Monday, December 30, 2013

Integrating FIN 48 Into The Tax Provision Process - Corporate Tax Provision Software

By Frank Miller

VAT is the only tax that involves the government not only in collecting substantial money from the private sector but also in paying a good deal of it back to them in the form of input tax credits. 136 countries now have a VAT of some sort and remain at least 63 countries that do not have VAT's, 41 of which now have some other form of general consumption tax and 23 of which appear to have thus far been able to avoid facing the problem. Over the last decade, VAT has arrived in Albania. The principal reasons for arrival of this form of taxation were, first, the early adoption of this form of taxation in the European Union (EU) and, second, the key role played in spreading the word to economic transition countries by the International Monetary Fund (IMF) in particular and by international agencies and advisors more generally.

The success of VAT in the EU showed that VAT worked. The consistent support and advocacy of this form of taxation by the IMF and others in a variety of countries, encouraged and facilitated the adoption of VAT by countries with much less developed economic and administrative structures than those in the original EU member states, like Albania. The VAT, it's invariably among the most important sources of government revenue. Not all is so good for VAT, however. Some of problems have always been inherent in the structure and operation of VATs but are exacerbated by the increased fiscal weight being placed under pressure for new fiscal revenues for example to offset revenue losses from tariff reductions needed to accord with WTO requirements. It is thus perhaps time for a new look at the role of VAT in Albania. I want to make some question that can be a referent point for this discussion. Can VATs be adapted to cope with the rising demands for more access to revenues by local and regional governments? Can tax administration deal with such new problems as those arising from changes in business practices with financial innovations and e- commerce? Does VAT provide a way to tap the informal sector or does it instead tend to expand that sector? The answers to such questions are not only critical to the fiscal stability of Albania, but also to her economic growth and development. Not only do we as yet have surprisingly little solid empirical knowledge of some critical factors but the relevant economic theory also remains rather sketchy and we know even less about the relevant political economy context.

Integration of UTPs with the current taxes payable account presents special challenges. Before FIN 48, tax reserves computed under FAS 5 were typically recorded in the current payable on the theory that the government could demand payment at any time. This meant that refunds and payments due with the filing of the return were co-mingled in the ending balances. Past FIN 48, these items are still included in the ending balances; however, the movement in the UTPs must be disclosed in a separate roll forward using the following prescribed categories: Beg Balance, PY Increase, PY Decrease, CY Increase, CY Decrease, Settlements Expiration.

Research demonstrated that most tax money benefited the middle classes and the rich, in short: those who need it least. Moreover, these strata of society were most likely to use tax planning to minimize their tax payments. They could afford to pay professionals to help them to pay less taxes because their income was augmented by transfers of tax money paid by the less affluent and by the less fortunate. The poor subsidized the tax planning of the rich, so that they could pay less taxes. No wonder that tax planning is regarded as the rich man's shot at tax evasion. The irony is that taxes were intended to lessen social polarity and friction - but they achieved exactly the opposite. In economies where taxes gobble up to 60% of the GDP (France, Germany, to name a few) - taxes became THE major economic disincentive. Why work for the taxman? Why finance the lavish lifestyle of numerous politicians and bloated bureaucracies through tax money? Why be a sucker when the rich and mighty play it safe?

The roll forward of UTPs within the current taxes payable may give rise to a cumulative translation adjustment where activity is recorded in local currency and is translated into a different reporting currency. A cumulative translation adjustment arises because the beginning and ending balances are recorded at the beginning and ending spot rates, and the activity is recorded at the rates used in the income statement for the period. In their presentation of the UTP roll forward, companies will have to decide the best presentation of this item; i.e. should the cumulative translation be combined with the activity columns or should it be separately stated. For calendar year filers, this disclosure is not required until the 4th quarter of 2007. The roll forward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision. Changes in tax rates can also have a signify-cant impact on the integration of UTPs into the tax provision.

The initial VAT legislation, usually close to standard international models, as time goes on tends to become both more complex and to some extent ad hoc in how it is actually applied. The structure of VAT becomes littered with privileges and exemptions that minimize its revenue impact and make it difficult to manage. Sometimes, once concessions enter the system, they have been subsequently enlarged surreptitiously without quick response from the tax administration, becoming in effect almost a "self- assessment" system without the necessary administrative systems and safeguards to support such a system. Concessions thus feed on themselves, encouraging taxpayers to lobby for still more concessions, just as tax amnesties create an incentive to defer payment in anticipation of future amnesties. Little assistance in coping with these complexities is offered in the way of taxpayer services. Nor is much done to guard against abuse, with most so-called VAT "audits" amounting to little more than simple numerical checks. Widespread base erosion facilitates both evasion and also, when taxpayers are subject to audit, corruption.

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