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  • Alignment of tax and accounting outcomes

    We analyse the differences between the accounting and tax results. This includes understanding the effective tax rates and effective tax borne. We seek to understand and be able to explain any variances between tax and accounting outcomes. This provides an objective basis to obtain greater assurance.

    Ratings

    We apply a consistent rating system when reviewing and assessing the alignment of tax and accounting outcomes, which is outlined below.

    High

    We understand and can explain the various streams of economic activity and why the accounting and income tax results vary.

    Medium

    Further analysis and explanation required to understand the various streams of economic activity and/or why the accounting and tax results vary.

    Low

    We identified concerns from our analysis of the various streams of economic activity and/or why accounting and tax results vary.

    Red flag

    We do not understand and cannot explain the various streams of economic activity and/or why accounting and tax results vary.

    We have not observed a significant difference in the proportion of the ratings obtained by taxpayers in STARs since the March 2019 Findings Report.

    The reviews completed up to the end of January 2019 and June 2020 resulted in the following ratings:

    Alignment between accounting and tax results, January 2019

    Donut graph depicts the alignment of tax and accounting ratings as at Jan 2019. 88% of taxpayers attained high assurance, 9% attained medium assurance, 3% attained low assurance.

    Alignment between accounting and tax results, June 2020


    Donut graph depicts the alignment of tax and accounting ratings as at June 2020. 88% of taxpayers attained high assurance, 10% attained medium assurance, 2% attained low assurance.

    Observations

    We generally obtain high assurance over reported income and expenses as:

    • most taxpayers have audited financial statements, and
    • we are able to review the reconciliation between financial statements with the starting profit and loss disclosed in the relevant tax return.

    This is more challenging for MEC groups, foreign bank branches and stapled groups. We are also seeing good procedures for calculating taxable income from accounting results. The ratings for this focus area do not include those issues/transactions that have been separately rated in the review. For example, it will not reflect transfer mis-pricing results or results from other identified risk areas such as thin capitalisation or tax consolidation. This results in overall higher ratings in this focus area.

      Last modified: 02 Oct 2020QC 63840