international hospitality accounting and taxation system

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Chapter 10

International Accounting and Taxation

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INTERNATIONAL ACCOUNTING

  • There is at present no universally accepted definition for international accounting.

  • International accounting includes all varieties of principles, methods, and standards of all countries.

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INTERNATIONAL ACCOUNTING (Cont’d)

  • The differences in standards, policies, and techniques reflect varying geographic, social, economic, political, and legal influences of individual countries.

  • This collection of all accounting principles, methods, and standards is considered the international accounting system.

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INTERNATIONAL ACCOUNTING (Cont’d)

  • In some countries, such as the United States and Britain, apart from assisting financial decisions by the management, accounting is primarily oriented toward parties external to the business organization who provide capital to it.

  • Financial reports are very important for the investors and creditors for investment decision making.

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INTERNATIONAL ACCOUNTING (Cont’d)

  • In some other countries, financial accounting has a different emphasis and performs other roles.

  • For instance, accounting is mainly used by the government to ensure the collection of the proper amount of income tax in many Latin American countries.

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GENERAL ACCOUNTING MODELS

  • No two countries have identical financial reporting and disclosure system.

  • However, certain countries maintain some similar practices based on close political and economic ties, geographic proximity, and similar legal systems.

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GENERAL ACCOUNTING MODELS (Cont’d)

  • Almost every former British colony follows British financial accounting practices.

  • Practices in Canada and Mexico are heavily influenced by U.S. practice due to geographic proximity and close political and economic ties.

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British-American Model

  • This accounting cluster is represented by forty-three countries. It is the most influential model, dominated by the accounting practices used in the United Kingdom and the United States.

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British-American Model (Cont’d)

  • Apart from being used as an international control tool by managers on a daily basis, the accounting role is relatively oriented toward the decision needs of investors and creditors, since both public ownership and debt financing are greatest in these countries.

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Continental Model

  • Accounting in the continental cluster is influenced by the practices found in the continental European countries and Japan. In this model, most countries practice civil law and banks primarily supply capital to businesses.

  • It is not the primary role of financial accounting to provide timely and sophisticated reports for investors’ decision-making needs.

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South American Model

  • Nine South American countries are included in this accounting cluster. Spanish is a dominant language in this group except for Brazil, which uses Portuguese.

  • The most distinctive aspect of accounting practice in this model is the persistent use of adjustment for inflation since all these countries experienced hyperinflation in the past.

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Mixed Economy Model

  • This cluster includes Eastern European countries and Russia.

  • As discussed in Chapters 4 and 5, all these countries are now experiencing a transition from authoritarian to democratic governments, and from socialist to market economies.

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Islamic Model

  • In addition to these four major models, two other general accounting practices exist; the Islamic model and accounting in communist countries.

  • For instance, the Islamic religion prohibits any recognition of interest on money.

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Communist Model

  • As discussed in Chapter 5, the means of production and business are owned by the government in communist countries.

  • In addition to the managers, government decision makers are the main users of the financial information.

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HARMONIZATION OF ACCOUNTING STANDARDS

  • International accounting harmonization does not mean complete standardization of different accounting practices.

  • Harmonization recognizes national differences in accounting systems and attempts to reconcile the differences to attain an acceptable degree of uniformity.

  • Various national and international accounting professional organizations have worked on developing a conceptual framework for establishing accounting and auditing standards.

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HARMONIZATION OF ACCOUNTING STANDARDS (Cont’d)

  • The international Accounting Standards Committee (IASC) is the leading organization in developing worldwide accounting standards.

  • Founded in 1973, the IASC consists of representatives of 106 private professional accounting organizations in eighty countries.

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HARMONIZATION OF ACCOUNTING STANDARDS (Cont’d)

  • Hospitality Financial and Technology Professionals (HFTP), formerly the International Association of Hospitality Accountants (IAHA), based in Austin, Texas, represents financial and accounting professionals in the hospitality industry worldwide.

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ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

  • For U.S. hospitality firms taking foreign currencies as receivables, foreign currency transactions must be translated into U.S. dollars for preparing financial statements for shareholders and creditors, and for measuring taxable income and tax liabilities.

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INTERNATIONAL TAXATION

  • Tax management is always a central part of international financial management. Taxation of different countries affects international hospitality firms’ market entry decision, determination of net cash flows after taxes in capital budgeting, decisions on how to finance overseas development, when and where to remit cash, and how to maximize expected bottom-line profits after taxes.

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INTERNATIONAL TAXATION (Cont’d)

  • International taxation is very complex and constantly changing since individual countries’ laws, economic policies, regulations, and agreements between two countries often change.

  • It is impossible in a general international hospitality management text to set out all the complexities of the tax laws of many countries.

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TYPES OF TAXES

  • However, the most important characteristics of a country to be considered within a hospitality firm’s international tax assessment for entry decision include:

(1) corporate income taxes,

(2) withholding taxes, and

(3) provision for carrybacks and carryforwards

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Corporate Income Taxes

  • The corporate income tax is the most widely used type of tax in the world. Many countries rely heavily on corporate income tax as a major source of government revenue.

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Withholding Taxes

  • When a foreign hotel property or restaurant transfers various fund to the parent company, such as earnings or royalties, these outflow funds can be subject to withholding taxes levied by the host tax authorities.

  • Withholding taxes are assessed on dividends, interest, and royalties.

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Laws on Carrybacks and Carryforwards

  • If an overseas hotel property or restaurant has negative earnings in a particular year, it must consult the host tax laws to find out whether the net operating loss can be carried back or forward to offset positive earnings in other years.

  • Most countries do not permit net operating loss carrybacks.

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INTERNATIONAL TAX PLANNING

  • To maximize profits after tax is the prime objective of all global hospitality financial executives and managers. Managers must be aware of host country taxes on operating profits and fund transfers.

  • Good international tax planning ensures that the company is not more heavily taxed than its domestic or third-country competitors.

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