Business Tax Environment anno 2015: Improved and Reinvented!

While in the past a call to your tax advisor was only required close to the tax return deadline or when confronted with a tax audit, the current business environment demands having your advisor on speed dial.

TEXT VIVIAN L.M. BONIFACIO-PIETERS MSC, TAX MANAGER AT MEIJBURG & CO CARIBBEAN. JEANISE J. JOB MSC, TAX MANAGER AT MEIJBURG & CO CARIBBEAN. LAETITIA J.V. WALL MSC, TAX CONSULTANT AT MEIJBURG & CO CARIBBEAN

The current tax environment has evolved from accepting a one line explanation on your tax expense to requiring an in-depth analysis to account for your tax position. Stakeholders of financial statements (i.e. shareholders, investors and tax authorities) increasingly demand greater transparency and insight into the tax position of a company. As a result, more attention is paid to the standards of information, presentation, and disclosures to be presented in financial statements. Furthermore, the tax environment of a company is shifting from being an incident-driven approach to a process- oriented approach, gaining insights into tax risks and the risk control measures to be taken (the tax function of a company). Therefore, a thorough review of, amongst others, the company’s accounting of income taxes (Tax Accounting) can provide comprehensive insight into its tax function, and, based on the information obtained, the performance (efficiency and effectiveness) of the tax function can be measured. The performance of the tax function is often referred to as Tax Performance and the management of the risks and responsibilities of the tax function can be referred to as Tax Performance Management.

Tax Performance Management: where are we and where do we want to be?
Tax performance management is the process of design, implementation and execution of an efficient and effective tax function through which the company:
• Analyzes the current and desired level of implementation of its tax strategy, tax compliance and tax risk appetite;
• Identifies the current risks in the internal processes and tax compliance as well as the tax value adding processes within the business framework;
• Implements the necessary infrastructure and controls to achieve the goals as laid out in the tax strategy; and
• Continuously evaluates and reviews the implemented processes to assess the efficiency and effectiveness of the tax function.

The changing business tax environment requires a new approach and interpretation of your tax position. No longer is the emphasis solely on your tax expense and tax return, but rather on the management of your overall tax performance.

Tax accounting: the presentation of the tax position in the financial statements
Internal and external auditors rely on tax experts to provide and/or assess the tax position of a company in order to accurately reflect the tax position in financial statements. The most important information to be presented in the financial statements with regard to income taxes is tax expense. Tax expense comprises current tax and (movements in) deferred tax.

Current tax is the amount of income tax payable (recoverable) with respect to the taxable profit (loss) in the current period and prior periods to the extent that it has not yet been settled. On the other hand, deferred tax arises from current transactions that have future tax consequences due to temporary differences arising from different accounting methods for the accounting and taxable profit, tax losses carry forward, and tax credits. International accounting principles, such as Dutch GAAP and the IFRS, require separate presentation and disclosures of the tax position in the balance sheet, the income statement, and the equity of the company.

Presentation of the tax position in the balance sheet
Under the Dutch GAAP and IFRS, unpaid current tax for current and prior periods is recognized as a liability. If the amount already paid exceeds the amount due for those periods, the excess is recognized as an asset. The current tax liabilities (assets) are measured by the amount expected to be paid to (or recovered from) the taxation authorities at applicable (future) tax rates. In addition, an overview of the Receiver Office, in connection with the outstanding profit tax assessments, can support the calculation of the current tax liability (asset). Under the IFRS, deferred tax asset and liability are classified as non-current in the balance sheet. Under the Dutch GAAP, general classification rules for current/non- current assets apply to deferred tax assets. Therefore a portion of a deferred tax asset may be classified as current. Unlike the IFRS, the deferred tax liabilities are classified as a separate class of provisions within liabilities, for which the current/non-current distinction is not applicable.

Unlike the IFRS, the deferred tax assets and liabilities are allowed to be discounted under the Dutch GAAP. Furthermore, the current and deferred taxes are measured using the tax rates and tax laws that have been (substantively) enacted by the reporting date.

The accurate presentation of information on a company’s tax position requires an in-depth knowledge of current tax legislation, anticipation of future tax legislation, and the reporting requirements as prescribed by the accounting guidelines.

Presentation of the tax position in the income statement and equity
Under both Dutch GAAP and IFRS, total income tax expense recognized in the income statement is the sum of the current tax expense (or recovery) plus the movement in the deferred tax liabilities and assets during the period, net of tax amounts recognized directly in the equity.

In case a transaction and/or event is recognized outside the income statement (either in other comprehensive income under the IFRS or directly in the equity under the IFRS and under the Dutch GAAP), the deferred tax expenses in connection herewith are also recognized under other comprehensive income or in the equity.

Disclosures in the notes
In the notes of financial statements, applicable methods of calculating the tax expense as well as the effective tax rate should be disclosed. In addition, accounting principles require that reconciliation be presented between the tax expense (derived from the taxable profit) and accounting profit. This provides the user of the information with insight into the transactions that impact the taxable profit and consequently the effective tax rate of the company.

Summary and conclusion
The tax professionals with a specialization in Tax Accounting & Tax Reporting of Meijburg & Co Caribbean aim to bridge the gap between your accountants and tax advisors. We are specialized in the recognition and analysis of your business transactions’ tax impact on the financial statements of your company.

We have extensive experience in providing our expertise and assistance during internal and external audits, as well as in designing and effectively implementing a tax function that contributes to your overall tax management (tax governance). We look forward to assisting you in the process of maximizing the added value and effectiveness of tax performance management.