Ernst and Young Tax Guide - Essay Example

Taxation In the late 1980's, most countries in this region were facing growing fiscal deficits and rising levels of debt, mainly attributed to poor fiscal and monetary policies, and high levels of corruption in the government. It therefore became necessary to explore new institutions for public finance management. In East Africa, the most significant aspect of tax reform was the creation of semi-autonomous revenue agencies, beginning with Uganda (1991), Kenya (1995), Tanzania (1996) and Rwanda (2000). The specific objectives of these reforms were: To raise tax revenue as a ratio of the GDP To improve economic efficiency of the tax system To reduce compliance and administrative costs, while expanding the tax base; and To improve the administrative efficiency of the tax system. (Peter W. Bernstein Pub. Date: December2005) Formation of these agencies led to new accountability relations: by placing the responsibility for revenue collection outside the civil service, it was now possible to "bypass" the deficiencies in existing state institutions through offering higher salaries and more flexible procedures for recruitment of staff. It was also expected that the new institutions provided a better environment for integrity in revenue administration. Tax reform can therefore be seen as an attempt to achieve the larger goals of an accountable and transparent government through improved revenue collection and tax policies. Mr. Waweru said that the adoption of the revenue agency model has generally been successful in improving tax administration. Under the general direction of the East African Revenue Authorities Commissioners General Forum and the East African Revenue Authorities Technical Committee, the revenue authorities have managed to keep the regional tax administration reform agenda on track. The reforms focused on building integrated institutions for better synergies between the legacy revenue departments, rationalizing and lowering tax rates, introduction of VAT as a replacement of Sales Tax, automation of functions, meeting targets by enhancing revenue mainly from existing taxpayers, and adoption of a corporate planning approach to revenue administration. ACCA is the largest and fastest growing international accountancy body with over 345,000 students and members in 160 countries. ACCA has been active in East Africa for many years, and has offices in Nairobi, Kampala and Addis Ababa, and active student branches in Dar es Salaam, Kigali and Khartoum. The first ever ACCA East African Accountants Convention brought together members and other accountants from the Eastern, Central and Horn of Africa region. (Cheryl D. Block, Pub. Date: October2004) "The Convention is also part of ACCA East Africa's overall strategy to provide appropriate platforms for ACCA members to share professional knowledge and best practice, as well as to engage business, political and civil society leaders, as part of the wider community in which they live and work," says John Nyakahuma, the Head of Corporate Development, and ACCA East Africa. Mr. Chas Roy-Chowdhury, the Secretary of the ACCA Taxation Committee at the organization's London Headquarters spoke on the European perspective on tax reform, while Mr. Francis Kamulegeya, Tax Partner in the Kenya branch of international accounting firm PriceWaterhouseCoopers (PWC), spoke on Tax Reform: Issues and Challenges in East Africa. Mr. Kamulegeya works primarily with PWC Kenya's multinational and regional clients in the manufacturing and services sector, some of whom are the largest taxpayers in East Africa. In addition to his current role as the leader of the PWC indirect tax services group in East Africa, he helps clients in the areas of tax planning and compliance, and in particular advising companies wishing to invest in East Africa on aspects such as corporate structuring and financing in order to take advantage of the available investment incentives in the region. Lord Marshall concluded that a number of options should be considered. He stated that it was unclear from his consultation whether economic instruments had a role but his own personal belief was that a role did exist for them as part of a package. The other components of the package foreseen were, broadly speaking, voluntary agreements and options trading. However the underlying ethos for any measure was that the UK competitive position should not be affected. The contributors to this response whose products are exposed to international competition emphasized their grave concern at the tax causing a significant increase in their costs and making their products globally uncompetitive. They consider that their energy use efficiency is continuously monitored and improved upon and they would be perfectly willing to sign an agreement with the Government to reduce their energy use by a stated percentage by 2010. (Richard L. Doernberg, Pub. Date: September2004) In addition the levy is to target 30% of UK energy users and disproportionately the recession bound manufacturing sector. For instance British Steel, which has been shedding thousands of jobs over the last few years, will receive a 5m national insurance reduction but pay 220m in additional energy tax. It is precisely this type of business that will be worst affected due to the price inelastic global market place in which it operates. The consultation document itself talks of the signing of specific energy reduction agreements with energy intensive businesses. The signing of such an agreement would result in a reduced levy being applied to those sectors. The Marshall report however, separates out the levy and business agreements. Our reading of that report is that essentially a business specific agreement should exclude the levy being applied. We consider the use of agreements to be the way forward. There should be no need for an energy tax. In our view there should be a mandatory requirement for all significant businesses to enter into a business agreement with the Government on an energy use reduction plan. The First Year Capital Allowance definition or the Corporation Tax payments on account definition could be used (depending on the number of businesses that could be administered by the Government in the scheme), to define a "significant business". A tax imposed for environmental reasons should recycle any revenue back into the area in which the tax was implemented to better (i.e. hypothecation). This can include projects such as clean technology investments, energy efficient capital investments and upgrading of equipment. As the tax proposal stands, only 2.86% of revenue will be re-invested. Hypothecating revenue will significantly improve energy efficiency in business, and the tax levy could be lowered in due course once the political targets and legal commitments have been met. The spreadsheet provides a structure for obtaining the information needed to help CPAs formulate a recommendation to clients. The lead worksheet of the spreadsheet contains a section into which CPAs must enter a number of variables marked in red. The black numbers are intermediate calculations used in the recommendation. A separate section of the lead worksheet is the outcome section that will show which alternative provides the greater net present value of the calculated cash flows. Begin by obtaining some basic information about the client's former residence, such as its cost, portion of the cost allocated to the land, the size of the down payment that was made, the mortgage rate, how many years the client is into that mortgage and how many years the client envisions renting the property (Decision horizon --Years). This basic information can be entered into the spreadsheet in the appropriate cells. Another important set of variables is the status of the local residential housing sales and rental markets. Your experience may be sufficient to answer these questions, or you may need to consult with a real estate professional in the area. Are houses in the local market selling at fair value or at some discounted amount (market depression factor) At what percentage of fair value are houses currently being rented CPAs also will have to provide some guidance in the determination of the return-on-alternate-investment variable used to compare the returns the client can expect from renting vs. selling. Take into consideration the client's investment position and risk-return preferences. For a simple solution, assume the proceeds will be used to reduce the mortgage on the new home and use the interest rate on the new mortgage for this variable. (Stephen Schwarz, Pub. Date: August2005) The spreadsheet illustrates how changes in one market have implications on the equilibrium price and quantity in U.K. and international markets. Section 4.1.1: The Model The model is based on three interrelated markets; coffee, tea and milk. It is assumed that consumers view coffee and tea as substitutes, and drink coffee with milk, and tea without milk. The coffee market is represented by the following demand and supply conditions: Qd = a - bP Qs = c + dP + H + T Qd = Qs Where H is an exogenous variable that represents the current harvest conditions, while T is an exogenous variable that represents the level of taxation on producers. P and Q are the price and quantity of coffee, while b represents the price elasticity of demand for coffee and d represents the price elasticity of supply for coffee. The reduced form equations (solving for P and Q) determine the equilibrium price and output level. P = (a - c - H - T) / (d + b) Qd = a - b ((a - c - H - T) / (d + b)) The tea market is represented by the following demand and supply conditions: Qdt = e - fPt + gP Qstt = x + jPt Qdt = Qst Where Pt is the price of tea, P is the price of coffee, f is the price elasticity of demand for tea, j is the price elasticity of supply for tea, and g is the cross price elasticity of demand for tea with respect to the price of coffee. The positive sign before gP implies that the two goods are substitutes. The reduced form equations (solving for P and Q) determine the equilibrium price and output level for tea. Pt = (e + gP - x) / (j + f) Qdt = x + j((e + gP - x) / (j + f)) The milk market is represented by the following demand and supply conditions: Qdm = k - lPm - nP Qsm = o + rPm Qdm = Qsm Where Pm is the price of milk, P is the price of coffee, l is the price elasticity of demand for milk, r is the price elasticity of supply for milk and n is the cross price elasticity of demand for milk with respect to the price of coffee. The negative sign before nP implies that the two goods are complements. The reduced form equations (solving for P and Q) determine the equilibrium price and output level for milk. Pm = (K - nPc - o)/(l + r) Qm = o + r((k - nPc - o)/(l + r)) An increase in the market supply (improved harvest) will cause the price of coffee (P) to fall. This will have a knock on effect in other markets. The lower price for coffee will cause an increase in the quantity demanded for milk (Qdm = k - lPm - nP) and a decrease in the quantity demanded of tea (Qdt = e - fPt + gP). Therefore, a fall in the price of coffee (P) will lead to a fall in the price of tea (Pt). The walk-through exercise is important as it allows you to check if the spreadsheet model is behaving properly. The aim is to make sure that the output from the spreadsheet corresponds with the output from the walk through exercise. In other words it acts as a safety check, if the two do not correspond then an error has occurred in either the spreadsheet or your calculations. Given the following input parameters, and solving the reduced form equations, the output should be as follows: Parameter Value Parameter Value a 100.0 j 0.7 b 0.8 k 30.0 c 20.0 l 1.2 d 0.8 n 0.8 e 10.0 o 3.0 f 0.6 r 0.9 g 0.8 H 50 x 8.0 T 10.0 The output is: Coffee Tea Milk Price 12.50 9.23 8.10 Quantity 90.00 14.46 10.29 Total Revenue 1125.00 133.49 83.27 If H is increased to 60, then: Coffee Tea Milk Price 6.25 5.38 10.48 Quantity 90.00 11.77 12.43 Total Revenue 593.75 63.37 130.20 The spreadsheet The following screen shots depict a suggested layout for the spreadsheet. Note the use of named sheets to give instructional information. 1. The introduction sheet gives the aims of the spreadsheet activity, the sequence of tasks that you wish the student to undertake and a description of what information is on the different pages. An important requirement of this sheet is to explain how the comment boxes are used for instructional information. 2. The simulation model worksheet contains the actual model. The inclusion of comments within the spreadsheet allows the teacher to include glossary terms and instructions. 3. The additional information sheet could be used by the educator to embed the spreadsheet activity within other resources, for instance, linking to relevant articles on the web, or a discussion board. 4. The working area contains the workings of the spreadsheet model. It should have clear warnings for users not to change anything on this page unless requested by the educator. Screenshot 3: View of the Working Area The design blends both numeric and text information. By including text, numeric and graphical information, it enhances the value of the resource as it accommodates different learning preferences. Cross referencing the output area with the walk through exercise, it is evident that the model behaved as expected. The improvement in harvest conditions caused a decrease in the price of tea. The spreadsheet formulas and functions This section outlines the formulas that were used in the spreadsheet. The cell addresses correspond with the spreadsheet illustrated through the previous screen shots. The first sets of formulas that need to be developed are those that create a numeric value for the words entered in the Harvest (C6) and Taxation (C7) cells. The conversion into values of 50 for neutral, 40 for decrease and 60 for increase is undertaken in the Working Area. The formulas use a set of 'If' statements, i.e., if C6 is neutral then the cell value should be 50, however if C6 is increase then the cell value should be 40, if C6 does not equal neutral or increase then the cell value should equal 60. The formulas are: C10 =IF('The Simulation Model'!C6="neutral",50,IF('The Simulation Model'!C6="increase",60,40)) C11 =IF('The Simulation Model'!C7="no change",10,IF('The Simulation Model'!C7="increase",15,5)) The second set of formulas that need to be developed are those used to calculate the actual outputs (price, quantity and total revenue) for the three markets. These are based on the reduced form equations that were calculated earlier. The formulas are: C18 =('Working Area'!C4-'Working Area'!C5-'Working Area'!C10-'Working Area'!C11)/('The Simulation Model'!E6+'The Simulation Model'!E6) C19 =Working Area'!C4-('The Simulation Model'!E6*('The Simulation Model'!C18)) C20 =C18*C19 C22 =('Working Area'!C6+('The Simulation Model'!E12*'The Simulation Model'!C18)-'Working Area'!C9)/('The Simulation Model'!E8+'The Simulation Model'!E9) C23 =Working Area'!C9+('The Simulation Model'!E9*'The Simulation Model'!C22) C24 =C22*C23 C26 =('Working Area'!C7-('The Simulation Model'!E13*'The Simulation Model'!C18)-'Working Area'!C8)/('The Simulation Model'!E10+'The Simulation Model'!E11) C27 =Working Area'!C8+('The Simulation Model'!E11*'The Simulation Model'!C26) C28 =C26*C27 The third set is used to calculate the percentage change between the original values and the actual values. The original values are simply those calculated when harvest is set as 'neutral' and taxation is set as 'no change'. The values are stored in the Working Area. The calculation is rounded to one decimal place. The reason for this is that the values being used to calculate the growth rates are not all to one decimal place. Therefore, you may find that even with the harvest and taxation set as neutral, some growth rates are not zero. This problem is eradicated by the use of rounding within the equation. The formulas are: D18 =ROUND(((C18-'Working Area'!C14)/'Working Area'!C14)*100,1) D19 =ROUND(((C19-'Working Area'!C15)/'Working Area'!C15)*100,1) D20 =ROUND(((C20-'Working Area'!C16)/'Working Area'!C16)*100,1) D22 =ROUND(((C22-'Working Area'!C18)/'Working Area'!C18)*100, 1) D23 =ROUND(((C23-'Working Area'!C19)/'Working Area'!C19)*100, 1) D24 =ROUND(((C24-'Working Area'!C20)/'Working Area'!C20)*100, 1) D26 =ROUND(((C26-'Working Area'!C22)/'Working Area'!C22)*100,1) D27 =ROUND(((C27-'Working Area'!C23)/'Working Area'!C23)*100,1) D28 =ROUND(((C28-'Working Area'!C24)/'Working Area'!C24)*100,1) The final stage is to convert the numeric growth rates into textual descriptions. This was achieved by the use of the 'IF' statement. For instance, if the growth rate is greater than zero then the term 'increase' is to be used. However, if the value is less than zero then the term 'decrease' is applied, while if the value equals zero then the term 'no change' is used. The formulas are; E18 =IF('The Simulation Model'!D18>0,"increase", IF('The Simulation Model'!D180,"increase", IF('The Simulation Model'!D190,"increase", IF('The Simulation Model'!D200,"increase", IF('The Simulation Model'!D220,"increase", IF('The Simulation Model'!D230,"increase", IF('The Simulation Model'!D240,"increase", IF('The Simulation Model'!D260,"increase", IF('The Simulation Model'!D270,"increase", IF('The Simulation Model'!D28 Read More