Practice Ethical Decisions

Transcription

1 Taxation & Business Decisions Activity 1 Ethical Implications of Taxation and Business Decisions You have been retained by the merchandising corporation exploration group for another session of discussion on ethics, taxation, and tax related business decisions. The core group wants to ensure they situate the corporation with high ethical standards and avoid unethical taxation decisions. Which items provide a foundation for ethical taxation accounting activities? Question 1: Establish ethics guidelines for financial reporting based on the Sarbanes-Oxley Law. The correct response is A: ethical. Using the Sarbanes-Oxley Act as a base for developing a code of ethics is a great start and sends a positive message to investors. Question 2: Establish ways to determine lowest possible taxes, and pay taxes only when it is apparent you must. The correct answer is B: unethical. This statement implies that unethical options (such as tax loopholes and offshore investments) may be considered, leading to possibly making unethical tax avoidance decisions. Question 3: Keep government at an arm s length, and do not influence their decisions inappropriately. The correct answer is A: ethical. Keeping the government at an arm s length facilitates maintaining a cooperative, professional, working relationship and 1

2 avoiding conflict of interest. Question 4: Be compliant with national and international regulations in disclosure of corporate transactions. The correct answer is A: ethical. Knowing and abiding to national and international regulations facilitates making ethical business decisions regarding financial reporting and disclosure of activities (such as transfer pricing and offshore investments). Question 5: Establish off-shore divisions for tax avoidance where you can. The correct answer is B: unethical. This statement implies unethical tax avoidance at any opportunity. The establishment of offshore divisions must have a sound economic reason. Activity 2 Question 6: Tom asks, Can you summarize the corporate responsibility for financial reporting based on the Sarbanes-Oxley Act? Model answer is: Section 302 of the Sarbanes-Oxley Act of 2002 outlines the corporate responsibility for financial reporting where the corporate officers, those who sign the report, are responsible for the following: Review the report. Attest that the information reported is truthful and not misleading. Attest that the financial information reported is fairly presented. Establish and maintain internal controls that ensure appropriate and correct information sharing. Evaluate the internal control and report on its effectiveness. Report any deficiencies or fraud. Report significant changes to the internal control that would weaken its effectiveness. 2

3 Question 7: Jack is interested in the reporting standards specific to CEO compensation and asks, What are some of the current tax reporting standards that we need to consider regarding CEO compensation? The model answer is: CEO compensation can be complex as corporations use various non-cash methods for executive compensation. There are tax implications to both the employer and receiving individual. The IRS highly recommends using their most current auditing guide for tax reporting and compensation tax planning to ensure compliance. New tax reporting laws established include efforts to stop abuse of tax shelters, which can be a part of executive compensation. The reporting requirement standards include the requirement of disclosure of reportable and listed activities. It is favorable to establish a consistent method of keeping files and records for CEO compensation. Question 8: Ellen continues, What about the use of tax shelters; are they all unethical? The model answer is: Ethical and legal tax shelters can be set up when done so in adherence to the IRS guidelines for appropriate economic reasons. Legal tax shelters enable corporations to minimize tax liability, which is a reasonable responsibility corporations have to their shareholders. However, tax shelters are under close scrutiny of the IRS because of the high potential of abuse in using tax shelters for tax evasion, especially tax shelters with offshore components. Tom continues, OK. We hear of corporations being investigated for abusive tax shelters. Which example tax shelter business decision is ethical? Question 9: A tax shelter that requires substantial contributions with a degree of risk and involves current losses to produce future income. Is this an ethical or unethical activity? The correct response is A: ethical. This tax shelter is ethical as long as the investment is set up to produce income and the risk of loss is proportionate to the expected tax benefit. Question 10: A tax shelter is marketed as a business prospect of large writeoff in relation to low risk, small investment. Is this an ethical or unethical 3

4 activity? The correct response is B: unethical. This tax shelter is unethical and implies being an abusive tax shelter as the investment and tax benefit amounts are marketed as disproportionate. Tom is interested in the potential of the multinational aspect for this corporation. He asks, What are tax implications for establishing ethical offshore investments? You respond that the business decision to establish offshore subsidiary corporations for global business expansion is a flourishing trend, but it must adhere to key business decisions to maintain ethical operations as they are now under the scrutiny of a federal anti-fraud task force. Which key functions will you suggest to maintain ethical offshore operations? Question 11: Plan to pay the difference between foreign taxes paid and U.S. corporation tax upon repatriation to the U.S. parent corporation. Question 12: Defer repatriation of profits for 10 years, then you no longer have to claim those profits. The correct response is B: False. Question 13: Choosing a tax favorable location for an offshore operation is only one factor and does not determine the success of the offshore operation. 4

5 Question 14: Keep accurate records and plan to disclose the offshore operation s profits, clients, and business partners. 5