The October 2009
edition
of the International Association of Risk and
Compliance Professionals (IARCP)
newsletter
Dear
Members,
This month we will discuss about the
corporate tax compliance management
challenges, an area
that is relatively unknown to many risk and compliance
officers,
but it becomes more important and difficult to understand year
after year.
Corporate tax compliance has become
an increasingly complex issue with
constantly changing requirements. Organizations must manage
one important compliance risk: The
risk that they do not comply with tax laws and regulations.
This is an operational risk according to the
Basel ii framework, and a major compliance risk that leads to
reputational risk in most countries of the world.
In large part because of the complexity and uncertainty in the
application of tax laws, the actual level of corporate income tax
noncompliance (illegal tax avoidance) is poorly understood.
According to the Government Accountability Office (GAO), the
audit, evaluation and investigative arm of Congress,
one of the major challenges is to
distinguish between legal and illegal tax management. Much
corporate tax avoidance is legal and the true tax liability for
large corporations is very difficult to determine.
The amount of corporate tax avoidance is unknown.
A complex tax code, complicated business
transactions, and often multinational corporate structures make
determining corporate tax liabilities and the extent of corporate
tax avoidance a challenge.
Tax
avoidance has become such a concern that some
tax experts say corporate tax departments have become “profit
centers” as corporations seek to take advantage of the tax laws in
order to maximize shareholder value. Some corporate tax
avoidance is
clearly legal, some falls in gray areas of the tax code, and some
is clearly noncompliance or illegal.
Often corporate tax avoidance is legal.
For example, multinational
corporations can locate active trade or business operations in
jurisdictions that have lower effective tax rates and, unless and
until they repatriate the income, defer taxation on that income,
thus reducing their effective tax rate.
Tax shelters are one example of how tax
avoidance, including corporate tax avoidance, can shade into the
illegal. Some tax shelters are legal though perhaps
aggressive interpretations of the law, but others cross the line.
In a 2003 testimony, the Government Accountability Office (GAO)
reported that there were identified 27 kinds
of abusive shelter transactions—called listed
transactions—promoted to corporations and others.
Abusive shelters allow complex transactions that manipulate many
parts of the tax code or regulations and are typically buried
among legitimate transactions reported on tax returns.
Because these transactions are often
composed of many pieces located in several parts of a complex tax
return, they are essentially hidden from plain sight, which
contributes to the difficulty of determining the scope of the
abusive shelter problem.
Often lacking economic substance or a business purpose other than
generating tax benefits, abusive shelters have been promoted by
some tax professionals, often in confidence, for significant fees,
sometimes with the participation of tax-indifferent parties, such
as foreign or tax-exempt entities. These shelters
may involve unnecessary steps and
flow-through entities, such as partnerships, which make
detection of these transactions more difficult.
For example, a company had a sizable gain
from the sale of a subsidiary and wanted to avoid or minimize
paying tax on the gain. An investment bank proposed forming an
offshore partnership with a foreign corporation (a tax-indifferent
party) for the express purpose of sheltering the capital gains of
its corporate client. The partnership purchased and quickly resold
notes in a contingent
installment sale transaction.
The partnership earned a large capital gain, most of which it
allocated to the foreign corporate partner. Later, related losses
were allocated to the U.S. corporation, generating approximately
$100 million in capital loss for the investment bank’s client. The
corporation used this capital loss to shelter its U.S.-based
capital gains.
Both the Tax Court and the Third Circuit Court of Appeals ruled
that the transaction lacked economic substance. The Third Circuit,
in addition to requiring economic substance, held that a
transaction must have a subjective non tax business motive to be
respected for tax purposes. For this
transaction, the investment bank was to earn a fee of $2 million.
Establishing a presence in a low-tax country
is another technique for avoiding corporate income tax.
Some low-tax countries are called tax havens. The company’s
presence in a tax haven in some cases may be nominal, nothing more
than a file in an office. Use of a tax haven can be questionable
when combined with abusive transfer pricing or techniques, such as
interest stripping, to artificially shift income to the tax haven.
Why I should be concerned?
Because tax compliance becomes more
important, and it is a role for risk and compliance officers.
It is interesting to have a look at the job
description below.
CASE STUDY
Compliance Auditor
City: Atlanta
State: Georgia
Country: USA
Company Name: Siemens
Job Description
The mission of Siemens Corporate Audit (CFA) is to add value and
improve the worldwide operations and processes of Siemens AG and
its Affiliated Companies (Siemens), by
independently and objectively evaluating and reporting on Siemens'
financial reporting integrity, the effectiveness of risk
management and internal control systems, and the adherence to
Siemens' compliance policies in a systematic and disciplined
manner.
Compliance Audit shall conduct - in accordance with the Siemens
Global Audit plan and
in coordination with the Chief Compliance Officer -
enterprise-wide, risk-based regulatory compliance Audit
Engagements to evaluate,
whether Siemens business conduct is in accordance with federal,
state and statutory law and regulation and Siemens Compliance
policies.
The scope of Compliance Audit work covers:
* Regulatory compliance of
(i) conducting government business,
(ii) offering financial products,
(iii) offering medical equipment subject to the U.S. Food and Drug
Administration (FDA) or other relevant local regulation,
(iv) offering energy or transportation solutions in accordance
with standards for environmental law and regulation,
(v) offering product and services subject to anti-trust law and
regulation,
(vi) offering cross-border products and services subject to export
and import regulation, and
(v) any other regulatory compliance where Siemens is subject to in
conducting global business.
* Compliance with relevant Tax and Social Security law, in
particular transfer pricing and permanent establishment.
* Compliance with work-force regulation such as Health and Safety
law and regulation, data privacy, work permission laws and
regulation.
Employment Tax Evasion Schemes
According to the US Internal Revenue Service (IRS),
the most common types of employment tax
non-compliance include:
Pyramiding
"Pyramiding" of employment taxes is a fraudulent practice where a
business withholds taxes from its employees but intentionally
fails to remit them to the IRS.
An often cause is a
lack of profit or capital for operating costs, so the business
owner uses the trust funds to pay other liabilities.
The quarterly employment tax liabilities
accumulate (or “pyramid”) until the employer has little hope of
catching up.
Businesses involved in pyramiding frequently
shut down or file for bankruptcy and then start a new business
under a different name starting the cycle over.
Unreliable Third Party Payers
There are two
primary categories of third party payers –
Payroll Service Providers and Professional Employer Organizations.
Payroll Service Providers typically perform services for employers
such as filing employment tax returns and making employment tax
payments. Professional Employer Organizations offer employee
leasing meaning that they handle administrative, personnel, and
payroll accounting functions for employees who have been leased to
other companies that use their services.
Many of these
companies provide outstanding services to employers.
Unfortunately, in some instances, companies of both types of
services have failed to pay the collected employment taxes. When
these employment service companies dissolve, millions in
employment taxes can be left unpaid. Employers are urged to
exercise due diligence in selecting and monitoring a third party
payer.
Frivolous Arguments
Unscrupulous
individuals and promoters have used a variety of false or
misleading arguments for not paying employment taxes.
These schemes are
based on an incorrect interpretation of “Section 861” and other
parts of the tax law and have been refuted in court.
One variation of
this scheme involves the improper use of Form 941c, Supporting
Statement to Correct Information on Form 941, to attempt to get a
refund of previously paid employment taxes. Recent court cases
have resulted in criminal convictions of promoters.
Employer
participants could also be held responsible for back payments of
employment taxes, plus penalties and interest.
Offshore Employee Leasing
This scheme, which
was designated as a Listed Transaction by the Service in 2003,
misuses the otherwise legal business practice of employee leasing.
Under the typical
promotion, an individual taxpayer supposedly
resigns from his or her current employer or professional
corporation and signs an employment contract with an offshore
employee leasing company.
The offshore company indirectly leases the
individual’s services back to the original employer using a
domestic leasing company as an intermediary. The individual
performs the same services before and after entering into the
leasing arrangement.
While the total
amount paid for the individual’s services stays the same or
increases, most of the funds are sent offshore as “deferred”
compensation. The “deferred” compensation is then paid to the
individual as a “loan” or ends up in an account under the
individual’s control.
Promoters of these
arrangements improperly claim that neither employment taxes nor
income taxes are owed on the “deferred” compensation. Because it
is a Listed Transaction those who use the scheme are required to
disclose their participation on current tax returns, and will be
liable for the unpaid tax and subject to penalties and interest.
Civil and criminal actions are being taken
against promoters and participants in offshore leasing schemes
– one promoter was convicted of defrauding the U.S. and
sentenced to 70 months imprisonment, two other promoters have been
ordered by the courts to stop marketing the scheme and a San Diego
doctor plead guilty to tax evasion and is awaiting sentencing.
Misclassifying worker status
Sometimes employers incorrectly treat
employees as independent contractors to avoid paying employment
taxes.
Generally if the
payer has the right to control what work will be done and how it
will be done, the worker is an employee.
Employers who
misclassify employees as independent contractors will be liable
for the employment taxes on wages paid to the misclassified worker
and subject to penalties.
Paying Employees in Cash
Paying employees in whole or partially in cash is a common method
of evading income and employment taxes.
There is nothing wrong with compensating an
employee in cash, but employment taxes are owed regardless of how
the employees are paid.
Filing False Payroll Tax Returns or Failing to File Payroll Tax
Returns
Preparing false
payroll tax returns intentionally understating the amount of wages
on which taxes are owed or failing to file employment tax returns
are methods commonly used to evade employment taxes.
Dear
member,
Write in your CV, resume,
websites etc. that you are members of the International
Association of Risk and Compliance Professionals (IARCP)
Take advantage of the distance learning and online certification
program - at a cost that is unheard of.
www.risk-compliance-association.com/Distance_Learning_and_Certification.htm
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