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Financial and Tax Reporting for MSMEs Development

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Financial and Tax Reporting for MSMEs Development

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  1. Financial and Tax Reporting for MSMEs Development Samir AGOUMI FCM President Amman- 18 June 2013

  2. Outline • Some information about FCM • Financial and Tax Reporting: • Accounting and Tax Schemes • Compliance Costs • Solutions? 2

  3. FCM • Created in 1999; • Represents the accountancy profession in the Mediterranean area; • 22 professional institutes of accountants from 18 Mediterranean countries, more than 320.000 professionals; • Acknowledged Grouping of IFAC. 3

  4. The Regional Dimension: • Regional dimension increasingly important => economic spaces do not coincide with national boundaries • Where regional dimension => regional profession stronger • Cumulative, reinforcing impact on country level activities • Bring international perspective to attention of country regulators 4

  5. Mission &Objectives/1 • Promote co-operation among the professional accountancy bodies in the region; • Share knowledge in relation to professional common interests; • Assist members to achieve/improve professional and quality assurance standards in compliance with IFAC requirements; • Ensure that the regional interests and opinions are considered on an international level within the profession; • Promote visibility of professional themes within the region and dialogue with policy makers; • Promote the value of reliable and comparable financial information in the Med Region. 5

  6. Mission & Objectives/2 • To contribute to economic development in the Mediterranean region and; • To work towards the implementation of a more integrated market between the Mediterranean countries. 6

  7. FCM Activities • Network => Exchange of Info & Best Practice among MBs; • Forum => Conferences, Seminars, Workshops, Studies & Research; • Specific Targeted Action => Such as Mentoring, Twinning Programmes, etc.. • Support to IFAC Compliance Programme 7

  8. MED Region • Critical factors: • Strategic dimension/focus/coordination of cooperation activities, • Trade not Aid, • Convergence of regulations, • Support to SMEs, • Trade Agreements, • Institution building. 8

  9. Financial & Tax Reporting Overview • Linksbetweenfinancial and taxreporting • Compliancecosts • Taxburden vs. complianceburden • Formal economy vs. Informal economy • Business dimensionvarieswidelyamongSMEs • Userneedvary (investors vs. providers of finance) • Possiblesolutions • Conventionalapproach • Oldideasfornewtimes • A freshperspective

  10. Financial & Tax Reporting Financial Reporting = TaxReporting? • The case forassociatingtax and financialreportingisatttractive • Alignmentbringssimplicity, cutscompliancecosts and reducesavoidance • But • Financial Reporting (FR) and TaxReporting (TR) havedifferingobjectives • The mainpurpose of FR (IFRS in particular) istoprovide a true and fair view of the capacity of a business to generate profits • The mail purpose of TR is to raisemoney for the governement in conformity with policy objectives (e.g. redistribution of income, incentives, correction of market inefficiencies)

  11. Financial & Tax Reporting Financial Reporting • FR isessentialto a wellfunctioning market economy • FR standardsshouldnotbeundulyinfluencedbyimproperexternalfactors, suchastax policy considerations • Convergence of FR regulationis a major policy objective • G20 Cannes, amongothers • Suchconvergenceispoorlycompatiblewith strong linksbetweenfinancial and taxreporting • Studies show that the use of IFRS asbasisfortaxationis far frombeinganoptimalsolution and itresults in anincrease in the complexity of taxreporting (An accounting and TaxationConundrum, World Bank – CFRR). • Italianexperiencewithintroduction of IFRS (extendedto separate FS, not just consolidated FS) clearlyconfirmscomplexity of assessingtaxes on IFRS reporting.

  12. ComplianceCosts TaxBurden vs. ComplianceBurden • High taxburdenisnotnecessarily due to high taxrates • Taxcompliancecosts can addsubstantiallyto the overallcosts of keeping a small business in the formal economy • Compliancecosts are largely regressive • Researchindicatesthat the costs of complyingwith the tax system can put a particularly high burden on small business in the formal economy • The majority of empiricalstudies on the growth of informal economy conclude thattax and social security compliance are key factorsdiscouraging Micro and SmallEnterprisesfromoperating in the formal economy • Althoughthisistrue in bothdeveloped and developingcountries, the size of the problem (the informal economy) isquitedifferent in developing, developed and transitioncountries

  13. ComplianceCosts TaxComplianceCosts – mainfactors

  14. ComplianceCosts TaxComplianceCosts – mainfactors

  15. ComplianceCosts ComplianceCostsas % of Taxable Turnover – UK Taxcompliancecosts are regressive Smaller Companies => HigherCosts Source: Sandfordet al., Administrative and ComplianceCosts of Taxation, 1989 (data referto 1986-87)

  16. ComplianceCosts Total TaxComplianceCosts – EU Source: EuropeanCommission, EuropeanTaxSurvey, WorkingPaper 3/2004 (estimate)

  17. ComplianceCosts Shadoweconomy as % of GDP (taxcomplianceas a keyfactordiscouragingMSMEs from formal economy) Schneider, Klingmair, ShadowEconomiesaround the World: What do WeKnow, WorkinkPaper 403, Johannes Kepler University, Linz

  18. ComplianceCosts RegionalVariations in Size of Informal Economy Schneider, Klingmair, ShadowEconomiesaround the World: What do WeKnow, WorkinkPaper 403, Johannes Kepler University, Linz

  19. Business Dimension Micro&Small vs Medium • A centralconsiderationisthatrecognising the diversity of MSMEsiscritical to sensibletax reporting and financial reporting design • A key feature of the MSME sectorisheterogeneity • The key challengesrelatetoSmall and Micro ratherthan Medium sizedenterprises • Needs of MSMEsand users of FR vary with the size of an MSME • Micro and Small MSMEsmostfrequently use FR to access finance (users are mostlybanks and state-guaranteedloanschemes) • Providers of finance (Micro and Small) vs. investors (Medium)

  20. Conclusions Some ideasbeingdiscussed • International initiativestopromotesmall business developmentunanimouslyemphasize the importance of tax/financialreporting system reform (EC, OECD, WB, etc.) • Review of differentreportingrequirementstowhichSMEs are subject, in ordertosimplify and consolidate requirementsasmuchaspossible (EC) • Nature of reports, theirfrequency, period of timethatrecordshavetobekept • Simplifytaxadministration • Taxadministrationis more oftencitedas a problemthantaxrates (OECD) • Simplification and exemptionfrom FS filingrequirements (proposedrevised 4th and 7th directive, simplification project, EC) • AuditexemptionforSmallSMEs (proposaltoincreasethresholdsforstatutoryaudit, proposedrevised 4th and 7th directive, EC)

  21. Conclusions Some risksmightarise… • Lesstransparency • Publishingauditedfinancialstatementshelpsfoster a culture of transparency and makes rating of creditworthiness and transactionseasier • Access to finance likelytobecome more difficult • Banks (especiallyafter Basel II and even more so with Basel III) needtorely on reliable, auditedfinancialstatementsto base theirdecisionsupon • Access to finance hasalwaysbeen a criticalfactorforSMEs; so much so thatstate-guaranteedloansschemeshavebeen set up in manyjurisdictions • Duringcurrentfinancialcrisis, bankliquidityisreducedtodangerouslevels and veryfewresources are availablefor SME lending, asitisperceivedas more risky and lowergrade, unlesssupportedbygoodfinancialevidence

  22. Conclusions A fresh look at compliance • Publishingauditedfinancialstatementsincreasestransparency and makestransactions and accessto finance easier • The cost of preparing, auditing and filingfinancialstatementsis a heavyburden on the smallerSMEs and needstobe offset by some kind of advantage • SMEswhoundertaketocomplywithregulationsshouldberewardedwithanhigherdegree of reliability and trust by the TaxAdministration • Some TaxAdministrationsalreadyhavetakensteps in thisdirection…

  23. Conclusions More compliance, more advantages… • Holland • The TaxAdministrationoffersan “IndividualCompliance Agreement” program • Companiessigningthisagremeent, undertake, amongotherthings • toprovide “a system of internal control, internal audit and external audit aimed at preparing and filing acceptable tax returns” • The Tax Administration, in turn, offers several advantages, e.g.: • adjusts the form and intensity of its supervision to the quality of internal control, internal audit and external audit; • ensures timely payment of tax refunds; • issues its interpretation of the legal consequences as soon as possible after receipt of a point of view taken or to be taken, as much as possible in consultation; • will clarify and explain why specific information is requested and mutually agree on the response period

  24. Conclusions As a better alternative to reducingcompliancerequirements: • Eliminate duplicate filing of information • Converge taxreporting and financialreportingas far aspossible • Introduce advantages for SMEsthatwill offset the cost of compliance and auditing: • Easieraccesstocredit (includingstate-guaranteedloanschemes) • Acknowledgement of higherreliabilitybyTaxAuthorities, includingquickerrefunds, priorityhandling of matters, reduced chance of taxaudit, etc.

  25. THANK YOUwww.fcmweb.org