President Obama announced his intention to curb the use of offshore tax havens for multinational corporations. The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years. According to the New York Times, firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS. It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.
This move should come as a surprise to no one. The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown. The TARP program designed to revitalize banks has expenditures that amounted to $700 bn. Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn. These amounts are over and above routine federal budget expenditures that is running significant deficits as well.
The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk. For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws. Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures. The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.
The IRS has hired hundreds of new agents and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models. As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.
The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and Large and Mid-size Businesses (LSMB). The IFI for LSMB has developed three tiers of examination risk. Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance. Clearly the audit risk factors risk
To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment. The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk. A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.
Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor. It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.
The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier. The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries. The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.
The IARP is the newest risk application in the Profit|Optimizer product series. The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.
The IARP is available in two versions.
The IRS Audit Risk Program for investment partnerships (IARP)
Buy it on Amazon here: IARP
The Corporate Audit Risk Program (CARP)
Buy it on Amazon here: CARP
Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey
You Tube Video: Chairman of the Board, Pay to the Piper
In the first great act of his Presidency, Barack Obama signed the economic recovery package into law today at a jubilant signing ceremony in Denver Colorado. President Obama’s selection of Denver as the location for the signing ceremony was a symbolic gesture that places the focus of the recovery act outside of the political swamp of Washington DC. President Obama is committed to depoliticalizing the recovery initiatives as much as possible. The CEO of Namaste, a small business dedicated to developing technologies to support renewable energy initiatives spoke on how this bill will stimulate small business growth in his introduction of President Obama.
The recovery bill is constructed of a number of tranches designed to stabilize the economy by stimulating growth and creating jobs in much needed infrastructure development projects. Specifically the package includes tax cuts, aid to state governments, funding of emergency social services programs, a project to digitize medical records, alternative energy program funding and a large infrastructure spending program. The aid to state governments and the funding of social service programs like food stamps and unemployment insurance will keep people employed, fed and housed. This will also infuse money and direct spending to help the ailing retail sector of the economy.
The package totals $780bn is a significant infusion of money into the moribund economy but some fear it is not enough. Paul Krugman believes that the stimulus package is not large enough. The Nobel Laureate economist estimates that the economic downturn will shave almost $2tr from the GDP over the next two years. Mr. Krugman believes that a recovery plan needs to approximate that scale to be an effective stimulus package.
In an effort to provide taxpayers with a degree of transparency for the stimulus program, the Administration has created a website Recovery.Gov where all citizens and concerned taxpayers can monitor the progress of the program.
The stimulus package will immediately provide aid to state budgets that are reeling in deficits. States like California have declared a state of emergency to deal with the revenue shortfalls and gaping budget deficits. Without the cash infusion, state governments will be forced to layoff thousands of workers and shut down vital government services that the middle class, working poor and marginalized groups depend on to subsist. The program will also immediately fund shovel ready infrastructure projects are already in process and potentially could have shut down without the passage of the stimulus package.
We applaud President Obama’s initiative and leadership to get this bill passed. We continue to support our President’s efforts to bind the political and economic wounds of our country.
You Tube Video: Section Gang Song
President Obama’s announcement that he intends to limit compensation for CEO’s of banks that accept TARP funds is only the tip of the iceberg. This one gives real meaning to the concept of Good Bank/Bad Bank and it could get ugly. As the government led economic recovery plan is implemented the banking system will still require massive capital infusions to maintain solvency. This will usher in far reaching structural and systemic changes in the banking system and capital market industries. Executive compensation is but a minor issue.
These structural changes risk creating a bifurcated banking system. The Bad Bank, so designated because it was placed into a timeout with a capital infusion by a benevolent state agency will be forced to change the banks demeanor and the manner in which it conducts business. These Bad Banks will become wards of a state intent on controlling behaviors by minimizing the risk posture these types of institutions can assume. Good Banks, so named because they remain above the need to accept the federal largess of TARP funds, will be free to conduct business without the additional cumbersome oversight of regulatory agencies.
What will the topology of a bifurcated banking system look like? A model that one may consider could be found in the People’s Republic of China where state controlled banking enterprises conduct business alongside emerging private sector banks that are mostly agencies of large global investment banks. In the US the history may be reversed; but the full or partial nationalization of weak banks will create a new institutional hybrid that will need to function under different ground rules then those imposed on fully privatized domestic banks.
The Bad Banks will become quasi-state run enterprises. Their business model and charter will be highly risk adverse forcing them to focus on mortgage related and low margin retail transactional type business. These banks will be required to maintain expensive brick and mortar branch networks to make sure that all sectors of society have access to the financial system. This might actually provide a growth opportunity for these types of banks because the “unbanked sector” of the economy remains large. A large and vibrant money services business (MSB) industry has flourished and thrived to serve the unbanked sector. The unbanked sector purchases banking services and it represents a significant expense burden on the underclasses and working poor who don’t have checking or savings accounts. Bringing this sector into the state banking system would also help to combat money laundering and the loss of tax revenues of cash based businesses. The sale of money orders, money transfer services and the sale of savings bonds and other fungible certificates will become a source of revenue dedicated to paying down the TARP debt.
The Bad Banks will not just become glorified MSBs. Bad Banks will need to focus on the stressed mortgage and credit card debt markets. These customer facing retail lines of business will offer a full line of workout resources to stave off the rate of home foreclosures and credit card delinquencies.
The Bad Banks will be capitalized with the Level III toxic assets that Hank Paulson so shrewdly purchased from the large investment banking institutions. The Treasury Department can dispense with FASB valuation rules and use these assets to value the collateral to maintain sufficient levels of capitalization in line with Basel II recommendations. Smoke and mirrors perhaps; but backed by the full faith and credit worthiness of the US government who can argue?
Equity shareholders in the Bad Banks can expect to see their shares underperform the market and its Good Bank peers. A balance sheet loaded with questionable asset quality, high debt to equity ratios, low margin businesses and high overhead due to excessive fixed costs all conspire against the Bad Banks shareholders potential of realizing a handsome return on their investment.
The Good Banks, liberated from the tyranny of balance sheets polluted with toxic assets and freed from the need of additional rounds of TARP funding will be energized with new entrepreneurial zeal. They will be free to ply their trade as evangelists of free market laissez faire capitalism. The Good Banks will be unencumbered by any new regulations federal agencies impose on the TARP dependent Bad Banks.
Unfettered from bureaucratic control, the Good Banks will be able to fulfill their mission of maximizing value for their shareholders. The risk profile of the Good Banks will be considerably different from that of the Bad Banks. The focus of their business will be on marketing higher margin and more risky financial products. They will offer investment banking and other transactional services and will command fees on scales radically different from the Bad Banks collecting two bits for each money order sold. The Good Banks will offer a full array of investment products and transactional services. Hedge funds, brokerage transactions and a full range wealth management services will be part of the product portfolios of Good Banks.
The Good Banks blessed with healthy balance sheets and strong cash flows from steady product sales into high net worth market segments will embark on aggressive acquisition programs of financial service providers. Healthy regional and community banks will be purchased on the cheap with the blessing of the acquired company’s shareholders who want to be freed from the tyranny of state control and TARP dependency. Good Banks will be the preferred bank for a vibrant and growing small business market and will command healthy fee income and sit on generous account balances this type of business provides. If a small business or retail customer account underperforms or becomes delinquent the account will be banished to the workout professionals eagerly waiting in the Bad Bank.
The Good Banks will be more like a giant private equity firm holding a vast portfolio of public financial companies and services providers. Good Banks will be nimble and voracious practitioners of free market capitalism. The accouterments of affluence like generous stock options, corporate jets, exotic junkets, splashy corporate parties will be in full swing. Larry Kudlow should have nothing to worry about. Free market capitalism as the only sure road to wealth and freedom will remain open to anyone as long as they have the means to pay the modest toll.
You Tube Video: Ennio Morricone, The Good the Bad and the Ugly
Risk: systemic, banking, market
“The more things don’t change, the more they stay the same.” This quote is worthy of becoming a Yogism if it is not one already. The great American philosopher, Yogi Berra could have opined these words about the degree of change the new Obama Administration is bringing to the art of governance. Fresh off the trivial embarrassment of the new Treasury Secretary Tim Geithner’s forgetfulness to pay taxes, we are now presented with the unsurprising news that Obama’s nominee for Health and Human Services Secretary Tom Daschle failed to pay taxes on various forms of income and gratuities. He has made up this slight oversight by writing a check for a cool $140 G’s. That is a lot of oversightedness.
Obama’s promise to bring change to governance looks suspiciously like the old ways of governance. The installation of a Treasury Secretary that is not aware of his tax liability is most disturbing. More disturbing is Tom Daschle’s nomination as a cabinet secretary charged with reforming a broken health care system. In that position Daschle will be responsible to fix a health care system that has been hijacked to serve the special interests of commercial providers. That will be a most difficult task for Daschle because most of the income and honorariums he failed to declare came from the very same special interests the new Health and Human Services Secretary will need to dislodge from gorging themselves at the money troughs the current health care system richly confers. Insurance companies, HMO’s, and other commercial health care service providers fed Mr. Daschle a steady stream of income since his departure from the Senate two years ago. Most ironic was the provision of a limousine and chauffeur to Mr. Daschle by a private equity firm. Mr. Daschle gives real meaning to the term limousine liberal.
You can’t make this stuff up. We criticized Republicans because of their hypocrisy concerning their self professed commitment to integrity and family values only to witness a parade of GOPers getting caught in extramarital affairs, lying to grand juries and gay sex scandals. The democrats ask Americans to pay taxes to serve the needs of the common folk and working people but take every opportunity to avoid reaching into their own pockets to pay their fair share. The disease of exceptionalism and a deep sense of entitlement is a pandemic that crosses the isle and has thoroughly infected the heard of elephants and donkeys that lazily graze within the people’s halls of government in our nations capitol.
You Tube Video: Mike and Angelo, Life Is So Peculiar
Risk: Health Care System, governance
There is a wonderful story in the New Testament from the Book of Matthew. It tells about a man Jesus discovers in a synagogue with a withered hand. The Pharisees who were the fundamentalists of their day asked if it was lawful to heal on the Sabbath? Jesus answers that it is always lawful to do the right thing on the Sabbath. Jesus understood that The Divine Healer requires us always to be mindful as to how to respond to those in need even if that means violating supposedly sacred rules to do so.
The Republican Party opposition to the economic stimulus legislation reminds me of this story from the Gospel. The passage of the recovery bill in the congress was accomplished without one affirmative vote from the GOP. Almost every Republican to the last member cited concern about the country sliding into socialism. Taking a cue from lead party shill Rush Limbaugh, the self anointed demagogue and chief has been howling about the government sponsored recovery plan. Speaking for all Republicans, Rush states that government involvement will lead to the corruption of free market enterprise, ballooning administrative bureaucracies and the sure return of the debauchery of erstwhile earmarks splayed about in an orgy of pork barrel spending sprees.
The economy like the man with the shrived hand needs healing. He cannot find work if he is not healed. The doctor is in the house and being faithful to the Hippocratic Oath is compelled to heal despite the incantations of conservative demagogues of damnable results if ideological dogmas are violated.
An interesting historical analogy steeped in realpolitik can be found in a famous statement made by Deng Xiaoping as China’s disastrous Great Leap Forward was concluding. Said Deng: “I don’t care if it’s a white cat or a black cat. It’s a good cat so long as it catches mice.” This was interpreted to mean that being productive is more important then upholding beliefs in communism or capitalism.
The leader of China at the time, Mao Tse-Tung saw this type of thinking as a great threat to his power. To consolidate his power and mitigate the threat Deng’s thinking represented, Mao launched the equally disastrous Cultural Revolution. Deng and his policies were rehabilitated years later only after the damage of the Cultural Revolution became apparent. The adoption of liberalized economic reforms and the eradication of ideological strictures has done wonders for China. Like Mao, the GOP demands ideological purity regardless of the effect. The United States has pursued the policies advocated by the GOP since the Reagan Administration. Those policies and philosophies have brought us to where we sit today. A moribund economy over dependent on a financial services industry, leverage and the availability of cheap credit.
President Obama’s recovery program is classic move taken from the Keynesian economics playbook. It offers a massive capital infusion into the economy that is funded by an increase in Federal debt and a generous tax cuts that should satiate the most rabid Reaganomic raconteur. Obama is not beholden to ideology. The Great Empiricist has proclaimed the death to all ideologies and is not beholden to the stale bread of old dogmas. Obama is willing and most able to craft solutions from tools and systemic loam to effect the cure. He might even resort to a dollop of supply-siderism and sprinkle a bitty bit of voodoo economics on the zombie republicans to get the American economy going again.
You Tube Video: Dr. John, Gris-Gris Gumbo Ya Ya
Risk: economy, politics, recession
Though the recession and other pressing domestic issues are the prime focus of the Obama Administration it has been an active week for foreign policy issues as well. Moving with dispatch to show that his administration has turned a page on how America engages the world, Obama has made some important moves to show the global community of nations a different face of power.
During the week, Obama signed orders to close the Gitmo internment camp. He has asked the military to develop an exit strategy from Iraq. He has appointed retired Sen. George Mitchell as a special envoy to the Middle East to revitalize the art of diplomacy in the region for the US. He has instructed Mitchell to listen and not to dictate. Most significantly, in his first post inaugural interview, Obama spoke directly and plainly to the Arab world through the Al Arabiya network. President Obama seems intent on becoming an arbiter of peace in the clash of civilizations.
It is a new day and a new way in Washington DC. The trains at the station. We hope everyone gets on board this train.
As Salaam Alaikum
You Tube Video: Yusef Islam, Peace Train
Its been a week of firsts for our country and an endless succession of firsts for the new Obama Administration. So it is with sadness we post the melancholy news that Obama has recorded his first kills as a President. A number of news reports are surfacing announcing that today unmanned US spy drones have launched missile strikes within the sovereign borders of Pakistan killing 8 people. Weather these reports are true and weather those killed are Al Qaeda operatives could not be determined.
As it was under Bush the grim toll of death continues with Obama.
You Tube Video: Mormon Tabernacle Choir, Battle Hymn of the Republic
Risk: war, national sovereignty, peace
President Obama has rescinded the Mexico City policy which seeks to block funding to foreign family planning organizations that also provide abortions. The Mexico City policy was first signed into law during the Reagan administration. It was rescinded by Clinton, reenacted under George W. Bush and will now be rescinded by Obama.
Pro Choice supporters hail the move, while the Right to Life proponents are dismayed about Obama’s decision to continue this Democratic party legacy. Protesters voiced their concern during the The March for Life demonstration in Washington DC. The protest is an annual event that is usually held on the anniversary of the Roe vs. Wade Supreme Court decision that legalized abortion.
The fight to maintain legalized abortions, the right to choose one’s reproductive rights and the Right to Life movement continue a struggle where opportunities to find common ground and compromise seems forever elusive.
You Tube Video: Mariachi, Viva Obama 2008
Risk: civil rights, respect for life