1 asia – pacific tax conference karachi 17 – 18 march 2006 paper on post-reform era- role of...

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ASIA – PACIFIC TAX CONFERENCE KARACHI

17 – 18 MARCH 2006

Paper on

Post-Reform Era- Role of ProfessionalsPost-Reform Era- Role of Professionals

by

SYED SHABBAR ZAIDI, FCASYED SHABBAR ZAIDI, FCAPARTNER

A.F. FERGUSON & CO.A.F. FERGUSON & CO.

PRESIDENTTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTANTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

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CONTENTSCONTENTS

• INTRODUCTION• SIGNIF ICANCE OF TAXATION SYSTEM • CHARECTERSTICS OF TAX REFORM PROCESS• FEATURES OF PROGRESSIVE FISCAL LAWS• TAX PRACTICES AROUND THE GLOBE• FORMS AND STRUCTURES OF TAX PRACTICES• OBSTACLES IN THE GROWTH OF TAX PRACTICES • FUTURE • CONCLUSION

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SIGNIFICANCE OF TAXATION SYSTEM FOR SIGNIFICANCE OF TAXATION SYSTEM FOR SUSTAINABLE ECONOMIC DEVELOPMENTSUSTAINABLE ECONOMIC DEVELOPMENT

• The need for an effective tax system for the equitable distribution of wealth as laid down by Adam Smith and the observations of the House of Lords that 'Tax is the Price for Civilisation’ are still valid consideration

• The objective of sustained economic growth, poverty alleviation and increase in employment level can 'only' be attained if there is a reasonable 'Tax to GDP' ratio with equitable composition of total tax collection as to Direct and Indirect Taxes

• An effective taxation system is the only ‘driver’ in the hands of society to reign uncontrollable accumulation of wealth in the capitalistic system and its utilisation by the society at large.

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SIGNIFICANCE OF TAXATION SYSTEM FOR SIGNIFICANCE OF TAXATION SYSTEM FOR SUSTAINABLE ECONOMIC DEVELOPMENT (Cont’d)SUSTAINABLE ECONOMIC DEVELOPMENT (Cont’d)

• Western societies appreciated these considerations in late eighteenth and ninetieth century and they are reaping the fruits by way of provision of basic necessities to their common man. We in the developing world do not appreciate the importance of this ‘noble’ objective and try to remove ‘distortions’ in accumulation and utilisation of wealth either by moral jargons or regressive taxation measures such as presumptive taxation.

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PRIMARY CHANGES IN THE ‘TAXATION’ SYSTEM PRIMARY CHANGES IN THE ‘TAXATION’ SYSTEM AND PROCEDURE INTRODUCED BY THE TAX AND PROCEDURE INTRODUCED BY THE TAX REFORM PROCESSREFORM PROCESS

• Tax Reform Process is the step introduced to bring the taxation policies, legislation, business processes, in line with 'International Best Practices’. These practices are all well tested.

• There can be national or domestic considerations with reference to ‘Taxation Policies’ for example, protection of ‘Agriculture’ sector by ‘France’ or import duty structure in China, however, there is almost unanimity of the view that 'Tax Legislation' and 'Business Processes' for all the countries have to be brought in line with the international standards.

• Tax Legislation' and frequent amendments therein, are not the means to improve taxation policy and business processes.

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COMMON LANGUAGE OF PROGRESSIVE FISCAL COMMON LANGUAGE OF PROGRESSIVE FISCAL LAWSLAWS

• In the present days the common language of any progressive tax legislation is:

– Separation of primary legislation and the Business Processes descriptions in the statutes.

– Reducing the ‘options’options’ of interpretation and application of statute by:

• Lowering the kinds of taxes;

• Removing disparities in rates applicable for various kinds of income;

• Avoiding the legislation relating to exemptions and privileges.

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COMMON LANGUAGE OF MODERN FISCAL LAWS COMMON LANGUAGE OF MODERN FISCAL LAWS (Cont’d)(Cont’d)

– Introduction of resolution mechanism for dispute between authorities and taxpayers these may consist of:

• Dispute Resolution Forums;• Advance Rulings; and• Advance Pricing Arrangement.

– Introduction of Anti-Avoidance provisions such as:

• Thin Capitalisation;• Recharacterisation; and • Arm length Consideration – Transfer Pricing.

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• The concept of reducing options is extremely important in fiscal statutes for the reason that abuse of law and discretion by taxpayer and tax authority respectively emanate only where there are 'options' available for both the parties.

• The other aspect is the relevance of ‘Business Processes’. Such processes consist of two parts viz.:

– Processes undertaken by the businessman or the Consultant as the case may be, prior to filing of return and the requirements after filing the return; and

– Internal Process undertaken by the tax authorities.

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• In the past, ‘Business Process’ was deeply entrenched in legislation. Such legislation stipulated that a person called 'assessing officer' by way of an order was supposed to decide 'What a businessman has earned'. This process was called “Assessment”. In other words the underlying theme was “You are wrong unless proved otherwise to me”. Consequently, it required notices, hearings, proceedings, evidences and mechanism for the conduct of the assessing officer.

• Now, under the generally accepted best practices, it is the businessmen whose 'Accounts' would determine income and consequently tax thereon.

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• The role of tax authorities is only to 'check' if required, whether or not accounts reflect true and fair view of the affairs of business. This check, if any, is not for the determination of income but providing deterrence for misdeclaration and other abuse of law. This nature of verification is called ‘Audit’. In this case, the underlying philosophy is “You are right unless proved otherwise”.

• The role of tax professionals in the Post- Reform Era will entirely depend on the structure of taxation policy, tax legislation and business process as it would evolve once the reform process achieve the desired level of acceptability. Tax Reforms are ongoing processes. It is, however, important to note that in the foreseeable future major changes are not expected in legislative structure or the business processes of taxation. It is only the ‘Taxation Policy' that may require reconsideration.

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STATUS AND NATURE OF TAX PRACTICES STATUS AND NATURE OF TAX PRACTICES AROUND THE WORLDAROUND THE WORLD

• On the international scene there are two kinds of taxation practice structures around the world:

– Developing countries like Pakistan, India, Malaysia etc.– Developed structures like USA, UK, Germany and other

EU countries.

• In the first group of countries there is no segregation of tax advisory and consultancy services and tax litigation services. In the latter kind of societies tax litigation practices are not integrated with tax advisory and consultancy services. This dissimilar structure has evolved on account of status of tax legislation and business processes

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STATUS AND NATURE OF TAX PRACTICES STATUS AND NATURE OF TAX PRACTICES AROUND THE WORLD (Cont’d)AROUND THE WORLD (Cont’d)

• Whenever tax legislation will be brought in line with international best practices, the taxation practice and the role of professional will also go through a process of change. This change will be mullet-dimensional. It would affect the structure of firms and practices as well as activities undertaken by them.

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PRESENT FORMS AND STRUCTURE OF TAX PRESENT FORMS AND STRUCTURE OF TAX PRACTICESPRACTICES

Organisation Structure

• In our country tax practices may be classified into following kinds with reference to their structure:

a) Big Tax Lawyers' Firms

• These firms, in principle, are engaged in litigation and appeal practices with representation at Tribunals, High Court and the Supreme Court. Like other famous lawyers these practices in principle revolve around ‘personalities’.

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PRESENT FORMS AND STRUCTURE OF TAX PRESENT FORMS AND STRUCTURE OF TAX PRACTICES (Cont’d)PRACTICES (Cont’d)

b) Large Sized Audit Firm’s Tax Practices

• This represents the tax practices by Big Four and other large sized audit (Chartered Accountant's) firms. These firms are involved in tax advisory; tax consultancy and appeal upto the stage of Tribunals.

c) Medium Sized Partnership consisting of Non-Chartered Accountants

• This represent firms consisting of tax practitioners not being Chartered Accountants which engage in all segments of tax practices such as Tax Advisory, tax representation before the officer, Appeals before Commissioner / Collector Appeals. Such firms in certain cases also represent before the High Court and the Supreme Court.

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PRESENT FORMS AND STRUCTURE OF TAX PRESENT FORMS AND STRUCTURE OF TAX PRACTICES (Cont’dPRACTICES (Cont’d)

d) Medium Sized Chartered Accountant’s Firms Tax Practices

• These firms are similar to medium sized non-chartered accountant's firms in their activities and structure except that such firms consist of Chartered Accountants.

e) One Member Tax Advisory

• In this case, the person providing the services is a business advisor. Such advice also includes, tax consultancy and representation. This practice is usually limited upto representation before the tax officers and Appeal before the Collector / Commissioner (Appeals).

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RESENT FORMS AND STRUCTURE OF TAX RESENT FORMS AND STRUCTURE OF TAX PRACTICES (Cont’d)PRACTICES (Cont’d)

• An empirical analysis reveals that there is a substantial decline in the practices in the category of (c) and (d) kinds of firms. This is not a good trend. Medium sized firms and practices are the backbone of the profession specially in the countries like us where a major portion of businesses are in Small and Medium Sized sector.

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Nature of Activities

• An analysis of the kind of activities undertaken by tax services’ firms around the world and present position in Pakistan reveals the following:

Kind of Activities Position in Pakistan

1. Tax Advisory and Tax Number of Hours Planning Strategies and consumed in relation to other related financial total hours estimated 5services per cent or less. Billing

around 7 to 9 per cent

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2. Preparation of Number of hoursAccounts/statements consumed as total for filing the returns hours estimated 30 to

40 per cent. Billing 10

15 per cent even less

3. Preparation return for Number of hours spentfiling before the Taxation as a percentage of totalAuthority hours around 35 to 40 per

cent. Billing 10 to 20 per cent

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4. Representation before Number of hours spentthe Taxation Authorities is estimated to be around for ‘assessment’ in the 40 to 50 per cent. Billing past and for support in 40 to 50 per cent in small ‘Audit’ in the post reform and medium sized firmera

5. Appeals before Collector/ Number of ours spentCommissioner Appeal is estimated to be

around 20 to 30 per cent. Billing 30 to

40 per cent

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6. Appeals before the Number of hours spentTribunal in overall practices in the

country is not more than

2 to 3 per cent. Billing 3 to 5 per cent

7. Appeals / References Number of ours spentbefore the High Court is less than 1 to 2 per and the Supreme Court cent. Billing is around 5 to

10 per cent

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OBSTACLES IN THE GROWTH OF TAX OBSTACLES IN THE GROWTH OF TAX PRACTICESPRACTICES

• Primary obstacles hampering growth of tax practices in the country are:

– Lack of appreciation amongst business community with underselling of services;

– Lack of ‘Human Resources’ which in principle represent lack of initiative and ‘hope’;

– Improper segregation in the tax firms structure for personnel involved in:

• Tax Accounting• Compilation and Preparation of Return• Tax Planning & Business Advisory; and• Tax Litigation.

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OBSTACLES IN THE GROWTH OF TAX OBSTACLES IN THE GROWTH OF TAX PRACTICES (Cont’dPRACTICES (Cont’d)

• This lack of segregation of functions, lead to a situation where we intermingle the role of tax consultant and adviser with tax litigation.

• Continuity and survival of a profession depends entirely on its ‘economic’ viability.

• It is considered that in the present structure almost 70 to 80 per cent of economic drivers are remuneration and fees from ‘Representation before Authorities’ and ‘Tax Litigation’. In the post-reform scenario this percentage would drop substantially which would be limited to 30-40 per cent of revenue.

• This requires fundamental changes in structure of the firms and the preparation of tax practitioners for the same.

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OBSTACLES IN THE GROWTH OF TAX PRACTICES OBSTACLES IN THE GROWTH OF TAX PRACTICES (Cont’d(Cont’d)

• In other words the 'economics' of firms is expected to change.

• Another important character of our tax practice is complete isolation of practices in field of Income Tax, Sales Tax, Federal Excise and Customs. There are very few firms and practices, which engage them in all those segments of tax system. One of the key features of tax reform is to consolidate and co-ordinate the ‘Business Processes' for all such taxes.

• In this situation, the role of profession requires ‘a change’ with reference to ‘one window operation’ for all taxes. One of field where almost all of us are virtually ignorant is ‘Customs’. We consider tax practice in customs to be the ‘clearance’ of consignment from the ports.

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OBSTACLES IN THE GROWTH OF TAX OBSTACLES IN THE GROWTH OF TAX PRACTICES (Cont’d)PRACTICES (Cont’d)

• Human nature by its very instinct adapts the change in tangible technology whereas it takes time to adapt or appreciate positively of a change in 'intellectual technology that requires change in the mindset. It took our Prophet 40 years to convince the people, to even start preaching that a change in mindset is required

• To conclude this aspect, it is stated that this is a totally different paradigm, which require consideration. There is huge prospect in the post-WTO regime in indirect taxation practices. That segment is totally unexplored by our professionals.

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FUTURE FUTURE

• In the backdrop of the aforesaid discussion, it appear that future role of Tax Professional is different from the past in every respect that include:

– Structure of the firms;– Kinds of activities;– Human Resources requirements;– Training and Education requirements of personnel; and– The Revenue driver.

• In usual circumstances, such changes should arise by way of an evolutionary process. However, in our country, it appear to be a ‘revolution’ primarily for the reason that over a period of six to eight years, whole legislative structure and business process has been changed for Income Tax, Sales Tax, Federal Excise and Customs. Unfortunately that 'revolution' is not being fully acknowledged by tax practices. It is still being felt that it is a wave not a ‘Tsunami’.

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FUTURE (Cont’dFUTURE (Cont’d)

• Tax professionals can measure the ‘pulse’ with reference to acceptability of any charge in the ‘Business Process’ and ultimately the effects of overall tax reforms exercise. Resentment or acceptability of any new process entirely depends on the role of professionals in the field.

• Future of tax practices would inevitably segregate the services of Business Advisory with the Tax Litigation. Tax practitioners' offices in future will be places to provide resolution or tax advise for a business proposition rather than waiting room for the wisdom of an Honourable Judge at the Supreme Court.

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FUTURE (Cont’dFUTURE (Cont’d)

• Another very important aspect we can not ignore is the opening of services from abroad in the post WTO regime. In future there would be open competition from professionals around the world.

• To conclude this aspect it is my opinion that it is a right time to see the whole issue in international or regional perspective. Thus the theme of conference being 'Asia-Pacific' in nature is appropriate and timely.

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CONCLUSION CONCLUSION

• I conclude the subject with the statement that this represents a food for thoughts. There is huge potential for business advisory service in the country. It is my view that we have not explored even a fraction of the same. Tax services are integral component of Business advisory services. As the economy and businesses will grow and there would be 'Compulsive Corporatisation' and 'Globalisation' which would result in an increase in the size of professional services. In my view, the future is bright however we need to improve education and awareness amongst various stakeholders.

Thank you

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