Benefits of Safe Harbour Provisions - Essay Example

BENEFITS OF THE INTRODUCTION OF SAFE HARBOUR IN AUSTRALIA Name: Course: Professor’s Name University Name City, State Date due Introduction In the economy of different countries and for insolvent companies, safe harbour could be viewed as a transfer pricing system that is used to exempt some category of tax payers from a number of given obligations that are enforced by a country’s pricing rules. The tax payers can use the safe harbour provisions to apply simplified methods to the organization that allow for the transfer of prices in a specific way. The tax administrators often develop the provisions for the application of safe harbour to help relieve off some burden of compliance obligations required by the law such as the documentation requirements in the organization and transfer of pricing. The issue of safe harbour for insolvent companies has been under much debate with the Australian institute of company directors (AICD) providing maximum support for it to be adopted. AICD is the second largest member based association with over 25,000 individual members, thus their support for the insolvent trading has a higher chance of being adopted because of the big movement by the directors. The AICD has endorsed to need to create laws to support insolvent trading since it will provide and protect the interest of all the stakeholders of the different organizations. It has been argued that thousands of different insolvent companies could have been easily saved if the new safe harbour laws had been adopted in the country. With the closure of large institutions due to insolvency, the shareholders lose their source of profits and the employees of the organization lose their jobs. Whereas the issue of safe harbour may be seen to have certain shortcomings, the benefits outweigh the shortcomings and proper administration of the safe harbour provisions would highly benefit companies and the economy as a whole. Benefits of safe harbour provisions Among the benefits of adopting safe harbour provisions in the Australian economy include the fact that it would provide a compliance relief to the organizations that are facing insolvency complications. The safe harbour principle provides alternatives for the compliance laws that are developed by the country’s administrative structure. The application of the principle of the arms length requires that collection and analysis of data be done as part of the provisions of the law. However, such data collection and analysis procedures may be expensive to obtain in the organizations [Dan09]. Properly designed and developed safe harbours in a country may help reduce the inherent risks that taxpayers undergo in the pricing requirements of the law and the collection and analysis of data for the organization [Ell10]. Since the organization is already facing financial problems, the financial risks are likely to increase the problem as the taxpayers are required by law to collect and analyse data for the organizations. The current insolvency trading laws provided in Australia mostly provide incentives for the closure and termination of a business that is struggling rather than offers a chance and an option that will encourage the resurrection of the business [Phi071]. Currently, in Australia, the insolvent businesses are not allowed to be in operation and the directors of the organization would be held liable. The law stipulated that the directors who allow their businesses to continue being in operation can face disqualification from acting as company directors and or stiff penalties. The productivity commission draft report however recommended that the directors should be allowed to restructure the business without liability according to the safe harbour clause [Mig]. The safe harbour principle is also likely to increase the organizations chances of survival as it provides alternative means for the organization facing insolvency issues to restructure and thus save the business from the risk of being dissolved [Wil05]. It has been argued that the proper management of the safe harbour principle would help provide the directors with alternative means of helping their businesses continue with their operations without the being taken liable for insolvent trading. The new provisions that have been proposed and supported by the AICD are expected to provide the directors of different organizations with the chance to identify and seek restructuring advice for a limited period of time to find a solution for the insolvency problem that is workable for the business while at the same time avoiding personal liability. For this to be achieved, the directors are required to meet four main parameters namely; the requirements for the directors to maintain proper books of account. The directors are required in their financial reporting to provide accurate financial accounts that reflect on a true and fair value of the business performance. Secondly, the directors are required to seek advice from advisors who are qualified in the field of restructuring businesses. The final decisions made by the directors to restructure the business must provide and consider all the interests of the different stakeholders on the organization. Finally, the directors are expected to ensure that the restructuring efforts by the company are diligently pursued to ensure that the organizations insolvency problems are suppressed [Ven10]. Secondly, the safe harbour also provides the business with certainty to the tax payers’ transactions with the tax administrators that have adopted the safe harbour that the prices that are charges on controlled transactions will be accepted. The tax administrators in Australia need to adopt accept the prices charged to the taxpayers with a limited audit being conducted or without any audit being conducted provided the taxpayers have met the necessary eligibility conditions for safe harbour provisions [Sat09]. The recommendations by the report provided by the AICD require and propose that the directors be imposed o a duty to act in the best interest of the creditors and members of the business. The directors may act to fulfil their personal interest when opting for safe harbour. They should therefore, be audited to identify whether they acted in the interest of the creditors and the members or to fulfil their self interest. It is important for the organization to consider the interests of the creditors while making decisions on the insolvent business. The restructuring of the business should be conducted in such as a way that they recognize the interest of the creditors and other stakeholders. The directors, however, do not owe and specific duty to the creditors when the business is declared insolvent and a restructuring process is proposed. Safe harbour provisions may have negative effects on the tax revenues that are collected by the country implementing it since they allow some businesses and taxpayers to evade the tax payments as they restructure their businesses for future growth and returns. Similarly, the safe harbour may also create controlled transactions between the country and the taxpayers that are actively electing safe harbour. In as much as, the safe harbour provisions may seem to reduce the tax revenue collections and create controlled transactions on the country, the taxpayers and given an opportunity to restructure offering them equity and uniformity in growth for all businesses. Equity and uniformity issues would be raised by the requirements that the taxpayers need to meet the necessary eligibility control conditions required by the provisions of the safe harbour [Jam12]. A well developed safe harbour in a country also protects the interests of the advisors that are consulted by the directors thus creating certainty that they will not be held liable for breach in the corporations act. Without such assurance for protection, the advisors may be viewed as ‘shadow director’ who act on behalf of the business but don’t have the interest of the business at heart. Therefore, the advisors may be held liable for breaching the corporations’ act, with such breach including the insolvent trading liability. If the advisors are not granted the certainty of no liability for the restructuring of the business, then it they would in most cases is reluctant to provide recommendations on how to restructure the business [And08]. When countries adopt the safe harbour and are willing and able to adjust the outcomes that are evident in safe harbour with mutual agreement, it reduces the chance of double taxation on the taxpayers and potential risks that may arise. In most cases, the directors usually make the major choices regarding the business. If the reports provided by the directors show a true and fair view of the business as proof that it is insolvent, then adjustments can be made mutually to allow safe harbour provisions to be made on the business. In such a case, the directors will not held liable for any negatives that may arise in the restructuring of the business. Moreover, it has been identified that safe harbour may create instances of double taxation and non-double taxation. The taxpayers and tax administrators can agree to negotiate on a multilateral basis to allow the business a relief from the administrative complexities and compliance requirements without creating a problem of double taxation on that of double non-taxation. Therefore, to increase certainty provided by the safe harbour provisions, the bilateral or multilateral basis for safe harbour should be encouraged under the right circumstances. Finally, the safe harbour provisions will easily allow the tax administrators to redirect the resources available to them from the lower risk transactions to the medium, complex and higher risks transactions and taxpayers. It has been argued that when a country adopts the provisions of safe harbour, it is not only the tax payers who benefit but also the tax administrators. Whereas the tax payers will be exempted from undertaking some of the compliance requirements by the law, the tax administrators and company stakeholders also benefit in numerous ways [Int13]. Although the shareholders are afraid of the financial risks that the organization is likely to face if they undertake safe harbouring, the benefits in terms of the future cash flows after restructuring the organization would be numerous to the shareholders. The genuine restructuring of a business by the directors would provide a platform for growth of the business thereby increasing the chance of enjoying future cash flows for the organization. With the laws that hold the directors liable if the opt for safe harbour at the self interest, it would be hard for them to take on safe harbour for any other interest other than to restructure the business. Similarly, when a business is dissolved, the directors’ risk losing their jobs, thus they would opt to identify means to restructure the business for it to be in operation so they can secure their jobs. When a business is declared insolvent, then the creditors stand a high chance of losing their revenues from the credit materials that the business owes them. Under the current system in the Australian economy, the law requires that the directors appoint an external administrator to take over the financial risks that the business may have from future debts [Eur07]. In such a case, the creditors with accrued debts by the business stand to lose if safe harbour is adopted. However, with the new proposal by the AICD reports, the creditors are provided with protection. When the directors identify the restructuring options available to the organization and restructure it and the company returns to its normal operations, then it is possible for the creditors to receive their accruals. The tax administrators also benefit from safe harbouring by shifting their examination of resources and audit from the less complex transactions and smaller taxpayers to the more complicated transactions and high risk cases. Where there are less complex transactions required, the taxpayers can then prices their transactions, file the tax returns with lower compliance burdens imposed on them. The tax administrators are however expected to be careful on concerns that arise from the degree of approximation used in the arm’s length determination of prices. The arm’s length price approximation allows the administrators to determine the transfer prices under safe harbour rules for the eligible taxpayers. Similarly, the safe harbour would result in a high degree of simplicity in administration for the tax administrators. Safe harbouring reduces the compliance requirements by the tax administrators since the eligibility of a particular tax payer or transaction for safe harbour need not be audited by the transfer pricing experts. The reduce compliance requirements would allow the tax administrators to reduce the revenue commitments thus securing more tax revenues on the low risk situations. The safe harbouring for the tax administrators would also reduce the usage of administrative resources and focus them on the higher risk and more complex transactions for the taxpayers. Shortcomings of safe harbour One shortcoming of safe harbour in Australia that has been identified is that it will create ‘zombie companies’ in the future. In as much as it has been viewed to benefit the economy by saving the economy from expenses amounting to over $4, billion a year and saving jobs for the citizens of the country, there is a high risk that the safe harbour would create a multitude of ‘zombie companies’. The reasoning behind the issue of the ‘zombie companies’ is the view that the directors of such businesses are trying to identify means through which they can extend the life of a company that should be ‘dead’. The shareholders of most business organizations are also concerned that the safe harbour would also expose their businesses to financial risks. Conclusion In conclusion, it has been recognized that the benefits outweigh the shortcomings and proper administration of the safe harbour provisions would highly benefit companies and the economy as a whole. The introduction of safe harbour in Australia would help save the economy about one-third of the total cost of liabilities that are usually left after disposing off the company’s assets [NER09]. The major benefits identified for safe harbour are that first, it offers compliance relief to both the taxpayers and the tax administrators. The compliance relief goes a long way in reducing the costs incurred by both the taxpayers and tax administrators and allows the reallocation of resources into other important developments that will provide growth in the business after restructuring is done and growth in the economy as a whole. Secondly, the issue of safe harbour for businesses offers the directors, taxpayers, creditors and tax administrators with the certainty that the transfer prices will be accepted and that there is an opportunity to save the organization and enhance future growth if the directors act in the best interest of the business. Finally, the safe harbour would also provide administrative simplicity as it will help reduce the evaluation criteria necessary to qualify to undertake safe harbour provisions. The new report by the AICD recommends that it is not a must for the tax administrators to conduct an audit to determine the risk situations facing the organization. The major shortcoming identified is that safe harbour is likely to create ‘zombie companies’. The problem can be addressed easily provided that the tax administrator and taxpayers have a mutual understanding and both provide truthfulness in their dealings. Countries that have successfully adopted safe harbour have enjoyed growth in the economy as it ensures that revenues collected from tax for growth as maintained at an increasing rate. When a business is declared insolvent, then the most likely move is to liquidate it. However, safe harbour provides an opportunity to restructure the business and provide an opportunity for future growth while at the same time ensuring that those employed by the business do not lose their employment. Similarly, safe harbour provides certainty that the creditors’ interest will be considered even after the business is declared insolvent. It is therefore important for countries to consider the introduction of safe harbour as it provides them with growth opportunities for the company. REFERENCES Dan09: , (Danielle, 2009), Ell10: , (Ellul & Yerramilli, 2010), Phi071: , (Philip, 2007), Mig: , (Miguel & Francisco, 2004), Wil05: , (William & James, 2005), Ven10: , (Venkat & Francis, 2010), Sat09: , (Satyendra, 2009), Jam12: , (James & Charles, 2012), And08: , (Andreas & Vallelado, 2008), Int13: , (Khurana, 2013), Eur07: , (Anon., 2007), NER09: , (NERA Economic Consulting, 2009), Read More