A GOOD STARTING point in preparing for the Tax Risk Management strategy process is for the BO/CFO , together with the tax manager , to complete the following Tax Risk Management best practice checklist prepared by PricewaterhouseCoopers in their tax risk management guide.
How It Can Produce Surprisingly Gratifying Results For Foreign Persons
The simple rule for the source of interest paid by individuals has become an international tax shelter for tax-averse foreign persons. The active ingredient in virtually all international tax haven operations is the deduction of interest from a stream of business income otherwise subject to high taxation. The second ingredient is the deflection of interest, free of further U.S. tax, to some benign low-tax environment.
In order to understand how the source rule for interest can produce surprisingly gratifying results for foreign persons, it is necessary to understand the rule itself. And what is that rule? Interest paid by individuals, partnerships, and trusts takes its source from their place of Read More
The Australian Financial Review’s Fleur Anderson reported today on an internal ATO memo to staff. The memo said “We are currently exploring a new initiative for undertaking assurance work through the External Compliance Assurance Process (ECAP) project…This approach will look at how we might use the capabilities of accounting professionals, who are registered company auditors, to conduct certain assurance reviews on our behalf.”
This is an interesting development, but the report does not indicate whether the ATO would engage and pay the external auditor, or that corporate taxpayers would be expected to do so as part of their tax risk mitigation processes.
If the ATO was to engage the corporation’s existing auditor, that would raise ethical Read More
Today, I’m going to move forward and look at the OECD Model Treaty’s rules on permanent establishment. This is important for a simple reason: in order to exert its taxing rights over a transaction or individual, a jurisdiction must either prove the person/business is a resident (which we covered over the last few weeks) or prove the transaction took place within the jurisdiction’s borders. A permanent establishment is where a transaction occurs; hence the determination of a permanent establishment is of vital importance.
Let’s start with the basic definition: “For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.” The commentary adds important, further clarification. Read More
As a general rule, interest paid by individuals, partnerships, and trusts takes its source from their place of residence. A natural corollary to this rule is that interest paid by individuals, partnerships, and trusts that are “residents” of the United States has U.S. source.
This source rule has consequences that both borrowers and lenders will occasionally find startling. An example will help illustrate this point. Hans is a German citizen. He meets John, a U.S. citizen, at St. Andrew’s Golf Course for the British Open. John is the owner of Tyco, a U.S. toy-manufacturing corporation. Hans loans John $ 100,000. One year later, the two meet up for another rendez-vous at the British Open. At that time, John repays the loan, complete with interest. Read More
Methodology
AN EXPERIENCED FIRM that will manage the Tax Risk Management strategies must be well positioned to take the methodology to the various divisions in the business. In doing so, the Tax Risk Management firm must not necessarily be tax specialists but must work very closely with associated technical tax firms through an established network, who have the required expertise to assist in giving opinions in those tax risk areas that require attention.
The Tax Risk Management management firm must facilitate the whole process from inception to completion. They act as the external project champion with the key business role players in the tax team. They will review the law, the facts, and the conclusions so as Read More
On October 30, 2013, Senator Baucus issued a statement about the merger of California-based Applied Materials (manufacturer of semiconductor manufacturing equipment) with Tokyo Electron along with the reincorporation of the entity in the Netherlands. He referred to information from an October 8 New York Times article. Baucus noted that Applied Materials effective tax rate will decrease from 22% to 17%, saving about $100 million annually.
Baucus also observes that this type of restructuring is “a new spin on the old “inversion” problem. And it’s becoming an increasingly popular practice.”
Finally, he observes: “This is a simple issue. Globalization has made America’s tax code out Read More
Colorado clearly does not stick to the trends. Whether it is legalizing marijuana or attempting to get Northern Colorado to become the 51st state, Colorado has been all over the news during the past year. Recently, the state had on its ballot an interesting tax that stayed in line with Colorado’s unusual politics. Specifically, on November 5, 2013, Colorado voters passed the pot tax.
On its face, the tax appears to operate similar to somewhat steep excise tax. It appears that recreational marijuana sales will be subject to a 25% tax which goes into effect on January 1, 2014. Of the 25%, 15% will be allocated to public school construction projects and 10% will go to funding enforcement regulation on the retail pot sales. This excise tax, which is similar to tobacco and cigarette taxes, is in addition to 2.9% sales tax at the retail level. Read More
Last week, I looked at the residence provisions of the OECD Model Tax Treaty for individuals. This week, I’ll take a look at the provisions for non-individuals.
Before moving forward, however, it is important to briefly diverge into an area of academic discussion: partnerships, and how the OECD treaty deals with these business entities. Under Article 1, the treaty applies to “persons who are residents of one or both of the contracting states.” This leads to the question of, “how does the treaty deal with a pass-through entity?” Is the entity actually a separate company or is the entity a collection of its partners? If the latter, how do we deal with that? While this might seem like an academic debate, in reality it’s not, as some jurisdictions treat these business entities in a very different manner. The debate went so far as to have the OECD issue a paper on this Read More
Because of the nature of the global economy and the reality that it relies upon the equilibrium and floating mechanism of rates, financial collapse of a country’s currency has become a real financial risk. A world economy integration remains in its earliest stages of development. Developed, emerging, and underdeveloped economies have become bound by the General Agreement of Tariffs and Trade, GATT and the World Trade Organization, WTO. Trade and currency valuations are intertwined in total coherence.
Each nation experiences populism that brings about a pressure to provide employment and higher standards of living. Some have conceded to alarming national fiscal financial irresponsibility. Exporting to enhance current account surpluses and thwart balance of payment has become paramount. These imbalances shatter currency positions and Read More
Formerly available only to large and midsize businesses and in a geographically limited pilot program for smaller entities, the IRS’s Fast Track Settlement program is now available to smaller businesses nationwide, the IRS announced Wednesday, November 6.
Fast-track settlement allows the IRS and business or self-employed taxpayers under examination to use alternative dispute resolution procedures to resolve tax controversies more quickly, without a formal administrative appeal or litigation. The program began on a pilot basis in 2001 for businesses over which the IRS’s Large and Mid-Size Business Division (LMSB, now the Large Business and International Division) had jurisdiction—those with more than $10 million in assets. Read More
IN THE PROCESS of implementing the tax risk management 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. This will ensure that the tax manager is able to connect with key areas in the business to get a firsthand account of what is happening in “real time,” rather than waiting for financial Read More
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