It’s official, if you have losses then prepare to shed them. Loss carry back is here and tax losses incurred in 2012-13 can be carried back and set off against tax paid in 2011-12 (Budget paper No 2 page 39). In the coming years tax losses can be carried back two years earlier.

The Government has abandoned the much needed reduction in company tax rate and opted for the loss carry back. Some you win, most you lose. The devil will be in the detail when the legislation is enacted.

The most notable known limitations are that the carry back will be limited to $1m each year and may not exceed the company’s franking account positive balance. If the carry back results in a negative franking account balance then there is the danger of franking deficit tax busting your cash flow

Will this discourage companies paying franked dividends to their shareholders? Not sure but the move is expected to increase investment. At least it is hoped that the carry back will slow the spiralling redundancies and help pay unpaid salaries and super guarantee payments.

It is also important to look for other conditions for carry back as in carry forward: COT and SBT, a veritable maze of rules and “do not do’s” before you reach the top of the greasy pole of tax relief.

Too many unknown unknowns?

In theory there’s not much difference between handicapping the budget and choosing the preferred runner in the Melbourne cup. The media analysts get rolled out for both; from Kohler to mitchell to gittins, and a few former politicians (Peter “He’s never delivered a surplus” Costello, Paul “Insert funny comment” Keating) have their say in Canberra and in the Cup case everyone else has their pick. And in both cases after a long build-up and many speeches (or one long one) it’s over and done with and everyone is looking for something to drink (though a WET increase would be a harsh kick in the pants). The main difference is that people forget the horses’s name the next day.

So what’s the “form” tell us this year? A few vote-pleasing sweeteners along the lines of the “school kid’s bonus” (most of which I’d guess will kick in next year) and lots of “fair go” measures (eg tax increases by removing access to rebates and concessions). The early “fair dinkum/legend of the digger” cuts revolves around superannuation. When the Howard Government unveiled their superannuation reforms, no-one believed that they would last for long, and it appears that it’s successor government will chip away at the tax advantages again.

The real prognosticating skill is from guessing the other potential cuts and nicks to create the expected surplus. Here are some predictions:

- Amendments to the medical expenses tax offset, perhaps adding a form of means test or replacing it with a means test centrelink payment
- Reduction of the CGT discount? (A big move and fairly unlikely)
- Increase in funding for the ATO’s FBT team (the sleeping giant of tax risk)
- Extending indexation freezes on superannuation caps etc
- Lots of coughing when a surplus is announced

We’ll see how it turns out tomorrow. For a full free recap of the budget by CCH’s tax experts, go to http://www.cch.com.au/AU/MarketingPromo/MarketingPromo.aspx?PageTitle=Budget-Night-2012&ID=442. And if you happen to bump into any of CCH’s writers in Canberra then buy them a drink, being locked up inside Parliament for 6 hours is far from fun.

Happy Budget Night.

It’s Budget time and print and electronic space is brimming with stories, speculation and downright rubbish. None so intriguing as the Government’s cooling on the proposal to reduce the tax rate for all companies. While other countries in our neighbourhood are enforcing unbelievably low tax rates, the long standing 30 per cent corporate rate has survived for quite some time in Australia.

Never before has the corporate tax rate come under such pressure. The Budget is a good place to start and it’s coming today.

What to expect on Tuesday night in the corporate tax area? Loss carry back, possibly at the cost of a lower tax rate, see Swan won’t commit to company tax cut.

As pointed out by the Business Tax Working group in its report, the greatest benefit from loss carry back would be derived by previously profitable companies that are in temporary loss position.  It’s only loss refundability.

According to the Report the two-year (on-going) carry back is subject to a cap of $1m and limited to the franking account balance.

If Newtonian gravitation is true then the fruits of the tree land close to the tree, unless a strong wind of tax planning is blowing across to tax havens.

A revealing report published by the Greenlining Institute (Tax avoidance in Silicon Valley) highlights how high tech valley companies in the U.S have devised ingenious methods of minimising taxes at home.

According to the report the amount of cash held by the companies increased by 21% to just under $ 430 billion. The number of foreign subsidiaries by these companies increased by a net total of 51 from 2010 to 2011.

The report goes on to say that the tax rate of some of the companies is even less than that of middle-income Americans with average household incomes of $ 64,500 per year.

 Isn’t it sad when apples go rotten?

The Advocate General of the European Court of Justice (ECJ) has issued an opinion on the case of HRMC v. Philips Electronics UK Ltd (C-18/11, 19 April 2012).

Briefly the facts in the case are:

• Parent company was established in the Netherlands. Entities in the group included a UK company and a permanent establishment of the Dutch company in the UK
• The UK authorities disallowed setting off loses of the PE against the income of the UK company
• The UK authorities based their decision on the grounds that a set off will be available only if the PE losses cannot be used against non-UK profits of the group.

The Advocate General, whose opinion is generally followed by the ECJ has advised that the PE losses could be set off against the profits of the UK company, on the grounds that disallowing would restrict the EU freedom of establishment.

Would the outcome be the same if a non EU group of companies, such an Australian group, are involved? Probably not.

One of the changes introduced by the new R&D incentive is the ability to claim the incentive even if the R&D activity is conducted overseas. However there are several conditions to be satisfied before incentives will become available, notably approval by Innovation Australia.

Now Singapore has joined the party, announcing enhanced Productivity and Innovation (PIC) scheme incentives in its 2012 budget. The PIC provides a 400% tax deduction of up to $400,000 of qualifying expenditure incurred, R & D expenditure included. Any excess is entitled to a tax deduction of 150%. In the alternative a cash payout of 30% of the qualifying expenditure may be claimed.

The budget proposes to change the cash payout. For year of assessment 2013 to 2015, it will be increased from 30% to 60% of the qualifying expenditure subject to a maximum of $ 60,000, which will be available on a quarterly basis from 1 July 2012.

By way of illustration, if the qualifying expenditure on R&D was $10,000, under the current scheme a tax deduction of $40,000 is available (a tax saving of $6,800 at the current corporate tax rate of 17%). Alternatively a cash payout of 30% can be claimed. The budget proposes to increase the payout percentage from 30 to 60. Therefore the  alternate payout in this case will be $ 6,000 (instead of $3,000).

For software, Singapore will remove the ‘multiple sale’ requirement for R& D incentive, just like Australia.

Moving against the current of territorial taxation, the US Congress imposed reporting and tax requirements on financial institutions around the world when it enacted FATCA. Strange as it was FATCA provides exemption relief for certain financial institutions classified as “deemed compliant FFIs”. Regulations released this year have further expanded the meaning of deemed compliant FFI.
Exemptions will be granted only on application to the IRS and the organizations will be obliged to provide certification every three years that they meet the exemption requirements.

Section III –Deemed complaint status for certain FFIs provides some examples – see IRS Revenue Bulletin 2011-19.

FFIs that are licensed and regulated as banks or similar organizations under the laws of their formation may be exempt from the FATCA requirements. Local FFI members of participating FFI groups may also be exempt, provided the FFI member neither has operations nor solicits account holders, outside the county of it organisation.

Certain investment and retirement funds may also come into this exemption. However, it cannot be assumed that Australian investment and superannuation funds would be exempted, since the decision will depend on IRS and the US Treasury being satisfied that there will be no tax evasion. Given the current political furore over tax avoidance and the dwindling tax revenue, and the resulting anxiety fuelled by the November Presidential elections in the US it is very unlikely that the exemption net would be spread liberally.

While the mining tax may be heavily debated by industry, and the carbon tax by skeptics and alternative modellers, it’s nice to know that there are some tax breaks that seem absurd to most people.

A clear example is in Florida – the Florida Rent-a-Cow Scam.

There is no better example of the story of the goose and the golden eggs than the unfolding saga of Vodafone in India. Retroactive legislation has rarely before taken on such a diabolical turn.

The recent budget speech by the Indian Finance Minister signaled the introduction of retroactive amendments to tax cross-border transactions in which the underlying assets are located in India. Capital gains arising to a non-resident from transfer of shares in a company incorporated outside India with substantial assets or interests in India to another non-resident will become taxable in India.

Under the proposed measures, capital gains will be payable on share transfers between non-residents if the company has “substantial” assets or interests in India. Furthermore shares in a company incorporated outside India would be deemed to be in India if the shares derive their value, whether directly or indirectly, “substantially” from assets located in India. “Substantially” remains to be defined.

The new measures are in spite of the decision of the Supreme Court in January this year to the contrary.. Here it was held that the offshore sale of shares in a Cayman Island company owned by Hutchinson Telecommunications International Ltd to Vodafone International B.V was outside the jurisdiction of the Indian tax authorities and not subject to withholding tax in India.

The Court held that ‘Controlling interest’ in a company is not a separate asset independent of holding of shares. It is not an identifiable or distinct capital asset.

Should the net be cast so far and wide, especially in these turbulent times?

The recent release of the discussion paper “Improving the operation of the tax hedging provisions” and the ongoing project of the accounting bodies to replace IAS 39 and hence AASB 139 (in Australia) on hedge effectiveness has got everyone hot and bothered. Moves are far gone to abolish the current 80-125 per cent hedge effectiveness bright line test in AASB 139. An exposure draft was released in 2010.

The Discussion paper aims to reserve hedge accounting in TOFA to the effective portion of the hedging relationship. This implies that taxation rules in TOFA need to have rules that would assist in separating the effective and ineffective portions of the hedging relationship. How can this be done without a bright line test, such as the 80-125 per cent test?

Both TOFA and AASB 139 need to undergo further review and substantial amendments for the confusion to be cleared. It is indeed heartening to note that the ISAB has deferred the mandatory effective date for IFRS 9 from 1 January 2013 to 1 January 2015 allowing sufficient time for issues to be  fully reviewed and workable rules put in place.