Tax Law: Problem Solving - Assignment Example

Running head: TAX RISK MANAGEMENT Tax risk management Insert Name Institution Date Introduction Tax risk management Businesses make profits by taking risks. In order to make appropriate profits however, the firms must evaluate their strength of taking risks so that they can establish the best balance between risks and opportunities. Some of the risks to be taken into account are directly or indirectly related to tax. The main challenge for many firms is the ability to determine the appropriate balance between the risks involved and the probable opportunities. Due to the consequences of scandals such as the Enron, the corporate environment has transformed drastically and risk management in all sectors is the top priority in most organizations (Ernst & Young, 2007). Oblib Status Bilbo who has been employed by Oblib Pty LTD to conduct treasure hunting consultancy services has none of his clients contributing more than 10% of his gross income. The firm should consider assigning Bilbo other work based on the income he is generating for the company in the trust consultancy services. Since the Australian economy is growing reasonably at an expansion rate of about 4% GDP growth, the firm should take advantage of the situation to make more profits. Most of the corporate profits have been rising fast while both profits and revenue for most firms growing faster than the underlying expansion in GDP. Due to this growth, the global market has increasingly become complex and the challenge to many firms is to ensure that the complexity is controlled to manageable levels. Oblib thus should manage the complexity at the market place by implementing appropriate risk management and governance frameworks. The firm should make use of the cheap and responsive tax and superannuation compliance arrangements initiated by Australian Taxation Office to facilitate its operations and avoid incurring losses (Australian Taxation Office, 2009). Mergers and acquisitions The global financial crisis have resulted to a decline in the demand for treasure hunting consulting services in the year 2009/2010, the firm should consider the options of mergers and acquisitions. The county has been experiencing an increase in takeovers, mergers and acquisitions and therefore Oblib will be in line with the current trends should it implement the suggestions. Larger deals in the mergers and acquisitions have resulted to creation of new and complex financial instruments to cater for the complexity in the market place. Mergers and acquisitions are appropriate for Oblib since it is a large firm that operates in highly internationalized conditions. Under mergers and acquisitions, the major income tax issues that the firm should consider for examination include: the necessary application of rollovers, tax values of significant assets such as the luxury apartment purchased in Paris and the utilization of capital losses. Another issue is capital raising through the use of hybrid securities which include hybrid instruments that may be categorized as debit for income tax purposes, but equity for accounting reasons. To avoid incurring losses especially in the private equity deals like the characterization and the forms of paying the investors and the accompanying transaction fees (Australian Taxation Office, 2009). Relationship with large businesses Oblib should associate itself with large businesses and create constructive relationships with them. This is because large businesses and top Australian firms generate 45% of corporate tax revenue while large corporate groups generate 67% of company tax and about 36% of total tax revenue. Co-operation and trust must thus be in line for Oblib to realize profits at the time when treasure hunting consulting services are experiencing low demand (Australian Taxation Office, 2009). Role of directors and members of the board in tax governance The directors of Oblib have a role to play in the governance of tax in the firm. The company should create a sound framework to manage all its tax risk and comply with its tax obligations. It should have a well resourced in-house tax governance ability and appropriate reporting strategies with significant tax risks. It should also establish an effective tax risk mitigation ability which should include the firm’s relationship with the tax office. It should also have the ability to consistently and regularly audit tax governance systems (Australian Taxation Office, 2009). Tax risk management Audit committees should come up with a properly developed and highly sensitive strategy of controlling tax risk because they pose both a huge significance to the firms financial reporting as well as reputation risks. The volume of tax-associated resource weaknesses reported by various risk analysis agencies such as Sarbanes-Oxley have prompted many firms to develop proper strategies of assessing and controlling tax risk. These developments together with demands for higher transparency and discloser done by the Securities and Exchange Commission, Congress and even the taxing authorities have resulted to a proper and close look of the tax risks taken by many firms (Ariff, 2007). These mainly involve the nature of relations with tax directors and any professional assigned or concerned with the role tax risk management. The primary challenge for audit committees including the one mentioned in our case is to determine how tax directors and executives handle tax risks and the manner in which they coordinate their operations in the whole process of risk management (Ariff, 2007). After conducted the prudential audit with respect to 2009/2010 tax return, it was suggested that Oblid consider or address the following issues: Scope of the tax risks Though the tax department in any firm is assigned the role of controlling and managing nearly all the task risks in many firms, other departments such as marketing and sales, procurement, M&A, human resources and observance can also manage a number of task risks. Audit committees recommend a broader consideration of the implication of task risks to the firm’s business activities as well as the profitability of the firm. This will be achieved by considering the scope and nature of the tax risks involved. Identify, gauge and control the portfolio of tax risks With this wide view of the organization’s tax risks, managers should or need to understand the strategies to apply in an attempt to identify measure and control several classes of tax risk. Proper management requires an integration of the firm’s tax risk management into the firm’s overall risk management system. Audit committees will determine the people responsible for tax risk management other than the tax director and his team (Neubig, 2010). Set a communication protocol Management should consistently update the audit committees on the progress of the firm’s tax risk management processes. Periodic meetings-say annual, quarterly or semi-annually should be held to update the audit team in order to conduct appropriate audits in the firms. Internal control, conformity and disclosure of matters in the meetings will provide an opportunity to the committees to play a major role or rather an inactive part in the tax affairs and procedures of the firm in as far as tax risk management is concerned. This will reduce the risk of future moves by the company (Neubig, 2010). Determination of tax risk policy should be left to the tax director alone The management of the firm should ensure that the role of tax risk management is understood by every stakeholder of the firm so that the role of designing the policies and strategies in tax risk management is not left to the tax director or his team alone. Every partner should be involved in formulation of the strategies for the firm to reduce tax risks in future (Neubig, 2010). Tax technical risk Tax technical risk is described as tax risk primarily emerges from a potential uncertainty in the elucidation of tax laws by tax governing bodies. Firms often get opinions concerning the tax technical risk of specific tax positions. For example opinions may suggest a 70-to-80 percent chance of losing the position on the worth in litigation. This is the most likely risk that affects Oblib Pty Ltd and will thus be discussed in detail. Even if the firm has a greatest opinion, the 20-30 percent chance of losing the position encompasses technical and regulatory risks of unwinding the operation or paying penalties (Research Institute of America, inc., 2000). It is evident that tax positions can offer unexpected results due to countless causes or micro-risks that need whole evaluation in the course tax planning. Just like other corporate investments, tax investments require a measure of the risk-return tradeoff (Cernauskas &Tarantino, 2009). Benefits of tax risk management A proper tax risk management will enable the firm to meet its objectives as well as meet other requirements such as increase in the level of understanding of the firms tax strategy by the Board, improve the internal communication between various departments in the firm and develop an appropriate framework and system for tacking and controlling risks. Other benefits are an improved and efficient tax rates and increased earnings per share and less earnings per share in the firm and less successful tax authority problems. A good tax risk management system will also save on the operational costs of the firm and create a context for the determination and approval of new tax management systems (Neubig, 2010). Conclusion The audit conducted revealed that the firm had not adequately evaluated the level and nature of tax risk and only a small fraction of the tax risk was directly or indirectly under the control of the tax function. By leaving all the decisions or major decisions to one person, that is, Bilbo, the treasure hunting consultant professional, the firm’s policies in tax risk management are clearly inappropriate (Maginn, 2007). The four steps that should be followed in tax risk management are risk identification and evaluation of all the aspects that accompany the risk in the firm’s operations, risk reduction in which the managers and the major stake holders of the firm should design controls to alleviate risks and offer indicators of the possibilities of the risk. The third step is execution where the risk owners are recognized within the various groups to coordinate and enhance risk strategy. The final step is tax risk policy and procedure in which properly organized strategies are designed beginning from the top management to other stake holders of the firm (Mitchell, 2005). References Ariff, B. (2007). Investments Aust Adaptation. Australia: McGraw-Hill Australian Tax office. Retrospective measures decision tool. Retrieved on January 10 2009 from Australian Tax office. Tax Office policy for penalties and general interest charge. Retrieved on January 10 2009 from CCH Tax Law Editors. (2008).U.S. Master Tax Guide. New York: CCH Cernauskas, D. & Tarantino, A. (2009).Risk Management in Finance: Six Sigma and Other Next- Generation Techniques. New York: John Wiley and Sons Clifford, D. (2008). Plan your estate. London: Nolo Ernst & Young. (2007).Tax Risk Management. New York: Lexis Nexis Butterworths Givens, C. (2005). More Wealth without Risk. New York: Pocket Books Hudson, A. (2003), Equity and Trusts (3rd ed.), London: Cavendish Publishing, Lasser, J.K. (2009). Preparing your 2009 Tax Return. New York: John Wiley and Sons Maginn, J. (2007). Managing investment portfolios: a dynamic process. New York: John Wiley and Sons Mitchell, C. (2005)Hayton and Marshall's Commentary and Cases on the Law of Trusts and Equitable Remedies London: Sweet & Maxwell Mitchell, C.,Hayton, D & Matthews, P. (2006).Underhill and Hayton's Law Relating to Trusts and Trustees New York: Butterworths Neubig T. "Tax risk and strong corporate governance". 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