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Archive for the ‘Taxation’ Category

The Australian Taxation Office (ATO) benchmarking process means that, for small businesses, the quality of taxpayers’ record-keeping is about to take the spotlight.

In statements released, the Australian Taxation Office has said that: “if taxpayers’ keep good records then the taxpayer has nothing to fear. Fail to keep good records and the onus will be on the taxpayer to prove the ATO wrong, if and when they apply the benchmark and issue a default assessment”

What this means for businesses is that if the taxpayer can not substantiate their lodgments they must prove the ATO wrong or else the industry set benchmark will be applied by the ATO.

For example: John runs a small sandwich shop with a turnover of $150,000. The key ratio’s the ATO would be looking at for a sandwich shop would be Labour/Sales, Rent/Sales and Cost of Goods Sold/Sales. All of Johns ratio’s are substantially different to that of the ATO. John receives a letter from the ATO stating that his lodgments are different to the benchmarks. Does John need to worry?

Well this depends on the accuracy of his lodgment. If they are correct and John is able to substantiate his claims then whether they fall outside the benchmarks or not he is correct and can back up his claims. However, if he failed to keep records of his claims then the ATO will enforce the benchmarks set.

The ATO says that in dealing with the cash economy it isn’t their intention to issue arbitrary default assessments, and that there is a robust process they follow in relation to benchmarking audits.

Many businesses have already received letters from the Australian Taxation Office advising that the previous years assessments have fallen outside the benchmark for that industry. This has caused unwanted alarm in many cash businesses across Australia. However, as long as the tax payer has good record keeping they have no reason to be alarmed.

Additional information can be found about the business benchmarking process directly on the ATO Website.

Enterprises in Albania must follow financial accounting and reporting rules aimed at providing investors with a true and fair view of the financial situation of the enterprise. These rules increase transparency and international comparability of the results of an enterprise or a group, and are a strong step into the foreigner market. International Accounting Standards (IAS) and National Accounting Standards (NAS) are widely used by Multinational Enterprises (MNEs).

Financial accounting and reporting rules are quickly shifting away from traditional legal concepts applied in commercial and fiscal laws. They are increasingly based on a fair presentation approach. The results shown for financial purposes may differ considerably from the profits shown in the books of single enterprises or in the tax returns. MNEs therefore risk being confronted with unwarranted requests for tax profits adjustments or with the requirement that profits shown for financial purposes in a given country be taxable in that country.
The national and international business community is of the view that it is important for tax authorities and policy makers to understand the reasons why the results shown in financial statements of an enterprise or a group differs from the taxable results of such enterprise or group.

Different approaches followed to determine taxable profits
Some countries in Europe follow the concept of dependence in determining the taxable results. This means that the profits resulting from the commercial accounts are taken as the primary basis for tax assessment. Subject to the relevant taxation rules, certain fiscal adjustments have to be made in order to calculate the taxable profits.

Other countries, in particular those with a common law tradition, follow the concept of independence. Two separate sets of rules are applied, one for the commercial results and another for tax purposes. Such countries do not rely heavily on commercial accounting rules for taxation, which may have as a consequence that the two systems differ considerably.
Both systems have advantages and shortcomings. With separate taxation rules, two sets of rules must be applied, which may increase the compliance burden for enterprises. It may also be easier to deviate for tax purposes from certain principles followed in commercial accounting. However, even when taxation is based on the commercial accounts, certain tax adjustments are unavoidable.

For the time being, it would be unrealistic to ask for a common approach in this respect. Each country is free to decide whether the determination of the taxable results should be based primarily on commercial accounts or derived from the application of a separate set of taxation rules.
Countries have the right to follow different approaches with respect to the relationship between commercial and tax accounting (dependence/independence). Both approaches have advantages and shortcomings. However, in both cases, well-established principles of taxation must not be disregarded.

Differences between commercial accounting and capital market rules
Commercial law prescribes how the financial results of a single enterprise are determined. These rules are often set out in specific accounting laws. Accounting and reporting rules are based on the principle of fair presentation and are mainly designed to increase transparency for investors. The standards must be applied consistently to the whole group. Sometimes, enterprises are given a choice with regard to the application of a given method or rule. The uniform application is examined by external auditors and is enforceable by supervisory bodies. Specific accounting and reporting standards for companies increase transparency and comparability, mainly for investors. A convergence of the principles governing existing accounting and reporting standards is desirable in order to increase comparability and to facilitate multiple listings. However, possible tax implications for companies, especially in countries relying on commercial accounts as primary basis for tax assessment, have to be kept in mind, and the convergence should not deteriorate the tax position of enterprises.

Different approaches and different purposes

Commercial, financial and taxation rules serve their own purposes and, as a consequence, differences in the results should be expected and accepted.

o Commercial accounting rules are used to determine the commercial results of a single entity. They establish, in particular, whether a profit or a loss has resulted for a given period. The rules may form part of a country’s commercial or company law. They are intended to protect the rights of shareholders and creditors and, as a consequence, the prudence principle occupies an important place.

o Financial accounting and reporting rules are part of a country’s capital market regulations. Their objective is to give investors (and other stakeholders) a reliable and, as accurate as possible, picture of the financial situation of the economic entity (group) at a given moment (financial position, performance, cash flows). The guiding principle is “fair presentation” or “true and fair view”. Other important rules in this respect are “substance over form”, “market value measurement”, and – as a consequence of true and fair – the factual prohibition of hidden reserves.

o Taxation rules are used to determine taxable profits. Their objective is to define the tax liability of enterprises to the tax administration for a given year. The rules must be susceptible to compliance by taxpayers and control and enforcement by tax authorities. Taxation rules for companies are usually designed to preserve economic neutrality, so that business decisions are not unduly influenced by fiscal measures. The rules may also provide for non-fiscal objectives. Tax laws reflect general principles of taxation, such as non-discrimination or taxation according to economic capacity, but also practicalities, such as availability of funds for payment of the liability (realization), fairness between different categories of taxpayers (neutrality), the annual character of the liability (loss carryovers, standardized depreciations), long-term profitability (prudence, imparity, valuation below market value) and other such factors. For example, tax systems may prescribe special timing rules for the recognition (or deferral) of income, loss carryovers from other years and other rules peculiar to the field of taxation.

The approaches followed for the calculation of commercial, financial and taxation statements serve different purposes. Although the respective rules are focused on the same general object (the results of a business entity in a given period), it is important to understand that, under existing concepts, the rules applied in financial accounting and those applied for tax purposes should not be expected to be strictly comparable.

The good of interactions between accounting and taxation rules

As a result of demands by international capital markets (globalization), widely used accounting and reporting standards are expected to lead to a certain harmonization in the area of accounting and reporting. On the other hand, so long as each country imposes its own taxes, implementing its own tax policies, a similar degree of harmonization of taxation rules is not to be expected. At the same time, the more the rules used for financial accounting differ from those used in the field of taxation, and the more the results of a group become transparent, the more obvious the differences that result from the application of the two sets of rules become. Tax authorities should not use the financial results of an entity (in the same country or in third countries) as a pretext for an adjustment of the taxable profits of an enterprise or to justify transfer pricing corrections.
The rules applied for financial accounting and those used for tax purposes may differ considerably and may lead to results that cannot reasonably be compared. Tax authorities and policy makers should accept that the underlying principles of financial accounting are not always compatible with basic principles and practices used in the field of taxation. From a tax policy perspective, it is important that taxation rules are not undermined by an inappropriate extension of financial reporting requirements.

Internationally recognized accounting standards can be seen as a coherent set of rules for accounting and reporting that should give investors a “true and fair view” of the financial situation (balance sheet), performance (income statement) and changes in the financial position (cash flow) of an economic entity at a given moment.

In the field of taxation, some widely accepted principles clearly deviate from concepts used for financial accounting and reporting purposes. In addition, tax laws often provide for non-fiscal objectives, e.g. the granting of specific incentives (for R&D, for special reserves, to promote self-financing, to attract certain business activities, etc.). They may be designed to influence the behavior of enterprises by granting incentives or using disincentives (e.g. environmental taxes or relieves). Furthermore, a country’s taxation system is the result of a political decision-making process and therefore, in many cases, neither neutral for businesses nor fully internally consistent.
Taxation and financial accounting rules serve different purposes, have different objectives and are based on different principles. Although both sets of rules are used to measure the annual results of an enterprise, differences in the results or in the methods applied have to be accepted. Financial accounting looks at the enterprise as an economic entity, whereas taxation is normally based on a separate entity approach.

Policy makers in the fields of taxation and accounting must be aware of these differences. Tax authorities must respect them and refrain from using companies’ financial results for tax adjustments.

By Eduart GJOKUTAJ

Western historical experience with taxation has been that a government’s increased financial dependency on tax revenues may generate governance benefits, because it encourages the accountability of the state to its citizens. Explicit or implicit agreement about who should pay tax, at what rates and for what purposes was reached through bargaining between the ruler and the potential taxpayers. In contemporary OECD countries issues of taxation remain central and important – especially around elections.

In contrast, taxation is not high on the domestic political agenda in Balkan countries. With the exception of Greece, the politics of taxation are, in general, limited to involve a few specialized interest groups, and tend to take place in non-public arenas. Small lobby groups pressure for exemptions, for rate reductions on imports, or bargain with officials or ministers about tax liabilities.

Local government taxation is, however, a major exception to this. Around election time, this form of taxation is often high on the political agenda of both national and local politicians.

But, this politicization of local government taxes does not increase tax compliance among citizens. To the contrary, it often undermines local government tax collection efforts. The main reason why issues of taxation has not entered the political agenda in those countries is that only a minority of citizens pay direct taxes to the state and the failure of revenue-raising seems most acute in countries that receive large amounts of aid. Partly as a result of this, donors are increasingly directly involved in recipient country tax policy making and administration. Typically, donors push for ambitious overall revenue targets. This may, in some contexts, have significant but unintended negative influences on (i) taxpayers’ rights through coercive tax enforcement, and (ii) accountability by empowering the bureaucracy at the expense of elected politicians.

As part of the research programme, I have analyzed the relationship between taxation and accountability in the context of tax reforms carried out in a number Balkan countries. I focused on three interrelated issues affecting the relationship between taxation and accountability:
i) The internal accountability of the tax system was assessed with reference to administrative reforms of the tax system;
ii) ii) the democratic accountability of the tax reforms was analyzed by assessing whether the tax reforms created closer links between governments and their citizens; and iii) we also studied to what extent external accountability relations between governments and international donors affected domestic accountability relations.

In this part of the research project I emphasized the ongoing tax reforms in Albania, Bulgaria, Bosnia, and Serbia where reforms were introduced as part of the economic restructuring agreements with the international donor community.

The research has found that generally, the tax reforms have only to a limited extent succeeded in widening the tax net. Only formal business corporations appear visibly affected by the central government tax reforms. However, our research suggests that a voice and an organized response to the new revenue policies are developing within the business communities in the specific countries. The fact that these issues are being treated through formal, public organizations, rather than through bribery and public deals may indicate the beginning of a link between economic elites and government in issues of revenue generation.

My research indicates that it is not easy to introduce democratic accountability through externally imposed tax reforms. The tax reforms carried out in were to a large extent formulated and imposed by the international donor community. To meet the targets set by the IMF and Ministry of Finance, the revenue authorities in have focused on increasing collection and compliance from existing taxpayers rather than attempting the more complicated task of widening the tax base. Attempts to meet externally set tax-to-GDP targets may undermine democratic accountability if legal processes and taxpayers’ rights are set aside in order to comply with external accountability demands. The semi-military operations to prevent smuggling and tax evasion in Uganda illustrate this concern. Our findings suggest that if coercion is accepted as an integral part of tax collection it is unlikely that state-society relations can become more accountable and democratic.

A case that was recently decided in the Federal Court highlights a problem in relation to the keeping of business records. During the 1988 income year, a unit trust engaged in the purchase of a significant investment. It was not a good investment. Not too long afterwards the investment was worthless and in May 1993 the investment was sold for $1. This resulted in the unit trust incurring a capital loss of nearly $2.5m.

All of the units in the trust were sold from the original owner to a new owner in two tranches. One was in June 1993 and the other was in June 1995.

Capital losses may only be deducted for tax purposes against capital gains. Put another way, capital losses may not be used as a deduction against normal income. Due to this, the capital losses were carried forward by the unit trust until a capital gain was made by the unit trust in 2001.

The Australia Taxation Office (“ATO”) raised amended assessments against the ultimate beneficiaries of the trust and would not allow the capital loss of $2.5m to be set off against the capital gain made in 2001. The beneficiaries objected to this and the matter found its way to the Federal Court.

The main argument of the ATO was that the trust had fundamentally changed through some things that happened in 1993. I won’t go into the details of that.

However, the ATO also argued that the taxpayers could not prove that the purchase of the investment occurred in 1988 because, among other things, the primary documents that evidence the transaction no longer existed. This was so even though the financial statements of the unit trust showed the acquisition and there was verbal evidence from the people who actually engaged in the transaction. I note that the financial statements were prepared by a reputable firm of Chartered Accountants.

In his testimony before the court, the original owner of the units said that he did not have any of the business records of any of his companies or entities from 21 years ago. I know of few people that would.

So here’s the point. Generally, businesses are required to keep their records for a five year period under the Australian taxation law. But when it comes to capital gains tax, you need to keep records of everything that may be relevant to working out whether you have made a capital gain or capital loss. And, according to the ATO publication “Record Keeping For Small Business”, “You must keep these records for five years after you sell or otherwise dispose of an asset…”. So, you may need to keep the records for a very long time.

You will note in the case I refer to above that the ATO required the taxpayer to produce business records of a transaction that was 21 years old. Further, the disposal of the investment occurred in 1993, so that was 16 years earlier (not five).

The moral of the story is this: if you think that a transaction may have long term significant tax implications, don’t (ever?) throw out the primary documents that relate to that transaction. Keeping an electronic (scanned) image is something that you should consider.

Wishing you easier business.

John M. Jeffreys

Raising tax rates on the “wealthy” during an economic downturn is a recipe for economic disaster. Hoover tried this tactic in 1932 (Revenue Tax Act), which was the largest peacetime tax increase in history. The Act increased taxes across the board, so that top earners were taxed at 63% on their net income. The 1932 Act also increased the tax on the net income of corporations from 12% to 13.75%. You don’t need a calculator to do the math. That increase occurred less than three years after the1929 stock market crash. If President Obama has his way, he will try to repeat history and increase taxes on the “wealthy” (two years after the near collapse of the nation’s financial system) for the same reasons Hoover sited when he signed the legislation – to reduce the federal deficit. If you want to stop economic growth, increasing taxes is the way to go.

If the GOP does not fight this tax increase, and stop President Obama’s attempt to repeat history, our economy will stall and slide into another recession. The “wealthy” in this country have been branded by the left as evil. These “wealthy” are not evil. They represent the American Dream achievers. Individuals who take economic risk, who start businesses, who innovate and who employ people. The byproduct of seeking the American Dream is employment. Some call it trickle down economics with a scowl.

American Dream achievers should not be punished with punitive taxation. Rather, they should be held up as real-life American heroes. They should be rewarded with lower taxes(reduced tax on capital gains, dividends, interest and business profits). They are the heartbeat of America’s economic system. Takeaway the incentive to seek unlimited economic prosperity, through higher taxes, and you destroy the American Dream. There is a reason why immigrants from all corners of the globe risk life and limb to get to our shores. It’s the American Dream. If we continue to label the “wealthy” as evil and, thus tax them differently than everybody else,then we will destroy the American Dream. The tables will have been turned. Instead of immigrants fighting to get to our shores, our own children will be forced to seek the American Dream elsewhere.

Small and medium enterprises (SMEs) are undoubtedly very important actors in the Albanian trade and economy, both in quantitative and qualitative terms. As regards the former aspects, SMEs represent 97.8% of all enterprises located in the Albania, and they employ more than two thirds of the overall workforce (Instat, 2008). For what concerns the qualitative aspects, it has been pointed out that the role of SMEs in the Albanian society has become increasingly important as providers of employment opportunities and key players for the wellbeing of the communities at local and regional level. At the same time it will be no longer possible to ignore their impact on economy given the fact that actually the average firms size is decreasing, and therefore the Albanian business scene will be occupied predominantly by SMEs, not only in quantitative terms.

The required capabilities of auditors were generally identified by analyzing the activities required to perform particular audit tasks, and through practice and experience. They were often based on the notion that auditors are generalists, who may subsequently develop into specialists to meet organizational needs. The required capabilities of audit managers and directors were typically identified and based on the notion that they were to be both people leaders and tax technical leaders. Coaching, communication, and leadership skills are seen by many as important capabilities. Experienced personnel (who have proven and demonstrated abilities to perform audit work) generally identify the required capabilities to perform audit work. Specialist qualifications and skills were not cited as important factors in determining who is to identify the required capabilities. The majority of responses identified senior management, team leaders and experienced audit staff as the people who identified the required capabilities. This was often done jointly or in consultation with human resource stakeholders, training departments and head office.

The required capabilities for audit staff in Albania using competency models are as listed below:

- conduct investigations;
- determine compliance;
- tax accounting and financial analysis;
- conduct research and analysis;
- apply the law (technical expertise);
- make effective decisions;
- communicate effectively;
- apply work processes and procedures;
- manage own work;
- achieve results; and
- manage relationships.

Responsibility and accountability for improving auditors, audit managers and audit directors commonly lies with the staff member in question and their direct manager and/or local management team. Responsibility and accountability is influenced by the organizational structure that change in accordance with the change of tax leadership. Human resource departments (where applicable) often have joint responsibility and/or are significant contributors to this process, together with tax auditing / training departments.

The audit is responsible for managing a coordinated audit program for all taxes for which the tax administration is responsible (Income Tax, VAT, etc.). This does not necessarily mean that an auditor will be expected to do a complete audit of all taxes but rather that the Audit Department will adopt a coordinated approach in selecting and conducting audits. Whenever possible, income tax and VAT audits should be conducted simultaneously, even though different tax periods may be audited for each type of tax. For example, an income tax audit for 2007, 2008 tax years and a VAT audit only for 2008 tax periods. This will enable common issues, records and areas of concern to be dealt with comprehensively.

The Regional Audit Directories, that have the competencies to audit SMEs also develop close cooperation with all other Directories of the Regional Tax Directorate and neighbor Regional Tax Directorates in particular; the Anti-Evasion Directorate in General Taxation Directorate, not only to ensure cases of suspected evasion are referred on a timely basis but also to volunteer the expert audit services of the Directorate in investigations being conducted; the Enforced Collections Directorate to receive referrals of audit stop-filers or no filers; and, the Appeals Directorate – to re-audit taxpayers who have produced new evidence during the appeal process.

The substructure of the directory includes units to conduct both office audits and field audits. Additionally, auditors can be grouped by specialty, both by type of tax (VAT, Excise, Income, etc.) and type of industry (banking, manufacturing, retailers, etc.)

Repeated focus on an industry will permit an auditor to become expert in the tax legislation issues and the necessary audit techniques related to specific industries. A separate unit handle risk analysis methodology based in automatic selection with data mining drill system. Until an automated case selection system based on risk analysis is developed in all country, this unit will Coordinate the regional directorates that work manually with them that really are automated. Once the automated system really is effective in place, staffing will be reduced but will still be necessary to ensure that the risk assessment system is functioning properly and to supplement it as appropriate. This is necessary to provide a small number of audits for compliance coverage even where the risk is relatively low, and to deal with newly discovered pockets of non-compliance.

Finally, a separate audit review unit is necessary for post audit quality assurance and trend analysis. A strong accounting education is required for the staff assigned to perform income tax and specialty audits in the field (outside the tax administration’s office). Staff handling simple office audits (where the taxpayer visits a tax administration office) and VAT audits or controls require minimal accounting skills. Auditors assigned to complex case audits, audit classification, and audit quality review, should possess excellent skills and have significant experience in the department. All staff must be knowledgeable in tax law, audit techniques, and internal operating procedures. Along with all other public contact employees of the tax administration, they must possess good interpersonal skills and exercise good judgment in accomplishing their work assignments.