be beneficial to determine if the employee would be entitled to a further tax-free relocation allowance in terms of the laws of the jurisdiction to which he or she has been seconded.
Capital gains tax
If the employee decides to sell his primary residence in South Africa before he leaves to render services offshore, he may qualify for the primary residence exclusion. This exclusion exempts the first R1 500 000 of the capital gain or loss incurred as a result of the sale, from the seller's aggregate capital gain/loss. In order for this exclusion to apply, the residence has to be one in which the employee ordinarily resided and which was used mainly for domestic purposes. The Draft Taxation Law Amendment Bill No. 6 of 2009 proposes an amendment whereby no capital gains tax will be due on the sale of a primary residence which has a gross value of up to R2 000 000. If the primary residence is valued above the R2 000 000 threshold, the normal rules will still apply. However, the sale of the employee's primary residence may have implications for the tax residency of the individual and thereby cause the forfeiture of any relief available to the employee in terms of a double taxation agreement.
Double taxation agreement
The employee could obtain relief in respect of foreign tax imposed on his remuneration for services rendered offshore, if he qualifies for exemption in terms of a double taxation agreement between South Africa and the country in which he is rendering services. In terms of Article 15 of the Organisation for Economic Co-operation and Development Model Convention, remuneration derived by a resident (i.e. the employee) of a Contracting State (i.e. South Africa) in respect of an employment exercised in the other Contracting State (i.e. the offshore jurisdiction) will only be taxed in the first-mentioned State (i.e. South Africa), provided certain requirements are met. The employee must be present in the other State (i.e. the offshore jurisdiction) for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration must be paid by, or on behalf of, an employer who is not a resident of the other State (i.e. the offshore jurisdiction), and the remuneration must not be borne by a permanent establishment which the employer has in the other State (i.e. the offshore jurisdiction).
South African exchange controls
In terms of Exchange Control Regulation 6, individuals who become entitled to foreign currency are required to remit this money to South Africa within 30 days of accrual. However, the South African exchange control authorities allow an individual who renders services to a non-resident while physically abroad, to retain offshore the remuneration received for those services rendered outside of South Africa. The payment of remuneration must be directly associated with the services that were rendered by the individual while he was outside of South Africa, and this is determined by the South African exchange control authorities on a time spent basis. Split contracts that include a remuneration formula which apportions the employee's gross remuneration package, incentive bonus and leave entitlement on a time spent basis, are an effective way of ensuring that the remuneration paid for rendering services offshore is not in contravention of the Exchange Control Regulations. Split contracts are also useful in reducing the foreign tax liability of the employee if he renders services in two different offshore jurisdictions, by apportioning the remuneration received by the individual for the services rendered offshore, between the two jurisdictions.
Offshore remuneration
An important consideration for an employer is the amount to be paid to the relevant employee for the services rendered offshore. In this regard, it becomes necessary to calculate the amount of remuneration required to ensure the employee is not disadvantaged by his/her secondment as a result of differences in currency and the cost of the standard of living in the offshore jurisdictions. Employers therefore often include a Cost of Living Allowance ("COLA") in an employee's remuneration for services rendered offshore. A COLA may be determined by contacting relevant analysts in the offshore jurisdiction. However, this can be costly and time consuming. An alternative would be to utilise an online program that calculates the relevant COLA. We have found this to be an accurate and efficient way in which to determine the COLA. For example, the program that we use has the ability to calculate a COLA for over 10 000 cities worldwide. It can also determine the COLA necessary to ensure a specific employee's standard of living remains the same. The calculation of this type of COLA includes considerations such as the rental currently paid by the employee, the value of the car used by the employee, and so on.
Once the employee's remuneration has been calculated, the tax implications in the relevant jurisdiction must be considered. In our experience, the appointment of reputable tax consultants in the relevant jurisdictions is essential to ensuring accurate and reliable information regarding the tax implications and available exemptions in the offshore jurisdiction.
As can be seen from above, secondments provide a number of benefits to employers and employees. However, the secondment must be carefully implemented to ensure that the relevant benefits are available, and that the secondment falls within the parameters of the South African tax and exchange control provisions.
*Caroline Rogers is a tax associate and Hanneke Farrand a tax director at ENS
7 Tax Risks in the media in the USA
The following press releases and aricles written about Daniel N. Erasmus' book - 7 Habitual Tax Mistakes
May 20, 2008 - CPA Magazine
Tax Guru's Book Explores Corporate Tax Risk
JUPITER, FL – “Tax compliance in most businesses only covers about 40 percent of the total tax risk in those businesses….the other 60 percent is hidden.”...more>>>
March 10, 2008 - SiloBreaker.com
Book Encourages Corporate Tax Risk Management
A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>
March 5, 2008 - Risk & Insurance
Seven Tips to Avoid Costly Tax Mistakes
The deadline for corporate tax returns is March 17, 2008. What better time than days away for advice on tax risk management? A properly structured and executed tax risk management process in a business can create minimal tax exposure and full regulatory compliance, while completely managing and avoiding costly tax mistakes....more>>>
March 3, 2008 - Smart Pros
Tax Guru's Book Explores Corporate Tax Risk
March 3, 2008 -- — Lexis Nexis has published a new book about corporate tax risk management, Managing 7 Habitual Tax Mistakes (A Tax Risk Management Handbook), written by tax attorney and author Daniel Erasmus...more>>>
March 3, 2008 - Web CPA
Book Encourages Corporate Tax Risk Management
A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>
26 February, 2008 - MASS MEDIA DISTRIBUTION NEWSWIRE
TAX GURU'S BOOK EXPLORES CORPORATE TAX MISTAKES THAT CAN BE AVOIDED, POSSIBLY SAVING $MILLIONS...more>>>
May 20, 2008 - CPA Magazine
Tax Guru's Book Explores Corporate Tax Risk
JUPITER, FL – “Tax compliance in most businesses only covers about 40 percent of the total tax risk in those businesses….the other 60 percent is hidden.”...more>>>
March 10, 2008 - SiloBreaker.com
Book Encourages Corporate Tax Risk Management
A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>
March 5, 2008 - Risk & Insurance
Seven Tips to Avoid Costly Tax Mistakes
The deadline for corporate tax returns is March 17, 2008. What better time than days away for advice on tax risk management? A properly structured and executed tax risk management process in a business can create minimal tax exposure and full regulatory compliance, while completely managing and avoiding costly tax mistakes....more>>>
March 3, 2008 - Smart Pros
Tax Guru's Book Explores Corporate Tax Risk
March 3, 2008 -- — Lexis Nexis has published a new book about corporate tax risk management, Managing 7 Habitual Tax Mistakes (A Tax Risk Management Handbook), written by tax attorney and author Daniel Erasmus...more>>>
March 3, 2008 - Web CPA
Book Encourages Corporate Tax Risk Management
A new book explains how companies can avoid "deadly tax mistakes" that could cripple their business...more>>>
26 February, 2008 - MASS MEDIA DISTRIBUTION NEWSWIRE
TAX GURU'S BOOK EXPLORES CORPORATE TAX MISTAKES THAT CAN BE AVOIDED, POSSIBLY SAVING $MILLIONS...more>>>
SOUTH AFRICA: Be careful how you classify your investment? for tax purposes into Barry Tannenbaum's Ponzi Scheme
So if you read the BUSREP.CO.ZA article by a journalist quoting hungry for money SARS, in your panic you may make the wrong classification choices on how to treat your investment (or not?) in the Ponzi-scam by Barry Tannenbaum. If you clssify it as an investment, you may have participated in a broader unlawful transaction breaking every rulebook in the Banks Act. On the other hand...and wouldn't you like to know? A Special Report of the likely tax consequences on the Barry Tannenbaum Ponzi Scam is available to order - currently being researched and written. One copy for the first 5 subscribers is available for a charitable contribution of R50,00 to the SPCA. The stray dogs and cats need it! Everyone after that - the research and tax direction to help you get the taxman to pay for your mess, will cost you R950,00 per report. Cheap, considering your losses may come down by your marginal tax rate.
BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009
By Roy Cokayne
Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.
Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.
However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.
Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.
Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.
Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.
BUSREP.CO.ZA Article
Tax shock may await Tannenbaum's investors
June 18, 2009
By Roy Cokayne
Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.
Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.
However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.
Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.
Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.
Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.
World-wide: A tax speech on TRM given to FD’s of a multinational in Europe
The theme of the talk was: • no surprises when it comes to tax; • do not expect a tax manager to know everything; • be prepared for a tax audit; • make sure that you budget expenditure for the appropriate tax risk reviews; • calculate the total amount of payroll, corporate and other taxes you pay and you'll be surprised to see that it makes a substantial expense amount on your profit and loss statement; • play the game and know the rules;
A recent OECD report shows that in Europe tax authorities in the last tax year conducted verification audits to the value of US$ 45 billion. The total number of tax disputes outside Germany in Europe totals 1 million. Large tax units have also been created by various tax authorities to tax large businesses. The percentage collection of these LTU’s, out of the total additional tax collections, can be summarized as follows:
• 9.5% in Romania;
• 9.8% in Hungary;
• 14.3% in Italy;
• 71.2% in Germany;
• 46.7% in the United Kingdom;
Corporations in Europe can expect that tax authorities will “throw more mud than before to see what sticks”. In order for these corporations to ensure that most of the mud does “not stick”, more resources and management of the verification audits, which may become tax disputes, will have to be undertaken. Tax risk management processes will include frequent tax risk reviews prior to a tax audit taking place, and a process of lobbying and engaging on a regular basis with the LTU’s in the various countries. Many corporations are not doing this.
What is the crux of the problem?
EBITA and the ranking of tax. This appears to be one of the main problems. Earnings before interest, taxes and amortization. Senior managers are usually measured on their performance according to EBITA. Tax does not feature in this formula. This results in no real focus on managing tax risk as effectively as, for instance, sales and distribution. Unless, of course, there is a surprise tax authority visit - then it is too late. This causes a ranking problem with financial directors in that tax risk is not ranked as a high as a priority. This is a big mistake.
A further problem is that tax managers within these large corporations may be very well skilled in tax technical issues. However, they are not trained tax lawyers. They have little understanding of the rules of evidence. This means that concepts such as onus of proof, standard of proof and what evidence is ultimately acceptable in a court, throws these individuals off when tax authorities challenge them on the proof they produce at the time of an audit.
In order to give these tax managers the necessary confidence, and in order to prepare them properly for a tax audit, is absolutely essential that a tax review process takes place where the evidence at hand and available in the corporation is carefully scrutinized under the supervision of a tax trial lawyer, working with the tax manager before a tax audit – preparing that tax manager. This is not some process whereby the individual simply looks through a bunch of documents. It also entails going into the corporation and interviewing the personnel who operate in the various divisions of a business unit. It is then established what are the status of their archives and records. The tax risk management process prepares the tax manager for a tax audit.
The results are usually staggering. It is not unusual that in any given situation the tax risk that emerges in such a process is sometimes as much as three times more than any tax provision that was created. This does not mean that corporations should shy away from the process. Once a corporation knows what its potential tax risk will be, it is then able to put into play a specific staged plan of action to help root out the tax risks, and in most instances to drop the tax risks to less than the original provisioned amount. Unless corporations are aware of what these tax risks are, they cannot do anything to reduce them.
For more information on this topic, please look out for the various publications that are available for download on this site. Also look out for the various workshops that are on offer. In addition to this you can make contact with Daniel Erasmus at daniel@dnerasmus.com.
A recent OECD report shows that in Europe tax authorities in the last tax year conducted verification audits to the value of US$ 45 billion. The total number of tax disputes outside Germany in Europe totals 1 million. Large tax units have also been created by various tax authorities to tax large businesses. The percentage collection of these LTU’s, out of the total additional tax collections, can be summarized as follows:
• 9.5% in Romania;
• 9.8% in Hungary;
• 14.3% in Italy;
• 71.2% in Germany;
• 46.7% in the United Kingdom;
Corporations in Europe can expect that tax authorities will “throw more mud than before to see what sticks”. In order for these corporations to ensure that most of the mud does “not stick”, more resources and management of the verification audits, which may become tax disputes, will have to be undertaken. Tax risk management processes will include frequent tax risk reviews prior to a tax audit taking place, and a process of lobbying and engaging on a regular basis with the LTU’s in the various countries. Many corporations are not doing this.
What is the crux of the problem?
EBITA and the ranking of tax. This appears to be one of the main problems. Earnings before interest, taxes and amortization. Senior managers are usually measured on their performance according to EBITA. Tax does not feature in this formula. This results in no real focus on managing tax risk as effectively as, for instance, sales and distribution. Unless, of course, there is a surprise tax authority visit - then it is too late. This causes a ranking problem with financial directors in that tax risk is not ranked as a high as a priority. This is a big mistake.
A further problem is that tax managers within these large corporations may be very well skilled in tax technical issues. However, they are not trained tax lawyers. They have little understanding of the rules of evidence. This means that concepts such as onus of proof, standard of proof and what evidence is ultimately acceptable in a court, throws these individuals off when tax authorities challenge them on the proof they produce at the time of an audit.
In order to give these tax managers the necessary confidence, and in order to prepare them properly for a tax audit, is absolutely essential that a tax review process takes place where the evidence at hand and available in the corporation is carefully scrutinized under the supervision of a tax trial lawyer, working with the tax manager before a tax audit – preparing that tax manager. This is not some process whereby the individual simply looks through a bunch of documents. It also entails going into the corporation and interviewing the personnel who operate in the various divisions of a business unit. It is then established what are the status of their archives and records. The tax risk management process prepares the tax manager for a tax audit.
The results are usually staggering. It is not unusual that in any given situation the tax risk that emerges in such a process is sometimes as much as three times more than any tax provision that was created. This does not mean that corporations should shy away from the process. Once a corporation knows what its potential tax risk will be, it is then able to put into play a specific staged plan of action to help root out the tax risks, and in most instances to drop the tax risks to less than the original provisioned amount. Unless corporations are aware of what these tax risks are, they cannot do anything to reduce them.
For more information on this topic, please look out for the various publications that are available for download on this site. Also look out for the various workshops that are on offer. In addition to this you can make contact with Daniel Erasmus at daniel@dnerasmus.com.
World-wide: Preparing for a tax audit
If you missed the workshop on 9 June 2009, get a copy of the notes: For the Workshop program, see below: To buy the notes now copy and paste: http://www.etaxes.co.za/ebook_CustomerDetails.asp?ProdID=19
TRRBS #1 How to prepare for a Tax Audit
Part 1 of The Tax Risk Review Boardroom Series
This unique Tax Risk Management Boardroom Series has been designed specifically for any entity that may be subject to a tax audit (from SME's to all levels of senior management and tax executives or corporations), as well as the professionals who consult and assist these entities.
This series will go a long way towards helping you ensure your organization's future tax health.
Breakfast, Registration and Tea:
08:00am – 8:45am
This Workshop is divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.
Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape
Coffee Break – 10h00am – 10:30am
Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process
Session 3 - 11:30 am – 12:30 pm – Wrapping up the tax risk review process and compiling the tax risk review report for senior management
Who Should Attend?
To buy the notes now copy and paste:
http://www.etaxes.co.za/ebook_CustomerDetails.asp?ProdID=19
TRRBS #1 How to prepare for a Tax Audit
Part 1 of The Tax Risk Review Boardroom Series
This unique Tax Risk Management Boardroom Series has been designed specifically for any entity that may be subject to a tax audit (from SME's to all levels of senior management and tax executives or corporations), as well as the professionals who consult and assist these entities.
This series will go a long way towards helping you ensure your organization's future tax health.
Breakfast, Registration and Tea:
08:00am – 8:45am
This Workshop is divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.
Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape
- Revisiting the rights of taxpayers, the procedural landscape, the onus and standard of proof
- Revisit penalties, interest and suspension of payment provisions
- Understand which tax mistakes you make red flag SARS
- Be capable of drawing SARS into interaction at an administrative level - avoiding litigation
- Plan for optimal communication and cooperation within your organization, ensuring a high degree of tax awareness in the business, from the ground up
Coffee Break – 10h00am – 10:30am
Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process
- Compile a detailed tax risk matrix with excel summarizing the key tax risks
- Determine the on and off the radar screen tax issues
- Identify which business unit heads will be invited to the interview process
- Review the questions to be asked in the interview process
- Understanding the business unit process and the tax risks that may arise
- Review all tax advice and opinion given in the last 3 years
- Carefully record into minutes and revisit the results of the interview process
- Obtain any other relevant facts
- Revisit the tax risk matrix to amend in accordance with the new found facts
Session 3 - 11:30 am – 12:30 pm – Wrapping up the tax risk review process and compiling the tax risk review report for senior management
- You will be taken through a comprehensive tax risk review sample report
- You will be given insight into what must be inserted in the report and highlighted for senior management
- You will be shown how the tax review report interacts with the tax risk management matrix
Who Should Attend?
- Business owners
- CEOs,
- Managing Directors
- CFOs
- Financial Directors
- Anyone involved in Financial Management
- Senior Managers
- Financial Directors
- Accountants
- Legal Professionals
- Tax Managers
- Directors
- Risk Managers
- Corporate Lawyers
To buy the notes now copy and paste:
http://www.etaxes.co.za/ebook_CustomerDetails.asp?ProdID=19
USA: MISREPORTING BY THE IRS: A SCARING TACTIC?
Court and federal prosecutor data differ substantially from the information IRS publishes on federal criminal enforcement. Significant differences were found not only in the counts, but in the general patterns of prosecution, conviction and prison sentencing rates, as well as in recorded trends overtime.
TRAC's study covered the period of 1981 through 1995. Similar to the findings in the 1980 study, it found that in every year the IRS recorded sending to federal prosecutors fewer criminal referrals than the prosecutors say they received. Once the matter reached court, however, especially in recent years, the IRS has claimed credit for more work than the prosecutors said they achieved. In 1995, for example, the IRS data claims almost 50% more prosecutions than the Justice Department, and over twice the numbers of individuals sentenced to prison. IRS also recorded the completion of two times more tax prosecutions than the U.S. courts said the courts had handled from all federal investigative agencies. (The IRS is not the only agency that refers tax cases.) The discrepancies between the data from the IRS and that data from the prosecutors and the courts have grown steadily more serious during the last decade.
Prison sentences appear to be even more inflated in IRS tracking system than prosecutions. In 1995 IRS says that its Criminal Investigation Program sent 2,229 individuals to prison. During the same period federal prosecutors reported that IRS referrals resulted in 947 individuals being sentenced to prison terms. Focusing only on criminal prosecutions where tax fraud was the lead charge, IRS systems recorded 733 of these had a tax offense (Title 26) as the lead charge. The federal courts and federal prosecutors each recorded less than half that number (337 and 318, respectively) as sentenced to prison from all sources for tax fraud.
In addition, IRS has withheld the information that TRAC requested which might allow TRAC to carry out a systematic referral-by-referral examination of these discrepancies. Finally, IRS has taken a very insular stance stating that it was satisfied with its data and saw no need to compare it with other sources to check its reliability -- this despite studies spanning a twenty year period finding this IRS data system seriously flawed.
TRAC's study covered the period of 1981 through 1995. Similar to the findings in the 1980 study, it found that in every year the IRS recorded sending to federal prosecutors fewer criminal referrals than the prosecutors say they received. Once the matter reached court, however, especially in recent years, the IRS has claimed credit for more work than the prosecutors said they achieved. In 1995, for example, the IRS data claims almost 50% more prosecutions than the Justice Department, and over twice the numbers of individuals sentenced to prison. IRS also recorded the completion of two times more tax prosecutions than the U.S. courts said the courts had handled from all federal investigative agencies. (The IRS is not the only agency that refers tax cases.) The discrepancies between the data from the IRS and that data from the prosecutors and the courts have grown steadily more serious during the last decade.
Prison sentences appear to be even more inflated in IRS tracking system than prosecutions. In 1995 IRS says that its Criminal Investigation Program sent 2,229 individuals to prison. During the same period federal prosecutors reported that IRS referrals resulted in 947 individuals being sentenced to prison terms. Focusing only on criminal prosecutions where tax fraud was the lead charge, IRS systems recorded 733 of these had a tax offense (Title 26) as the lead charge. The federal courts and federal prosecutors each recorded less than half that number (337 and 318, respectively) as sentenced to prison from all sources for tax fraud.
In addition, IRS has withheld the information that TRAC requested which might allow TRAC to carry out a systematic referral-by-referral examination of these discrepancies. Finally, IRS has taken a very insular stance stating that it was satisfied with its data and saw no need to compare it with other sources to check its reliability -- this despite studies spanning a twenty year period finding this IRS data system seriously flawed.
Property owned by foreigners in South Africa
Some tax rules must be considered by foreigners owning immovable property in South Africa.
Any gain on the sale of the immovable property sold in SA by a foreigner is subject to Capital Gains Tax. This includes property held through a company or a trust if certain conditions are met.
On the sale, transfer duty is also payable.
Be careful to take these taxes into account when buying and selling property in South Africa.
For more information contact Daniel N Erasmus at daniel@dnerasmus.com
Any gain on the sale of the immovable property sold in SA by a foreigner is subject to Capital Gains Tax. This includes property held through a company or a trust if certain conditions are met.
On the sale, transfer duty is also payable.
Be careful to take these taxes into account when buying and selling property in South Africa.
For more information contact Daniel N Erasmus at daniel@dnerasmus.com
This is the continuation (PART 2) of an article posted on 3 June 2009... ... c. To insure that SARS complies with its duties as carefully spelt ou
USA: TAX AUDITS OF LARGE CORPORATES ON THE DECLINE? Fewer large corporations are getting audited. Instead, the Internal Revenue Service is cracking down on smaller corporations, particularly for those with $50 million or less in assets. While big corporations are getting away with, audit rates for smaller corporations is up, allowing the IRS to claim that audits for all corporations is increasing.
...
The findings, contained in the latest data from the Transactional Records Access Clearinghouse (TRAC), makes disturbing reading. Tax audit rates of the largest companies are less than half what they were 20 years ago with the number of field audits and auditor hours aimed at the large corporations down 30 per cent and the total of additional taxes these entities are found to owe the government falling 20 per cent.
The IRS is focusing on smaller corporations, because it takes less time. So by implication, it would be more cost efficient. But a closer look at the numbers tells the opposite.
According to Traclinks, each revenue agent hour spent auditing the smallest corporations delivered an extra $682 in additional recommended taxes. By way of contrast, every revenue hour auditing corporations with more than $250 million in assets delivered $7,498 in additional taxes.
...
The findings, contained in the latest data from the Transactional Records Access Clearinghouse (TRAC), makes disturbing reading. Tax audit rates of the largest companies are less than half what they were 20 years ago with the number of field audits and auditor hours aimed at the large corporations down 30 per cent and the total of additional taxes these entities are found to owe the government falling 20 per cent.
The IRS is focusing on smaller corporations, because it takes less time. So by implication, it would be more cost efficient. But a closer look at the numbers tells the opposite.
According to Traclinks, each revenue agent hour spent auditing the smallest corporations delivered an extra $682 in additional recommended taxes. By way of contrast, every revenue hour auditing corporations with more than $250 million in assets delivered $7,498 in additional taxes.
SOUTH AFRICA: Can SARS Simply Throw ‘SUBSTANCE OVER FORM’ Out There – PART 2
This is the continuation (PART 2) of an article posted on 3 June 2009...
...
c. To insure that SARS complies with its duties as carefully spelt out above, and in compliance with is duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in the letter of findings, with the conclusions.
d. What is the nature of the findings that are referred to? Findings based on:
i. Physical evidence, in the form of information, documents or things extraneous to the tax returns;
ii. This would include the actual agreements signed by the parties;
iii. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
iv. None of SARS’ findings produce this evidence. The only evidence they produce is derived from an armchair analysis.
v. SARS’ approach to the findings are also in contravention of their Practice Manual that states SARS must produce ‘concrete evidence’. That means solid undisputed evidence. Not mere conjecture based on an armchair analysis, firing accusations that are unsubstantiated by solid evidence.
vi. SARS have two ways forward, and one of them is not to raise revised assessments, as their investigation is complete, and is now being driven by partial and biased conduct to get the revised assessment out before the date of prescription, in an improper manner. The two ways forward are:
- SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded;
- SARS must cease the audit.
3. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions it must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.
4. SARS tends to contend that the transaction under investigation is a simulated one, and now from the judgment it follows, that the SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 in the alternative. SARS must be requested to make up their minds and decide on whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of s 103, then they must abandon the substance over form attack.
5. In addition to this, to be able to come to a conclusion that a transaction is subject to the substance over form doctrine, SARS bears the initial onus of proof.
6. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a simulation.
7. Simulation will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove.
8. Usually, no concrete evidence supporting such a finding will be put forward by SARS.
9. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound by their own views to provide concrete evidence.
10. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different from what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, of inferences derived from conjecture, or from other inferences. SARS in this matter have typically followed their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. The latest new judgment in effect prevents SARS from doing so, in the absence of actual physical evidence. The approach of SARS in arriving at its conclusions is clearly flawed in logic.
11. SARS often tends not to follow a reasoned lined of logic, and often relies on conjecture and inferences to make their findings and reach their conclusions. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. None of these have been applied. A syllogism is a statement of logical relationship. The typical syllogism has three parts:
a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.
12. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.
13. In both theories, the minor premise rests on ignoring that the rights and obligations that flow from each of the agreements, between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ say so. It only by following SARS’ say so (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.
14. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party and the representatives of those parties together with their professional advisors knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.
15. Other that their armchair analysis of what the agreements mean, appropriately and usually just before the expiry of the prescription period giving SARS the last opportunity to extract more tax from this transaction.
16. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax. Rather than to establish the true nature of the transaction before attempting to collect more tax.
...
c. To insure that SARS complies with its duties as carefully spelt out above, and in compliance with is duties in terms of section 4(2) of the SARS Act and section 195 of the Constitution (both sections require SARS to act with a high standard of professional ethics, impartially, fairly, without any bias, and in an accountable and transparent manner), SARS must summarise the ‘findings of the audit’ and set out the ‘conclusion based on these findings’. If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated. If the taxpayer’s returns appear not to be substantially correct, then these findings must be made available in the letter of findings, with the conclusions.
d. What is the nature of the findings that are referred to? Findings based on:
i. Physical evidence, in the form of information, documents or things extraneous to the tax returns;
ii. This would include the actual agreements signed by the parties;
iii. But the enquiry does not end there. If SARS avers that the agreements are a ‘fraud’, then they must provide evidence other than from the agreements themselves (on an armchair analysis basis) that the agreements are a fraud. For instance, evidence of another agreement superseding the one presented to SARS, or testimony of an individual stating that the agreements are a fraud.
iv. None of SARS’ findings produce this evidence. The only evidence they produce is derived from an armchair analysis.
v. SARS’ approach to the findings are also in contravention of their Practice Manual that states SARS must produce ‘concrete evidence’. That means solid undisputed evidence. Not mere conjecture based on an armchair analysis, firing accusations that are unsubstantiated by solid evidence.
vi. SARS have two ways forward, and one of them is not to raise revised assessments, as their investigation is complete, and is now being driven by partial and biased conduct to get the revised assessment out before the date of prescription, in an improper manner. The two ways forward are:
- SARS must conduct further investigation to substantiate their initial suspicions that the agreements are a ‘fraud’ and find the ‘concrete evidence’ that their suspicions are founded;
- SARS must cease the audit.
3. In attempting to apply the substance over form doctrine to a variety of transactions, SARS’ reasoning and conclusions it must be considered in light of the recent unreported judgment NWK Limited v CSARS on substance over form.
4. SARS tends to contend that the transaction under investigation is a simulated one, and now from the judgment it follows, that the SARS cannot at the same time have been satisfied that such transaction had a tax avoidance effect. To have been so satisfied presupposes the validity of the transaction. In such circumstances the court has held that the Commissioner may not invoke section 103 in the alternative. SARS must be requested to make up their minds and decide on whether the transaction is a simulated one, or one that falls foul of the old section 103 provisions. Here SARS must exercise a choice. If they are to proceed on the basis of s 103, then they must abandon the substance over form attack.
5. In addition to this, to be able to come to a conclusion that a transaction is subject to the substance over form doctrine, SARS bears the initial onus of proof.
6. To rebut a substance over form allegation, the taxpayer need only prove that the parties actually intended that each agreement would inter partes have the effect according to the tenor of the agreements. This usually appears off the face of the documents by the parties that signed the agreements. Written confirmation of this fact should be submitted to SARS at the time they make the finding, before the revised assessments are reached, to confirm that the agreements are what the parties intended them to be. That disposes of the lose allegation by SARS that the agreements are a simulation.
7. Simulation will be established if it can be shown that the parties do not intend to be bound by all the terms of their contract. This is difficult for SARS to prove.
8. Usually, no concrete evidence supporting such a finding will be put forward by SARS.
9. In addition to the difficulty of discharging the onus of proof to enable SARS to raise a lawful revised assessment, in terms of the SARS Practice Manual, before any estimates are made, SARS are duty bound by their own views to provide concrete evidence.
10. The onus rests on SARS to prove that the agreements are not what they purport to be and that the parties attempted to conceal the true nature of a transaction by giving it a form different from what they really intended. This is effectively alleging fraudulent activity and SARS must have concrete facts and evidence on which such a conclusion is based. It will not suffice to simply draw inferences through expert witnesses, of inferences derived from conjecture, or from other inferences. SARS in this matter have typically followed their historical discourse by using adjectives rather than concrete evidence in an attempt to justify their findings. The latest new judgment in effect prevents SARS from doing so, in the absence of actual physical evidence. The approach of SARS in arriving at its conclusions is clearly flawed in logic.
11. SARS often tends not to follow a reasoned lined of logic, and often relies on conjecture and inferences to make their findings and reach their conclusions. The concepts of ‘syllogism’, ‘didactive reasoning’ and ‘cause and effect’ are the tools used for a proper analysis. None of these have been applied. A syllogism is a statement of logical relationship. The typical syllogism has three parts:
a. The major premise, a statement of broad applicability;
b. The minor premise, a narrower statement of particular applicability that is related sufficiently to the major premise, so as to arrive at the third part, the conclusion;
c. The conclusion which follows logically from the major and the minor premises.
12. SARS will attempt to state that the major premise is that simulated transactions can be ignored, and their true nature must be given effect to in determining the tax consequences.
13. In both theories, the minor premise rests on ignoring that the rights and obligations that flow from each of the agreements, between different contracting parties. There is no premise for ignoring the agreements, other than SARS’ say so. It only by following SARS’ say so (with no concrete evidence of a fraud being present) that one can reconstruct all the transactions to reflect something other than what they purport to be.
14. The minor premise to uphold the major premise and to arrive at the logical conclusion requires that the identity and existence of the different contracting parties is completely ignored. The assumption is made that each party and the representatives of those parties together with their professional advisors knowingly committed the fraud – without SARS providing a shred of evidence that any one party did so.
15. Other that their armchair analysis of what the agreements mean, appropriately and usually just before the expiry of the prescription period giving SARS the last opportunity to extract more tax from this transaction.
16. This line of reasoning will show that any findings and conclusions by SARS are driven by an ulterior motive – to collect more tax. Rather than to establish the true nature of the transaction before attempting to collect more tax.
SOUTH AFRICA: Can SARS Simply Throw ‘SUBSTANCE OVER FORM’ Out There – PART 1
SOUTH AFRICA: CAN SARS SIMPLY THROW ‘SUBSTANCE OVER FORM’ OUT THERE – PART 1 1. It often happens that SARS simply ‘throws out there’ the threat of substance over form, when attempting to attack a transaction entered into by a taxpayer. Other times, the doctrine is used as a ‘fall back’ additional reason for issuing a revised assessment, where their other substantive reasons are weak. 2. This modus operandi by SARS should be challenged, and can be achieved by applying the following measures:
a. The SARS Internal Audit Manual sets the internal SARS norm. The manual describes the norm practiced by SARS in the implementation of audits and enquiries. For SARS it creates a self-imposed limitation which SARS should not deviate from except for sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it does not apply these norms to all taxpayers undergoing audits or enquiries.
b. What follows are extensive extracts of these guidelines:
‘In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part.
…
SARS intends to give each taxpayer/group of taxpayers the attention which is necessary according to its tax importance and tax risk.
…
The object of an audit is in general the examination of [a] tax return of a taxpayer and/or the books and records on which the tax return is based.
…
The risk profiling team will manually select cases to be audited by screening the tax returns in order to determine the level of risk per case, and to establish which cases warrant an audit (desk or field) selection will be done under the guidance and ambit of the Manual Risk document.
The Audit Assignment
The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit.
The audit assignment is thus the link between the audit plan and the auditing process.
2. Stage 1: AUDIT PLANNING
… The team leader will have to prioritise each case assigned. All decisions taken at this stage of the audit process and all information and considerations on which decisions are based, are recorded in the audit file.
Pre-planning
Not as critical in our environment, although the following two components of pre-planning should still be relevant:
• An engagement letter informing the taxpayer of the audit, i.e. notice of the intention to audit, when, purpose, approximate duration, information required and other general aspects.
• Allocation of staff in respect of the specific engagement.
Collecting Information
Prior to the audit, information will have to be collected, on the taxpayer to be audited, as this will provide inside into the entity.
• Information on the taxpayer himself. Obtained from the existing tax files of the taxpayer. …
• Information from other sources (third parties) …
• Information on the business processes, administrative organisation and the internal control of the entity. …
• Information from minutes of meetings e.g. board of …
• Information from the file of the tax consultant and/or accountant/ external auditor of the taxpayer. …
The auditor should restrict the initial information collected to the potential issues of the relevant case, which will be of value to the audit of the risk areas identified.
…
Carrying out the preliminary analytical review
The purpose of this exercise is not to produce volumes of interesting, but ultimately useless information.
… The preliminary review may require that the auditor researches the tax laws and court cases that are relevant to particular issues to be examined in the audit of the entity. Notes on the research are incorporated into the audit working papers.’
Risk analysis based on the tax return
In determining which activities will be carried out to achieve the audit objectives, the team leader continually considers the relationship between the cost and the benefits of the audit …
3. Stage 2: THE IMPLEMENTATION OF THE AUDIT PROGRAMME …
The general rule is as follows:
• Where the auditor finds no or immaterial mistakes or errors, the audit in that particular area should be stopped.
• Where many material mistakes or errors are detected, the audit should be expanded in that particular area.
• If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated.
The auditor must consider whether advice or support from a well-informed colleague is necessary. Consultation with colleagues will ensure that the auditor is better informed when making decisions.
All decisions at this stage of the auditing process, as well as the information and considerations, on which they are based, are recorded in the audit file. Sampling techniques are encouraged while performing the audit.’
4. Stage 3: CONCLUSION
In this stage of the auditing process the auditor in charge reviews and summarises the findings of the audit and forms a conclusion based on these findings.
During the discussion with the taxpayer the auditor informs him of the conclusions reached on the tax return(s) and explains the decision. If the taxpayer does not agree with the judgement, the auditor listens to the reasons and considers whether these reasons may call for an adjustment of the conclusion. If it is decided that no adjustment is required, bearing in mind the outcome of previous consultation with colleagues, the auditor discusses the taxpayer’s reason and arguments with the audit manager.
Where compromises are reached, they are recorded in the file and included in the report. SARS and the taxpayer should sign the compromises.
After the concluding discussions with the taxpayer and the audit manager, the position of SARS is determined. There are two possibilities:
• No further action is required; or
• The results of the audit necessitate further action, which usually involves adjustment of the assessments as well as the levying of interest, penalties and additional tax.
In some instances this is not sufficient and it is necessary to extend the audit to the criminal domain. This calls for a change in the nature of the audit. The timely recognition of such a change, is an essential element of the auditing process. Refer to part 7 of the audit manual.
The audit report is completed and forwarded to the team leader who reviews, monitors and controls the completion and quality of the audits being performed. The team leader communicates the relevant findings to the research and analysis team and the risk evaluation committee.’
TO BE CONTINUED...in PART 2
a. The SARS Internal Audit Manual sets the internal SARS norm. The manual describes the norm practiced by SARS in the implementation of audits and enquiries. For SARS it creates a self-imposed limitation which SARS should not deviate from except for sufficient reason. If SARS applies these administrative norms regularly in the exercise of its duties, then SARS violates the principles of impartiality, equality, fairness and accountability if it does not apply these norms to all taxpayers undergoing audits or enquiries.
b. What follows are extensive extracts of these guidelines:
‘In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part.
…
SARS intends to give each taxpayer/group of taxpayers the attention which is necessary according to its tax importance and tax risk.
…
The object of an audit is in general the examination of [a] tax return of a taxpayer and/or the books and records on which the tax return is based.
…
The risk profiling team will manually select cases to be audited by screening the tax returns in order to determine the level of risk per case, and to establish which cases warrant an audit (desk or field) selection will be done under the guidance and ambit of the Manual Risk document.
The Audit Assignment
The audit plan includes the schedule and set up of audits to be carried out within a certain time period. The audit plan translates itself into the audit assignment, which indicates which taxpayers and which elements of the tax return(s) need to be audited. This is important for each auditor, as it sets out the nature and scope of the audit.
The audit assignment is thus the link between the audit plan and the auditing process.
2. Stage 1: AUDIT PLANNING
… The team leader will have to prioritise each case assigned. All decisions taken at this stage of the audit process and all information and considerations on which decisions are based, are recorded in the audit file.
Pre-planning
Not as critical in our environment, although the following two components of pre-planning should still be relevant:
• An engagement letter informing the taxpayer of the audit, i.e. notice of the intention to audit, when, purpose, approximate duration, information required and other general aspects.
• Allocation of staff in respect of the specific engagement.
Collecting Information
Prior to the audit, information will have to be collected, on the taxpayer to be audited, as this will provide inside into the entity.
• Information on the taxpayer himself. Obtained from the existing tax files of the taxpayer. …
• Information from other sources (third parties) …
• Information on the business processes, administrative organisation and the internal control of the entity. …
• Information from minutes of meetings e.g. board of …
• Information from the file of the tax consultant and/or accountant/ external auditor of the taxpayer. …
The auditor should restrict the initial information collected to the potential issues of the relevant case, which will be of value to the audit of the risk areas identified.
…
Carrying out the preliminary analytical review
The purpose of this exercise is not to produce volumes of interesting, but ultimately useless information.
… The preliminary review may require that the auditor researches the tax laws and court cases that are relevant to particular issues to be examined in the audit of the entity. Notes on the research are incorporated into the audit working papers.’
Risk analysis based on the tax return
In determining which activities will be carried out to achieve the audit objectives, the team leader continually considers the relationship between the cost and the benefits of the audit …
3. Stage 2: THE IMPLEMENTATION OF THE AUDIT PROGRAMME …
The general rule is as follows:
• Where the auditor finds no or immaterial mistakes or errors, the audit in that particular area should be stopped.
• Where many material mistakes or errors are detected, the audit should be expanded in that particular area.
• If it appears that the taxpayer’s returns are substantially correct, the audit should be terminated.
The auditor must consider whether advice or support from a well-informed colleague is necessary. Consultation with colleagues will ensure that the auditor is better informed when making decisions.
All decisions at this stage of the auditing process, as well as the information and considerations, on which they are based, are recorded in the audit file. Sampling techniques are encouraged while performing the audit.’
4. Stage 3: CONCLUSION
In this stage of the auditing process the auditor in charge reviews and summarises the findings of the audit and forms a conclusion based on these findings.
During the discussion with the taxpayer the auditor informs him of the conclusions reached on the tax return(s) and explains the decision. If the taxpayer does not agree with the judgement, the auditor listens to the reasons and considers whether these reasons may call for an adjustment of the conclusion. If it is decided that no adjustment is required, bearing in mind the outcome of previous consultation with colleagues, the auditor discusses the taxpayer’s reason and arguments with the audit manager.
Where compromises are reached, they are recorded in the file and included in the report. SARS and the taxpayer should sign the compromises.
After the concluding discussions with the taxpayer and the audit manager, the position of SARS is determined. There are two possibilities:
• No further action is required; or
• The results of the audit necessitate further action, which usually involves adjustment of the assessments as well as the levying of interest, penalties and additional tax.
In some instances this is not sufficient and it is necessary to extend the audit to the criminal domain. This calls for a change in the nature of the audit. The timely recognition of such a change, is an essential element of the auditing process. Refer to part 7 of the audit manual.
The audit report is completed and forwarded to the team leader who reviews, monitors and controls the completion and quality of the audits being performed. The team leader communicates the relevant findings to the research and analysis team and the risk evaluation committee.’
TO BE CONTINUED...in PART 2
West vs East Europe: The difference between accounting and tax principles
Different purposes of tax and accounting systems Tax and accounting systems exist for different reasons. The tax system, through tax laws, exists for the purpose of collecting revenue for the community and sometimes for encouraging or discouraging certain kinds of activities, and as a means of making transfer payments. The end result of an application of tax laws is usually that taxpayers are required to pay money to fund public spending. On the other hand, the accounting system, through accounting concepts and standards, exists for financial reporting reasons (i.e. to contribute to the ability of users of financial reports, like investors, to allocate scarce economic resources, like investment funds). This difference was summarised by the United States Supreme Court in Thor Power Tool Co v Commissioner:
“The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Inland Revenue Service is to protect the public fisc. Consistently with its goal and responsibilities, financial accounting has as its foundation the principle of conservatism, with it’s corollary that “possible errors in measurement [should] be in the direction of understatement rather than overstatement of net income and net assets.” In view of the Treasury’s markedly different goal and responsibilities, understatement of income is not destined to be its guiding light. Given this diversity, even contrariety, of objectives, any presumptive equivalence between tax and financial accounting would be unacceptable.”
With these different purposes in mind, it can be argued that rules governing the calculation of profit or loss for income tax purposes (taxable income or tax loss) are necessarily different to those governing the calculation of profit or loss for financial reporting purposes. It might be said, for example, that taxation rules require greater precision because they may result in the compulsory extraction of money from the taxpayer.
Overseas Experience
In his overview of accounting and taxation in Europe, Hoogendoorn summarises the position as follows:
INDEPENDENCE DEPENDENCE
Czech Republic Belgium
Denmark Finland
Ireland France
Netherlands Germany
Norway Italy
Poland Sweden
United Kingdom Hungary & Romania
The countries with a strong link between accounting and taxation are listed under the heading ‘Dependence’, although legislation in 1996 removed the link for depreciation, inventory valuations, work in progress and warranty provisions in Sweden.
In recent times there has been a development towards more independence between accounting and taxation. This development is linked to the transition to a market economy for some Eastern European countries, as well as accounting harmonisation which interferes with the basic structure of dependence.
Some commentators argue that the link between taxation and accounting “pollutes” the capability of financial reports to give a ‘true and fair’ view of the economic and financial situation of businesses. The critics of the link say that “development of good accounting is hindered by tax concerns and the influence of the tax authorities who need consistent, well-specified and easy to verify rules instead of the more ‘true and fair’ rules.
A similar conclusion was reached by a 1987 OECD study which found that tax considerations were a major obstacle to greater comparability and harmonisation in accounting practices in member countries.
From a tax perspective, Johnson has argued against ‘Generally Accepted Accounting Principles’ (GAAP) as a tax base because, in many circumstances, corporations can under report their earnings without adverse non-tax consequences.9 He argues that reported GAAP income is sufficiently elastic that taxing it would cause the reporting income to shrivel, which would both reduce tax revenue and also damage the pricing mechanisms of the capital markets.
Also in countries where there is a strong link between accounting and taxation, companies are often allowed to undervalue assets.
On the other hand, for “practical reasons it is easier to work with only one accounting system, and it saves money for the companies to have only one system.”
The Review of Business Taxation found that most of the Group 1 countries it examined had a basic approach to determining taxable income whereby the starting point was accounting practice based on statutory accounts.
The review found that there were two essential differences in the treatment between countries. Firstly most countries had explicit recognition of accounting principles eg. section 446 (a) of the United States Internal Revenue Code. Secondly all countries had variations from accounting standards in their tax provisions. The extent of the adjustments necessary to reconcile the tax and accounting position varied considerably between the countries.
So it seems that the international experience is not uniform in the interface between tax and accounting. While many European countries have a closer link between tax and accounting than does Australia, the link is subject to specific legislation and tax concepts tend to predominate. There are commentators who argue that the dominance of tax detracts from the purpose of accounts of providing a ‘true and fair’ view; and there are commentators who argue that accounting standards are not sufficiently precise to form the basis of taxation.
In relation to the United Kingdom, Lamb concludes:
“Although many voices claim that greater tax conformity would reduce complexity, and thereby cost, it seems likely that the UK tax and accounting rule-making will continue to operate with relative autonomy. While the practices of tax and accounting profit measurement are undeniably interdependent, differences in profit calculations are inevitable as long as the rules remain out of phase and are expressed through independent institutions.”
A similar conclusion seems apt for the current position in Australia. Any substantial move towards convergence of tax and accounting treatments will require a meeting of minds between the accounting and tax professions and government.
Current use of accounting practice in the income tax law
In Australia there is no systematic connection between the income tax law and accounting concepts or standards. However, the two interrelate in various ways.
Timing of recognition of ordinary income and general deductions
Accounting practice has sometimes been drawn upon by the courts in interpreting income tax law, particularly in relation to the timing of recognition of income and outgoings under the ordinary income and general deduction rules.
In determining when ordinary income is ‘derived’, the courts have drawn upon business conceptions and the principles and practices of accountancy.
Hill and Heerey JJ recently summarised the position as follows:
“Perhaps the only relevance Ballarat Brewing has for the present case is that it adds to the quite substantial case law in which the High Court has made it clear that where the question at issue is the derivation of gross income that, being a matter for which the ITA Act makes no specific provision, the Court will have regard to the conceptions of business and the principles and practices of commercial accountancy. The case also makes it clear that the Court would be reluctant to apply to income tax a method of accounting which would produce a misleading result in the absence of a specific statutory provision which required that.
Before turning to the accounting evidence in the present case it is important to note that while the earlier cases, such as Carden, Arthur Murray and Henderson, may be thought to have suggested that business and accounting principles are to be applied by the Court in determining questions of derivation, some later cases, for example the Australian Gas Light Company case in this Court have made the point that accounting principles are not determinative, although they may be persuasive.
Certainly where the question is whether a loss or outgoing is incurred for the purposes of s 51(1) it is clear that accounting principles are not determinative, cf Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616. Indeed, in the latter case Barwick CJ expressed the view that the “prudence and commercial propriety of such a course [accruing annual or long leave] has little bearing on the question whether there is present in the year of income a loss or outgoing within the meaning of s 51(1) where a jurisprudential analysis prevails over a commercial view, that accounting and business practice will not always be irrelevant and may indeed provide useful assistance to the Court: Coles Myer Finance Ltd v Federal Commissioner of Taxation (1992-3) 176 CLR 640 at 666 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.
It is not necessary in the present case to decide if there is really a difference between the emphasis put on accounting practices in the early cases and the views expressed in the later cases. It suffices here to say that on either view of the law the business and accounting practices assist the Court in the working out of the principles behind the statutory language of “income derived.”
In determining when losses or outgoings are ‘incurred’, sometimes the courts have tended towards approaches that produce results like those found in accounting.
For example, in Coles Myer Finance Ltd v FC of T 93 ATC 4214; (1993) 25 ATR 524, the High Court referred to commercial and accounting principles in deciding that a deduction for discounts on certain debt instruments should be spread over 2 years (the period of the instruments).
Another example is the recognition by the courts that unreported insurance claims are presently existing liabilities of an insurer and that the provisions a general insurer makes in its accounts for them are an allowable deduction if they represent a reasonable actuarial estimate. This recognises provisions for ‘incurred but not reported’ claims, but not provisions for events that have not yet occurred.
Nevertheless, the courts have made it clear that the interpretation of tax law ultimately involves a jurisprudential analysis of relevant provisions. For example, expenses are not necessarily recognised for income tax purposes at the same time as they are for accounting purposes and the cost of trading stock must be ascertained from the meaning apparent from the statute rather than accounting (although the two may well coincide).
Hanlan and Nethercott have argued that “the merits of comparability between accounting practice and taxation law have been recognised by academics, courts of law and governments...[but] While Australian courts have endorsed the importance of accounting concepts, principles and practices, such factors are not determinative in reaching a decision. That is, accounting practice, while relevant must be used solely as an aid assisting in the interpretation of the Tax Act (1936) and (1977), and cannot be substituted for legal or jurisprudential analysis itself.”
On this basis the approach of the courts in interpreting the law will affect the extent of divergence between accounting and tax concepts. The less formalistic is the approach to judicial interpretation the more likely it is that the outcome will reflect the commercial substance of a matter.
Another observation that can be made is that the system of precedent applied in our system of law means that income tax law may not keep pace with developments in accounting concepts and standards. A court decision many years ago which drew upon accounting practice at that time may still represent the law now, even though the accounting practice upon which the decision was based may have changed.
“The primary goal of financial accounting is to provide useful information to management, shareholders, creditors, and others properly interested; the major responsibility of the accountant is to protect these parties from being misled. The primary goal of the income tax system, in contrast, is the equitable collection of revenue; the major responsibility of the Inland Revenue Service is to protect the public fisc. Consistently with its goal and responsibilities, financial accounting has as its foundation the principle of conservatism, with it’s corollary that “possible errors in measurement [should] be in the direction of understatement rather than overstatement of net income and net assets.” In view of the Treasury’s markedly different goal and responsibilities, understatement of income is not destined to be its guiding light. Given this diversity, even contrariety, of objectives, any presumptive equivalence between tax and financial accounting would be unacceptable.”
With these different purposes in mind, it can be argued that rules governing the calculation of profit or loss for income tax purposes (taxable income or tax loss) are necessarily different to those governing the calculation of profit or loss for financial reporting purposes. It might be said, for example, that taxation rules require greater precision because they may result in the compulsory extraction of money from the taxpayer.
Overseas Experience
In his overview of accounting and taxation in Europe, Hoogendoorn summarises the position as follows:
INDEPENDENCE DEPENDENCE
Czech Republic Belgium
Denmark Finland
Ireland France
Netherlands Germany
Norway Italy
Poland Sweden
United Kingdom Hungary & Romania
The countries with a strong link between accounting and taxation are listed under the heading ‘Dependence’, although legislation in 1996 removed the link for depreciation, inventory valuations, work in progress and warranty provisions in Sweden.
In recent times there has been a development towards more independence between accounting and taxation. This development is linked to the transition to a market economy for some Eastern European countries, as well as accounting harmonisation which interferes with the basic structure of dependence.
Some commentators argue that the link between taxation and accounting “pollutes” the capability of financial reports to give a ‘true and fair’ view of the economic and financial situation of businesses. The critics of the link say that “development of good accounting is hindered by tax concerns and the influence of the tax authorities who need consistent, well-specified and easy to verify rules instead of the more ‘true and fair’ rules.
A similar conclusion was reached by a 1987 OECD study which found that tax considerations were a major obstacle to greater comparability and harmonisation in accounting practices in member countries.
From a tax perspective, Johnson has argued against ‘Generally Accepted Accounting Principles’ (GAAP) as a tax base because, in many circumstances, corporations can under report their earnings without adverse non-tax consequences.9 He argues that reported GAAP income is sufficiently elastic that taxing it would cause the reporting income to shrivel, which would both reduce tax revenue and also damage the pricing mechanisms of the capital markets.
Also in countries where there is a strong link between accounting and taxation, companies are often allowed to undervalue assets.
On the other hand, for “practical reasons it is easier to work with only one accounting system, and it saves money for the companies to have only one system.”
The Review of Business Taxation found that most of the Group 1 countries it examined had a basic approach to determining taxable income whereby the starting point was accounting practice based on statutory accounts.
The review found that there were two essential differences in the treatment between countries. Firstly most countries had explicit recognition of accounting principles eg. section 446 (a) of the United States Internal Revenue Code. Secondly all countries had variations from accounting standards in their tax provisions. The extent of the adjustments necessary to reconcile the tax and accounting position varied considerably between the countries.
So it seems that the international experience is not uniform in the interface between tax and accounting. While many European countries have a closer link between tax and accounting than does Australia, the link is subject to specific legislation and tax concepts tend to predominate. There are commentators who argue that the dominance of tax detracts from the purpose of accounts of providing a ‘true and fair’ view; and there are commentators who argue that accounting standards are not sufficiently precise to form the basis of taxation.
In relation to the United Kingdom, Lamb concludes:
“Although many voices claim that greater tax conformity would reduce complexity, and thereby cost, it seems likely that the UK tax and accounting rule-making will continue to operate with relative autonomy. While the practices of tax and accounting profit measurement are undeniably interdependent, differences in profit calculations are inevitable as long as the rules remain out of phase and are expressed through independent institutions.”
A similar conclusion seems apt for the current position in Australia. Any substantial move towards convergence of tax and accounting treatments will require a meeting of minds between the accounting and tax professions and government.
Current use of accounting practice in the income tax law
In Australia there is no systematic connection between the income tax law and accounting concepts or standards. However, the two interrelate in various ways.
Timing of recognition of ordinary income and general deductions
Accounting practice has sometimes been drawn upon by the courts in interpreting income tax law, particularly in relation to the timing of recognition of income and outgoings under the ordinary income and general deduction rules.
In determining when ordinary income is ‘derived’, the courts have drawn upon business conceptions and the principles and practices of accountancy.
Hill and Heerey JJ recently summarised the position as follows:
“Perhaps the only relevance Ballarat Brewing has for the present case is that it adds to the quite substantial case law in which the High Court has made it clear that where the question at issue is the derivation of gross income that, being a matter for which the ITA Act makes no specific provision, the Court will have regard to the conceptions of business and the principles and practices of commercial accountancy. The case also makes it clear that the Court would be reluctant to apply to income tax a method of accounting which would produce a misleading result in the absence of a specific statutory provision which required that.
Before turning to the accounting evidence in the present case it is important to note that while the earlier cases, such as Carden, Arthur Murray and Henderson, may be thought to have suggested that business and accounting principles are to be applied by the Court in determining questions of derivation, some later cases, for example the Australian Gas Light Company case in this Court have made the point that accounting principles are not determinative, although they may be persuasive.
Certainly where the question is whether a loss or outgoing is incurred for the purposes of s 51(1) it is clear that accounting principles are not determinative, cf Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, Nilsen Development Laboratories Pty Ltd v Federal Commissioner of Taxation (1981) 144 CLR 616. Indeed, in the latter case Barwick CJ expressed the view that the “prudence and commercial propriety of such a course [accruing annual or long leave] has little bearing on the question whether there is present in the year of income a loss or outgoing within the meaning of s 51(1) where a jurisprudential analysis prevails over a commercial view, that accounting and business practice will not always be irrelevant and may indeed provide useful assistance to the Court: Coles Myer Finance Ltd v Federal Commissioner of Taxation (1992-3) 176 CLR 640 at 666 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.
It is not necessary in the present case to decide if there is really a difference between the emphasis put on accounting practices in the early cases and the views expressed in the later cases. It suffices here to say that on either view of the law the business and accounting practices assist the Court in the working out of the principles behind the statutory language of “income derived.”
In determining when losses or outgoings are ‘incurred’, sometimes the courts have tended towards approaches that produce results like those found in accounting.
For example, in Coles Myer Finance Ltd v FC of T 93 ATC 4214; (1993) 25 ATR 524, the High Court referred to commercial and accounting principles in deciding that a deduction for discounts on certain debt instruments should be spread over 2 years (the period of the instruments).
Another example is the recognition by the courts that unreported insurance claims are presently existing liabilities of an insurer and that the provisions a general insurer makes in its accounts for them are an allowable deduction if they represent a reasonable actuarial estimate. This recognises provisions for ‘incurred but not reported’ claims, but not provisions for events that have not yet occurred.
Nevertheless, the courts have made it clear that the interpretation of tax law ultimately involves a jurisprudential analysis of relevant provisions. For example, expenses are not necessarily recognised for income tax purposes at the same time as they are for accounting purposes and the cost of trading stock must be ascertained from the meaning apparent from the statute rather than accounting (although the two may well coincide).
Hanlan and Nethercott have argued that “the merits of comparability between accounting practice and taxation law have been recognised by academics, courts of law and governments...[but] While Australian courts have endorsed the importance of accounting concepts, principles and practices, such factors are not determinative in reaching a decision. That is, accounting practice, while relevant must be used solely as an aid assisting in the interpretation of the Tax Act (1936) and (1977), and cannot be substituted for legal or jurisprudential analysis itself.”
On this basis the approach of the courts in interpreting the law will affect the extent of divergence between accounting and tax concepts. The less formalistic is the approach to judicial interpretation the more likely it is that the outcome will reflect the commercial substance of a matter.
Another observation that can be made is that the system of precedent applied in our system of law means that income tax law may not keep pace with developments in accounting concepts and standards. A court decision many years ago which drew upon accounting practice at that time may still represent the law now, even though the accounting practice upon which the decision was based may have changed.
Monday, June 1, 2009
WORLD: OECD influenced countries standardize their systems: Are you adapting your tax risk management systems in line with these developments?
The OECD Tax Administration division, under the chairmanship of South African Tax Commissioner, Pravin Gordhan, has recently released an OECD report investigating the overlap of various tax administration systems in 43 countries, and the similarities are remarkable. What does this mean to Taxpayers?
The obvious advantage is that you can expect similar treatment in the 43 countries in the approach of tax administrators to verification audits and the follow up tax administration review procedures: both areas being the source of significant tax risk especially to large taxpayers in those countries. A recent review of 15 of those countries delivered a completed verification audit exposure only to large taxpayers of some $ 41 bn! That is significant.
Special processes should be implemented to manage the interaction with tax administrations, especially for large multi-national taxpayers. If you are interested in our blueprint at no cost to you, please email daniel@dnerasmus.com with the following in the SUBJECT HEADING - "Your OECD Blue Print Report".
For more information, visit the website of the OECD and download the report.
The obvious advantage is that you can expect similar treatment in the 43 countries in the approach of tax administrators to verification audits and the follow up tax administration review procedures: both areas being the source of significant tax risk especially to large taxpayers in those countries. A recent review of 15 of those countries delivered a completed verification audit exposure only to large taxpayers of some $ 41 bn! That is significant.
Special processes should be implemented to manage the interaction with tax administrations, especially for large multi-national taxpayers. If you are interested in our blueprint at no cost to you, please email daniel@dnerasmus.com with the following in the SUBJECT HEADING - "Your OECD Blue Print Report".
For more information, visit the website of the OECD and download the report.
THE {TRM} TAX RISK MANAGEMENT BOARDROOM SERIES SOUTH AFRICA: A Tax Risk Review – Preparing for a tax audit EXCLUSIVE TO ONLY 8 PEOPLE
This unique TRM Boardroom Series has been designed specifically for all levels of senior management and tax executives, and will go a long way towards helping you ensure your organisation’s future tax health.
Registration and Tea:
08:00am – 8:30am
The Boardroom workshops are divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.
Introduction to the Process – 08:30am to 08h45am
Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape
Coffee Break – 10h00am – 10:30am
Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process
Session 3 - 11:30 am – 12:30 am – Wrapping up the tax risk review process and compiling the tax risk review report for senior management
BOARDROOM LUNCH : 12:30 am – 13:30 am – Question and Answer session during lunch
TAX RISK REVIEW in preparation for a tax audit: the following key points will be covered
THE SPEAKERS:
Kerry Watkin – Tax Risk Review Specialist
Workshop Presenter
Daniel Erasmus – Keynote address.
Daniel Erasmus is a well known specialist in tax both in South Africa and abroad. He leads a tax risk management practice with clients in South Africa, Africa, Europe and the USA. His tax risk review teams are currently on assignment in Europe, the USA and South Africa. They attend to complex risk review processes for major multi-national corporations. He is also the author of the book “7 Habitual Tax Mistakes” which will be given to you at the seminar. Daniel’s further credentials are available on the website www.taxriskmanagement.com
Kerry Watkin is a tax risk review team leader and has been involved in complex tax risk review processes with Daniel over the past few years. Her training and experience has brought her into direct contact with large multi-national corporations, their complex tax review problems and the innovative solutions provided through a methodology that has stood the test of time. After obtaining a BA and LLB at the University of Witwatersrand, Kerry Watkin’s legal career began at former 100-year old law firm Moss Morris where she completed her articles before joining their tax department headed by Daniel Erasmus. She has been part of Daniel’s team ever since. The firm’s diverse client base has equipped Kerry with skills in a variety of areas in the field of taxation. Kerry has also obtained a Higher Diploma in Tax Law and International Tax from the University of Johannesburg.
DETAILS:
BOARDROOM SESSION DATES:
• June 11th
• July 22nd
• August 13th
• September 17th
• November 9th
• December 10th
WHO SHOULD ATTEND THE TRM BOARDROOM SESSIONS?
CEOs,
Managing Directors
CFOs
Financial Directors
Anyone involved in Financial Management
Senior Managers
Financial Directors
Accountants
Legal Professionals
Tax Managers
Directors
Risk Managers
Corporate Lawyers
READ WHAT PREVIOUS DELEGATES HAVE TO SAY
http://www.dnerasmus.com
VENUE:
Regus, Sandton
TIME:
8:00 – 13:30 ( Half Day)
COST PER DELEGATE:
R2, 215.20 p/p excl VAT (R2, 525.33.00 incl Vat)
Book 4 weeks prior to the event date and get a
20% Discount on Early Bird Bookings !
BOOK NOW and RECEIVE A COMPLIMENTARY Subscription to TAXtalk Magazine, Comprehensive Tax Risk Management Seminar Notes, a Copy of the Lexisnexis tax handbook “Managing the 7 Habitual Tax Mistakes” PLUS the new Tax Risk Matrix.
Registration and Tea:
08:00am – 8:30am
The Boardroom workshops are divided into 3 sessions to prepare you for a tax audit. At the end of the workshop you will have grasped key concepts and learnt how to compile an effective tax risk matrix and tax risk report.
Introduction to the Process – 08:30am to 08h45am
Session 1 – 08:45am – 10:00am – Preparing for the tax review and the legal landscape
- Revisiting the rights of taxpayers, the procedural landscape, the onus and standard of proof
- Revisit penalties, interest and suspension of payment provisions
- Understand which tax mistakes you make red flag SARS
- Be capable of drawing SARS into interaction at an administrative level - avoiding litigation
- Plan for optimal communication and cooperation within your organization, ensuring a high degree of tax awareness in the business, from the ground up
Coffee Break – 10h00am – 10:30am
Session 2 - 10:30 am - 11:30 am – The tax risk review interview process and fact gathering process
- Compile a detailed tax risk matrix with excel summarizing the key tax risks
- Determine the on and off the radar screen tax issues
- Identify which business unit heads will be invited to the interview process
- Review the questions to be asked in the interview process
- Understanding the business unit process and the tax risks that may arise
- Review all tax advice and opinion given in the last 3 years
- Carefully record into minutes and revisit the results of the interview process
- Obtain any other relevant facts
- Revisit the tax risk matrix to amend in accordance with the new found facts
Session 3 - 11:30 am – 12:30 am – Wrapping up the tax risk review process and compiling the tax risk review report for senior management
- You will be taken through a comprehensive tax risk review sample report
- You will be given insight into what must be inserted in the report and highlighted for senior management
- You will be shown how the tax review report interacts with the tax risk management matrix
BOARDROOM LUNCH : 12:30 am – 13:30 am – Question and Answer session during lunch
TAX RISK REVIEW in preparation for a tax audit: the following key points will be covered
- Step-by-step instructions how to plan the tax risk review in preparation for a tax audit
- Why have a tax technician and trial specialist as part of the process
- Who do you interview in the company?
- How to handle various tax risks
- The tax risk matrix and how to use it
- A 'game plan' report at the conclusion of the tax review process and its importance
- Concluding a tax review process in five days
- The need for an outside facilitator
- The legal landscape summary and its use
- The reasoning behind the onus and standard of proof for each risk item
- Building a future defense file
- Running Spot Audits and Insuring your archives are up to date
- What the final product should look like
- Managing tax risks into the future.
THE SPEAKERS:
Kerry Watkin – Tax Risk Review Specialist
Workshop Presenter
Daniel Erasmus – Keynote address.
Daniel Erasmus is a well known specialist in tax both in South Africa and abroad. He leads a tax risk management practice with clients in South Africa, Africa, Europe and the USA. His tax risk review teams are currently on assignment in Europe, the USA and South Africa. They attend to complex risk review processes for major multi-national corporations. He is also the author of the book “7 Habitual Tax Mistakes” which will be given to you at the seminar. Daniel’s further credentials are available on the website www.taxriskmanagement.com
Kerry Watkin is a tax risk review team leader and has been involved in complex tax risk review processes with Daniel over the past few years. Her training and experience has brought her into direct contact with large multi-national corporations, their complex tax review problems and the innovative solutions provided through a methodology that has stood the test of time. After obtaining a BA and LLB at the University of Witwatersrand, Kerry Watkin’s legal career began at former 100-year old law firm Moss Morris where she completed her articles before joining their tax department headed by Daniel Erasmus. She has been part of Daniel’s team ever since. The firm’s diverse client base has equipped Kerry with skills in a variety of areas in the field of taxation. Kerry has also obtained a Higher Diploma in Tax Law and International Tax from the University of Johannesburg.
DETAILS:
BOARDROOM SESSION DATES:
• June 11th
• July 22nd
• August 13th
• September 17th
• November 9th
• December 10th
WHO SHOULD ATTEND THE TRM BOARDROOM SESSIONS?
CEOs,
Managing Directors
CFOs
Financial Directors
Anyone involved in Financial Management
Senior Managers
Financial Directors
Accountants
Legal Professionals
Tax Managers
Directors
Risk Managers
Corporate Lawyers
READ WHAT PREVIOUS DELEGATES HAVE TO SAY
http://www.dnerasmus.com
VENUE:
Regus, Sandton
TIME:
8:00 – 13:30 ( Half Day)
COST PER DELEGATE:
R2, 215.20 p/p excl VAT (R2, 525.33.00 incl Vat)
Book 4 weeks prior to the event date and get a
20% Discount on Early Bird Bookings !
BOOK NOW and RECEIVE A COMPLIMENTARY Subscription to TAXtalk Magazine, Comprehensive Tax Risk Management Seminar Notes, a Copy of the Lexisnexis tax handbook “Managing the 7 Habitual Tax Mistakes” PLUS the new Tax Risk Matrix.
Poland: VAT deduction on the purchases of fuel to vehicles
Janina Fornalik from MDDP & Partners
On December 22 2008 the European Court of Justice (ECJ) handed down a ruling (case file C-414/07) stating that Polish VAT provisions placing restrictions on the deduction of VAT on the purchase of fuel to vehicles are contrary to the European Community regulations. The ruling was issued with regard to the dispute pending before the Polish regional administrative court in Cracow between the Polish tax authority (director of the tax chamber in Cracow) and Magoora. The Polish court decided to refer the questions to ECJ for a preliminary ruling with respect to the conformity of national law with the EU regulations.
Poland: VAT deduction on the purchases of fuel to vehicles
MDDP & Partners
The ECJ stated that the Polish law is in breach of the standstill clause stipulated in article 17(6) of the sixth EC directive, which allows the new member states to retain after the accession to EU, only those restrictions on the right to deduct input VAT which existed and were actually applied when the directive entered into force (i.e. in the case of Poland on the accession date). In other words, Poland was entitled to retain the restrictions binding before accession, i.e. until April 30 2004.
In fact Poland has introduced two amendments to the local regulations since joining the EU, changing the criteria determining the vehicles entitling input VAT deduction (on purchases/leasing of the car as well as on fuel used to the car): firstly as of May 1 2004 (when the new VAT act was entered into force), and secondly as of August 22 2005. In both cases the scope of the restrictions in input VAT deduction have been extended comparing to those in place before May 1 2004.
As a consequence of the infringement by the Polish regulations of the EU rules confirmed in the ECJ ruling, the Polish taxpayers are entitled to disregard the Polish VAT law and deduct input VAT incurred on purchases of fuel in those cases, where such a right would be permissible under the regulations binding before May 1 2004 as well as before August 22 2005, when the additional amendments were introduced to the Polish VAT act.
Moreover, the above ruling also provides grounds for the right to full deduction of input VAT on purchases of vehicles as well as on leasing fees, where such a deduction was allowed under the provisions binding before May 1 2004 and before August 22 2005.
Some of the Polish taxpayers have already applied for the refund of VAT not deducted previously after May 1 2004. The Polish tax authorities accept the right to recover VAT only with regard to the vehicles which would entitle for deduction based on the regulations in force before Poland's accession.
However, there are also grounds arising from the ECJ ruling to recover VAT incurred on the purchases of fuel used by all vehicles used for taxable activities, including passenger cars, irrespective of fulfillment of the criteria applicable before May 1 2004. This interpretation would lead to significant financial consequences for the state budget, and therefore, it not accepted by the Polish tax authorities. The taxpayers might, however, appeal against the negative decisions to the administrative court.
Also the proceedings before the Polish administrative court regarding the Magoora case analysed by ECJ will be finalised soon (the final court verdict is expected in April 2009) which would also provide basis for the future strategy to be taken by Polish taxpayers.
Nevertheless, the Polish automotive market has responded immediately to the business needs arising from the ECJ ruling and again the car producers offer cars fulfilling the criteria binding before May 1 2004.
Janina Fornalik (janina.fornalik@mddp.pl)
On December 22 2008 the European Court of Justice (ECJ) handed down a ruling (case file C-414/07) stating that Polish VAT provisions placing restrictions on the deduction of VAT on the purchase of fuel to vehicles are contrary to the European Community regulations. The ruling was issued with regard to the dispute pending before the Polish regional administrative court in Cracow between the Polish tax authority (director of the tax chamber in Cracow) and Magoora. The Polish court decided to refer the questions to ECJ for a preliminary ruling with respect to the conformity of national law with the EU regulations.
Poland: VAT deduction on the purchases of fuel to vehicles
MDDP & Partners
The ECJ stated that the Polish law is in breach of the standstill clause stipulated in article 17(6) of the sixth EC directive, which allows the new member states to retain after the accession to EU, only those restrictions on the right to deduct input VAT which existed and were actually applied when the directive entered into force (i.e. in the case of Poland on the accession date). In other words, Poland was entitled to retain the restrictions binding before accession, i.e. until April 30 2004.
In fact Poland has introduced two amendments to the local regulations since joining the EU, changing the criteria determining the vehicles entitling input VAT deduction (on purchases/leasing of the car as well as on fuel used to the car): firstly as of May 1 2004 (when the new VAT act was entered into force), and secondly as of August 22 2005. In both cases the scope of the restrictions in input VAT deduction have been extended comparing to those in place before May 1 2004.
As a consequence of the infringement by the Polish regulations of the EU rules confirmed in the ECJ ruling, the Polish taxpayers are entitled to disregard the Polish VAT law and deduct input VAT incurred on purchases of fuel in those cases, where such a right would be permissible under the regulations binding before May 1 2004 as well as before August 22 2005, when the additional amendments were introduced to the Polish VAT act.
Moreover, the above ruling also provides grounds for the right to full deduction of input VAT on purchases of vehicles as well as on leasing fees, where such a deduction was allowed under the provisions binding before May 1 2004 and before August 22 2005.
Some of the Polish taxpayers have already applied for the refund of VAT not deducted previously after May 1 2004. The Polish tax authorities accept the right to recover VAT only with regard to the vehicles which would entitle for deduction based on the regulations in force before Poland's accession.
However, there are also grounds arising from the ECJ ruling to recover VAT incurred on the purchases of fuel used by all vehicles used for taxable activities, including passenger cars, irrespective of fulfillment of the criteria applicable before May 1 2004. This interpretation would lead to significant financial consequences for the state budget, and therefore, it not accepted by the Polish tax authorities. The taxpayers might, however, appeal against the negative decisions to the administrative court.
Also the proceedings before the Polish administrative court regarding the Magoora case analysed by ECJ will be finalised soon (the final court verdict is expected in April 2009) which would also provide basis for the future strategy to be taken by Polish taxpayers.
Nevertheless, the Polish automotive market has responded immediately to the business needs arising from the ECJ ruling and again the car producers offer cars fulfilling the criteria binding before May 1 2004.
Janina Fornalik (janina.fornalik@mddp.pl)
SOUTH AFRICA: Functus Officio: SARS cannot change its reasons
Once SARS has issued revised assessments, unless it re-enters the S79 route in the Income Tax Act and complies with its jurisdictional facts to issue revised assessments again, it cannot change the reasons it gives for issuing the revised assessments in the first place. It cannot change its mind. It is married to its reasons for the revised assessments.
For this reason, it is important to get SARS to issue reasons for its revised assessment.
After the revised assessment has been issued, the regulation 3 option should also be exercised, to get the actual reasons SARS has issued the revised assessments.
If there is a difference between the reasons given in the letter of findings, and the reasons given after the revised assessment, under regulation 3, it is arguable that SARS acted arbitrarily or unfairly, in that the reasons do not match! Why do they not match? What has changed between the letter of findings and the revised assessment? If no proper justification can be given, it is arguable under PAJA that no adequate reasons exist for the decision taken by SARS to issue the revised assessments in the first place.
A similar situation may arise with the disallowance of the objection, and the grounds of assessment issued by SARS. Once again, the grounds of assessment should match the reasons given in the letter of findings, and at the time of the regulation 3 reasons past revised assessments. If not, why? What has changed entitling SARS past the time of the decision to issue the revised assessments to change its reasons. In terms of administrative law, it cannot. SARS is functus officio, unless it re-enters the whole S79 process again.
For this reason, it is important to get SARS to issue reasons for its revised assessment.
After the revised assessment has been issued, the regulation 3 option should also be exercised, to get the actual reasons SARS has issued the revised assessments.
If there is a difference between the reasons given in the letter of findings, and the reasons given after the revised assessment, under regulation 3, it is arguable that SARS acted arbitrarily or unfairly, in that the reasons do not match! Why do they not match? What has changed between the letter of findings and the revised assessment? If no proper justification can be given, it is arguable under PAJA that no adequate reasons exist for the decision taken by SARS to issue the revised assessments in the first place.
A similar situation may arise with the disallowance of the objection, and the grounds of assessment issued by SARS. Once again, the grounds of assessment should match the reasons given in the letter of findings, and at the time of the regulation 3 reasons past revised assessments. If not, why? What has changed entitling SARS past the time of the decision to issue the revised assessments to change its reasons. In terms of administrative law, it cannot. SARS is functus officio, unless it re-enters the whole S79 process again.
GLOBAL Tax Risk Management: An Analytical Approach
1. Introduction The increasing significance of measuring and managing tax risk in any taxpaying corporation is underpinned by the introduction of SOX 404 (and now FIN 48, details are annexed to this document as annexure 1) in the USA. Both these developments emphasize the importance of transparent corporate governance. These developments are also being followed by changes taking place to IFRS world-wide. Many material discrepancies in corporations relate specifically to Tax Risk Management problems. Independent surveys conducted on SOX 404 have shown that on average 30% of the material discrepancy filings to the SEC are tax problems. Tax risk is one of the risk areas within a corporation that is difficult to quantify and manage unless a significant Tax Risk Management process has been effected in that organization. Many of the tax risks have nothing to do with the current financial year and in many instances relate to prior financial periods which may go back many years. What is more is that research has shown that the tax risks exposed do not just reside in the area of tax compliance but emanate from the areas of financial accounting, transactions and the operations of the corporation. The expertise offered by TRM Services is in the area of putting into place an effective process to expose, measure and manage the tax risk in any corporation in any jurisdiction worldwide. The Tax Risk Management process also relies on the input of key tax technical advisors in each of those jurisdictions to assist in making an effective determination as to the extent of the tax risk issue. Once that has been determined the most appropriate advice and recommendations can be made to senior management in the corporation as to the practical way forward to manage and resolve the tax risk. The balance of this document sets out the theoretical framework within which such a Tax Risk Management process will be implemented. Apart from executing many Tax Risk Management processes for a variety of multi-national corporations, TRM Services has also been involved in the development of Tax Risk Management from an academic point of view, in determining the driving principles, and in this regard have compiled an extensive guideline which can be followed in detail by any person introduced to the Tax Risk Management process so that they can understand what that process is, what it purports to achieve and the precise steps that need to be taken. It is this process that TRM Service assists in implementing.
“TAX RISK MANAGEMENT STRATEGY: An analytical approach”
by Daniel N. Erasmus
2. An introduction to the Tax Risk Management Process
In an ideal situation a taxpaying business would be entitled to claim all of its expenditure as tax deductions, and be entitled to certain additional tax allowances to benefit its bottom line. At the end of the day it will be able to rely on the fact that its real accounting profit (less the additional tax allowances for any capital expenditure) will be subject to a fair rate of taxation.
The certainty of its current tax liability must be determined accurately.
Difficult circumstances would arise if, in addition to its accurate current tax liability, and its deferred tax liability, the business faces the following unnecessary additional tax exposures:
- additional penalties for late payment
- interest (not tax deductible) for late payment
- arrears taxes, with penalties and interest, on undetermined tax liabilities.
To achieve a current tax status, where current tax liability is accurately determined, without any material weaknesses (SOX 404) or uncertain tax positions (Fin 48), current and future, the business would have to have achieved the following:
The goals and objectives are as follows:
3. Define the Problem
An increase in tax predictability and accuracy, means integrated detailed internal process designed to identify all potential tax exposures.
The aim is to reduce the defects or material weaknesses in tax compliance.
The problem of defective tax compliance can best be illustrated by looking at the Revenue Service statistics for a participating OECD country:
The aim is to reduce the defects to 3 or 4 per million.
In extrapolating these statistics, the following table will give some indication of the potential exposure:
TAX % DEFECTIVE DEFECTS IN A MILLION R MILLION
$8 bn 6% 6000 $480 m
$1 bn 6% 6000 $60 m
$250 m 6% 6000 $20 m
The potential tax exposure of corporates in any tax jurisdiction can be determined by applying the following formula:
Amount of extra tax
Collected through audits
And investigations
___________________ X 100 = Average Potential
exposure %
Total business registrations
The overall aim is to reduce the defects in a million to 3 or 4, through the implementation of the {TRM} process.
4. Analyse the Problem
4.1 Operations Tax Unreliability
Why? Lack of Communication of new or unusual operations transactions
Why? Brainstorm session required
Why? For example: Multi-state transaction and sales or use tax
or VAT exemptions, and full compliance with onus & standard of proof requirements.
4.2 Compliance Tax Unreliability
Why? Unreliable information is recorded and transferred
Why? No internal tax audits
Why? Lack of communications from key staff
Why? Compliance recording mistakes and lack of supporting documentation.
4.3 Financial Accounting Tax Unreliability
Why? Brainstorm session required
Why? Lack of communication of new or unusual financial transactions
Why? For example: Take-on figures of provisions into Oracle or SAP; incorrect accounting treatment of transactions contra to agreements e.g. royalty collections and payments.
4.4 Transactions Tax Unreliability
Why? Brainstorm session required
Why? No Pre / Post audits
Why? For example: Structured finance structures; Mergers / acquisitions followed by asset stripping and dividend flow; Cross-border transactions, and transfer pricing.
5. Compliance
The most likely main cause is unreliable and unaudited source material, and lack of supporting records, that introduces the material weakness of an additional unpredictable extra tax exposure.
All income tax, VAT or use sales tax, PAYE or payroll tax will yield mistakes made in the financial reporting, transactions and operations divisions.
One of the best methods for exposing the tax unreliability in the tax compliance, transactions, financial reporting and operations divisions is through brainstorming sessions involving the appointed tax team.
A TRM Tax Survey verifies that contributors to the root causes are as follows:
6. Prevent the Problem
This section focuses on various countermeasures required to reduce or eliminate the root causes.
The problem is the unpredictable nature of tax in the corporate taxpayer, especially as the tax authorities become increasingly more vigilant and aggressive in pursuing them.
A primary root cause is the insatiable appetite of the State to increase its ability to collect taxes to fund increasing State expenditure, the perception that taxpayers underpay taxes, and the calculated guess that only about 40% of tax risk is usually attended to by the tax compliance divisions of taxpayers. The other 60% tax risk resides in the transactions, operations and financial divisions of the taxpayer.
The following are some potential countermeasures to some of the root causes:
1. The insatiable appetite of the State for money:
Countermeasure 1. - State lobbying;
Countermeasure 2. - Change in government;
Countermeasure 3. - Moving the business to another jurisdiction.
2. Tax authorities negative perception:
Countermeasure 1. - Build relationship with tax officials;
Countermeasure 2. - Call for on-the-radar screen issues with a plan to resolve these;
Countermeasure 3. - Ensure timely returns, fair provisional tax payments, and meeting positively the key indicators set by the tax authorities as to compliancy levels.
3. Tax compliance division shortcomings with unreliable information and lack of supporting documentation (which requires countermeasures for each of the supporting financial, operations and transactions divisions):
- Financial countermeasures:
Countermeasure 1. - Ensure ‘fiddle proof’ transfer of accounting information to the tax packs;
Countermeasure 2. - Regular internal tax audits in the various key tax areas (VAT, PAYE, Income Tax, Customs + Excise), with external consultant supervision;
Countermeasure 3. - Analysis of all historical archives.
- Operations countermeasures:
Countermeasure 1. - Regular email, meeting and other communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Regular internal audits to review what is reported as being subject to tax provisions.
- Transactions countermeasures:
Countermeasure 1. - Regular communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Legal/tax audits of key major transactions over last 5 years to ensure proper compliance with planning of transactions, proper implementation and post implementation processes.
7. Communication
In the process of implementing the Tax Risk Management system, in order to minimize tax risk on an ongoing basis, it will be necessary to implement a communication system between the tax compliance division, the financial accounting divisions, the transaction division and the operations of the corporation. The communication process will require frequent documentation which attempts to highlight any tax risk that has developed in each of the mentioned divisions to the tax compliance division, through a systematic series of questionnaires generated by the tax compliance division.
The reliability of the information gathered from key personnel in the various divisions by means of these questionnaires will depend on the integrity of those key individuals which can be measured by paying attention to a number of personality traits of each individual:
a) Attitude to compliance;
b) Attention to detail;
c) Following directions;
d) Respect for policies;
e) Role awareness;
f) Practical thinking;
g) Consistency and reliability;
h) Meeting standards;
i) Personal accountability;
j) Systems judgment.
These subjective factors can be measured in each individual participating in the Tax Risk Management system by putting them through the Innermetrix© process which takes each individual no more than 15 minutes to complete. This process will provide the Financial Director, Chief Financial Officer and/or Tax Manager with a report setting out the strengths and weaknesses of each individual who participate in answering the questionnaires. For instance, if an individual scores high on a majority of these subjective indicators there is an assurance that he/she will take the process seriously and give accurate and complete information on a regular basis. If the score shows a weakness in a number of these subjective indicators, then management will have the opportunity through an initial training process to emphasize the significance of accurate and complete information, and they will also know which questionnaires that have been submitted to them need to be scrutinized with greater care to ensure that the participant has completed their task properly. For example, if a participant shows a weakness in many areas, the Tax Manager would always telephone that individual after the completion of each questionnaire to discuss the answers given. In this way the Tax Manager can ensure that the proper attention has been given to the questionnaire by that individual.
Through this management process the individuals showing any weaknesses will usually, through a process of interaction and teaching, improve those weaknesses and as such become more reliable in the information that they provide.
The Innermetrix© testing will be repeated 6 monthly so as to keep monitoring any changes in the strengths and weaknesses on these personality traits.
8. Methodology
As an experienced firm in implementing TRM strategies for a number of multi-national corporations, TRM Services are well positioned to take the methodology globally to corporations based in other tax jurisdictions. In doing so we do not presume to be tax specialists in those jurisdictions, but work very closely with associated firms through a global network, who have the required expertise to assist in giving opinions in those tax risk areas determined. The service we offer is to facilitate the whole TRM process from inception to completion. We act as the project champion, and ultimately will review the law, the facts and the conclusions so as to test the viability and quality of the technical advice against the actual position that the corporation finds itself in, with the guidance of specialists in the appropriate country. It is the same methodology that has been followed world-wide.
Annexure 1
The NEW FIN 48: Addressing Uncertain Tax Positions – All the more reason to introduce and develop a Tax Risk Management Strategy
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued the final interpretation amending FASB Statement of Financial Accounting Standards Number 109, “Accounting for Income Taxes.” Of particular importance, was FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The purpose of publishing the interpretations was to address the uncertainty in accounting for income tax assets and liabilities. Previously, FASB Number 109 contained no guidance on accounting for income tax benefits and liabilities, and therefore, resulted in corporations taking inconsistent positions. FIN 48 attempts to reconcile the inconsistencies by prescribing a consistent recognition threshold and measurement of tax attributes and liabilities. It also gives practitioners a clearly defined set of criteria to use when recognizing, derecognizing, and measuring uncertain tax positions for financial statements, as well as requiring additional disclosures regarding uncertainty.
Under FIN 48, the evaluation of a tax position is based on a two-step process. The first step is recognition: the enterprise determines whether it is more likely than not (which is a 50% or greater likelihood) that a tax position would be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: the tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize on financial statements.
In asserting the more likely than not standard, all the facts and circumstances are taken into account. Additionally, the practitioner must presume that the tax position will be examined by the relevant taxing authority with full knowledge of all the other materials, technical merits of the relevant tax law and their applicability to the facts and circumstances of the tax position. The practitioner may take into account any past administrative practices and precedents of the tax authority in its dealings with the corporation, when those practices and precedents are widely understood. Finally, each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions.
The appropriate timing of claiming the benefits of a tax position is when it becomes clear that the tax position has a more likely than not chance of being sustained. If a previously taken tax position does not meet the more likely than not standard then it shall be adjusted in the first period after the effective date of FIN 48 (January 1, 2007).
A corporation must classify the liability associated with an unrecognized tax benefit as a current liability to the extent the enterprise anticipates payment of cash within one year or the operating cycle, if longer. The liability for an unrecognized tax benefit shall not be combined with deferred tax liabilities or assets.
In addition to taking into account the benefit that a particular tax position will create for a particular corporation, interest and penalties must also be computed in addition to the tax liability, when the law requires the payment of interest or penalties on an underpayment of taxes. Tax liability will cease to be a liability during the first interim period in which any one of the following three conditions occurs: 1) The more likely than not recognition threshold is met by the reporting date; 2) The tax matter is ultimately settled through negotiation or litigation; or 3) The statue of limitations for the relevant taxing authority to examine has expired.
“TAX RISK MANAGEMENT STRATEGY: An analytical approach”
by Daniel N. Erasmus
2. An introduction to the Tax Risk Management Process
In an ideal situation a taxpaying business would be entitled to claim all of its expenditure as tax deductions, and be entitled to certain additional tax allowances to benefit its bottom line. At the end of the day it will be able to rely on the fact that its real accounting profit (less the additional tax allowances for any capital expenditure) will be subject to a fair rate of taxation.
The certainty of its current tax liability must be determined accurately.
Difficult circumstances would arise if, in addition to its accurate current tax liability, and its deferred tax liability, the business faces the following unnecessary additional tax exposures:
- additional penalties for late payment
- interest (not tax deductible) for late payment
- arrears taxes, with penalties and interest, on undetermined tax liabilities.
To achieve a current tax status, where current tax liability is accurately determined, without any material weaknesses (SOX 404) or uncertain tax positions (Fin 48), current and future, the business would have to have achieved the following:
- current incomes and expenses carefully analysed and the tax pack reviewed to ensure proper compliance, and identification of known interpretation problem areas;
- determining and finalizing all outstanding tax on-the-radar screen issues as per the {TRM} process;
- a thorough inquiry process involving key staff in the business to determine and finalize all tax off-the-radar screen issues;
- Implementing and maintaining a process that ensures continued thorough compliance, through trained internal consultants and internal tax audit reviews on tax compliance issues.
The goals and objectives are as follows:
- complete on-the-radar screen issues;
- determine through inquiry and complete off-the-radar screen issues;
- Implement the {TRM} maintenance system.
3. Define the Problem
An increase in tax predictability and accuracy, means integrated detailed internal process designed to identify all potential tax exposures.
The aim is to reduce the defects or material weaknesses in tax compliance.
The problem of defective tax compliance can best be illustrated by looking at the Revenue Service statistics for a participating OECD country:
- 2m business tax registrations;
- Produced $17bn of taxes;
- RS collected through audits an additional $1bn, or 6% of what was paid;
- Translating to an average an additional 6% (without specific investigation into the affairs of the taxpayer) tax exposure;
- For the largest taxpayer in that country it was $48m;
- This translates to 6000 defects per a million.
The aim is to reduce the defects to 3 or 4 per million.
In extrapolating these statistics, the following table will give some indication of the potential exposure:
TAX % DEFECTIVE DEFECTS IN A MILLION R MILLION
$8 bn 6% 6000 $480 m
$1 bn 6% 6000 $60 m
$250 m 6% 6000 $20 m
The potential tax exposure of corporates in any tax jurisdiction can be determined by applying the following formula:
Amount of extra tax
Collected through audits
And investigations
___________________ X 100 = Average Potential
exposure %
Total business registrations
The overall aim is to reduce the defects in a million to 3 or 4, through the implementation of the {TRM} process.
4. Analyse the Problem
4.1 Operations Tax Unreliability
Why? Lack of Communication of new or unusual operations transactions
Why? Brainstorm session required
Why? For example: Multi-state transaction and sales or use tax
or VAT exemptions, and full compliance with onus & standard of proof requirements.
4.2 Compliance Tax Unreliability
Why? Unreliable information is recorded and transferred
Why? No internal tax audits
Why? Lack of communications from key staff
Why? Compliance recording mistakes and lack of supporting documentation.
4.3 Financial Accounting Tax Unreliability
Why? Brainstorm session required
Why? Lack of communication of new or unusual financial transactions
Why? For example: Take-on figures of provisions into Oracle or SAP; incorrect accounting treatment of transactions contra to agreements e.g. royalty collections and payments.
4.4 Transactions Tax Unreliability
Why? Brainstorm session required
Why? No Pre / Post audits
Why? For example: Structured finance structures; Mergers / acquisitions followed by asset stripping and dividend flow; Cross-border transactions, and transfer pricing.
5. Compliance
The most likely main cause is unreliable and unaudited source material, and lack of supporting records, that introduces the material weakness of an additional unpredictable extra tax exposure.
All income tax, VAT or use sales tax, PAYE or payroll tax will yield mistakes made in the financial reporting, transactions and operations divisions.
One of the best methods for exposing the tax unreliability in the tax compliance, transactions, financial reporting and operations divisions is through brainstorming sessions involving the appointed tax team.
A TRM Tax Survey verifies that contributors to the root causes are as follows:
- Only 15% of the survey participants are certain they are 100% tax compliant;
- 79% have no tax strategy;
- Between 50 and 60% do not have at least monthly communication with the transactions and operations divisions;
- 40% do not have their tax returns up-to-date;
- 66% to 80% have not had VAT or sales and use taxes or payroll taxes audits
- Only 16% of the Boards discuss tax strategy and tax planning at their board meetings.
6. Prevent the Problem
This section focuses on various countermeasures required to reduce or eliminate the root causes.
The problem is the unpredictable nature of tax in the corporate taxpayer, especially as the tax authorities become increasingly more vigilant and aggressive in pursuing them.
A primary root cause is the insatiable appetite of the State to increase its ability to collect taxes to fund increasing State expenditure, the perception that taxpayers underpay taxes, and the calculated guess that only about 40% of tax risk is usually attended to by the tax compliance divisions of taxpayers. The other 60% tax risk resides in the transactions, operations and financial divisions of the taxpayer.
The following are some potential countermeasures to some of the root causes:
1. The insatiable appetite of the State for money:
Countermeasure 1. - State lobbying;
Countermeasure 2. - Change in government;
Countermeasure 3. - Moving the business to another jurisdiction.
2. Tax authorities negative perception:
Countermeasure 1. - Build relationship with tax officials;
Countermeasure 2. - Call for on-the-radar screen issues with a plan to resolve these;
Countermeasure 3. - Ensure timely returns, fair provisional tax payments, and meeting positively the key indicators set by the tax authorities as to compliancy levels.
3. Tax compliance division shortcomings with unreliable information and lack of supporting documentation (which requires countermeasures for each of the supporting financial, operations and transactions divisions):
- Financial countermeasures:
Countermeasure 1. - Ensure ‘fiddle proof’ transfer of accounting information to the tax packs;
Countermeasure 2. - Regular internal tax audits in the various key tax areas (VAT, PAYE, Income Tax, Customs + Excise), with external consultant supervision;
Countermeasure 3. - Analysis of all historical archives.
- Operations countermeasures:
Countermeasure 1. - Regular email, meeting and other communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Regular internal audits to review what is reported as being subject to tax provisions.
- Transactions countermeasures:
Countermeasure 1. - Regular communication between operations and tax compliance;
Countermeasure 2. - Tax training and awareness of various transactions and potential tax implications;
Countermeasure 3. - Legal/tax audits of key major transactions over last 5 years to ensure proper compliance with planning of transactions, proper implementation and post implementation processes.
7. Communication
In the process of implementing the Tax Risk Management system, in order to minimize tax risk on an ongoing basis, it will be necessary to implement a communication system between the tax compliance division, the financial accounting divisions, the transaction division and the operations of the corporation. The communication process will require frequent documentation which attempts to highlight any tax risk that has developed in each of the mentioned divisions to the tax compliance division, through a systematic series of questionnaires generated by the tax compliance division.
The reliability of the information gathered from key personnel in the various divisions by means of these questionnaires will depend on the integrity of those key individuals which can be measured by paying attention to a number of personality traits of each individual:
a) Attitude to compliance;
b) Attention to detail;
c) Following directions;
d) Respect for policies;
e) Role awareness;
f) Practical thinking;
g) Consistency and reliability;
h) Meeting standards;
i) Personal accountability;
j) Systems judgment.
These subjective factors can be measured in each individual participating in the Tax Risk Management system by putting them through the Innermetrix© process which takes each individual no more than 15 minutes to complete. This process will provide the Financial Director, Chief Financial Officer and/or Tax Manager with a report setting out the strengths and weaknesses of each individual who participate in answering the questionnaires. For instance, if an individual scores high on a majority of these subjective indicators there is an assurance that he/she will take the process seriously and give accurate and complete information on a regular basis. If the score shows a weakness in a number of these subjective indicators, then management will have the opportunity through an initial training process to emphasize the significance of accurate and complete information, and they will also know which questionnaires that have been submitted to them need to be scrutinized with greater care to ensure that the participant has completed their task properly. For example, if a participant shows a weakness in many areas, the Tax Manager would always telephone that individual after the completion of each questionnaire to discuss the answers given. In this way the Tax Manager can ensure that the proper attention has been given to the questionnaire by that individual.
Through this management process the individuals showing any weaknesses will usually, through a process of interaction and teaching, improve those weaknesses and as such become more reliable in the information that they provide.
The Innermetrix© testing will be repeated 6 monthly so as to keep monitoring any changes in the strengths and weaknesses on these personality traits.
8. Methodology
As an experienced firm in implementing TRM strategies for a number of multi-national corporations, TRM Services are well positioned to take the methodology globally to corporations based in other tax jurisdictions. In doing so we do not presume to be tax specialists in those jurisdictions, but work very closely with associated firms through a global network, who have the required expertise to assist in giving opinions in those tax risk areas determined. The service we offer is to facilitate the whole TRM process from inception to completion. We act as the project champion, and ultimately will review the law, the facts and the conclusions so as to test the viability and quality of the technical advice against the actual position that the corporation finds itself in, with the guidance of specialists in the appropriate country. It is the same methodology that has been followed world-wide.
Annexure 1
The NEW FIN 48: Addressing Uncertain Tax Positions – All the more reason to introduce and develop a Tax Risk Management Strategy
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued the final interpretation amending FASB Statement of Financial Accounting Standards Number 109, “Accounting for Income Taxes.” Of particular importance, was FASB Interpretation Number 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The purpose of publishing the interpretations was to address the uncertainty in accounting for income tax assets and liabilities. Previously, FASB Number 109 contained no guidance on accounting for income tax benefits and liabilities, and therefore, resulted in corporations taking inconsistent positions. FIN 48 attempts to reconcile the inconsistencies by prescribing a consistent recognition threshold and measurement of tax attributes and liabilities. It also gives practitioners a clearly defined set of criteria to use when recognizing, derecognizing, and measuring uncertain tax positions for financial statements, as well as requiring additional disclosures regarding uncertainty.
Under FIN 48, the evaluation of a tax position is based on a two-step process. The first step is recognition: the enterprise determines whether it is more likely than not (which is a 50% or greater likelihood) that a tax position would be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: the tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize on financial statements.
In asserting the more likely than not standard, all the facts and circumstances are taken into account. Additionally, the practitioner must presume that the tax position will be examined by the relevant taxing authority with full knowledge of all the other materials, technical merits of the relevant tax law and their applicability to the facts and circumstances of the tax position. The practitioner may take into account any past administrative practices and precedents of the tax authority in its dealings with the corporation, when those practices and precedents are widely understood. Finally, each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions.
The appropriate timing of claiming the benefits of a tax position is when it becomes clear that the tax position has a more likely than not chance of being sustained. If a previously taken tax position does not meet the more likely than not standard then it shall be adjusted in the first period after the effective date of FIN 48 (January 1, 2007).
A corporation must classify the liability associated with an unrecognized tax benefit as a current liability to the extent the enterprise anticipates payment of cash within one year or the operating cycle, if longer. The liability for an unrecognized tax benefit shall not be combined with deferred tax liabilities or assets.
In addition to taking into account the benefit that a particular tax position will create for a particular corporation, interest and penalties must also be computed in addition to the tax liability, when the law requires the payment of interest or penalties on an underpayment of taxes. Tax liability will cease to be a liability during the first interim period in which any one of the following three conditions occurs: 1) The more likely than not recognition threshold is met by the reporting date; 2) The tax matter is ultimately settled through negotiation or litigation; or 3) The statue of limitations for the relevant taxing authority to examine has expired.
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