Taxing Times 1 – The Law

Tax and the taxing times it can potentially cause boards is something I’d like to look at over the next two blogs, spending some time on tax law and some time on tax lore!

Let’s start with the law, particularly the international implications of the various tax regimes across the different jurisdictions and the veritable tightrope boards sometimes need to walk to keep everything kosher with people like the USA’s Inland Revenue Service (IRS) and our Australian Taxation Office (ATO)…both understandably keen for their legally entitled slice of the tax pie!

For most boards of small Australian companies, there’s not too much to concern themselves with. After all, beyond the GST, providing for long service leave and perhaps attending to the odd acquisition, that’s generally as far as it goes.

Once a company starts to trade internationally, however, it becomes that bit more complex and demands more of a board’s time and attention.

They’re suddenly required to factor in and spend time on matters like foreign exchange and hedging. Their attention will also be on weighing up when it’s best to repatriate offshore funds, when it’s most prudent to convert them back to Australian dollars.

The complexities multiply, of course, when companies have entities in other countries.

That’s when boards need to have a sound understanding of the relevant tax laws. And if they don’t, they need to call in expert advisors to keep them on the legal side of the ledger.

In a flash, they’re confronted with questions like where the revenue was derived and who’s deserving of the tax.

Without going into the intricacies, there was a recent test case in the US involving a software company. The Australian arm of the company received payment from its US subsidiary for an amount of compact discs it purchased.

The latter chose to deduct these amounts on its tax returns as cost of goods sold but the US IRS took an altogether different position, arguing that they should be treated as royalties and subject to US withholding tax.

In the world of tax law, this is known as Related Party Transaction Pricing and can pose some humungous headaches.

There’s another beast known as the Base Erosion and Profit Shifting Project.

It’s an Organisation for Economic Co-operation and Development – or OECD – initiative that calls for the fairness and integrity of international tax systems, the OECD countries seeking to achieve consistency between member economies when it comes to international transactions between companies and subsidiaries.

The draft they’ve come up with is awaiting legislative passage in Australia and if passed, will require a global group trading in Australia with an annual turnover of more than $1-billion to provide the ATO with details of all international related party transactions on a country-by-country basis.

Yes, it’s getting muddy for the non-tax experts, but that’s the point.

The more complex, the greater the need for sharp and astute tax law heads around the boardroom table.

And if they don’t exist there, the wise board will go outside to find them.

Until next time,
Kate.

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