G-20 Stamps Out Tax Havens
The fallout from the recent tax evasion settlement with UBS is reverberating throughout the G-20 community. As we reported back in October, the French Governments action directing banks to close branches and subsidiaries in non-OEDC compliant jurisdictions will pressure all G-20 participants to adopt a more uniform tax code and enforcement practice. The drive to strengthen the respect of tax treaties and the closure of havens to custody assets beyond the reach of national tax authorities signals a new era in multinational cooperation and the eclipse of radical free market tax practices.
The principal drivers for this unprecedented level of cooperation and standardization is the dire need for national tax authorities to recognize and tax revenue streams to help address the burgeoning budget deficits the global economic crisis has has wrought.
Clearly the crackdown on tax evasion is gaining momentum since the global financial crisis has devastated national treasuries. Enormous expenditures on stimulus programs and dramatically falling tax receipts has created a perfect storm and has created an enormous threat to the fiscal soundness of national treasuries.
Forbes reports that Singapore has become the latest in a flurry of jurisdictions complying with Office of Economic Cooperation and Development standards on transparency and exchange of information for tax purposes. Fifteen jurisdictions have come into compliance since April 2009. In addition to Singapore and the sea change occurring in the Suisse banking industry; other governments that have lost revenue to tax havens are individually taking tough action:
–The U.K. government has informed the Isle of Man that it will reduce revenue transfers of value-added tax receipts to the island by 50 million pounds next year, 9% of the island’s revenue.
–French banks are starting to close down their operations in tax havens.
–In Germany, the hiding of funds in Liechtenstein bank accounts has prompted a backlash against tax havens.
–In the United States, White House advisor Paul Volcker in December is due to report on ways of eliminating revenue losses to tax havens.
This heightened regulation and standardization amongst G-20 tax authorities is quickly closing any regulatory tax arbitrage opportunities for global investors. The closure of preferential tax domiciles will heighten the power and reach of national tax agencies enforcement capabilities and the scope of their examination reach. The IRS is stepping up its enforcement and institutional assets to assure that private equity and hedge fund industries comply with all the anti-money laundering laws and stringent tax codes.
Sum2’s IARP helps investment managers assess and manage the growing threat of audit and tax enforcement risk. Sum2’s CARP helps large and mid-size corporations assess compliance and manage IFI audit risk.
Risk: audit, enforcement, regulatory, tax, reputational, litigation
Survey Says: Corporate Tax Audits on the Rise
A recent survey published by Sabrix indicates that corporate tax audits are on the rise. Eighty-three percent of companies surveyed report an increased number of audits due to state and local tax revenue shortfalls. Survey respondents comprised 140 tax executives from the Forbes Global 2000 Index.
Ninety-six percent of the attendees said that despite the recession, transaction taxes such as sales and use taxes will continue to be an area of focus. In response to the economic downturn, 45 percent of the attendees said their companies had reduced their employee headcount, but 45 percent also increased their investment in tax technologies.
Eighty-one percent of the respondents have made sales and use tax and value-added tax a more strategic focus of their company due to the economy. A similar proportion said they have implemented new programs and processes to remain compliant.
The IRS is under pressure to enforce compliance with federal tax statutes. The US Treasury coffers are seriously depleted given all the stimulus and economic recovery expenditures. The IRS is mandated to assure that corporations comply with all tax laws. The IRS has developed an Industry Focus Issue, (IFI) audit strategy that profiles high risk corporate tax compliance statutes. IFI guides field audit personnel through a risk based assessment of corporate tax compliance. The IFI aggregates and ranks Three Tiers of high risk tax compliance issues. Examiners will conduct rigorous reviews of these issue sensitive factors. The factors concern revenue recognition, sales tax, partnership reporting, and the repatriation of revenue derived in foreign domiciles.
Sum2 has published a product, IRS Audit Risk Program (IARP) that guides corporate tax managers and tax professionals through a risk assessment of their exposure to IFI risk factors. The IARP helps corporate tax professionals score tax risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies. The IARP is available for purchase on Amazon.com.
Sum2 also has developed the Corporate Audit Risk Program (CARP). The CARP is IRS tax risk assessment tool for corporate tax managers. A single user license for CARP can be purchased on Amazon.com.
Risk: compliance, tax audit, reputation, litigation
You Tube video: Stevie Ray Vaughan, Taxman
Radio Nowhere: Tax Risk Delists Emmis Communications
Misinterpretation of the tax code led to the NASDAQ delisting of Emmis Communications after investors dumped the stock following a restatement announcement. In an 8-K Filing Emmis announced that its previously filed public financial statements cannot be relied on for accuracy. Emmis’s stock price has been trading below $1.00 per share after investors negative reaction to the company’s restatement of earnings and financial condition. The restatement was necessary after Emmis discovered it improperly accounted for the tax treatment of Federal Communication Commission (FCC) licensing rights.
Emmis operates a number of radio stations in key metropolitan markets and was forced to restate its financial statements for the past fiscal year and for the first quarter of this year to adjustments it made in its provision for income taxes. Last year the company wrote down the value of its FCC licenses. This put Emmis into a loss position leading the company to overstate the benefit for income taxes and understated deferred tax liabilities by $25.3 million for its fiscal year ended February 28, 2009.
Emmis CEO Jeff Smulyan, released a statement on the company website that read, “Certainly, ‘restating our earnings’ sounds ominous, but our restatement solely relates to a non cash technical tax issue that has no impact on our operations. While there might be big numbers involved and a lot of paperwork being filed, I don’t see anything to worry about.”
This is an interesting example of the consequences of tax risk. Most tax risk events result in huge settlement amounts, damage to executive reputations and the company brand and sometimes prison terms for the persons and parties involved. The delisting of the Emmis stock and the severe devaluation of shareholder equity is a more extreme result of the failure to mitigate tax risk factors.
Sum2’s Corporate Audit Risk Program (CARP) guides corporate tax managers through a thorough risk assessment of exposures to IRS Industry Focus Issues (IFI). CARP helps tax professionals score threats of IFI risk factors and implement mitigation actions. The CARP lists Emmis tax problem as a Tier Three IFI risk factor. It falls under the communications technology and media industry guidelines for amortization on intangibles, licensed programs and contract rights. The CARP is an indispensable guideline and tool that may have provided insights into the tax risk that led to a costly delisting and evaporation of shareholder equity.
Emmis share price closed today at $1.32. We wish the management, shareholders and employees a speedy remediation to the problems confronting the company and a recovery of the share price to reestablish its listing on the NASDAQ.
You Tube Music Radio: Bruce Springsteen, Radio Nowhere
Risk: tax, shareholder equity, reputation, regulatory
Perp Walks Begin: UBS Client Pleads Guilty
Forbes digital news service reports that a New Jersey client of the international banking giant UBS has pleaded guilty to concealing more than $6 million in assets in Swiss bank accounts. Juergen Homann of Saddle River is the fifth US client of UBS to plead guilty in an ongoing federal investigation into the bank’s practices. UBS officials have admitted helping wealthy American clients use foreign accounts to hide assets from the IRS.
Homann, 66, is a German-born U.S. citizen runs an industrial mineral and chemical trading company that does business mainly between China and Latin America. Prosecutors say Homman established an account with UBS in the late 1980’s in the name of a Liechtenstein foundation. Under the advice of Swiss lawyer Matthias Rickenbach, prosecutors say Homann transferred his assets to a Hong Kong corporation to hide assets from the IRS. Rickenbach was indicted for fraud in August for his alleged role in helping wealthy clients conceal their assets.
Under terms of the plea agreement, Homann pleaded guilty to one count information for purposely failing to report his foreign accounts. He acknowledged in a Newark federal courtroom Friday that in addition to not filing the required disclosure forms, he failed to report the account on his individual tax return and failed to report income earned on the account. Homann faces a maximum sentence of five years in prison and a fine that could potentially reach several million dollars.
UBS has entered into an agreement with the authorities to divulge names of some 4,450 wealthy Americans suspected of evading taxes through secret bank accounts.
Michael Ben’Ary, a trial attorney with the U.S. Department of Justice’s tax division, said Homann’s guilty plea is part of a wider multi-agency investigation that is continuing in New Jersey and nationally.
UBS clients Steven Michael Rubinstein of Boca Raton, Fla., Robert Moran of Ft. Lauderdale, Fla. and Jeffrey Chernick of Stanfordville, N.Y. have all pleaded guilty to filing a false tax return as part of the case. UBS client John McCarthy of Malibu, Calif., has pleaded guilty for failing to report his ownership of and interest in a foreign financial account.
“The IRS is serious about pursuing people with hidden offshore accounts, and we are stepping up our international efforts,” IRS Commissioner Doug Shulman said in a statement. “People should make sure they meet their filing requirements. Failure to do so can carry serious consequences.”
Sum2 publishes the Corporate Audit Risk Program (CARP). The CARP helps corporate entities that utilize offshore structures and investment partnerships assess their risk exposures to IRS Industry Focus Issues. The CARP is a vital tool to uncover and mitigate costly exposures to IRS tax audit risk.
Risk: tax, compliance, penalties, reputation, litigation
A Taxing Situation
President Obama announced his intention to curb the use of offshore tax havens for multinational corporations. The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years. According to the New York Times, firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS. It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.
This move should come as a surprise to no one. The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown. The TARP program designed to revitalize banks has expenditures that amounted to $700 bn. Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn. These amounts are over and above routine federal budget expenditures that is running significant deficits as well.
The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk. For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws. Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures. The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.
The IRS has hired hundreds of new agents and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models. As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.
The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and Large and Mid-size Businesses (LSMB). The IFI for LSMB has developed three tiers of examination risk. Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance. Clearly the audit risk factors risk
To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment. The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk. A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.
Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor. It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.
The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier. The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries. The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.
The IARP is the newest risk application in the Profit|Optimizer product series. The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.
The IARP is available in two versions.
The IRS Audit Risk Program for investment partnerships (IARP)
Buy it on Amazon here: IARP
The Corporate Audit Risk Program (CARP)
Buy it on Amazon here: CARP
Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey
You Tube Video: Chairman of the Board, Pay to the Piper
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