This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax professionals whose interests are improving the tax management processes.
Table of Contents
- A few tips that may help you avoid panic tax season
- Cost-benefit analysis of tax process re-engineering
- What do Schedule N of Form 1120 and Form 8865 have in common?
- Product Announcement
- FDTA-CITE International Tax Seminars, Los Angeles
- Check out our bulletin
Although some companies have finished their tax returns for year 2000, for many others the busy season
has just begun. Since most of you are busy with compliance tasks during this time of the year, I will be
brief. With the ever-growing international tax compliance work with shrinking budget (especially this
year), tax compliance is becoming an overwhelming task. Worse yet, tax compliance is perceived to produce
no value for the companies and, accordingly, the people stuck doing tax returns get very little attention
and comparable rewards. Thus, I have listed a few tips that may ease the burden of compliance in this issue
of newsletter. I also discuss cost-benefit issues with regard to tax process reengineering since well-concluded
tax process reengineering should significantly reduce compliance cost. Finally I discuss other compliance issues
regarding new international tax reporting requirements.
I would also like to take this opportunity to introduce a new way of preparing tax returns. Tax Technologies, Inc.
("TTI") has launched international tax compliance web sites that allow companies to prepare Forms 8865, 1065 and
5471 over the Internet. TTI has teamed up with IBM and completed hosting of its web-native international tax software.
(http://biz.yahoo.com/prnews/010529/fltu006.html)
By using this approach, TTI was able to significantly lower
international tax compliance cost for companies. Also by using this approach, companies may be able to start using
the software quickly and easily. This software has already been used to file some of the largest companies'
tax returns.
This marks a major milestone, as it is the first time any international tax software is made available
through the Internet. More importantly, this approach will change the way corporate tax software is employed
to prepare tax returns. Please visit
www.e8865.com,
www.e1065.com,
www.e5471.com, or
www.TaxSeries.com to see
if this is a better way to prepare your company's tax returns.
1. A few tips that may help you avoid panic tax season
Get organized.
Plan ahead your compliance. Although organizing the work in detail takes a bit of time in the beginning,
I believe it produces the largest benefit. This is particularly true with international tax compliance, as
the steps involved can easily have to be repeated if not planned ahead. Most last minute crunches, in my
view, are a result of poor front-end planning or simply due to lack of resources.
First, organize the process by computational sequence; foreign E&P computations, intercompany
transaction analysis, subpart F computations, dividend distributions analysis, domestic taxable income
computations, expense apportionments, and foreign tax credit computations. Of course, the organization must
follow the content of the tax return. For example, if your company has overall foreign losses, computation
of OFL and related tax attributes need to take place rather than foreign tax credit computations.
Have adequate resources.
No matter how well the work is organized, tax returns cannot be done without enough people. Organizing
the tasks help determine the resources required to complete the tax returns. Make sure you have proper
resources to get through the season. If you don't have enough resources, and try to squeeze more out of
your existing people, you will end up losing your people. Even with the perceived recession, there is a
significant shortage in international tax resources. Thus, if a company constantly imposes unreasonable
work demands on its existing resources, it will lose its people. It is very costly to lose key resources
during the compliance season. So, prepare by hiring a reasonable number of resources early on in the
process.
Monitor the progress.
The importance of knowing where you are during the tax compliance process cannot be overly emphasized.
To a large degree, the panic occurs when the tax group is not sure exactly where they are in the process.
I say sometimes that a tax return is like magic -- "somehow it happens by the filing date." However, it
gets done better with much less pain if you monitor the progress throughout the process. The monitoring
can be done formally or informally. Generally, formal monitoring may be helpful for large-scale tax
returns while informal monitoring may be more effective for simpler returns.
Separate the tax substantive analysis from tax data processing.
Most of the tax laws can be simplified into two main components -- factual analysis and the treatment
of such facts. For example, if an item of income is a foreign personal holding company income, it must be
included in US shareholder's current tax return as an item of gross income. This simple proposition
requires what is a "foreign personal holding company income", i.e. characterization of underlying facts
based on legal requirements. At the same time, it dictates the treatment of such income based on
computational rules. In order to be effective, companies may need to have two kinds of people; one
group of people who can analyze the facts to determine the legal characterization of such facts, and
the other group of people who understands how such facts should be processed through the tax software
being used. For a smaller return, companies my not need two kinds of people although it would be still
be beneficial to separate factual analysis and data processing.
Get involved in decision-making.
A common bottleneck in preparing complex tax returns is delays in making decisions on tax issues. I
think most tax people would agree that tax returns must be prepared based on the factual information
available at the time the returns are prepared even though the information may not be complete. It is
very common that not all information is available at the time of filing. Particularly because there are
new reporting requirements and undiscovered facts until the tax season. Thus, it is very important that
tax managers and planners participate in the compliance processes as decision makers on many of the tax
issues to expedite the tax return processes. Also remember, all the wonderful tax planning implemented
during the year means nothing unless they are properly reflected on the tax returns. So, get involved!
Follow deadlines.
Create reasonable deadlines that can be followed. It is practical to set a series of deadlines and
prepare the tax returns based on the information made available within the time frame. This would allow
timely decision-making and it would help avoid the last minute crunch. Of course, this does not mean to
create an inflexible process. The benefit of having reasonable deadlines should outweigh the detriment
of having to adjust the returns in the future.
Set clear tolerance standards.
Many times, tax compliance staff are not sure when and how to conclude a return. This is mostly likely
attributable to a lack of clear standard for review. Sometimes they leave the file open for petty issues
thinking that such issues need to be resolved before the return is finalized. It is very important to let
them know when and how to conclude a return. In most cases, if the information is not available by the
time the returns are prepared (with reasonable efforts for data collection), the same information will
not be available by the time the return is due anyway. So, have them make reasonable assumptions, document
such assumptions and conclude the returns. Most importantly, let the staff people know what the managers
expect during the review.
2. Cost-benefit analysis of tax process re-engineering »
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A number of companies have spent large sums of money for tax process reengineering and tax data depository
projects during the last few years. Were the results worth the investment? I believe the projects such as
tax process re-engineering, tax software implementation and tax web development should have clear
measurable benefit demonstrated before a project is undertaken. Especially during the compliance season,
tax managers must ask whether the company is better off as a result of the re-engineering.
These are some of the common questions that should be asked to measure the benefits of such projects.
1) How much did it cost? 2) How many man-hours did the project reduce compliance. 3) Can we reuse the
compliance data for tax planning? 4) Does the new process and tools reflect dynamic changes in
environments? 5) Has the new process been accepted by the member of your tax group? For example, if a
re-engineering project costs $500,000, the result should have reduced the benefit in the form of staff
hour reduction that is equivalent of $500,000 in comparison to the internal cost before the
re-engineering.
My general observation is that many companies are over-spending on re-engineering projects. I also see
that some of the re-engineering projects overly complicate the tax process. This does not mean that I am
suggesting companies not consider tax process re-engineering projects. I am suggesting, however, that
companies need to be smarter about tax process re-engineering. In fact, I believe most tax process
re-engineering can be done in-house with much less involvement with outside consultants.
3. What do Schedule N of Form 1120 and Form 8865 have in common?
»
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A new schedule for Form 1120 was introduced for the tax year 2000. Schedule N of Form 1120 now requires
comprehensive reporting of foreign operations. It appears that this schedule is being used as a control
sheet for the IRS to trigger investigation into whether companies have complied with all international tax
reporting requirements.
The schedule requires reporting of disregarded entities (foreign branches), Controlled foreign
Partnerships, non-controlled foreign partnerships, Controlled Foreign Corporations, foreign trust and
extraterritorial income exclusion. The schedule expanded what was required on Schedule K of Form 1120.
Ultimately, it highlights the international organizational structure.
Form 8865 also requires in-depth organizational information be reported. It requires reporting on
disregarded entities, characterization of the partnership under local laws, and whether the partnership
owns any "separate units" for dual consolidated loss purposes. Under these requirements, a taxpayer would
need to disclose information regarding the organizational structure that has been generating significant
foreign source income using hybrid structures. It further requires other organizational information such
as direct or constructive ownership information, other US partner information, and information on other
partnerships the reporting partnership owns. In short, the information requested is very redundant between
Schedule N of Form 1120 and Form 8865.
The compliance will reveal critical weakness in the hybrid structure since dual consolidated loss has
been an important issue with regard to many of the hybrid structures implemented. Because most of the
hybrid structure leaves very little profit in dual resident companies to avoid double taxation, application
of dual consolidated loss has been a concern for many of the companies with hybrid structures. By having to
disclose such information, a taxpayer has to highlight the key audit points to the IRS. It appears that it
is the start of a crack down on many of the hybrid entity structure that became so popular after the
check-the-box regulations were issued.
The requirements appear relatively benign. In practice, there are many companies that do not have such
information ready in-hand. Thus, companies will have to spend more time gathering organizational information
to be able to comply with the requirements for the schedule.
4. Product Announcement »
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TTI launches
www.e8865.com,
www.e1065.com, and
www.e5471.com
TTI pulled it off! TTI launched the first international tax web application. No Citrix connection, no Java
download, no remote dial-in -- just low cost of access and all you need is a computer with Internet access.
More importantly, this application will significantly reduce compliance cost. At the same time, it will
change the way international tax compliance is performed. For example, by using truly web-native software
via the Internet, companies may enjoy real-time processing of international tax information. It will remove
a large portion of the foreign data collection burden and significantly reduce the compliance cycle time.
It will significantly reduce travel cost for data collection training since the training of foreign office
staff can be done across the Internet.
This is a very significant step in the development of financial reporting software. As most of you would
agree, international tax return is probably the most complex form of financial reporting. It has all
elements of financial reporting software. Its elements include multi-currency trial balances, multi-tier
adjustments, large-scale consolidation, foreign currency translation, allocation, apportionment and complex
form reporting. Further, it includes non-financial information in order to determine complex conditions of
international tax. By completing the international tax software using the most advanced Internet
technology, TTI has proved that most complex form of financial reporting can be performed across the
geographic boundaries. This is just a beginning!
If you are interested in our compliance products, please visit our websites (www.e8865.com,
www.e1065.com, or
www.e5471.com), send an e-mail at
Sales@TaxTechnologies.com or call me at (866) 239-4884
for a product demo.
5. FDTA-CITE International Tax Seminars, Los Angeles »
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I was invited to the International Tax Planning and Compliance - Ninth Annual International Tax Seminar Series sponsored by the Council for International Tax Education (CITE). The last session is June 11 through June 13 in Los Angeles.
I will be presenting on the subject of International Tax Compliance. In particular, I will discuss
the issues with respect to "Preparing Form 8865 for Controlled Foreign Partnership." Since year 2001 is
the first year of full compliance for Form 8865, it would be a good idea to consider the large implications
of the Form 8865 compliance. I will discuss such implications of filing Form 8865 among other compliance
issues. Hope to see you there.
6. Check out our bulletin »
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Check out our bulletin to see if you would like to list a job or would like to find a job. Since most of
our visitors are from big four accounting firms and international tax people from corporate tax
departments, it would be a good forum to recruit employees for international tax jobs. So, if you have
an opening, send us an e-mail. We also have number of jobs posted on our bulletin.
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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