Why should you go for a tax opinion/ruling?

Recently, I have had the experience of reviewing direct/indirect tax rulings for my employer. While the process is useful, I was left wondering that with so many caveats/disclaimers, why should we go to the whole pain of getting one? After all, for other subjects such as valuation, accounting etc, opinions are rarely sought. Why make an exception for tax and law? After some search, I found out the following reasons. The primary reason in the Indian context is statutory reasons(financial statement or tax penalty protection).

1. Comfort opinion/Vet the transaction: Provides the taxpayer with comfort that a transaction the taxpayer is considering entering into will have the expected tax consequences. This involves steps like making sure all issues are properly thought out and documented, confronting any shortcuts or sloppy thinking, and due diligence via fact collection. From an internal standpoint, it is also useful as to assure proper implementation and continued compliance, and memorializes analysis for future reference
2. Contractual condition opinion:  Other parties seek assurance/closing condition as receipt of the opinion that the transaction will have the tax consequences specified in the contract.
3. Disclosure opinion: This opinion gives comfort regarding a person’s duty to disclose.
4. Penalty protection opinion: This opinion is intended to permit clients to rely on to avoid possible civil penalties.Can deter IRS  from challenging or asserting penalties.
5. Financial Statement Recognition: This opinion provides advice regarding the tax treatment of items for purposes of financial statements.  The “more likely than not” standard is required in order to recognize, for financial statement purposes, a tax benefit with respect to which there is some legal or factual uncertainty. This would be acceptable to the financial statement auditor. 
6. Reporting opinion:  This opinion provides advice regarding the proper tax reporting of a completed transaction.

References
https://www.americanbar.org/content/dam/aba/publishing/aba_tax_times/16feb/att-16feb-15ptc-d1p5-tax-opinions-3-0-ethical-considerations.authcheckdam.pdf

https://taxassociate.wordpress.com/2014/06/12/tax-opinion-practice/

Financial reporting and taxation a zero sum game?

Reposting from another blog of mine http://apoliticallyincorrect.blogspot.in/2012/10/financial-reporting-and-taxation-zero.html  At the risk of repetition, views purely personal.

2 hyped tax proposals in Budget 2012-13 that deliver very little

Accountants and lawyers would be well acquainted with substance over form doctrine, but what is form over substance? Well, that refers to the principle of preferring the strict statute over any other common interpretation(as done for penal/tax statutes), but in this case I refer to those tax provisions that have made great media headlines, will be enacted as well, but do not give any substantial benefit

1. 50% tax deduction for investments up to Rs 50000: This proposal named after Rajiv Gandhi(who already has an IIM etc named after him but I digress), confers 50% tax deduction on those investing upto Rs 50,000 directly in equities, and who have a taxable income of less than Rs 10lakh. Now, given that the tax slabs will have marginal tax rate of 20% in that bracket, that means the relief(in cash flow terms) will be 50%*Rs 50,000*20% i.e Rs 5000 i.e 10% of the investment. This is in return for holding the shares for 3yrs! Now, when the holding period for long term capital gains itself is just one year, one can see the rationale for imposing 3yrs to make investors more long term! But, this provision is hard to enforce(which employer/taxman can go to the demat account of the investor and check whether holding is still done? If it was through a mutual fund, then lock in period can ensure the same, but somehow I doubt that NSDL/CDSL will devise a special lockin for shares invested during this scheme. So how will this be monitored? Also, can a 10% upfront relief be enough to make investors hold shares for 3yrs? If the success of the NPS is anything to go by wherein even matching first year contribution for low income beneficiaries has not helped the scheme much, one cannot say what will happen here
2. Rs 10,000 deduction on savings bank interest:-It is an open secret that individuals still think their savings bank interest is exempt, and very few declare it on their tax returns. The few who come under the tax deduction limit just take it as it comes. So how can this provision confer people a benefit that they enjoy already(albeit illegally), or even induce them to save more(we already have an interest rate war among banks for that very purpose)

Boasting of inhouse developed R&D equipment in annual report? Pay tax!

Under the present Schedule VI of the Companies Act 1956, Indian companies need to give an update about their spending on scientific research. Because this is a document that goes to investors, companies would like to paint a rosy picture about their scientific and other prowess. In its annual report, a company

• stated that addition to plant and machinery fixed assets included testing equipments
• boasted in Director's report of having developed a number of testing equipments on its own, with a view to saving forex by avoiding importing from foreign countries.

But to the excise department, it argued that the research for which the machines were assembled was unsucessful, so they had dismantled the machines, which itself proved that the machines were not marketable. But the import substitution claim in the annual report negated that defence, by proving the machines to be marketable. Hence, in Usha Rectifier Corporation vs CCEx(New Delhi), the Supreme Court held in favour of Revenue, that the testing equipments manufactured in house were marketable and therefore subject to excise duty.

This ruling should make the CFOs more cautious of their claims in the annual reports.

Accounting tail wagging the tax dog-how accounting choices affect tax liability

Most people would know from Accounting 101/Tax 101 that USA corporations prefer LIFO basis of inventory accounting(prohibited by international accounting norms under IFRS) to save on their taxes in an inflationary scenario. But this just scratches the tip of the iceberg. There are many more serious implications of passing that accounting entry in your books, even if the tax records are maintained on a separate basis. Some of them are:-

1. Where accounting profits serve as an alternate basis of taxation-for example India imposes a 'Minimum Alternate tax' on the book profit(of course post certain adjustments for unrealized profits/losses)
2. Many countries mandate a reconciliation between the tax income and accounting income(or even the statutory tax rate and the effective tax rate paid by the company). Any major difference could invite a visit from the tax man.
3. Tax law typically stipulates penalties/fines/withdrawal of amnesty scheme options etc in cases where intention to evade taxes is proven. Where the substance over form doctrine in accounting mandates treatment overriding the legal form like
1. Characterizing leases as finance/operating irrespective of documentation
2. More importantly, The IAS 32 requirement on the issuer of financial instruments to classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument.  Specially where quasi equity instruments are structured to achieve the maximum tax benefit(read debt) but the company accounts for them as equity as per IFRS, the tax authorities could make out a case that the company was fully cognizant of the potentially differing treatment. 
4. In countries like Germany/France, where book profits serve as the taxation basis, companies straddle a thin line between inflating their profits(for external reporting) and minimizing tax payments. 
5. In case of withholding tax on international transactions, or even for some related party transactions, and more recently for Indian indirect tax liability(under service tax), the book entries take precedence over the date of the actual transaction.
6. Where separate businesses of the same legal entity are taxed differently,  then segment accounting and internal transfer pricing becomes much more important. An interesting example in this regard in the case of Ganesh Polytex was mentioned by me earlier at http://financeandcapitalmarkets.blogspot.com/2011/01/reducing-tax-payment-via-overhead.html

 While managers would engage internal accounting staff and external tax advisors to address these problems, a broad level understanding of the major issues pertinent to that geography is essential, to ensure that that 'big picture view' does not fall afoul of the tax man.

How IT/BPR has revolutionized the Income Tax Dept

The Budget documents give interesting nuggets. And the document on fiscal policy strategy was no exception(available here). There, the use of information technology in the BPR of the IT Dept was explained. I was aware about the drastically improved processing speed of the Dept(assessments finished quickly, appellate tribunals backlog reduced etc) but these points explain why it has happened. The Centralized Return Processing Centre(CPC) at Bangalore now processes 1.5 lakh returns/day(or 5.4 crore returns/yr). By May-11, two more CPCs will be operational in Manesar and Pune, with another planned in Kolkata by 2012.

This automation(mostly of retail individual tax payer returns) applies the retail banking approach(low cost high technology low touch) approach to tax. This Budget will nearly do away with most salaried tax payer returns so the high risk business/professional segment will be focussed on. And this may improve tax compliance, reducing black money in the bargain.

Information flows have been shifted online(e-returns, e-TDS, electronic reporting of high risk transactions) and human interface has been reduced(automated refunds etc). One of our IIM-A professors was associated closely with this project and had shared with us the benefits of this approach.