Transfer Pricing and Its Potential Effect on Tax Revenue

The corporate tax rate in the United States of America is 38.90%, second highest of any country in the world, and far and away the highest when comparing to other countries with similar economic status (Trading Economics). This may come as a surprise, as it seems you cannot turn on your television without hearing about how major corporations and the “one percent” are exploiting the general public and hoarding all of our countries wealth. The truth is large corporations pay an effective tax rate that is higher than more than 99% of citizens who file income tax returns in the United States each year. Despite this, statistics from 2015 show that corporate taxes only accounted for around 11% of the federal tax revenue generated in the United States that year (Trading Economics). In 1952 corporate taxes accounted for 33% of federal tax revenue generated during the year (McBride). Many people point to these statistics as support that large companies are fleeing the country for more favorable tax rates in similarly developed countries. Whether this is true or not, almost all major multi-national corporations have incorporated different techniques into their business operations to make sure they are not paying more income tax than is required. One of these techniques that many international companies employ is transfer pricing.

A transfer price is the price charged by a parent company to a foreign subsidy for an intercompany transaction. When compiling the corporation’s financial reports to meet outside reporting standards, these transactions are eliminated as the financial results of the subsidiary are combined with the parent, but for tax purposes the financials are not consolidated causing the intercompany transfers to remain (McKinley). These transfers directly affect how taxable income is spread throughout the organization, and can have real consequences on how much tax a multi-national corporation ends up paying. The latest and most substantial example of transfer pricing action that came under scrutiny was the 2006 case of the IRS v. GlaxoSmithKline for a dispute that took place from 1989 through 2005. In this case, the U.K. based Glaxo claimed that the drugs and marketing plan created to distribute them was developed outside the United States, causing the price charged for the product to be lower as more of the “value” of the transaction was assigned to the parent company as opposed to its U.S. subsidiary. The IRS argued that much of the marketing plan for the drugs distributed was created by the companies U.S. subsidiary meaning that the “value” was created within the United States, which would require that the U.S. subsidiary claim a much higher gross profit margin. In the end, GlaxoSmithKline was required to use an alternative method when distributing profits amongst the subsidy and parent company which required the company to pay a back tax payment of $3.4 billion dollars (McKinley). This example illustrates how much taxable income can be altered through transfer pricing, and also the leeway given to companies when deciding on the most appropriate transfer pricing method.

Due to the dollar amounts of potential tax savings, and also the potential losses that could be caused by a misguided transfer pricing allocation method, transfer pricing has become a huge focus of multi-national corporations. According to Ernst and Young’s 2010 Global Transfer Pricing Survey 66% of companies reported undergoing a recent transfer pricing audit; up 14% from the survey taken only three years earlier in 2007 (McKinley). Corporations aren’t the only ones who are taking notice to transfer pricing either. Governments have begun to develop special audit task forces that focus on corporation’s compliance with laws that apply to how transfer pricing should be handled. As evidenced in the example of GlaxoSmithKline cited earlier, it is not only the country that holds the headquarters of a corporation that has to worry about tax revenue being improperly diverted through transfer pricing, but also the country that holds the companies foreign subsidiary. This point alludes to the potential for a conflict of interest between two countries governments as generating revenue from taxes is usually one of the most discussed topics within a countries political landscape.

This brief overview of transfer pricing was meant to highlight one of the many ways large corporations have used the gray area of tax law to try and lessen their overall tax burden. Although it looks like transfer pricing will be around for years to come, the potential for abuse could be discouraged through widespread tax reform within the United States. This could be accomplished by lowering tax rates applied to large corporations who choose to maintain the parent company’s headquarters in the United States, as well as removing some of the ambiguity of selecting the appropriate economic method. With the recent leadership changes in the United States government hopefully some progress can be made in tax reform to retain major corporations headquartered in the United States, and possibly encourage some to return.

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How Accounting Services Can Help a Small Business

Accounting services aren’t just for multi-million dollar corporations. From startups to established family businesses, using an accountant to keep track of income, expenses and taxes can help any company reach its potential. Here are five reasons for any business to consider outsourcing their bookkeeping to a premier accounting provider.

1. Free Up Employees

A company may not have enough paperwork to justify a full-time accounting position. However, when non-accountant employees have to split their time between balancing the books and performing their other duties, they are unable to be as effective as employees who only have to concentrate on one job. By hiring a financial management firm to take care of their accounts, the company allows employees to do the jobs they were hired for.

2. Ensure Accuracy

Keeping up with accounts payable, accounts receivable, tax documents and other financial information can be complicated. Good accounting services employ Certified Professional Accountants, or CPAs, who are licensed and highly trained. By employing a numbers expert, a company is helping to ensure the accuracy of their books. This can help avoid costly mistakes that may lead to litigation or even the closure of the business.

3. Stay Up-To-Date

Tax laws and local regulations change frequently, and it can be hard to keep track of all the updates. Also, if a business is growing quickly, it can be difficult to keep track of the different laws that may apply at different stages of growth. A company can help ensure they stay in compliance by employing a dedicated firm whose sole responsibility is understanding these regulations. The accountant can make recommendations to the business owner about any changes that need to be made or upcoming financial legislation that may be relevant.

4. Limit Liability

Many accounting services provide some guarantee for their work within the initial contract. This means that if discrepancies occur, or if the IRS conducts an audit, the service provider will be liable for any mistakes that are found. However, financial disputes can tie up working capital for long periods of time, so it’s still important to do due diligence and choose a firm with a good reputation and solid experience.

5. Plan Ahead

Financial experts will understand all sides of a company’s financial picture, including upcoming budgets. Expert financial analysis can help create a more balanced budget, making it easier to plan future expansions or, if necessary, cutbacks. With proper forecasting, a business will be more likely to have appropriate inventory on hand, have enough funds for payroll, and pay enough quarterly taxes, to name a few examples.

Differences Between GAAP and IFRS

In the accounting world, there are sets of rules that are followed to make sure business is ran smoothly and orderly. In the United States accounts follow a set of rules known as GAAP (Generally Accepted Accounting Principles). It is known as being a rule based system. However, a larger population of the world follows the accounting standard known as IFRS (International Financial Reporting Standards. Many countries follow this standard which is known for being more principle based. These countries use this method so they can understand each other’s methods and can identify what they are doing. While GAAP and IFRS are not too different from each other, they do have some major differences.

With IFRS being principle based, it leaves a lot of room for different interpretation that could lead to disclosures on financial statements that can influence a firm a lot. GAAP’s rule based principle keeps firms on track by having a clear cut list of rules that show them what they can and cannot report. This does not allow firms to do as they please and keeps everyone on the same page. Another difference between the two companies is the use of LIFO (Last in First out). This is an inventory method used that means the last inventory that is brought into the company will be the first sold. GAAP allows companies to choose between this or FIFO (First in First out). IFRS however does not allow companies to use LIFO and they must go with FIFO. In regards to developmental costs the standards differ again. GAAP always label these costs as expenses. Whereas IFRS has a criteria that if these costs match, they can then be capitalized instead of expensed. GAAP being a rule based standard, if does not give companies that many choices. Once an asset is recorded to its’ market value, there is no turning back on that amount even if it changes in the future. IFRS however says that if there is a change in the market value of the asset than they may reverse the write down and change it to its new market value.

Even though there are many differences between the two, why there is not a rule standard that is used worldwide. One reason is based off of the two standards both have. The United States believes that they should have a specific rule set and if it is broken then they know to go to the auditors and accountants to find the problem. IFRS allows for more freedom and prefers that they give companies more flexibility in how they approach their business. Another reason why the two will not merge is that IFRS likes to work on problems alone. They do not reach out to others and work with them to fix what is wrong. GAAP is opposite as they want others to come in and help if there is an issue they cannot solve. They have released standards and in those none of them coincide with what IFRS believes. This continues to show that they are different.

Finally, a major reason why the two will not join to become one is politics. Politics are big issue in a lot of areas and accounting does not avoid it. In the United States, giving up their rule set of GAAP to a foreign policy from outsiders that they did not form is not appealing to them. They believe that if they give it up then they are not protecting the investors in the country and leaving them liable for future problems. GAAP members also think that with a more principle based standard and not rule based there is a lot of room for companies to do what they want. It is uncomfortable for GAAP to have looser rules and let companies do as they please. They believe there is a lot of room for problems that can arise from this. Once asked about why they don’t converge, they responded that investors believe that “giving up their high quality standards should not be compromised for the sake of uniformity. However there have been minor adjustments made to GAAP to close the differences between the two a little and they want to lessen the gap as much as possible without losing what they believe is to be right.

In conclusion, there are many differences between GAAP and IFRS. Both are set up to help companies correctly file information and do business in an efficient way while following standards. The differences between the two standards has become less but there is still a larger gap between the two. It will be interesting to follow the track of these two accounting standards and see if one day there will only be one set of standards.

Simple Steps to Prepare Your Books for Year-End Accounts

Keeping all financial records of your business is highly important to run the business smoothly. These records help a firm to detect profit and losses in order to estimate its growth and various other financial patterns. It is an essential legal requirement to keep the financial records in the prescribed manner. Among other things, this allows you to have an easy closing at the end of the financial year as all the financial records are already in place.

For new business owners, it can be confusing to understand what goes into a fiscal year closing. Even if you have an accountant or retainer working with you, it is highly important to keep a track of financial records yourself. It develops a sense of good business in you and as a business owner, you will know what exactly is happening with your money.

Some steps for preparing the books for year-end accounts are mentioned here.

Review Your Profit and Loss Statements: You will get a snapshot of your business’s financial performance through the profit and loss statements. You will realise what your revenues looks like and you can anticipate any large expenses that may hit your books. You can evaluate how much money you have available and you can check whether it will be wise to make big purchases at this time of the year. Keep a check on the expense accounts of large items and smaller recurring expenses, so you know if anything is going out of line.

Verify Your Vendor and Lender Files: You should not forget to review the paperwork associated with any of your vendors along with the information related to outstanding loans. Make sure that all your vendor forms are accurate and properly filled up. You also have to ensure that the information has been correctly input in your system so that it will populate the forms and accounts correctly when printed.

Take Inventory: If you are into selling products, then you should conduct an inventory assessment and compare it with the previous inventory report. Make the necessary adjustments to have an accurate account of how much capital you have wrapped in your current inventory. Even if you are not into selling items but rather sell services, it is a good idea to take an inventory of elements in your office such as equipment, computers, office supplies, etc.

Create a Budget for the Following Year: It is always better to plan early, and you can always prepare a financial plan for your business at the end of your fiscal year. When you are reviewing the accounts of the current year, you will see a pattern in things which you need to factor in the budget for the next fiscal year. When you will see the expenditures and stock of the ending year, you will have a better understanding of where to focus your efforts to move ahead in the business.

Allenby Accountants is an independent accounting firm, located in Uxbridge, the western part of London. We are accountants, business advisers, offering financial services and helping you to achieve your business objectives. Our offered range of services includes accounting, bookkeeping, tax management, VAT management, tax planning, Inheritance tax, capital gains tax issues, succession planning, etc. We specialise in offering services to sectors like medical & healthcare, retail industry, professional services, property & construction industry, charity and not-for-profit organisations and more.

Accountant Vs Bookkeeper – Understanding the Difference

Cash flow management and accountability are important aspects of operations for any business. With accurate recordings of transactions coupled with proper assessment and processing, business owners can have a firm foundation from which they can make decisions and plan their business’ growth.

Recording and understanding the basic financial needs of any business such as sales, expenses, and payments is not that hard but understanding the accounting needs of a business is not that easy. To understand this better, it is essential to realise the difference between Bookkeeping and Accountancy. The basic difference between the two is that the bookkeepers record and maintain the everyday financial activities of the organisation that can be then verified and examined by the accountants. Simply put, bookkeeping is one aspect of accountancy whereas the latter deals with the bigger picture.

The other differences between bookkeepers and accountants are mentioned below for you to understand their distinction better.

Bookkeepers: The territory of a bookkeeper lies in everyday financial activities. It includes everyday purchases, sales, payments, and expenses. The process is usually performed with the help of journals and ledgers. Some businesses also use software such as Sage, QuickBook, Xero, Kashflow or Peachtree, among others, to maintain records. This effort of maintaining journals and ledgers concludes into making the trial balance sheet that ensures that the debits and credits match perfectly. Bookkeepers play an important role in building a firm foundation for the business by recording and managing the everyday financial information.

Because of the advent of the bookkeeping software, some aspects of accountancy have merged with bookkeeping processes as some of the software are now able to generate financial statements from the everyday ledger. This blurs some of the traditional lines between bookkeeping and accounting. In terms of experience, bookkeepers are required to have at least two to four years of experience or an associate’s degree to qualify for the job.

Accountants: The job of an accountant is to examine and verify the generated financial data so that they can create financial reports, analyse records, and perform audits. All this helps in preparing financial reporting records such as tax returns, income statements, and balance sheets. The analysis of the accountant about the financial information can provide an insight into business forecasts, market trends, growth opportunities, and cash flow management. Accountants look at the bigger picture and decide, among other things, on how to deal with the data and plan future financial management.

It is a high-level process which makes sense of the previously compiled information and converts them into financial models. It is highly subjective than bookkeeping, which is largely transactional. It brings key financial indicators together resulting in better understanding of profitability. Accountancy turns the information from ledgers into statements revealing the larger picture for the business. Accountants also help owners and managers in effective and strategic tax planning, tax filing and financial forecasting. In terms of experience, an accountant must have a bachelor’s degree in accounting or a degree in finance to qualify for the job.

Allenby Accountants is an independent accounting firm, located in Uxbridge, the western part of London. We are accountants, business advisers, offering financial services and helping you to achieve your business objectives. Our offered range of services includes accounting, bookkeeping, tax management, VAT management, tax planning, Inheritance tax, capital gains tax issues, succession planning, etc. We specialise in offering services to sectors like medical & healthcare, retail industry, professional services, property & construction industry, charity and not-for-profit organisations and more.

Going Beyond ERP With Expenzing

ERP (Enterprise Resource Planning) has been the cornerstone of several small, medium, and large sized businesses for many years now. ERP acts as the aggregator accounting platform of choice for companies, but some may agree that its flexibility is questionable.

Top 3 challenges with ERP:

  • High value purchases and expenses around IT, Marketing, HR Services, Legal Fees, Utilities, and Regular Expenses like Annual Maintenance Contracts are taking place outside the ERP system. There is limited or no control on branch or department level spends. Delegation of Authorization and Corporate Policies are challenged exposing the company to risk.
  • ERPs are not viably built for every employee of the organization to log on to it for requesting, approving, or fetching information. They are built for recording post-facto transactions and processing them for P&L. The cost alone for each licenced user would be run too high.
  • Purchases made outside the ERP amount to significant percentage of SG&A expenses and the time spent managing the purchases and payments is huge because of the number of transactions. Manual data entries are required to integrate with the ERP. These spends are managed with a homegrown system or spreadsheets or email or worse – paper receipts. The accounts and finance operation remains tactical at best.

Expenzing takes you further than conventional ERP

Expenzing is an expert in spend management that includes – expense management, travel expense management and procure to pay software, adding immense supremacy to the existing ERP system. We help you beyond your ERP limitations, with an automated system that brings your stakeholders on a singular platform.

  • Purchase Orders (POs) can be made in a few minutes – starting from deciding which supplier, to raising the PO online and sending that to the supplier.
  • Expenzing Invoice Management software offers tight control into the Invoice due diligence process. Our best in class Automated Due Diligence with Invoice Scrutinizer ensures you never lose money to wrong payments.
  • Expense Management Software enables approvers with email approvals knowing that Process Checklists have been checked before any invoice lands on their desk.
  • Get MIS reports, analysis on spend areas to improve or negotiate with vendors.

Regardless of the industry you are in – insurance, finance, projects, media, engineering, healthcare, manufacturing our financial control and expense management solutions help businesses save a lot of time and cost in managing their procurement, travel, and employee expenses better, and it compliments your existing ERP. To summarize, ERP is at the core of the business for many years now, but it requires the right augmentation, Expenzing provides just that adding great value to your business.

Shabbir is an industry veteran and Serial Entrepreneur with over 30 years of experience. He started his career with HCL Technologies and ventured on the entrepreneurial journey shortly after 2 years.

Expenzing was founded with a view to create a successful Expense Management Software product that is globally accepted and utilized which includes Procure To Pay Software, Business Invoice Management Software, Travel Expense Management Software, Employee Expenses Management Software and more.

Shabbir is an Engineer with an MBA from IIM Kolkata. He is passionate about trekking, loves to travel and read.

5 Biggest Reasons For Considering QuickBooks Hosting For Your Growing Business

In today’s era of high competition, businesses are working hard to achieve the highest in every business aspect. Sometimes because of the burden of responsibility, they find it very difficult to manage everything from top to bottom. However, for a business to prosper one has to manage everything effectively and efficiently, especially the most important field of any kind of business industry that is accounting. Managing accounting data is as much difficult as essential for the business success especially for SMB’s as they find traditional accounting practices unaffordable. Every small business knows very well that accounting is a necessary evil that will take a lot of time and efforts, and can frustrate CPA’s while doing bookkeeping or further leads to data complications. Financial audit dealing and reporting may not look the most exciting part of a business but if treated in an effective way then these practices can provide considerable benefits.

From small to mid-sized businesses across the globe, people are taking advantages of cloud services to connect easily with clients to make their business practices more effective. The cloud technology has a lot of features that gives Startups and SMB’s the ability to avail most of the benefits that previously can only be afforded by the big boys with a big budget. In the case of managing finance and accounting data, many studies have shown that very few businesses are relying on hard drive or spreadsheet to store data. As every businessman knows the importance of accounting and wants to reduce the bookkeeping frustrations, they are shifting towards the most cost-efficient accounting system. Yes, we are going to talk about latest technology in trend for accounting treatments – QuickBooks cloud hosting. With days, people are turning towards QB hosting for their financial treatments.

No matter from where you are going to use it – you login outside, in the office or dedicate it in your home for your 24/7 remote access, it will ultimately be cost-effective and less risky to host your data for these below listed 5 major reasons:

Security And Spam Protection: Security of an on-premise data are very hard to guarantee. Most of the time, there is no real security of data in typical offices having many devices with USB connections that may lead to many serious business security risks. Chances are that your confidential data may get broken or lost. But by hosting QuickBooks you can safely store your data in the cloud. In data centers, there are a lot of security practices such as the implementation of most efficient Antivirus and firewalls to protect it from disasters. This will provide more consistent computing environment.

Cut Costs And Control The Way You Use Your Resources: In earlier days, businesses were relying on local computers, each time at the refreshment of hardware, they had to plan in a new way for their needs. But with the time, they shift from on-premises to the cloud servers since it provides them a tighter control over their business expenditures with predictable costs. It will also help to increase ROI by eliminating the cost of setting an in-house infrastructure and maintenance. This means to run QuickBooks application, you only have to pay for RAM, disk space and bandwidth that your cloud server uses. In other words, you don’t have to prepay, pay when needed. The best part is that it can save almost the half of money by controlling the way you use your resources with QuickBooks hosting.

Go Green With Cloud Accounting: Today everyone is talking about the buzzword “Global warming”, from plastic bottles Reutilization to reusable coffee cups, putting their best possible efforts to make the world green. But, do you ever think that how reducing all those paper works and moving business software system to the cloud will help to go green? Many worldwide types of research have shown that how cloud technology could reduce Data center usage in upcoming years. So, In this way, by hosting the most efficient cloud accounting software – QuickBooks can help SMB’s to eliminate resource use, the risk of error, and expenses. The staff is no longer bogged down by repetitious tasks that drain hours of productivity. Every department of a company can help themselves by using cloud hosting as they don’t have to shift their computers and other hardware one place to another, they can work seamlessly without any shuffle. In the cloud, businesses can Go Green and Grow Green.

Rapid Elasticity: Elasticity is another name for scalability that simply means the ability to scale up and down the capacity based on performance. Forecasting future demand is always a tough deal and there is an uncertainty with business risks. So definitively, SMB’s will opt for a service that provides them an opportunity to increase or decrease the demand for service. And by using QuickBooks hosting, businesses can meet their expectations during busy periods and off – peak periods by increasing & decreasing the capacity per use. By this way, one can easily manage the resources as per the use and monitor the resource utilization and performance. This means with QuickBooks hosting, clients are served with on-demand service quality.

Increased Productivity With Anytime-Anywhere Access: Everybody wants a hassle free environment to work. They try to handle everything on their own and in the case of software installation; if PC crashes, they lost their productive data. With anytime accessing of QuickBooks file through a highly available host, they can boost their productivity in multiple ways. Without interrupting each other, CPA’s can log on to their clients QB files at any time from any location at once. It also allows 30 people accessibility to the same application at once.

Bottom Line

In a nutshell, QuickBooks hosting is all in one package for accountants. It is as versatile as a small business owner wants with a lot of unexpected benefits. Are you ready to avail these benefits and move towards QuickBooks hosting?

Shalu Singh works as CPA with SageNext, a cloud service provider having experience in hosting major tax and accounting applications.