🗒️ Answer
Tax computation is the process of determining the taxable income and subsequently calculating the tax liability based on applicable rates and regulations. The method varies across jurisdictions and can involve adjustments to accounting profits.
Pakistan Corporate Income Tax: Resident companies in Pakistan are taxed on their worldwide income, while non-resident companies operating through a branch are taxed on their Pakistan-source income[1].
Methods of Calculating Tax (Ireland): In Ireland, different methods are employed to calculate tax, and guidance is provided on paying employees' tax to Revenue[2].
Preparing a Tax Computation (Singapore): Singapore emphasizes the preparation of a tax computation, a statement that adjusts accounting profit to arrive at the income chargeable to tax[3].
Income Tax Calculation on Salary (India): In India, calculating income tax on salary involves multiple steps such as computing gross salary, deductions, exemptions, and determining the tax payable[4].
Accounting Methods for Income Tax (General): The Income Tax Act allows two accountingmethods: the mercantile system and the cash system, each impacting income tax calculations differently[5].
Computation of Tax (General): The second phase in tax law involves calculating the amount to be paid, often through self-assessment methods[6].
🌐 Sources
taxsummaries.pwc.com - Pakistan Corporate Income Tax
revenue.ie - Methods of calculating tax
iras.gov.sg - Preparing a Tax Computation
etmoney.com - Income Tax Calculation on Salary
economictimes.com - Accounting Methods for Income Tax
britannica.com - Computation of Tax
Pillars One And Two: TP Considerations For Jurisdictions And MNEs
Digitalisation of the global economy has led to significant tax challenges, triggering concerns about fairness and transparency in the global tax architecture. As recent events have unfolded, it has become quite clear that these challenges could not have been addressed by unilateral measures undertaken by a tax jurisdiction. They have required a coordinated effort for more than 10 years, with G20 countries taking up the cause and tasking the OECD with crafting a package to:
Improve the coherence of tax rules across borders;
Reinforce substance requirements; and
Enhance transparency and certainty.
The BEPS package is an outcome of that effort.
Taxation of the digital economy, given its growing importance and the accompanying extra challenges, was identified for separate action, and after considerable international deliberations, there is now a two-pillar solution in place, with the objective to move beyond arm’s-length pricing and reallocate taxing rights based on factors other than physical presence.
Pillar one is intended to capture the value created in a jurisdiction by a business through specific nexus/source/substance to the jurisdiction, while pillar two is designed to ensure that global income is taxed at a minimum effective tax rate.
At this stage of discussion, pillar one would apply to large multinational enterprises (MNEs) with turnover of at least €20 billion. These MNEs would be required to reallocate certain amounts of taxable income (25% of profits exceeding a 10% consolidated return), called amount A, to market jurisdictions using a formulaic approach. The MNEs would also have to ensure a fixed baseline return (amount B) for the jurisdictions where related parties are engaged in a marketing and distribution function, based on the arm’s-length principle.
Pillar two is designed to ensure that large MNEs, with consolidated group revenue of over €750 million, pay a minimum level of tax (i.E., 15%). The pillar two rules require that transactions between group entities are to be priced consistently with the arm’s-length principle.
MNEs’ likely strategy
The guidance on the computation of amounts A and B, and pillar two is likely to impel large MNEs to consider if the present transfer pricing between group companies needs to be revised. Quite likely, MNEs may already be evaluating whether pillar one and pillar two guidance can be integrated with the present arm’s-length principle.
One challenge that may crop up for concerned MNEs until the time all jurisdictions accept the standardised principles and guidance from the OECD on the computation and determination of amounts A and B is the acceptability of the computation and determination of the amounts in the jurisdictions in which the MNEs operate. If not, the MNEs would face challenges in demonstrating intercompany pricing during transfer pricing audits. This may increase litigation for MNEs.
Given the above likelihood, MNEs may consider:
Revisiting their intercompany pricing and assessing whether their pricing policy complies with pillar one and pillar two guidelines, and if so, to what extent?
Consider protecting themselves through dispute prevention mechanisms such as applying for advance pricing agreements (APAs)/mutual agreement procedures (MAPs), to minimise transfer pricing litigation and uncertainty in their cashflows.
As it stands, tax jurisdictions are taking time to evaluate their overall tax position as a result of the standardised framework, and that creates uncertainty for MNEs. It will be interesting to examine how tax jurisdictions blend the OECD standardised framework with their existing regulations and agree on a consensus. A few possibilities emerge, as a first thought:
Would the standardised framework act as a safe harbour in the tax jurisdictions?
Would the present formulaic approach blend appropriately with the separate entity approach and arm’s-length principle, which is the core of the present OECD transfer pricing guidelines?
Would the tax jurisdictions prefer to accord a weightage to the local benchmarking/jurisdiction to create a specific advantage?
Would amount B (the baseline arm’s-length return for a marketing and distribution function) be differently assumed by tax jurisdictions?
Would existing bilateral APAs under MAP provisions of tax treaties be impacted?
Would MNEs consider opting for dispute redressal mechanisms such as multilateral APAs/MAPs, considering the involvement of multiple jurisdictions?
Would unilateral measures in the form of, for example, a digital service tax be scrapped? Also, what is the guarantee that such measures would not ‘morph’ through other forms? That may threaten to break the present well-crafted digital taxation architecture.
It is commonly expected that the present participating jurisdictions would agree to a framework/standardised principles for the computation of amount A and the determination of amount B. Based on the present guidance, it appears that while the computation of amount A would largely be formula driven, the determination of amount B would be based on an extensive transfer pricing exercise. It would thus be interesting to see what factors would be considered for determining amount B and if there would be any standardisation in the computation of this amount as well.
Outcome in the offing
Assuming a consensus is reached among participating jurisdictions, on pillar one, a fallout of such consensus would be a reporting requirement in all participating jurisdictions (for reporting the computation of amounts A and B). The BEPS Action 14 minimum standard, which includes timely and complete reporting of MAP statistics, is accepted by all member jurisdictions, which have been sharing the annual statistics of MAPs with the OECD. The OECD has been publishing jurisdiction-based MAP data for each year. The OECD also publishes the outcome of a peer review on country-by-country reporting.
Such collaborative efforts by the OECD have resulted in not only effective collation of data by jurisdictions, they have also led to a reduction in the delay in finalising MAPs, with a certain transparency in the process that the data assures. With this transparency and collaboration, and improved outcomes, a reporting requirement for amount A – akin to the country-by-country reporting requirement framework, i.E., detailed filing in the main jurisdiction while notifying other participating jurisdictions – would help to ease the compliance burden for large MNEs.
Furthermore, the OECD also announced that MAPs would be simplified to address the challenges arising out of the pillar one and pillar two framework. These simplifications would also assure revenue to source countries at a relatively low administrative cost, given the transparency it would lead to.
While the OECD and the participating countries have put in significant efforts to develop the framework, work on detailing and streamlining the computation of amounts A and B remains. This information is crucial as governments understand the outcome and would be able to better calibrate their fiscal systems. MNEs would also be able to achieve business certainties and improve on their commercial decisions for more investments.
As we continue to watch how the pillar one and pillar two framework pans out, its acceptability among participating jurisdictions would be a key aspect, considering some of the aspects discussed above.
The article was supported by Nandita Salgaonkar of Deloitte India.
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Stiff Sentences In Conservation Easement Criminal Case - Reactions
People in Court vector illustration. Cartoon flat advocate barrister and accused character standing ... [+] in front of judge and jury on legal defence process or court tribunal, courtroom interior background
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The big news last week for those who follow the controversy around syndicated conservation easements (SCE) is the extremely harsh sentences handed down by Judge Timothy Batten to CPA Jack Fisher and lawyer James Sinnott. Fisher got 25 years and Sinnott 23 years. There is also restitution to be paid: $455,855,755 from Fisher and $443,760,035 from Sinnott. Most of the coverage so far has been based on this DOJ press release. This piece will take a somewhat deeper dive giving you some background and reactions. We'll start with a bit of background.
About Syndicated Conservation Easements
In order to take a deduction for a charitable contribution you have to give something away entirely. Code Section 170(h) (Qualified Conservation Contribution) carves out an exception to that rule – allowing a deduction for placing a permanent restriction on a property, which is what an easement is. Like any other contribution the deduction is the fair market value of what you are giving.
Remember though, what you are giving away is the easement. You are keeping the property. The best way to determine fair market value is comparable sales. Unfortunately, there is a not a lot of buying and selling of easements, so the regulations allow the value to be the value of the property before the easement is placed on it (the before value) minus the value of the property after the easement is placed on it.
The before value is generally where the problem is. What the proponents of SCE have argued is that in determining the before value for a conservation easement, donation comparable sales are not really that relevant since what you are giving is a development potential. If a conservation easement is just part of a property that is valued based on comparable sales, it is not possible to buy property and within a very short time have an easement be worth a significant multiple of what you paid for the whole property. This debate ended up being a major factor in the sentencing as we will see.
About Sentencing
When the DOJ puts out a press release about an indictment, it will note what the maximum penalty is on each of the counts. The numbers can be quite impressive when there are a lot of counts, but generally sentences on multicount convictions are nowhere near the statutory maximum. To predict a sentence you need to look at the guidelines.
The guidelines established by the federal court system are advisory, but when judges exercise their discretion to go outside the guidelines, they have to explain their reasoning. The guidelines are not as complicated as the Tax Code, but they are complicated enough.
You need to determine an offense level and a criminal history category. There is a table that is a sort of grid with the rows being offense level and the columns being criminal history. Find the right cell and you get a range in months. Offense level 1 is 0-6 regardless of criminal history. Offense level 43 is life in prison regardless of of criminal history. The offense level is determined by adding or subtracting various factors from a base level for the offense, all of which can be debatable.
The thing is when you are dealing with tax shenanigans the base level is determined by the computed tax loss. $2,500 or less gives you a base offense level of 6, which at criminal history category 1 is 0-6 months. $100,000 brings you a base level of 16, which is 21-27 months in category 1.
The probation officer computed the same offense level for both Fisher and Sinnott. The tax loss for each of them was greater than $250 million, which is a base level of 34. They get points added for sophisticated means, encouraging others to violate internal revenue laws, being organizers of leaders and abuse or position of trust and special skill bringing them to 44. An offense level of 44 is enough for a life sentence. There are no life sentences for tax crimes which is where the multiple counts come into play. The statutory maximum for Fisher is 225 years and for Sinnott it is 91 years.
It Is Mostly All About The Tax Loss-Sinnott
Sinnott's attorneys were arguing for a sentence of no more than 8 years. They strongly objected to the government's tax loss computation, which was based on taking the appraised value subtracting what was paid for the property and multiplying by 35%. They note that even the recent law passed by Congress to rein in SCEs allows for the possibility that the easement might be worth 2.5 times the cost of the property and that the discounted cash flow method used in the appraisals was properly disclosed. They also note that the codefendant appraiser Clay Weibel was acquitted. Although they see the burden to prove how overstated the appraisals were to be on the government, they suggest as a possible answer that they were off by 30%, which is what Fisher indicated in recorded phone conversations.
That adjustment would bring the tax loss down to $110,017,303.85. A further adjustment would be to use the standard 28% rate rather than the 35% rate would bring it down to $88,013,843.08. Either of those numbers brings the offense level down to 30, which at criminal history I calls for 97 - 121 months. Going a step further and eliminating any appraisals done by the not-guilty Clay Weibel brings the tax loss all the way down to $35 million, which is level 28 calling for 78 to 97 months.
Another matter is what is happening with the other players. This gives you some insight into the sentencing game that DOJ plays with people who cooperate. Stein and Corey Agee are not yet sentenced but there is a five year cap on those sentences because there was only one count in the bill of information that they pled guilty to. I covered their plea in December 2020. Jim Benkoil is similarly situated as are Ralph Anderson and Victor Smith. Randall Lenz got one year probation. Terry Roberts got a year.
A Similar Story For Fisher
Those other sentences are one of the major arguments raised by Fisher's attorneys who suggested that a five year sentence is enough for him, since it would put him at the top of the heap. Fisher is 71 years old. Using the IRS standard life table, there is a better than 90% chance that his 25 years is effectively a life sentence.
The attorneys note that this is the first prosecution involving conservation easements and that there is an entire industry of promoters. They go on to argue that there is no need for deterrence since legislation passed while the case was going on has made fraud in conservation easements impossible. For what it is worth I would say that it has been made somewhat more difficult, but far from impossible. Fisher's attorneys make similar arguments on the tax loss.
On Fisher, the government notes that the statutory maximum sentence considering all the counts was 225 years. They asked for thirty as opposed to the five that Fisher was looking for. With 25 years, effectively life when considering Fisher is 71, the court clearly leaned toward the government.
In defending its tax loss computation the government argues that the best estimate for the true fair market value of the land before the easement was the price that Fisher and Sinnott paid, which was often just days before the donation. They cite TOT Property Holdings and Mill Road for precedent. Those are recent cases. The older valuation cases tend to be about property that was owned by the donors for a considerable period.
Let's move on to other reactions.
Excessive Sentences
Attorney Peter Goldberger is my go-to sourcey on criminal matters. His office focuses on appeals of federal criminal cases including sentencing and Supreme Court petitions. He views the sentences as clearly excessive. He wrote me:
"From what I read, the U.S. Sentencing Guidelines recommended life sentences in these cases. While no tax offense carries the potential of a literal life sentence, as a murder statute would, the sentences imposed in these cases require service of more time than the average life expectancy of a person of the defendants' age (about 15 years for a 70 year old male, according to the CDC), so in effect life sentences were imposed. The federal sentencing statute requires that each sentence be "no greater than necessary" to achieve the proper public purposes of punishment — recognition of the seriousness of the offense, deterrence, protection of the public, etc. It seems to me, and I think that any fair-minded person would agree, that these sentences greatly exceed that degree of severity, probably by about 100%. In other words, a sentence half as long, or somewhat less, would serve any of the proper purposes of criminal prosecution and punishment. Would any accountant or tax lawyer be deterred from committing a massive fraud by the prospect of serving life in prison if caught, but not deterred by the prospect of a ten year sentence? The Sentencing Guidelines, unfortunately, are designed to give dominant weight to the amount of "tax loss", in ways that really go haywire at the upper levels. No matter how seriously you view these particular tax frauds, it seems to me that the sentences are plainly excessive.”
“Do I also need to point out that the Guidelines are a set of suggestions from a presidentially-appointed Commission? The law requires judges to "consider" them, but they are not binding on judges, who in fact "vary downward" (decline to follow the Guidelines, by going lower) in significantly more than half of all criminal tax cases."
Criminal Tax Expert - What About The Taxpayers?
Jack Townsend wrote the book on tax crimes - literally. Tax Crimes, the textbook published by Carolina Academic Press, has him as the lead author. He argues that DOJ should go after some of the investors criminally. In his commentary on the DOJ release on his Federal Tax Crimes blog, Mr. Townsend wrote:
"My only comment relates to what I call the elephant in the room—the taxpayers willfully participating in such schemes. My experience in these elaborate abusive shelters is that well-heeled taxpayers are also complicit. Those taxpayers who are complicit feel (or at least hope) that the blizzard of paper (including fake opinions and appraisals) and participation of facially expert promoters will protect them from penalties, civil and criminal, thus giving them cost-free access to the audit lottery. But those who consulted independent counsel (and many, probably most, did at least in the Son-of-Boss shelters and, I suspect, in the Syndicated Conservation Easement Shelters) would have known the shelters did not work."
Townsend suggest that prosecuting and convicting taxpayers would send a message of the deals being much more risky which would reduce the market. He even suggests that enablers be able to reduce their sentence by providing evidence that their investors were aware the deals were no good. That is a pretty chilling thought. Besides possible criminal prosecution it could open the investors up to civil fraud penalty exposure.
Tax Court Watchdog
Lew Taishoff blogs about the Tax Court with incredible intensity. The Tax Court is buried in SCE cases which he refers to as "Dixieland Boonkdockery". Here is what he wrote me:
"Mr Reilly, my views (and you can print them in full): Hang 'em high, but remember, there are some legitimate conservation easements. As Judge Holmes put it in Oakbrook, "I fear that our efforts to clear cut and brush hog our way out of the volume of conservation-easement cases we have to deal with has left us a field far stumpier than when we began." 154 T. C. 10, at p. 128. A brush-hog approach eliminates both legitimate and dodgy deals. The real issue is the phony valuations. Nail the appraisers who put forward these phony numbers. And nail the high rollers who bought into these too-good-to-be-true dodges."
Kent Hovind's Worst Nightmare
My regular readers will remember Robert Baty. He is a retired IRS appeals officer who has followed other sorts of tax shenanigans most notably those of Kent Hovind and matters involving the parsonage exclusion. I thought he might have some useful thoughts on this case. He wrote me:
"It may be that those guys were some of "worst of the worst", and the sentences are easily justified. Alas, did the notice say they started over 15 years ago. There ought to be an easier way!
Also, the courts need to get more serious in handing out lengthy sentences to lesser tax cheats, like Glen Stoll. Glen got no jail time at all, and they've treated him like a choir boy because he invokes religion. They may at least be trying to revoke his probation now, and seize his hidden property, but he's fighting them all the way. Justice Department had to be nudged by the Court in his client's criminal case to even nab Glen, and then he got treated like the only client he had during 50 years of tax cheating was the one they were then prosecuting."
The Professor
University of Utah law professor Nancy A. McLaughlin who has written extensively on easements wrote me:
"A 25-year prison sentence and an order to pay $458 million in restitution should give significant pause to those continuing to promote syndicated transactions under other guises, like fee simple donations. It also should give promoters being sued by investors pause, as the DOJ’s case against Fisher went a long way to exposing the blatant valuation abuses involved in these transactions."
Word On The Street
Stefan Apotheker is an attorney with Erez Law in Miami currently representing investors in claims against financial advisors, he gave me his perspective on what is currently going on. He confirms that there are a significant number of cases in Tax Court and expects that the taxpayers will mostly lose, but that it will take a long time. He does not have a sense of DOJ's appetite to bring on more criminal cases. He can confirm that are some prominent promoters who have been the subjects of grand jury investigation. I guess they are waiting for the other shoe to drop. Some of those promoters have gotten out of the SCE business. Apotheker expects there will be a much smaller market. He allows that it is possible that there are legitimate deals out there. All the ones that have crossed his desk have been obviously fraudulent tax avoidance schemes.
From An Old Hand
Joe Kristan is one of the longest serving tax blogger. He started in 2002. He had to take a break in 2017 but came back. Kristan was surprised by the severity of the sentences. He compared them to the fifteen years that went to Paul Daugerdas, one of the masterminds of the Son of Boss deals. Daugerdas is currently at a halfway house in Chicago and scheduled for release in 2026. Kristan does not know how many deals are still being promoted but expects that they may be less brazen and that the sentence should get the attention of appraisers and promoters of those and other questionable shelters. He indicated that if he had been involved in one of these, which he wasn't, he would be talking to an attorney about offering a deal.
From A Conservation Advocate
A great deal of criticism of SCEs came from advocates for the proper use of the conservation easement deduction. Among them was Stephen Small. He notes that the two promoters were ordered to pay $900 million in restitution and wonders how much the total loss must have been to the government from these deals.
There Will Be More
At the trial where Fisher and Sinnott were convicted, there were some crazy jury problems, so I expect that the conviction itself and the sentence will both be appealed. Stay tuned. For a roundup of more than a decade’s worth of coverage of tax issues around easements check this post out. I have to note the prophetic nature of the headline of one of my earliest posts - Conservation Easements A New Field For Villainy.
Ugh: It’s Tax Season Again: Tips You Need To Know
Published 3:44 pm Monday, January 22, 2024
Tax Season 2024 is set to begin on January 29 with a filing deadline for individual income tax returns of April 15. ALDOR offers these tips to help you file safely and get your refund quickly:
Filing
Security
Refunds
For more information about Individual Income Tax, visit https://revenue.Alabama.Gov/ individual-corporate/.