The curious case of corporate tax avoidance- Myassignmenthelp.Com

Question: 1. From your firms financial statement, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firm over the past year articulating the reasons for the change. 2. What is your firms tax expense in its latest financial statements? 3. Is this figure the same as the company tax rate times your firms accounting income? Explain why this is, or is not, the case for your firm. 4. Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded. 5. Is there any current tax assets or income tax payable recorded by your company? Why is the income tax payable not the same as income tax expense? 6. Is the income tax expense shown in the income statement same as the income tax paid shown in the cash flow statement? If not why is the difference? 7. What do you find interesting, confusing, surprising or difficult to understand about the treatment of tax in your firms financial statements? What new insights, if any, have you gained about how companies account for income tax as a result of examining your firms tax expense in its accounts? Answer: Answer 1 Financial statements provide the snapshot of the financial position of the companies, especially the balance sheet. Assets, Liabilities and Owners Equity are considered as three major items of balance sheet. The latest annual report of Boral Limited shows the presence of three major items under the head Equity; they are Issued Capital, Reserves and Retained Earnings (Cohen-Cole Martinez-Garcia, 2013). The 2017 annual report of Boral Limited shows a massive increase in the amount of issued capital; that is $ 4,256.1 million in 2017 and $ 2,246.2 million in 2016 (Boral.com, 2017). The main purpose of the issue of equity shares is to fulfill the capital requirement. The way to calculate issued capital is to multiply the total number of shares outstanding by the total number of shares. In Boral Limited, the number of issued shares in 2017 and 2016 are 1,172,331,924 and 743,599,437 respectively. In 2017, Boral Limited undertook an equity rising of $ 2,018.9 million with a net transaction cost of $ 38.9 million. Boral Limited issued the shares under three heads; they are 93,750,000 ordinary shares under Institutional Placement; 233,648,069 ordinary shares under Institutional Entitlement Offer; and 101,334,418 ordinary shares under Retail Entitlement Offer (Boral.com, 2017). The next equity item is reserve. Reserve in equity is considered as the extra amount paid by shareholders apart from the basic price of the shares. Massive decrease in the equity reserve of Boral Limited can be seen in 2017 as the amount decreased to $ 19.3 million in 2017 from $ 162.0 million in 2016. Four kinds of reserves can be seen in Boral Limited; they are Foreign Currency Translation Reserve (FCTR), hedging reserve, share-based payment reserves and other reserves (Boral.com, 2017). It can be observed that there is not any reserve under the head of other reserve in 2017. The last item under equity of Boral Limited is Retained Earning. Retained earnings refer to the total profit and loss of the companies from the formation time. Positive retrained earning shows the presence of more profit in companies than losses. There is an increase in the retained earnings of Boral Limited in 2017; that is $ 1,156.1 million in 2017 from $ 1,098.1 million (Boral.com, 2017). Answer 2 At the time of carrying on the business operations, companies have to incur different types of expenses like operating expenses, selling expenses, administrative expenses and others. Tax Expenses is considered as one of them. Tax expenses of the companies can be derived by multiplying the business tax by income before taxes after doing all the tax reconciliation (Burman Phaup, 2012). It is also mandatory for Boral Limited to make their tax calculation correctly and pay them on yearly basis. In this context, it is required to be mentioned that companies are required to pay tax expenses to the federal government and state government of the companies. The Australian Taxation Law has imposed a tax rate of 30% for the Australian companies. The latest income statement of Boral Limited shows the rise in the income tax expenses of the company. The income tax expenses in 2017 and 2016 are $ 51.4 million and $ 35.6 million (Boral.com, 2017). The main reasons for the rise in income tax expense s can be either the increase in tax rate or profit before income tax or both. The annual report of Boral Limited shows that there has not been any change in tax rate from 2016 to 2017. Thus, the main reason behind the increase in tax expenses in Boral Limited is the increase in profit before income tax; that is $ 301.0 million in 2017 and $ 281.1 million. In the statement of cash flow of Boral Limited, the amounts of tax expenses are $ 41.8 million and $ 69.4 million (Boral.com, 2017). Answer 3 The latest annual report of Boral Limited shows the companys profit before tax in 2017 and 2016 are $ 301.0 million and $ 281.1 million respectively and the company has an income tax rate of 30% in both the year 2017 and 2016. In this way, the tax expenses of Boral Limited should be $ 90.3 million ($ 301.0 million*30%) in 2017 and $ 84.33 million ($ 281.1 million*30%) in 2016. However, in the companys income statement, the reported amount of tax expenses is $ 51.4 million and $ 35.6 million (Boral.com, 2017). Thus, it shows a clear difference in the tax expenses for Boral Limited. The reconciliation of income tax expenses shows that several factors contribute to this difference in income tax expenses. The first factor is the difference between Australian and overseas tax rate (Marron, 2012). The tax expenses among the parent company and its subsidiaries in other countries due to difference in tax rates and $ 3.4 million has been deducted from the tax expenses. The next factor is non- deductable depreciation and amortization. In 2017, Boral Limited has deducted depreciation and amortization from tax expenses and thus, $ 0.4 million has been added with the tax expenses (Boral.com, 2017). In the tax treatment of Boral Limited, one deductible item is the realization of the losses of capital and income tax. For this reason, $ 20.4 million is deducted from the tax expenses. The next item is non-deductable asset impairment and write-downs. In-spite of non-deductable nature, the company may have deducted them and as compensation, $ 6.1 million has been added with the tax expenses. The next item is shares of associates net profits that should be deducted from the income tax expenses. For this reason, $ 28.5 million has been deducted from the tax expenses (Boral.com, 2017). The next item is tax benefits from the vest of share acquisition right. This is a deductable item from the profit of the companies. For this reason, $ 11.5 million has been deducted from the income tax expenses of the company. The next item is finalization of different tax matters that does not have any effect on the tax expenses of Boral Limited in 2017. There are some other non-deductable significant other items can be seen that are not required to be deducted from the tax expenses. For this reason, $ 3.7 million has been added to the tax expenses of the company (Boral.com, 2017). Answer 4 Deferred tax assets and liabilities are two important parts in the tax treatment of the firms. In some situations, companies use to pay extra amount of tax in the current year that is considered as asset in the coming years and it is called deferred tax assets (Harrington, Smith Trippeer, 2012). In some situations, there are differences in profit and tax-carrying value of the firms and it is called deferred tax liabilities (Gallemore et al., 2012). The latest annual report of Boral Limited shows the reporting of differed tax assets in the balance sheet; they are $ 128.4 million in 2017 and $ 237.4 million in 2016 (Boral.com, 2017). Thus, decrease in the deferred tax assets can be seen in 2017 as compared to 2016. The financial notes of deferred tax and assets show the presence of differed tax assets and liabilities in both 2017 and 2016. In Boral Limited, the deferred tax assets are receivables, inventories, PPE (property, plant and equipment) and intangible assets. Boral Limited ha s recognized all these substances as their deferred tax assets it is probable that future taxable profits will be available from all these assets. The situation is opposite in case of deferred tax liabilities. Boral Limited has recognized all these substances as their deferred tax liabilities as it is probable that there will be future outflow of cash or losses due from these items. There can be a major reason for Boral Limited for the reduction of deferred tax assets in 2017 from 2016 that is the overpayment of tax in 2016. Boral Limited had to pay less amount of tax in 2017 as they already paid overtax in 2016. Answer 5 In the process of tax treatment, current tax assets, current tax liabilities or income tax payable are seen as important factors. In 2017, Boral Limited has not mention any thing about the current tax assets of the company. However, the company has reported about current tax liabilities in their balance sheet; that is $ 64.1 million in 2017 and $ 36.6 million in 2016 (Boral.com, 2017). It can be observed that the amount of current tax liabilities has increased in 2017 from2016. From the annual report of Boral Limited, it can be observed that there is difference between the amount of income tax expenses and income tax payable of the company. According to the description provided by Boral Limited, current tax liabilities are the income tax payable for the year and it is payable in respect of the previous year (Laux, 2013). However, the situation is completely different in case of income tax expenses. Income tax expense is considered as the major liability of Boral Limited as it is calc ulated on the current years income of the company. Thus, it can be seen that, there are major differences in the concept of income tax payable and income tax expenses. It needs to be mentioned that Boral Limited calculate the amount of income tax payable on the income of previous year where the calculation of income tax expenses is done based on the income of current year (Dhaliwal et al., 2013). For all these reasons, the amount of income tax payable is not same as the income tax expenses of Boral Limited. Answer 6 Companies use to mention about their income tax expenses in the income statement as well as in the statement of cash flows. The same aspect can also be seen in Boral Limited. According to the income statement of Boral Limited, the company reported $ 51.4 million in 2017 and $ 35.6 million in 2016 as income tax expenses (Boral.com, 2017). As per the statement of cash flow of Boral Limited, the company reported $ 41.8 million in 2017 and $ 69.4 in 2016 as income tax paid (Boral.com, 2017). Thus, it can be clearly observed that Boral Limited has reported two different amounts of tax expenses in income statement and cash flow statement. Some specific reasons are responsible for this disparity. Cash flow from operating activities shows the amount of cash inflow and outflow from the increase or decrease in current assets or liabilities (Saad, 2014). Income tax payable or current liabilities come under current liabilities of Boral Limited. For this reason, Boral Limited reported only the pa yment of income tax payable in the statement of cash flows. This is one of the reasons. In addition, there are different kinds of deductable or non-deductable items that cannot be included in the statement of cash flows as their reconciliation is done later. For this specific reason, the amount of income tax paid in the statement of cash flows shows either more or less as compared to the income tax expenses reported in the income statement (Dowling, 2014). Thus, the above discussed two reasons are responsible for creating differences among the income tax reported in cash flow statement and income statement. Answer 7 The above analysis on Boral Limited shows that there is not any confusing factor in the companys tax treatment as Boral Limited has mentioned all the rules of tax treatment along with proper justification. It can be mentioned that Boral Limited has done their tax treatment in an interesting way. In the note of tax reconciliation, Boral Limited has clearly mentioned about all the factors creating differences in the tax expenses. The company has also shown the amounts of tax reconciliation. All these aspects of tax treatment by Boral Limited is interesting as these help in increasing knowledge in taxation. In addition, one can gain deep insight about the innovative tax treatment of Boral Limited by observing the reasons of differences between the income tax expenses reported in income statement and statement of cash flows. Apart from this, one can gain insight about the fact that tax rate of different countries affect the tax treatment (Atkinson, 2013). 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