Volume 19 no. 1 hartered aCCountant · Coinciding with B paaward and oath taking Ceremony the Institute arranged half-day seminar on the theme “Recent Amendments in nepalese tax

CharteredaCCountant

T h e N e p a l September 2016

Journal of the InstItute of Chartered aCCountants of nepal

Volume 19 no. 1

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AccountantCharteredT h e N e p a l

(Quarterly Journal of the Institute of Chartered accountants of nepal)

Opinions expressed by the contributors in this journal are their own

and do not necessarily represent the views of the Institute. Member

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E d i t o r i a l c o m m i t t E E

CA. Mahesh Khanal Chairman

CA. Prakash Jung Thapa Vice-chairman

CA. Nil Bahadur Saru Magar Member

CA. Hemanta Pokharel Member

CA. Sweety Agrawal Member

CA. Rishi Ram Poudel Member

RA. Dev Bahadur Bohara Member

RA. Dilli Prasad Dahal Member

RA. Dharanidhar Adhikari Member

Mr. Binod Neupane Secretary

Mr. Binaya Paudel Editorial Support

Contentseditorial 4

president's Message 5

Accounting

Ifrs 9 – financial Instruments -CA. Sujit Pokharel 7

Auditing

understanding the dimensions of audit(public and private) -Mr. Dev Bahadur Bohara 10

nepal standards on auditing (nsa) – 200: Major Changes; Beware-CA. Samir Raj Satyal 15

Economy

role of fiscal and Monetary policies for sound public debt Management with reference to nepal-Mr. Tula Raj Basyal 20

hydro-power can declare nepal as a “tax free Country”- CA. Anal Raj Bhattarai 25

deposit Insurance: an introduction-CA. Puspa Chandra Khanal 27

tAxAtion

digital economy and tax Implications-CA. Surya Bhakta Pokharel-CA. Bishnu Prasad Bhandari 30

transfer pricing in nepal: need to have Comprehensive Guidelines and practice-CA. Kaushlendra Jha 35

reforming International tax systems to tackle tax Avoidance -Base Erosion and Profit Shifting (BEPS)-CA. Bhuvan Singh Chad 38

codE of Ethics

IesBa Code of ethics 2014: sustaining public trustAdeeb H. Khan, FCA 43

news 46

notice(s) 14,37

contributors City express Money transfersunrise Bank ltd.sipradi trading pvt ltd.nepal telecom sajha swasthya sewa

september 2016Vol 19. no. 1

Editorialaccounting standards Board of nepal has adopted Ifrs standards as nepal financial reporting standards. asB has prepared 42 nass/nfrss, (including preface and Conceptual framework) for full convergence with Ifrss.” the nfrs fully converged with Ifrs standards include the IasB framework and all Ias standards, Ifrs standards, and Interpretations. the Institute of Chartered accountants of nepal (ICan) has rolled out phase-wise implementation of nfrs beginning from fiscal Year 2014-15.

ICan had set the deadline for the a class Commercial Banks to implement nfrss for the preparation of financial statements from fiscal year 2015-16. However, while studying the published annual reports of some of the banks for the year 2015-16, with some exception most of them haven’t prepared their annual accounts in line with nfrs. the auditor of those organizations has expressed disclaimer of opinion or has given qualified opinion in the audit report. Commercial banks are gearing up to generate their financial statements in regular format citing lack of expertise to comply with the new reporting standards. It is a matter of concern that banks in our context assumes to have highest level of adherence in terms of compliances failed to implement nfrs in the respective banks.

ICan conducted a series of in-house and abroad trainings, workshops, diploma courses etc. on NFRSs for its successful implementation. Recently in the first quarter of current fiscal year, the Institute organized interaction program with CFOs of “A” class banks and their auditors to assess and identify the problems encountered in implementation stage of nfrs. despite the various initiatives of Institute to disseminate to knowledge and skill of members and staff of various business organization the visible outcome is yet to be seen in nfrss implementation.

In an outset, where most of the countries have already adopted and implemented these standards to make financial statements of the companies of their countries understandable and comparable across international boundaries. the above situation has compelled the Institute to revisit the initiatives undertaken so far and assess entire aspects of nfrs implementation process. a need of the hour is to have intensive training and discussion programs, assessments of level of technical support required for the organization and enhancement of the skills and expertise of members of ICan. In this context, only the efforts of the institute may not be sufficient and coordinated efforts is required from all the regulators for which Institute has to come forward as leader of the project.

the global experience shows that the implementation of Ifrs would have encountered challenges common to all countries, so support from all concerns and lead role from ICAN will definitely help to achieve the targeted successful implementation of IFRSs. ICan feel that it’s the time step up efforts further so that we can follow the global principles and practices.

Warm regards !

Editorial Board

Edit

orial

EditorialP

reside

nt's

Mess

age

dear Professional colleagues,It is well known to the members that the year 2073 is the 2nd year of 7th Council of the Institute. the election of the president for 2073 was held on 2073/03/31 and the Council members unanimously elected me to serve as President of the Institute for 2016/17. I have taken over the office of the president of the Institute of Chartered accountants of nepal in a formal ceremony held on 22nd July 2016 in Kathmandu. Before mentioning the activities performed by the Institute during the first quarter of 2073/74, I take this opportunity to extend my thankful gratitude to the Council members for reposing trust on me by electing the 20th president and lead the Institute.

now I would like to update you on some of the key activities accomplished during the first quarter of my tenure covering the period of July to september 2016.

institutional developmentthe Institute organized national Bpa award program coinciding with the ceremony for swearing in of newly elected president and Vice president of the Institute on 22nd July, 2016 at hotel soaltee Crowne plaza, Kathmandu. the Ceremony was jointly inaugurated by Guest of honors honorable Officiating Auditor General Mr. Sukdev Bhattarai Khatry and Governer of the nepal rastra Bank dr. Chiranjivi nepal. the other dignitaries graced the ceremony were Chairmen of Insurance Board and seBon.

to inspire corporate sector to be more transparent and accountable in timely reporting, Institute awarded National BPA awards under five different business categories (Banking sector, financial sector, Insurance sector, public sector entity and General sector) based on the evaluation of financial report of 2015 that participated in the competition. Dr. Chiranjivi nepal, Governer of nepal rastra Bank handed over the awards to the recipient as Guest of honors.

pursuant to section 13 of nepal Chartered accountants act, 2053 the Council of Institute of Chartered accountants of nepal has formed 4 standing and 23 non-standing Committees in order to support in the functioning of the Institute and making them accountable to the Council of the Institute.

Education and student Activities It is a matter of pleasure to bring the notice of the members and students that an agreement has been signed between ICan and nB Bank on 28 september 2016 to provide maximum education loan worth rs. 3,00,000/- (three lakhs) for maximum of 5 years period to the students of Cap III level against CAP II certificate.

With the support and contribution of members and various stakeholders, the Institute has established various scholarships to inspire students to pursue Ca education. In this connection, agreement between ICan and Ca. Kuber p. sharma has been signed and instituted Kuber sharma scholarship fund of nrs. 2 million for awarding scholarship to the students of entry level.

The Nepal Chartered Accountant | September 20166

With the objective of enhancing Ca education, Institute and faculty of Management studies of pokhara university signed a Mou with pokhara university on 20th July, 2016 to incorporate nfrs & nsas in the curriculum of Bachelor & Master level of the university.

membership and Professional developmentCoinciding with Bpa award and oath taking Ceremony the Institute arranged half-day seminar on the theme “Recent Amendments in nepalese tax laws” on 22nd July, 2016 (shrawan 7, 2073) friday, at hotel soaltee Crowne plaza, Kathmandu. on this occasion, a special panel discussion forum was arranged focusing on the recent changes in Income tax and Vat made through finance Bill, 2073.

I inaugurated the interaction on “nfrs Implementation stage in Commercial Banks and problems they are Facing” of the Chief Finance Officers (CFOs) of A class commercial banks on 1st august, 2016 at ICan premises. It provided a platform to participants to discuss and share their experiences and ground challenges facing in preparation of financial statements in line with NFRSs for the f/Y 2015/16 in their respective banks. Cfos of 24 different commercial banks attended the interaction.

the Institute also organized an interaction program with bank auditors on “nfrs Implementation stage in Commercial Banks and problems they are facing” on 27th July, 2016 at ICan premises. auditors of 12 audit firms participated in the program and shared their practical experiences and problems faced in the audit of financial statement prepared for 2015/16 pursuant to nfrs for banking sector.

international RelationIt is my privilege to inform to membership that on 3rd october 2016, an agreement has been signed between the Institute of Chartered accountants of nepal (ICan) and the Institute of Chartered accountants in england & Wales (ICaeW) recognizing each other’s professional qualifications. This MOU has created a milestone achievement in getting our Cas recognized in international fraternity. this is the outcome of our almost 3 year consistent efforts.

With the effect of this Mou, ICan members who are qualified from ICAN with 2 years post qualification experience in audit firms can apply for the membership of ICaeW just by passing the papers of professional level that include Business planning, Corporate reporting, strategic Business Management, Case study and completion of online ethics.

similarly, ICaeW members with Cop, issued from ICaeW, can apply for membership of ICan by passing Corporate laws, advance taxation of Cap III level and completion of one year internship.

the Institute hosted the 44th safa Board meeting and 82th safa assembly meeting on 12th august, 2016 in Kathmandu. during this occasion various Committee meetings were also held. the delegates from safa members’ bodies attended the meeting.

the Institute successfully organized one day safa International Conference on “Ethical dimensions of Accounting Profession” on 13th august, 2016 at hotel soaltee Crowne plaza, Kathmandu. the conference was inaugurated by honorable deputy prime Minister and finance Minister Mr. Krishna Bahadur Mahara.

heads and representatives safa accounting Bodies participated in the conference. the representatives of afghanistan, Bhutan and Maldives attended the conference as observer. In fact, the hosting of safa is an important event for the Institute. More than 200 national and international participants attended the conference.

president of the Institute of Chartered accountants of India (ICAI) CA. Devaraja Reddy and SAFA Nodal Officer Mr. Mudit Vashishtha; and the director General Mr. Choiten Wangchuk and General secretary Mr. sonam Wangdi of accounting and auditing standard Board of Bhutan, Ministry of finance paid a visit on 14th august, 2016 at ICAN office, Satdobato. During the meeting we discussed on the current situation of accounting profession and shared our knowledge and experiences with the visiting dignitaries.

Before I conclude, once again I take this opportunity to thank Council members for electing me to serve as president of the Institute and assure to deliver the best for the betterment of accounting profession. on the occasion of Bijaya dashain.tihar and Chhat festival I extend my best wishes to all of the members, stakeholders and ICan family.

With best regards,

cA. mahesh KhanalPresident

The Nepal Chartered Accountant | September 2016 7

ifRs 9 – financial instruments

cA. sujit Pokharel Ca. pokharel is a member of ICan

he can be reachad at [email protected]

the Ifrs 9 is substantially different from the Ias 39. the “Business Model” assessment is highly judgmental area which depends mostly on facts and circumstances. entities need to document the reasons behind their assessment, monitor the sales, scrutinize their history of sales, maintain sufficient track record of their portfolio of financial assets to make the comparison and arrive at a conclusion about objective of Business Model.

Background In July 2014, International accounting standard Board (IasB) published the new and complete version of Ifrs 9 as replacement of Ias 39. earlier to this the Ifrs 9 has gone through many changes since its first time publication in november 2009.

Ifrs 9 – financial Instruments has introduced a number of new measurement categories, whilst eliminating some of the categories under Ias 39 – financial Instruments: recognition & Measurement. this article is mainly focused on the “Classification part of Financial assets” as per Ifrs 9.

Accounting

Under IFRS 9, the Financial Assets are classified under one of the following categories:

financial assets

amortized Cost

debt Instruments

fair Value through other Comprehensive Income (fVoCI)

Fair Value through Profit & loss (fVtpl)

equity Instruments


Accounting

financial Assets – Amortized costA financial asset is classified at “Amortized Cost” category under Ifrs 9 if it passes Both the following tests:

tEst 1“hold – to – Collect” Business Model test: the financial asset is held by the entity WIthIn that BusIness Model portfolio of which the oBJeCtIVe is to hold the financial asset to collect the contractual cash flows.

It must be in such a “Business Model” of the entity, the objective of which is to hold the financial asset to collect the “contractual cash flows” from it rather than with a view of selling the financial assets to realize profits or losses. However the “hold to collect” business model doesn’t require an entity to hold the financial asset till its maturity. An entity’s business model can still be “hold to collect contractual cash flows” even when sales of financial assets occur.

tEst 2solely payment of principal and Interest (sppI) contractual cash flow Test: The contractual terms of the financial asset gives rise to cash flows that are solely payments of principal and interest (sppI) on principal outstanding on any specified date.

examples of financial assets those are likely to be classified as “Amortized Cost” provided they pass above two tests are Corporate debentures, trade receivables, loan receivables, Investments in Government Bonds those are not held for trading etc.

financial Assets – fair Value though other comprehensive income (fVoci)

(A) debt instruments Assets

A financial asset is classified at “Fair Value through Other Comprehensive Income (fVoCI)” category under Ifrs 9 if it passes Both the following tests:

tEst 1“hold to Collect and sell” Business Model test: the financial asset is held by the entity WIthIn such BusIness Model of which the oBJeCtIVe is not only to hold the financial asset to collect the contractual cash flows but also held for selling them.

tEst 2solely payment of principal and Interest (sppI) contractual cash flow Test: The contractual terms of the financial asset give rise on a specified date to cash flows that are solely payments of principals and interest on the principal outstanding.

unlike the “amortized Cost” category, the integral to this business model is to sell the instrument before the maturity happens. some examples are Government Bonds, Corporate Bonds, Corporate debentures etc.

Accounting Treatments for financial assets under “FVOCI – debt Instruments” under Ifrs 9 is different than for those which are classified as “Available for Sale” category under Ias 39.

under Ifrs 9, the interest income is recognized in Statement of Profit and Loss (SOPL) using the effective interest rate (EIR) method as applied for financial assets classified as “Amortized Cost”.

The FVOCI financial assets – Debt Instruments are subject to same impairment test model as applied to those for Amortized Cost category financial assets. Hence accordingly though these debt instruments are classified as “fVoCI” & recorded at fair value, the sopl treatment is same as for the Amortized cost category financial assets, with the difference between the amortized cost and the fair value being recognized in statement of comprehensive income (soCI) until the asset is derecognized.

at the time of de-recognition, the cumulative change in fair value recognized in soCI is recycled from other comprehensive income (oCI) of equity to “statement of Profit and Loss (SOPL)”.

hence it’s clearly evident that under Ifrs 9, for debt instruments financial assets categorized under “FVOCI”, the entities have to track both the amortized Cost and Fair Value of the financial assets. The amounts recognized in Profit and Loss Account warrant for “Amortized Cost” whereas the statement of financial position (sofp) will reflect changes in Fair Values.

(B) Equity instruments Assets

the standard approach provided by Ifrs 9 for investments in equity Instruments is to recognize it at fair Value and the default way of accounting the change in fair value is to reflect any such change through Profit and Loss account. however, such is applicable to those which are “held for trading” purpose.

for the investments in equity Instruments those are not held for trading, the entities can make an IrreVoCaBle


Accounting

election at the initial recognition to classify the financial assets at fVoCI with all subsequent changes in the fair values being recognized in soCI while the dividends incomes are recognized in Profit and Loss Account.

at the time of disposal of the investments, entities can’t recycle the cumulative changes in fair Value recognized in SOCI to Profit and Loss Account. Such cumulative change shall remain in oCI even after disposal of the investments, however the entities can transfer such amounts between reserves within equity i.e. transfer from fVoCI reserves to retained earnings.

debt instruments financial Assets – Amortized cost category or fVoci category?Under IAS 39, where an entity during the financial year sells or reclassifies more than insignificant amount of held-to-maturity investments before maturity, it is prohibited classifying any financial assets as held-to-maturity for a period of two years after occurrence of such event. And as a result all the held-to-maturity financial assets gets automatically classified as “Available for Sale” and measured at fair value. In a way, a penalty is imposed for a change in management’s intention.

In this area, the IFRS 9 has brought significant change to this category of financial assets while comparing with IAS 39. however if more than infrequent number of sales are made out of such portfolio i.e. “hold to collect contractual cash flows” portfolio, the entity should assess whether and how the sales are consistent with the “hold to collect contractual cash flows” objective of such portfolio. Some of the sales like selling the financial assets to realize cash to deal with unforeseen liquidity need, selling financial asset as a result of change in tax laws or laws of regulators, selling financial assets as result of increasing credit risk attached with it etc. don’t contradict with the objective of “hold to collect” business model.

In this context, Ifrs 9 has not given any threshold for the frequencies of sales that must occur under the “hold to collect and sell” business model & further where the sale is allowed under “hold to collect” category also under some circumstances; despite of that still the paramount yet thin line of distinction between the above “amortized Cost” and “fVoCI – for debt Instruments” is whether the business model is with the objective to hold the financial assets as “hold to Collect” or “hold to collect and sell”. hence information about the “past sales together with expectations of future sales” including frequency, value, nature of such sales and reasons of sales helps an entity to decide whether the sales are consistent with its “hold to collect and sell” business model or not.

Financial Assets – Fair Value through Profit and Lossthe residual category of Ifrs 9 for financial assets classification is FVTPL Category. A Financial Asset is classified and measured at FVTPL if the financial asset is:

a held for trading financial asset

a financial asset – debt Instrument which doesn’t qualify for fVoCI or amortized Cost category

a financial asset – equity Instrument which doesn’t qualify for fVoCI category

a financial asset which the entity elects to measure the same at fVtpl

for example, Investments in shares of listed companies which the entity has not elected to account for as fVoCI category.

the Ifrs 9 has taken this fVtpl category as residual category unlike the Ias 39 which has taken the fVoCI i.e. “available for sale” under Ias 39 as residual. hence under IFRS 9, the consideration first is to be given to whether a financial asset is to be categorized as FVOCI or not and if it is not, then it should be taken to fVtpl category.

conclusion – transition and implementation challengethe effective date for mandatory application of Ifrs 9 is January 1, 2018 and an early adoption of Ifrs 9 is allowed however after January 1, 2015 the earlier version of Ifrs 9 can’t be applied. after January 1, 2015, entities can apply the new version of Ifrs 9 and not any of earlier versions. however this shall be subject to enforcement by the local jurisdiction.

the Ifrs 9 is substantially different from the Ias 39. the “Business Model” assessment is highly judgmental area which depends mostly on facts and circumstances. entities need to document the reasons behind their assessment, monitor the sales, scrutinize their history of sales, maintain sufficient track record of their portfolio of financial assets to make the comparison and arrive at a conclusion about objective of Business Model.

The new classification and measurement of the financial assets will pose a challenge especially for financial institutions, as management will need to assess their financial assets classification in light of the new business models and develop the policy accordingly at the inception of implementation. hence entities should start proactive planning for transition to Ifrs 9 since this process takes significant amount and effort.


Background It is assumed that auditing is as old as accounting. With the pace of economic and social development, audit outlook, approach, technique and practices, the scope and audit service were also widened according to the requirement of legislation and meeting the need of society at large. If we see the history of auditing in nepal, it was started from Baisakh - 6, 1828 (B.s.) with the establishment of Kumari Chowk Adda by King prithvi narayan shah and assigned the duty of examining central account of revenue and expenditures. For the first time the constitution of Kingdom of nepal 2015 made a provision for audit of government accounting and established the Office of Auditor

understanding the dimensions of Audit (Public and Private)

mr. dev Bahadur BoharaMr. Bohara is a member of ICan


Audit is independent checking of accounting records to verify the accuracy; true and fairness of transactions. In simple term audit is comparison of what should be (criteria) and what is (condition noticed in audit examination).

General in 2016 (B.s.). later, in shrawan-1, 2027 (B.s.) Kumari Chowk adda was converted to Goswara tahabil. regarding audit of companies, Company act, 1993 came into existence in 1993 (B.s.) for the first time in Nepal, under the regime of prime Minister Juddha shamser rana. Biratnagar Jute mills ltd. was first joint stock Company established in ahsad 30, 1993 (B.s.) under the said law. It is assumed that audit of companies (private sector) was also started with the promulgation of the Companies act 1993 (B.s.).

In our present context, most of the people at local layers of society like Clubs, trusts, forums, users or Consumers Committees etc. are also to some extent aware of the accounting and auditing

Auditing


although the perception towards this profession appears somewhat unclear and negative among the stakeholders. With this in view, attempts has been made by discussing in this article mainly about the various aspects of audit so as to diminish the confusion and negative perception and generate further awareness among the stakeholders towards audit profession. It is hoped that the dimension mentioned seems useful to stakeholders to further understand the audit in its entirety.

What is Audit? audit is independent checking of accounting records to verify the accuracy; true and fairness of transactions. In simple term audit is comparison of what should be (criteria) and what is (condition noticed in audit examination). the audit environment of a country is also influenced by its accounting infrastructure, which includes preparers and users of information, information intermediaries, and mechanisms for regulating accounting information. audit is conducted following the national and international standards mainly pronounced by national accounting body, IntosaI or IfaC. Many people say that audit is thankless job. so there is minimum demand of quality audit in developing economies.

the following facts are also worth noting to better understand audit.

Who are Auditors? g auditor is an independent person or body of persons

with appropriate qualification for the job and conducting audit.

g auditors are value adder not the trouble makerg auditors are shareholders’ watchdog and play an

important role as gatekeeper to public capital market

g auditors have to play the role of both coach and referee

g an auditor is not a legal expert and performs an audit in accordance with the auditing pronouncements (Isas &IssaIs) issued by the IfaC/IntosaI.

g auditors must comply with a long audit process as prescribed by auditing standards

g auditors job is to trust but to verify

Who is Public Auditors & What is public sector audit? In every country supreme audit Institutions (saIs) are national agencies responsible for auditing government revenue and spending. there are three models of saIs that includes Westminster, Commission/Board and Courts

What is Audit? What is not Audit?g audit starts from where accounting ends g audit is systematic independent examination of

financial records of any organization g audit is mainly done with the help of vouchers,

documents, information and explanations received from the audited entities or authorities.

g Audit is verification job and starts with trust although some amount of skepticism is used

g Audit confirms accuracy, legality and reliability of financial transactions

g audit is audit of what has been documented g audit is generally conducted in sample basis by

conducting risk assessment g audit emphasizes proceduresg audit opinion is for doing things in a better wayg audit report is the outcome of audit and report

should not be cocktail of issuesg Integrity is the foundation of auditg It is assurance function

g It is not an investigationg audit not inquisition g audit is not trouble makingg no audit can be better than the people who

conducts itg audit does not have power to prosecute or take

action against wrong doersg audit is not the insurance cover or guarantee

that financial statement is free from any fraud, error and misstatement

g audit is not looked upon as an aid to management

Auditing


of accounts. In our country we have adopted westminster model and auditor General is the supreme auditor and a watchdog of public fund. public audit not only involves providing an opinion on the financial statements prepared by public bodies, but also evaluates with the perspective of regularity, propriety and economy, efficiency and effectiveness (value for money) of public expenditure. the mandate and jurisdiction of saI is mainly determined by country specific legislation. In our country, Constitution of nepal, 2015 (a.d.) and audit act, 1991(a.d.) are main source of audit mandate for carrying out financial and performance audit. the nature of public sector audit, its role and scope covers the following aspects and its contribution is discussed below.

g “auditing” is an examination of operations, activities and systems of a specific entity, to verify that they are executed or function in conformity with certain objectives, budgets, rules and requirements”.

g audits are essentially evaluations or reviews of the activities and operations of entities to ensure that they are being performed in compliance with set objectives, budgets, rules and standards

g public audits enhance legislative oversight by ensuring that appropriated expenditures are spent as espoused by legislation governing them.

g audits are integral aspects of sound public administration and corporate governance.

g audit paves way for development of nation not to disrupt it.

g audit’s aim is not to criticize but to place the executive or audited entities in comfortable zone by acting as aid to decision making process and timely correcting the weaknesses and cautions for repetition in subsequent year if not rectified

g the task of audit is not challenging government’s policy but examining and analyzing its policy implementation

g Public audits ensure that officers exercise extreme care and discipline in the use of public money for public welfare

g auditors do not wait for any irregularities, mistakes or lapses to happen so as to prepare thick report to submit in the parliament.

g public auditors have to comply with service condition (such as Civil service act, audit act) and Code of ethics

g Generally audit is carried out at the field level where books of accounts are kept by the entity being audited

g audit does not address the public grievancesg negativity is not the precondition for public auditg public audit is an important means to promote

transparency and accountability in management of public funds.

Who audits the Auditors? occasionally, people raise a question as who audits auditors. for a layman’s perspective such question is natural but audit cannot be audited because if we think that way, question also comes who will police the police? It means we cannot impose auditor to be audited by other auditor. however, the global standards/practice on auditing specifies to undertake the audit quality assurance system for ensuring compliance with auditing standards in carrying out the audit. g In case of public auditors (saI) they are audited by

the other supreme audit Institution through peer review (audit level & institutional) in accordance with the provision of saI performance Measurement framework pronounced by IntosaI. similarly, IssaI 5600 peer review Guideline also refers to a review of an saI by one or several partner saIs..

g private auditors are regulated through Quality assurance review/ independent oversight authorities

g separate auditing standard has been issued to conduct quality assurance review in private sector i.e. nepal standard on Quality Control (nsQC 1) which is in line with International standard on Quality Control (IsQC 1). such standard suggests the procedures and mechanism to ensure or check the quality of audit.

g In usa, Canada and in some other countries there are independent oversight Boards to inspects accounting firms, audit reports of public companies, performance of audit, issuance of audit reports, audit quality etc.

g In our context, a separate independent Quality assurance Board has been established under nepal Chartered accountants regulation, 2061.

g lack of familiarity with professional duties does not exempt the auditor from responsibility and liability and action is taken as specified in Code of Ethics/Code of Conduct for misconduct.

similarities and differences between Public and Private sector Auditingthere are many similarities between auditors in both public and private sectors, such as adherence to the same high ethical principles, use the same basic methods and application of the similar independent auditing

Auditing


standards. Both have to follow quality assurance processes and subject themselves to quality-control peer reviews. likewise both public and private audit are guided by the country legislation and auditing standards.

to a large extent, the audit methods or techniques are very common in private and public sector audit. however, the audit approach, scope, objectives and regulatory requirements may be different. We can also see some basic difference as mentioned below.

g Company auditors are appointed by the shareholders, whereas in the public sector the appointment of the national auditor (and auditor General in most countries) is legislated by the Constitution/ parliament

g private sector audit has a much narrower scope, essentially being limited to a true and fair opinion on the entity’s financial statements, whereas, in the public sector it must cover not only the audit of financial statements, but also aspects of financial governance and arrangements to secure value for money.

Audit and investigation–Many people perceive audit and investigation interchangeably but there is some fundamental difference between these two tasks. particularly, in public sector investigating authorities are instituted to carryout investigation for abuse of authority and corruption by public position holders. It is worth noting that audit may not meet the requirement and expectation of investigation. Generally, addressing corruption is not an explicit mandate of supreme audit Institutions and it is the domain of anti-corruption and anti-fraud agencies. In our case, investigations are undertaken by legally

authorized oversight organizations like Commission for the Investigation of abuse of authority (CIaa) on the basis of report of corruption and misconduct, and by focusing upon person or persons. occasionally, we have experienced that even investigating agencies raise the question on the credibility of audit because of missing link of corruption cases in the audit reports. some basic difference as mentioned below need to be taken into account in eliminating the confusion and expectation gap about audit.

It is also worth noting that audit does have investigative rights and cannot ask for certain information or documents from audited entities if refused by entity management. the other limitation is that audit has to rely or depend on persuasive evidence although conclusive evidence strongly supports in substantiating the audit issue. even in normal course of audit there may be practical and/or legal limitations to obtain sufficient appropriate audit evidence, which does not apply to investigating authorities.

can Audit control or detect corruption? In the wise words of Kautilya,‘just as it is impossible to know when a fish moving in water is drinking it, so it is impossible to find out when government servants in charge of undertakings misappropriate money.’ however, generally a question comes in the mind of people that can audit itself control corruption? the simple answer of this question is no. nevertheless, it can make corruption difficult. Apart from this, due to the fear that audit may reveal the wrongdoing; the concerned hesitate to commit such activities. this audit fear ultimately controls corruption.

Auditing

Aspect Audit investigationapproach audit starts with trust Investigation starts with doubt

purpose true and fair view suspect

scope examination of accounts accounting and related matters

use of techniques test checking thorough examination

examination of policy accounting policy followed not bound by accounting, convention, policy, disclosure

evidence Collect prima facie evidence to support the view point

Conclusive evidence to support view point

suspicion starts without suspicion assuming all matters are all right but with skepticism

started with doubt or something wrong

duplication audited accounts are not audited again Investigation may be conducted even after the accounts are audited


It is also to be noted that audit procedure alone even when carried out with due professional care do not guarantee to detect fraud and corruption. even an effective audit cannot always conclusively prove that corrupt practices have taken place. It is worth noting that corruption does not always involve money and it can be in the form of special favor or influence from higher authorities, relatives of the concerned etc. some examples of how audit can contribute in eradicating corruption is given below:

g Corruption is mainly a matter of concern for public sector not for private sector

g audit by itself cannot control the corruption but it can make corruption difficult or would be a deterrent to corrupt practices.

g auditors may come across situation during examination which smack or smell of corruption but feel helpless to deal with them

g some audit observation may be basis or pointer for conducting further investigation

Auditing

during the audit, the effectiveness of management’s internal control structure is reviewed and sometime the audit may be able to identify and reduce the conditions that breed corruption. so, some kind of synergy between audit and investigating agencies is essential because attempts of single agencies seems insufficient to eradicate corruption in the country.

conclusion With the rapid change in financial and capital market, the role of auditing profession has been more challenging. nonetheless, auditors must function as a public watch dog rendering services with complete fidelity to the public trust.

References:g nepal Chartered accountants regulation, 2061g IssaIsg International conference on anti-corruption in asia,

Qatar June 2008g annual report of saI sri-lankag Websites


A. BackgroundIn 2004, the IaasB began a comprehensive program to enhance the clarity of its International standards on auditing (Isas). this program involved the application of new drafting conventions to all Isas, either as part of a substantive revision or through a limited redrafting, to reflect the new conventions and matters of clarity generally.

on february 27, 2009, the Clarity project reached its completion when the public Interest oversight Board approved the due process for the last several clarified ISAs. auditors worldwide now have access to 36 newly updated and clarified ISAs and a clarified ISQC.

nepal standards on Auditing (nsA) – 200: major changes; Beware

cA. samir Raj satyalCa. satyal is a member of ICan


“The financial reporting framework adopted by management in preparing the financial statements that the auditor has determined is acceptable in view of the nature of the entity and the objectives of the financial statements, or that is required by law or regulations.”

B. Relevance to nepalas per the discussion of 197th Council meeting of ICan, nepal standards on auditing were revised and drafted based on IaasB hand book 2012 edition were made applicable voluntarily from 1st sharwan 2072 and mandatory from 1st sharwan 2073. although structural changes have been made by dividing all the standard to Conceptual part and application & other explanatory part. this article attempts to discuss on the major changes to the nsa – 200 in the wake of this adoption.

c. summary of changesfollowing is the brief description of changes brought about by the adoption on nsa – 200:

Auditing


1. objective

Previous Provision: new Provision:The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

In conducting an audit of financial statements, the overall objectives of the auditor are:

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and

To report on the financial statements, and communicate as required by the NSAs, in accordance with the auditor’s findings.

2. Definition of Applicable Financial Reporting Framework: Fair Presentation Framework and Compliance framework

Previous Provision: new Provision:applicable financial reporting framework wasn’t defined in NSA 200. It was defined in Glossary as: “The financial reporting framework adopted by management in preparing the financial statements that the auditor has determined is acceptable in view of the nature of the entity and the objectives of the financial statements, or that is required by law or regulations.”

The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. the term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and:

acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or

acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (i) or (ii) above.

Auditing

Comment

Previously, the objective was for audit of financial statements; auditor was not actively identified. It has now been changed to emphasize the responsibility of auditor in the audit of financial statements. Further,

comment

There are two levels of applicable financial reporting framework. Compliance framework and fair presentation framework. Compliance framework

is the basic framework that is acceptable while fair presentation framework required additional acknowledgement of:

audit concepts like: reasonable assurance, material misstatements, fraud and error and communication of audit findings have been expressly identified in the objective itself.


g need for additional disclosures that are not specifically required by the framework; and

g In extremely rare circumstances, departure from the framework to achieve fair presentation

further, it is worth noting that the new provision is rather unclear regarding the acceptability of the applicable financial reporting framework. In previous provision, acceptability was clearly defined as being under the professional judgment of auditor. In case of new provision, it isn’t so. however, para 6(a) of nsa 210 (revised), establishes determination of acceptability of applicable financial reporting framework by the auditor as one of the precondition for an audit. therefore, effectively, it is still under auditor’s professional judgment whether the financial reporting framework adopted by the entity is acceptable. factors that are relevant to the auditor’s determination of the acceptability of the financial statements have been explained in para a4 of nsa 210 (revised) as follows:

g the nature of the entity g The purpose of the financial statementsg The nature of the financial statements; and g Whether law or regulation prescribes the applicable

financial reporting framework

following pictorial representation illustrates the concept:

Complaince framework

additional disclosure not

specifically required by framework

departure from framework in

extremely rare but necessary circumstance

fair presentation framework

3. Definition and explanation of Professional Judgment

Previous Provision: new Provision:It is notable that previously, professional judgment wasn’t defined, neither in standard nor in glossary.

professional judgment – the application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

professional judgment is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or sufficient appropriate audit evidence.

Comment

In the absence of a standard definition there was a level of ambiguity previously as to what considers professional judgment; more so because professional judgment is often linked with auditor’s liability. due to newly introduced definition, the ambiguity has been removed. In the past, in cases of confusion, professional judgment was the shield used to defend decisions. this safety net is not available any more.

further, para a24 provides concrete distinction between a professional judgment and a normal judgment by highlighting following characteristics:

g it is exercised by an auditor whose: training, knowledge & experience

g have assisted in developing necessary competencies g to achieve reasonable judgment

Auditing


4. Definition and explanation of Reasonable Assurance

Previous Provision: new Provision:reasonable assurance is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements taken as a whole.

Reasonable assurance - In the context of an audit of financial statements, a high, but not absolute, level of assurance.

To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw reasonable conclusions on which to base the auditor’s opinion.

5. Expansion of Responsibility of management and those charged With governance (tcWg)

Previous Provision: New Provision:

the responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework is that of the management of the entity, with oversight from tCWG.

Management and tCWG should acknowledge and understand that they have the following responsibilities that are fundamental to the conduct of an audit in accordance with nsas:

i. preparation of the financial statements in accordance with the applicable financial reporting;

ii. internal control that management and tCWG determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

iii. provide the auditor with:

a. access to all information that is relevant to the preparation of the financial statements;

b. additional information that the auditor may request from management and tCWG; and

c. unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Auditing

Comment

previously, reasonable assurance was associated with accumulation of audit evidence which was lacking clarity. That has been clarified by incorporating sufficiency and appropriateness of audit evidence rather than mere accumulation. further, reasonable assurance

was associated with being able to draw conclusion that financial statements are free from material misstatements. the revision sorts this dilemma out as it points out that nature of conclusion is not relevant, rather quality of conclusion is relevant.

Comment

the new provision is more elaborative and expansion of responsibility of Management and tCWG appropriately addresses the prevalent “expectation Gap”. this

clarification helps narrow the gap between what the public and financial statement users believe auditors are responsible for versus what they actually are.


6. inherent limitation of audit

previous provision: new provision:

Inherent limitation of audit result from factors such as:

use of testing

Inherent limitation of internal control

audit evidence is persuasive than conclusive

the inherent limitations of an audit arise from:

The nature of financial reporting: involves judgment by management for estimates

the nature of audit procedures: management may not provide complete information, fraud may involve sophisticated schemes to conceal it and an audit is not an official investigation into alleged wrongdoing

the need for the audit to be conducted within a reasonable period of time and at a reasonable cost

other matters: fraud, related parties and related party transactions, non-compliance with laws & regulation, going concern issues

Comment

Limitation has been clarified by referring to the area and process by which the auditor performs the audit rather than the action s/he takes during audit. It helps to explain that it is not the actions of the auditor that create the limitation rather it is the process wherein the limitation lies. further, limitation of internal control has been removed and has been elaborated by points dealing with fraud/error and complex transactions.

D. conclusion

In conclusion, due the adoption of Clarified NSA 200, following are major changes:

g Objective of audit has been clarified to emphasize the responsibility of auditor in the audit of financial statements.

g applicable financial reporting framework has been extensively defined into two levels: Compliance framework and fair presentation framework.

however, auditor’s acceptability of it has been addressed through nsa 210 (revised).

g Professional judgement has been defined removing any ambiguity and clarifying the ambit of professional liability to auditors.

g Reasonable assurance has been clarified by associating it with sufficiency and appropriateness of audit evidence rather than mere accumulation of audit evidence.

g responsibility of Management and tCWG has been expanded and clarified to address the “Expectation Gap”.

g Inherent limitation of audit has been clarified by referring to the area & process by which the auditor performs. this helps clarify that the inherent limitations arises due to the process of audit rather than auditor himself.

Auditing


Mr. tula raj Basyal

Mr. Basyal is a former executive director, nepal rastra Bank

he can be reachad [email protected]

Coordination is vital among the debt management, fiscal, and monetary authorities, based on the clearer formulation of their respective roles and objectives. To make fiscal and monetary policy effective, we should leave aside the traditional notion of delegating debt management responsibility to the central bank with the intention of benefitting at some point in the future from the easy money available in the central bank.

1. Backgroundfiscal and monetary policies as the two overriding macroeconomic policies aim at achieving higher, non-inflationary, stable, and equitable economic growth on a sustainable basis. these objectives are achieved through effective and coordinated deployment of appropriate instruments available in the arsenal of these respective policies. Essentially, fiscal policy is concerned with raising economic growth and promoting employment while monetary policy is more focused on maintaining overall stability in the economy. the government and the central bank are the two separate institutions responsible for the formulation and implementation of fiscal and monetary policies which may produce conflicting situation as they pursue their overriding goal of economy’s expansion vs. stability respectively. another related

macroeconomic policy is the public debt management policy with its own objectives, instruments, costs, risks, impacts, and implications. Because of its unique scope, role, and inter-generational effect in the context of long-run interest of the economy and people, making public debt management effective, sound, and sustainable should constitute a priority agenda of the nation.

the primary objective of public debt management is to ensure that the government’s financing needs and payment obligations are met at the lowest possible cost over the medium to long-run consistent with a prudent degree of risk. poorly structured debt in terms of maturity, currency, or interest rate composition could be the cause for economic crises, as evidenced by experiences of many countries in the world. Efficiency and effectiveness in managing public debt is related with

role of fiscal and Monetary policies for sound

Public debt management with Reference to nepal

Economy


the stage of development and nature of sophistication in the financial market along with the appropriateness of the institutional features and regulatory regime in the country. under-developed, shallow, and fragmented financial market works as disincentive to the investors in the securities market. so, development of deep and liquid financial market together with the arrangement of adequate legislative framework, institutional structure, technological set-up, and regulatory mechanism constitute the backbone for the efficiency and effectiveness of public debt management.

at the macroeconomic policy level, a government securities market provides an avenue for domestic financing of budget deficits other than that provided by the central bank, thereby reducing the need for direct and potentially damaging monetary financing of government deficits in addition to facilitating the use of market-based indirect monetary policy instruments especially the open market operations. Working toward a macroeconomic policy framework with a credible commitment to prudent and sustainable fiscal policies and stable monetary conditions is, therefore, crucial for reducing the borrowing cost of the government over the medium to long-term. risky debt management practices increase the vulnerability of the economy to economic and financial shocks even in situations where there is sound macroeconomic policy environment. If macroeconomic policy environment is inappropriate, sound sovereign debt management may not by itself prevent any crisis. also, sound debt management policies are no substitute for sound fiscal and monetary management. It could, therefore, be observed that the pursuance of prudent debt management strategy under an enabling macroeconomic framework would reduce the cost and risk with respect to debt management quite considerably.

2. Role of fiscal Policyfiscal policy is the use of government budget as an economic tool to attain the objectives set by the government for the economy. Expansionary fiscal policy (large fiscal deficit) is the use of government spending or tax cuts to stimulate a higher level of economic activity. On the other hand, contractionary fiscal policy refers to the reduction in government spending or increase in taxes, which could lead to a lower level of economic activity which becomes necessary to stabilize the trade cycle. economic instability, often fed back by high fiscal deficits, rapid growth of money supply, and exchange rate misalignment could

weaken investor confidence as future expectations about costs and risks would become uncertain. such a scenario will also increase the risks associated with government securities market. Without low and stable inflation, it would be very difficult to attract investors toward government securities particularly in longer-term maturities. Expansionary fiscal policy will force monetary authorities to pursue an expansionary monetary policy, resulting in rise in inflationary expectations, misaligned exchange rate causing unfavorable developments in Balance of payment (Bop), crowding out the private sector, reduced national saving, distorted investment regime, encouraged capital flight, and possibly building a foundation for the emergence of currency or financial crisis. Large government deficits, through monetization of debt, cause rapid money growth and inflation. So, irresponsible fiscal policy could foster instability and uncertainty in the economy as a whole, thereby making it more difficult to attain the monetary policy goal of price stability, external stability, and financial sector stability.

3. Role of monetary PolicyMonetary policy is the use of monetary tools by the central bank to influence the money supply and interest rates to stabilize the economy. expansionary monetary policy is the use of monetary policy tools to increase the money supply, lower interest rates, and stimulate a higher level of economic activity. Contractionary monetary policy as a measure of stabilizing the trade cycle is the use of monetary policy tools to limit the money supply and raise interest rates, leading to a reduction in economic expansion. As automatic monetization of fiscal deficit will have unfavorable effects on the economy, making efforts toward correcting one of the major sources of instability in the monetary management would become extremely important. In an inflationary situation, the monetary authorities will prefer higher interest rate regime to discourage excessive credit growth for controlling its likely impact on inflation. However, such policy will run counter to the objective of debt management. there is an imminent risk of the domestic debt management being subservient to the monetary management for the fact that the central bank’s priority attention would ultimately lie on monetary management and monetary stability. In such situation, the objective of public debt management could be compromised. so, detailed guidelines for implementation of the fiscal or monetary policy should be designed in view of the coordination and interdependence between these policies.

Economy


4. importance of interdependence and coordination

Given the importance of interdependencies between the different policy instruments with respect to the macroeconomy, each policy should share understanding and appreciate the other’s objective. the policy mix refers to the combination of monetary and fiscal policy in a given situation depending on the economy’s business cycle phase that the policy attempts to address. a mix of tight monetary and easy fiscal policy leads to high interest rates, while a mix of easy monetary and tight fiscal policy leads to low interest rates. Restraining the fiscal authorities from engaging in excessive deficit financing aligns fiscal policy with monetary policy and makes it easier for the monetary authorities for pursuing the goal of price stability, external stability, and financial sector stability.

each policy striving for attaining its own goal disregarding the interdependency involved could weaken the overall macroeconomic foundation, stance, and strength. each policy is a sub-set of the whole system and should serve the overall macroeconomic objective of the nation. In the absence of such perspective, the trust, confidence, and credibility of the policies could erode.

fragmentation of market due to involvement of different agencies makes coordination difficult. Lack of unified, streamlined, and dedicated institution for debt management makes the market shallow and illiquid, ultimately resulting in higher cost for borrowing. In the light of such issues and challenges, it is essential to have a specialized agency to manage the public debt in an efficient and effective way with the least cost in the long-run, without involving any conflict of interest between the monetary policy and fiscal policy. Coordination is vital among the debt management, fiscal, and monetary authorities based on the clearer perspective of their respective roles and objectives

5. Legal Provision concerning Public debt management in nepal

as per article 115 (2) of nepal’s Constitution, the Government of nepal (Gon) shall not make any borrowing or provide any guarantee without as per federal law. article 59 (7) of the Constitution mentions that the management of budget deficit and other arrangements concerning fiscal discipline at federal, state, and local levels will be made in accordance with the federal law. according to article 59 (6), only the Gon will have the right to obtain foreign assistance and loan and, while obtaining such assistance or loan, it should be ensured

that the macroeconomic stability of the country is maintained.

as per the present legal arrangement, gross ceiling of GON’s domestic borrowing during the fiscal year and net outstanding external borrowing of the Gon as at the end of the fiscal year are specified every year. To make gross domestic borrowing as per the budget estimate, raising domestic Borrowing act is passed annually which mentions the amount of gross domestic borrowing that the Gon is legally empowered to borrow during the year. this act also mentions the ceiling of overdraft which the Gon may incur during the year as per nepal rastra Bank act, 2002 as an amount equal to 5 percent of the previous year’s government revenue. to make external borrowing as per the budget estimate, loan and Guarantee act, 1968 is amended every year specifying the ceiling of net outstanding external borrowing as at the next fiscal year-end. Thus, the ceiling of annual gross flow is specified in the case of domestic borrowing while the amount of cumulative net borrowing that will stand as at the next fiscal year-end is specified in the case of external borrowing.

according to rule 19 (3) of public debt rules, 2003, , nepal rastra Bank (nrB) is authorized to subscribe the unsubscribed portion of the treasury bills in the primary auctions, a case of direct and potentially damaging monetary financing of government securities. In such situation, the monetary policy objective could be undermined. Besides, the legislation has provided safeguards against excessive monetization of debt. as per section 75 (sub-sections 5 and 7) of the nrB act, 2002, the ceiling of (a) overdraft extended to Gon by nrB at any time and (b) bonds purchased from Gon by nrB and outstanding in its possession should not exceed 5 percent (sub-section 5) and 10 percent (sub-section 7) of the previous year’s government revenue respectively.

6. Recent fiscal BalanceIn nepal, socio-economic development plans formulated and implemented since 1956 under the aegis of the national planning Commission (npC) have so far focused on the creation and maintenance of macroeconomic foundation that is sound and sustainable. the 13th plan (2013/14-2015/16) has also recognized the role and importance of such foundation for which the plan postulated, as percent of Gdp, gross external borrowing and gross domestic borrowing at 2.65 and 2.25 (total 4.90) respectively. the three-Year plan (2010/11-2012/13) had projected these respective ratios at 1.86 percent and 2.33 percent (total 4.19 percent). the respective ratios

Economy


during the three-Year Interim plan (2007/08-2009/10) were projected at 2.35 percent and 2.15 percent (total 4.50 percent). amidst such developments, the current year’s budget suddenly raised the projection of total annual borrowing/Gdp ratio to an unprecedented level at 11.31 (external 7.60 and domestic 4.31) percent. Fiscal deficit is the excess of government expenditure (recurrent and capital) over revenue and grants and its financing components are the summation of net internal loan, net investment, net external borrowing, and net domestic borrowing of the government including net treasury position while total borrowing is the summation of gross external borrowing and gross domestic borrowing of the government. during FY2016/17, there is revenue deficit at 2 percent of GDP because of projection of revenue/Gdp at 22.0 percent and recurrent expenditure/Gdp at 24.0 percent. this situation connotes that the revenue mobilized would fall short of recurrent expenditure by 2 percent of the Gdp for the year. once committed by the government through the budget, it is certain that the recurrent expenditure will have to be met by the government. however, there are chances that the projected revenue may not be fully realized in which case the shortfall in revenue will exceed the budgeted target, with all sorts of effects and implications across the economy. so, restraint and caution need to be applied while planning the expenditure and financing sources. The following table exhibits the situation of fiscal deficit/surplus in the recent years in nepal:

Table 1. Fiscal Deficit/GDP Ratio (Percent)

fiscal year

Fiscal Deficit (Rs. billion)

gdP (Rs. billion)

fiscal Deficit/gdP (%)

total Exp. /GDP (%)

2016/17 256.32 estimate

2574.47 10.0 27.6

2015/16 65.65 rev. estimate

2248.69 3.1 11.1

2014/15 -21.99 2120.47 -1.1 -5.1

2013/14 -40.64 1964.54 -2.1 -11.0

2012/13 -31.12 1695.01 -1.8 -10.3

2011/12 9.67 1527.34 0.6 3.3

2010/11 13.20 1366.95 1.0 5.1

2009/10 10.57 1192.77 0.9 4.7Source: Budget Speech and Economic Survey (various years), GON, MOF

There was fiscal surplus/GDP ratio at 1.8 percent in 2012/13, 2.1 percent in 2013/14, and 1.1 percent in 2014/15. Prior to that, the fiscal deficit as percent of

Gdp came to 0.9 in 2009/10, 1.0 in 2010/11, and 0.6 in 2011/12. However, the fiscal deficit/GDP ratio was estimated to have risen to 3.1 percent in 2015/16. Alarmingly, the fiscal deficit/GDP ratio broke the shackles and reached 10.0 percent as estimated by the current 2016/17 budget. Such an unprecedented fiscal deficit exhibited in an abrupt way in utter disregard of fiscal discipline has already started fueling inflationary expectations and could lead to additional symptoms of macroeconomic instability and uncertainty.

7. Recent monetary situationMonetary developments in the recent years have signaled stable outcomes on an overall basis despite recording unexpected fluctuations on varied occasions depending on the measure of money supply we have chosen. Generally, it is believed that steady rate of increase in money supply is desirable compared to the fluctuating environment. The recent inflationary situation faced by the economy is attributed more to the supply-side shocks associated with disturbances, closures, and strikes than to the rise in money supply and aggregate demand pushing the inflation. The recent trend of money supply growth appears in the following table:

table 2. money supply growth (Percent)

fiscal year growth (%) of narrow

money or m1 (currency + demand deposits)

growth (%) of narrow money

Plus or m1+ (m1 + saving

and call deposits)

growth (%) of Broad money or m2 (m1 + time

deposits)

2016/17 18.5 estimate 18.5 estimate 17.0 estimate

2015/16 18.5 20.0 19.0

2014/15 19.7 21.8 19.9

2013/14 17.7 22.1 19.1

2012/13 14.4 17.3 16.4

2011/12 18.6 26.8 22.7

average 17.9 21.0 19.0

standard deviation

1.7 3.1 2.1

Source: Monetary Policy (various years), NRB

according to the table, the average growth rate of M1, M1+, and M2 has been 17.9 percent, 21.0 percent, and 19.0 percent respectively. the standard deviation of these respective series of money supply has been 1.7, 3.1, and 2.1, implying that the growth rate of M1 is most stable followed by M2, and M1+ which is most fluctuating. The slower growth in all three measures

Economy


of money supply in 2012/13 was attributed to the lower growth in net foreign assets at 18.0 percent in 2012/13 compared to its higher growth at 59.5 percent in 2011/12.

8. conclusion and Way forwardFor enhancing credibility, efficiency, and soundness of debt management operations, adequate attention and priority should be given for addressing the varied issues that have a significant bearing for public debt management. among them, putting in place a macroeconomic regime which ensures low and stable inflation that will attract investors in government securities, particularly in fixed-coupon, longer-term maturities, becomes of paramount interest. nepal has been facing a situation of supply-side shock during the past decade and, as a result, there has been constant pressure on prices. during the past decade (2006/07 to 2015/16), inflation averaged at 9.2 percent whereas economic growth averaged at 4.0 percent. this demonstrates the paradox of lower growth and high inflation. So, inflationary expectations should be controlled by adopting policies aimed at price stability.

Coordination is vital among the debt management, fiscal, and monetary authorities, based on the clearer formulation of their respective roles and objectives. to make fiscal and monetary policy effective, we should leave aside the traditional notion of delegating debt management responsibility to the central bank with the intention of benefitting at some point in the future from the easy money available in the central bank. Because of inflationary and cost and risk implications, central bank should no longer be viewed and treated as a source for monetizing the fiscal deficit. The fiscal policy should not be allowed to be misused for fostering cheap political interests by undermining the fiscal responsibility and accountability. so, legislation should be passed which should limit the fiscal deficit to a maximum specified percent of the projected Gdp. Moreover, in order to control the unfavorable macroeconomic consequences of the monetization of fiscal deficit, the law should be amended to stop automatic financing of the fiscal deficit.

For membership of the Euro zone, the fiscal deficit/GDP ratio should not exceed 3 percent while the outstanding public debt/Gdp ratio should not exceed 60 percent as part of the convergence criteria. In nepal’s present case, the outstanding public debt/Gdp ratio at around 25 percent is well below the euro criteria. However, the fiscal deficit/GDP ratio especially as estimated by the budget for fY2016/17 (10.0 percent) is well above the Euro criteria. Such a large deficit/

Gdp ratio was estimated as there was absence of any legal binding in this regard. this necessitates the formulation of an act specifying the ceiling of the total annual borrowing with reference to the Gdp along with other pressing provisions relating to fiscal discipline and accountability. Being a developing country with massive investment requirements even in the public sector especially in infrastructure building, the total annual borrowing/Gdp ratio in nepal could be pegged at 5 percent for the present. such a legal cap will avoid the likely risks associated with unsustainable monetization of fiscal deficit besides maintaining the public debt ratios at sustainable levels. Moreover, the borrowing/Gdp ratio like that in 2016/17 budget which provided for an unprecedented level at 11.31 percent (external 7.60 and domestic 4.31) of Gdp possibly generating unintended macroeconomic consequences will not be repeated.

Reference- abel, B. andrew, Ben s. Bernanke, and dean

Croushore, 2011, Macroeconomics, 7th ed., pearson education Inc., new Jersey, usa

- Gordon, robert J., 2012, Macroeconomics (2nd ed.), pearson education Inc., new Jersey, usa

- Mishkin, frederic s., 2007, Monetary policy strategy, MIt press, Mass., usa

- International Monetary fund and World Bank, 2003, Guidelines for public debt Management, Washington, dC

- World Bank and International Monetary fund, 2001, developing Government Bond Markets: a handbook, Washington, dC

- economic survey (various years), Gon, Mof- Budget speech (various years), Gon, Mof - Monetary policy (various years), nrB, Kathmandu- www.lawcommission.gov.np- www.nrb.org.np

Economy


It has long been recognized that an adequate supply of infrastructure services is an essential ingredient for productivity and growth. lack of adequate infrastructure causes logistics costs to rise steeply, thus reducing the country’s competitiveness and attractiveness of the investment climate. It may be argued that around 30 percent of a company’s total expenditure in nepal is absorbed by logistics costs.

We certainly subscribe the view that Infrastructure development will raises growth and lowers income inequality. adequate investment in infrastructure development may be a key win-win ingredient for poverty reduction.

hydro-power can declare nepal as a

“tax free country”

cA. Anal Raj BhattaraiCa. Bhattarai is a fellow member of

ICanhe can be reachad at

[email protected]

Local financial institutions should be encouraged to finance hydro projects allowing them to establish special purpose vehicle and they should work with other bilateral and multilateral funding agencies. Government should provide adequate safeguard against possible currency and security risk.

It will further enhance overall income generating opportunities. It would help raise general level of income of the rural poor.

nepal is bestowed with a lot of rivers which, combined with the geographic and climate conditions, provide an abundant water energy source. It is a clean and renewable energy, as well as a superior energy source for power generation. hydropower generation is a kind of potential energy generation by using endless water flow of rivers and differences in water heads, and is a physical process of transforming primary energy to electricity.

nepal is often plagued by blackouts

Economy


because of shortages in the country’s electricity supply. despite the abundance of hydro-energy resources which can be harnessed, nepal has structural problem regarding the public energy supply. for last hundred years, we had seen tons of report designing hydro power, most of them thrown to waste box and billions of rupees has been spent with little progress.

there is a wide gap between demand and supply of power in the country. serious efforts are required to finance projects to meet this wide gap. The resources available are inadequate to meet most of the infrastructure needs. If we had developed 100 MW per year after restoration of democracy, we could have stock of more than 2,300 MW. Instead, we spent billions to create tones of reports on hydro power. our progress in this field can be measured in terms of tones of reports but not in terms of MW.

policies to increase energy generation and industrialization are fading away with non-economic issues. though private sector involvement has started but has been affected by poor infrastructure, financial constraints and lack of effective regulatory frameworks which undermines the development of energy sector. further, present banking system and public institutions alone simply will not be able to pick up the tab.

The infrastructure financing needs of our county going to run into the trillions of rupees over the next few years-- when nepal is downgraded by most of the international rating agencies due to political risk. Availability of adequate financial resources is the foremost requirement for development of hydro resources. We must explore ways and means to raise additional resources for hydro development.

We are lagging behind because of our inability to design proper policies response and address several non-economic issues related to infrastructure projects. Most of the problems are man-made such as resistance to large infrastructure projects, political unrest, hue and cry of self-proclaimed environmentalist, lack of visionary leadership and political will. other problems are limited financial resources, difficult terrain and lack of distribution network.

Who to blame, is it our rulers, and/or planners and/or half-educated peoples representatives, and/

or experts? It is of course, all of them, to be more specific, “self-declared environmental protectionist and experts” - who always wanted to prosper their own business creating confusion among public. some of the major factors are unstable political system and imperfect legal frameworks. other biggest obstacle is land acquisition, which has been a serious complication for every infrastructure project in nepal.

the worse among them were, self-proclaimed environmental experts and human right activist, who are contesting that infrastructure development will have a disproportionate impact on the human capital of the poor, and hence on their job opportunities and income prospects. they further claim that, it will dis-balance the ecosystem and hence have negative impact on the environment. But they never considered the impact of non-availability of infrastructure services to rural poor. In fact, in our country, non-availability of infrastructure services for the poor have a significant negative impact on their health and/or education and, hence, on their income and welfare as well.

the other major problem for the nepalese government to invest in the country’s infrastructure is its financial resources or capability. therefore, private sector participation - both foreign and domestic - is needed. however, private sectors required a conducive investment climate and political stability - although they are improving - nepal is struggling to provide such assurance to all.

What next? Do we have any options? Local financial institutions should be encouraged to finance hydro projects allowing them to establish special purpose vehicle and they should work with other bilateral and multilateral funding agencies. Government should provide adequate safeguard against possible currency and security risk.

If we want our children to have prosperous and decent life, we need to invite energy hungry India “a sole buyer of our immense hydro energy” to harness it. In short term, we may have to compromise, but in long term, we will be wealthy. If we can harness only part of potential gift of nature, within fifteen years from now, we can declare nepal as a “tax free Country”.

Economy


Backgroundthe primary function of Banks and financial Institutions(BfIs) is to accept deposit from deposit holders and lend the same to their clients. the banks accept deposit from customers who have excess money with them and lend it to them who need it. they offer liquidity and facilitate funds transfer between savers (depositors) and debtors. So, banks and financial institutions are the most important mediator of financial system as they convert liquid assets into illiquid assets.

the nature of the business of BfIs is such that the savers can withdraw their money with little or no notice. It entirely depends on their need. In the other hand, the clients to whom the money was invested need time or nice performance to

deposit Insurance:

An introduction

an effective deposit insurance system depends on a number of external elements, internal factors and lots of preconditions. these factors and preconditions include: minute assessment of the economy and banking system, sound governance of agencies comprising the financial system safety net; strong prudential regulation and supervision; including well developed legal framework and accounting disclosure requirements.

pay back the amount. they lent the cash to different borrowers who have different risk profile, characteristics and payback requirements. Banks may face some financial trouble if the clients couldn’t return the cash which were lent to them. the liquidity which was maintained by BfIs may not be sufficient to return the cash to the depositors. due to this banks are always prone to bank runs. If any suspicious news about the mismanagement within the bank comes forward the situation can get much worst. the failures of banking institutions in the countries have very negative consequences which may extend to economic recessions in the country.

deposit Insurance or deposit guarantee plays a key role in maintenance of financial stability

cA. Puspa chandra KhanalCa. Khanal is a member of ICan


Economy


by sustaining public confidence in the banking system through protection of depositors, especially small and less informed depositors, against loss of deposit to a significant extent. (DICGC, 2007) It’s a scheme where the government or central bank of the country offers a confidence to the depositor that in case of the banks and financial institutions fail to return their deposits to them the insurer will reimburse the amount. It provides the assurance that the even in case of the complete insolvency of the Banks or financial institutions their fund are not at risk. In most of the case deposit insurer are government owned organization.

history of deposit insuranceat the time of the Great depression in the unites states in 1930’s, banks in us experienced widespread bank runs due to large withdrawals by the general public. the general public didn’t find their fund safe at bank and started withdrawing it. To fulfill the depositors demand banks and financial institutions started to sale their assets in low price as much of such cash was invested by those Banks. they suffered substantial losses on asset sales in an attempt to meet deposit withdrawals. this situation was so devastating for banks that president roosevelt declared a bank holiday. When banks were re-opened, they did so with their deposits insured by the federal government. This enabled depositors to be confident that their funds were now indeed safe, and therefore there was no need to withdraw them. so, deposit insurance has used the conception that if depositors know that the government will reimburse their deposits in case of a bank failure, they will not bother attempting to withdraw their deposits. This action by the government was sufficient to restore confidence in depositors that their funds were safe in banks. By establishing such type of “safety net” for depositors of banks, bank runs were eliminated in the united states. the federal deposit insurance corporation (fdIC) was established by Banking act 1933.

the International association of deposit Insurers (IadI) was formed on 6 May 2002 with the purpose of sharing deposit insurance expertise with the world and contributing to the stability of financial systems as the standard setter for deposit insurance with a global and expanding membership. Currently 106 countries are the members of IadI.

objectives of deposit insurance schemedeposit insurance which is recognized internationally as an important component of a country’s financial safety net and has been implemented in more than 120 countries

around the world. It is a system that protects depositors against the loss of their insured deposits placed with banks in the unlikely event of a bank failure. Broadly the objectives of deposit insurance can be described as follows:

g to safeguard right and deposit of deposit holderg To maintain the public confidence in banking

systemg To help to give stability to financial sectorg to protect deposit of small deposit holdersg to reduce the use of government fund for the

financial rescue

context nepalas a deposit insurer, deposit and Credit Guarantee fund (erstwhile deposit and Credit Guarantee Corporation) has started the deposit guarantee scheme in nepal from the year 2010 ad. this was started rightly after the failure of nepal development Bank in year 2008. dCGf is given the statutory responsibility to perform deposit guarantee by Government of nepal.

the deposit and Credit Guarantee fund is a government sponsored and administered separate entity where majority of shares is hold by Ministry of finance. as per the new act the authorized capital of fund is rs 10 billion and paid of capital is rs 5 billion. the current capital of the fund is rs. 2 billion. the major shareholder of the fund is Ministry of finance and Nepal Rastra Bank. MoF holds 90% of the share capital whereas nrB holds 10% of the capital.

dCGf insures the deposit of the natural depositors only. It has fixed the rate of premium of 0.2% on guaranteed amount to member institutions. Banks and financial institutions are required to pay the premium on semiannual basis. All the Bank and financial institutions who accepts deposits from general public are the members of dCGf. the membership is compulsory for all such type of BfIs. the coverage of deposit guarantee limit is up to rs 2, 00,000 per individual depositors per member institutions on saving and fixed deposit only. The limit is applied irrespective of numbers of accounts of a single person in a single bank. All the accounts (savings & fixed) held by single person is one bank counted as one for the purpose of Insurance and rs. 2, 00,000 is taken as limit.

the fund has insured total deposit of rs 3,18,36 Crore of 150 Banks and financial institutions as on mid June 2016. (nepal rastra Bank, 2016)

Economy


all the BfIs submit the details of their depositors and required premium amount to the dCGf on semi-annual basis. they are required to calculate the premium amount on the outstanding balance of each natural person’s account as on the day of payment of premium. the maximum limit for each account is rs. 200,000/- which includes principal and interest. If the outstanding balance (principal and interest) in any account exceeds rs. 200,000/- premium is required to be paid for rs. 200,000/- only.

In case of BfI’s liquidation, the concerned liquidator which is appointed by the competent court prepares the list of depositors to be compensated and send it to the DCGF. It verifies the data with their record and pays the amount to the insured depositors. dCGf pays principal and interest accumulated on the account of deposit holder at the date of liquidation to the extent of rs. 200,000/-irrespective of the premium received or amount guaranteed for such account. In case the liquidator sends the name of a depositor whose name is not in the list which was sent during the payment of premium, dCGf isn’t obliged to compensate such deposit holder. the amount is paid through the agent bank which is appointed with mutual agreement with dCGf and liquidator. dCGf disburse the amount to the agent bank and the concerned depositor is required to go to the agent bank to get the deposit refund.

dCGf has recently paid almost rs. 130 million of 1,800 depositors of himalayan finance limited (a “C” class financial institution) which went to liquidation as per the decision of the appellate court, patan in the year 2015 ad.

issues in deposit insurance system in nepalThe deposit insurance system has many benefits for the stability of financial system however, issues are associated with it. as depositors are guaranteed to receive their deposits in case of insolvency of bank the depositors become less prudent about their deposit in the banks and financial institutions. Banks and financial

institutions start to lend the money without giving due regard to the level of risk exposures to be faced by the bank. thus, the presence of deposit insurance system removes one potential constraint on the banks’ desire to lend and increases the riskiness of their lending. this is called moral hazard.

one of the major issues in nepalese deposit insurance system is high premium rate charged by the dCGf. It is highest as compared to the other developing countries. as per new act of dCGf, the premium charged by dCGf is 0.1 percent to 1 percent. If the minimum premium rate is proposed is implemented it is expected to bring some respite to the BfIs.

another issue in the nepalese deposit insurance system is that dCGf is charging same rate of premium to all the BFIs irrespective of their risk profile. There is no seperate provision for BfIs as per their categorization and financial health.

conclusionan effective deposit insurance system depends on a number of external elements, internal factors and lots of preconditions. these factors and preconditions include: minute assessment of the economy and banking system, sound governance of agencies comprising the financial system safety net; strong prudential regulation and supervision; including well developed legal framework and accounting disclosure requirements. If these preconditions are met deposit insurance can be taken as the strong safety net of the financial system.

Bibliography1. source : deposit and Credit Guarantee fund.

(2016). Annual Report. Kathmandu: dCGC.

2. nepal rastra Bank. (2016). Monetary Policy 2016-17. Kathmandu: nepal rastra Bank.

as per annual report of the fund of the f.Y. 2071-72 the details of the deposit insured by the fund is as follows:

(amount in rs lakhs)

Bfis no of members no of deposit holder guaranteed amount %

“a” class commercial Bank 30 89,68,161 2,12,74,34 74.82“B” class development bank 81 22,10,760 56,23,39 19.81“C” class financial institution 51 4,54,394 13,59,35 4.79“D” Class microfinance development Bank 2 2,87,645 1,62,92 0.58

total 164 1,19,20,960 2,84,20,00 100

(Source : Deposit and Credit Guarantee Fund, Annual Report 2016)

Economy


cA. Bishnu Prasad BhandariCa. Bhandari is a member of ICan


The need of the hour for Nepal on taxation of digital and e-Commerce transactions, both from Income Tax and Value Added Tax prospective, is to develop the clear cut provisions on Income Tax Act and Value Added Tax Act considering the international principles and practices (OECD could be the base to step up) on digital and e-Commerce transactions understanding the business models and economic activities.

1. Backgroundthe term was coined by don tapscott, author of the 1995 best-selling book “the digital economy: promise and peril in the age of networked intelligence” and the anniversary edition released in 2014. the rapid development of information technology and the popularity of internet, international trade have built up a new way of transactions modeling. the phenomenon of digitalization is considered the most important development of the economy since the industrial revolution and one of the major drivers of growth and innovation. the digital economy has changed the business model and integrated the global value chain. at the same time the digital economy has reduced the link between business activity and the specific place or location. digital economy can use the network transactions to

avoid the establishment of tangible premises.

In digital economy, enterprise servers use internet connection of digital products and services to conduct transactions. as the internet site and the servers itself do not constitute a physical junction point, this may lead to major challenges for global tax system. the main challenges with respect to taxation are decreasing relevance of a physical presence in the market of the customers, the increasing importance and mobility of intangibles and the high degree of integration of value chain. this has led us to think review on fundamental principles of taxation like permanent establishment (pe) concept, characterization of income, determination of transfer prices and application of withholding taxes etc.

digital Economy and tax implications

cA. surya Bhakta PokharelCa. pokharel is a fellow member of

ICanhe can be reachad at

[email protected]

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2. features of digital Economy and internet of things

digital economy rely on the use of electronic devices and network approach behavioral technology transactions, which are essential features of digital goods and services, business management and economic integration of trading activities. the key constituents of digital economy: 1) e-commerce: using the internet to sell goods or services, including business to business (B2B), business to consumer (B2C), consumer to consumer (C2C). 2) payment services: the buyers and sellers to provide intermediary services, credit card envelope or real-time bank transfer services. 3) online advertising: using the internet as a medium to deliver customer marketing information. 4) Cloud computing: refers to the use of shared resources and virtual resources to provide such as storage, computing, digital management and other services.

digital economy involve variety of initiatives including volume of transactions conducted online, the use of cloud or other technologies to streamline processes, the pervasiveness of technology skills in a company, or an economy’s acceptance of new digitally driven business models. these days, organization place digital at the heart of their strategy and enterprise to transform every part of their operations, r&d, supply chains and the use of cloud, analytics and CrM technologies.

further, the next big thing has come up is the Internet of thins (Iot). It refers to a network of interconnected devices that can be accessed through the internet. It can be defined as interplay for software, telecom and electronic hardware industry and promises to offer tremendous opportunities for many industries. the ecosystem is rapidly expanding owing to demand for both industrial and consumer Iot applications and is set to be a critical part of the next level of growth. With the advent of Internet of things (Iot), the number of connected sensors soon will reach trillions; working with billion of intelligent systems involving numerous applications will drive new consumer and business behavior.

3. size of digital Economy and internet impact Assessment

the increased use of digital technologies could add us$ 1.36 trillion to total global economic output in 2020, according to a recent study made by accenture and oxford economics. this may appear as only a fraction of a percent of total global gross world product (Currently sized at about us% 87 trillion) but it is a substantial contribution to growth. to put it in perspective, moving forward full force with digital would add an economy

the size of south Korea to the global market (Currently Gdp at us$ 1.3 trillion). the growth spurred by going digital will occur across all countries and regions and contribute even greater gains in emerging markets.

In India, as per the study made by Boston Consulting group, it is estimated that half a billion internet users by 2018 could birth a us$ 200 Billion digital economy. a digital population of 500 million could transform India’s economy, business landscape, governance and society beyond recognition. the biggest growth will come in e-commerce, which will expand almost five fold, while education and healthcare via mobile internet will expand further internet use. the internet of things (Iot) market in India is expected to grow up to us$ 15 Billion by 2020 from us$ 5.6 Billion this year, driven by adoption across sectors like manufacturing, automotive, transportation and logistics, a report by nasscom and deloitte. Iot market in India stands at us$ 5.6 Billion with 200 Million connected units in 2016. the Iot ecosystem in India consists of around 120 organizations from across the value chain. this is expected to grow to us$ 15 Billion with 2.7 Billion units by 2020. the global Iot market is expected to grow to over us$ 3 trillion by the same period as both consumer and industrial applications drive overall Iot growth.

4. growth of e-commerce in nepalWith the influx of latest technology, Nepal is on its way to success through e-commerce. online shopping is taking the nepalese market by storm and it is facilitated by fast speed inexpensive 3G and later 4G technology. the convenient mode of payments and user friendly shopping apps are further paving a pathway to unprecedented growth in e-commerce sector. according to a report by Kamyu, an online marketplace in nepal, the e-commerce sector is growing at a rapid pace, people are showing more trust in these marketplaces that offer a range of products from electronic items to home appliances to apparels. people are more inclined towards purchasing mobile phones, used motor vehicles, motorcycles, computer accessories and laptops through online platforms. the e-commerce ventures are giving the traditional brick and mortar stores a run for their money. some of the leading enterprises are now digitizing their operations and offer online shopping options via their official websites. The businesses now realize the significance of e-commerce and are now reserving a good chunk of their revenue to be spent on digital marketing. the advantage they aim to achieve is that not only they will have increased online presence, but also they can get feedback from their consumers instantly via social media sites and other digital modes. Compared to developed economies where e-commerce industry has

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faced a boom and matured, developing economies such as nepal have a lot of room for expansion and development.

the reason why e-commerce is gaining prominence in nepal is because of the increasing number of Internet users. this can also be directly attributed to the rise in the number of smartphone users. smartphone users have access to blazing fast internet on their fingertips, thanks to 3G (later 4G, lte) technology.

5. impact on taxation – global casesi. the eC Vs the us- recently the european Commission

(eC) ordered apple to pay up to us$ 12.5 Billion in back taxes to Ireland. the eC found that two tax rulings issued by Ireland to Apple artificially lowered the tax paid by the us technology giant in Ireland since 1991. The findings are unlikely to be the last word on the subject, as this is almost certain to be challenged before the european courts. Interestingly, similar investigations are also said to be in respect of some other large us multinational companies: amazon in luxembourg, starbucks in the netherlands etc. this has also created rift over the taxing rights between the two largest economic super powers, the us and the eu. two key factors have led to this. one, there is the eu-led multilateral Base Erosion and Profit Shifting (BEPS) initiative under oeCd that aims to make far reaching changes to the way MnCs do business today. there is also the enforcement within the eu of its state aid rules, which seek to curb eu member states from giving tax benefits to selected companies. While neither of these initiatives exclusively target us MnCs, they are nonetheless perceived as being the most affected. It is felt that Beps will result in us companies paying more taxes in the eu and other jurisdictions. the us is concerned that increased taxes found due in eu member states as a result of these investigations will be creditable against us taxes, which will lead to a reduction in us tax revenues (as and when these funds are repatriated to the us). over the years, several us MnCs have accumulated large piles of cash overseas including in their european subsidiaries. the total amount kept overseas by the big us companies is said to be about us$ 2 trillion, with the largest 15 companies accounting for about us$ 800 Billion. these events will propel some affected countries to protect their own interest, even if occasionally it leads to outcomes like in apple case, where the eu is forcing a reluctant Ireland to recover tax from an even more reluctant apple. further some other countries will

act as an interim measure unilaterally. for instance, Britain bringing in Google tax and India bringing its equalization levy are all examples of countries taking matters into their own hands pending the realization of benefits from multilateral initiatives.

ii. Abuse of Withholding tax – If a digital company receives a specific income from nonresident countries (origin) paid by the company, including dividends, interest, royalties, fees etc, the company may need to pay withholding tax in non - resident (source) country. the company in accordance with international tax law may require countries to non –resident (source) pre-payment provision for income tax. If payments between the payer and the recipient countries have a tax treaty, the digital economy companies may get preferential rates or zero rate of withholding tax paid to the source country. In order to achieve the purpose of tax avoidance, the digital economy companies need to set up a shell company in third country, third state owned wider preferential tax treaty network but does not have enough provisions to prevent the abuse of tax concessions. This way Base Erosion and Profit Shifting (Beps) arises.

iii. VAt tax Base Erosion – digital economy trading company having occult and virtualization features, making it difficult to discern the true identity to the tax authorities to bring it within the scope of the Vat.

6. Broader tax challengesBeyond the issue of Beps and tax avoidance, the key features of the digital economy raise more systemic challenges for tax policy makers that are generally grouped into three categories–the so-called “broader tax challenges”:

(i) the difficulty of collecting VAT/GST in the destination country where goods, services and intangibles are acquired by private consumers from suppliers based overseas which may not have any direct or indirect physical presence in the consumer’s jurisdiction;

(ii) the ability of some businesses to earn income from sales from a country with a less significant physical presence in the past, thereby calling into question the relevance of existing rules that look at physical presence when determining tax liabilities;

(iii) the ability of some businesses to utilize the contribution of users in their value chain for digital products and services, including through collection and monitoring of data, which raises the issue of how to attribute and value that contribution.

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7. global initiatives taken so faroeCd has concluded in its early work that no dramatic departure from the current rules is needed, but source taxation might not be sufficiently established in the digital economy. the potential reason is seen in the spread and evolution of ICt. this evolution has expanded the scale of cross border business activity undertaken without substantial physical operations in the market countries. at the same time, core functions can be centralized due to their mobility. Accordingly, the OECD identifies broader tax challenges that can be categorized into 1) nexus for taxation, 2) the use of data and the respective attribution of value and 3) the characterization of payments made for the digital products or related services.

action 1 of the oeCd Beps project examined the issues in detail. Specifically, it considered three broad options to address challenges arising from the digital economy. These are 1) a new nexus test based on significant economic presence, 2) a withholding tax on digital transactions and 3) an equalization levy. although the oeCd do not out rightly recommend these options, it has noted that the countries could consider introducing them in their domestic laws, subject to treaty obligations.

In India, vide the recent annual budget presented in february 2016, equalization levy has been proposed on specified services provided by non- residents. This levy applies at 6% of consideration paid for specified services to a nonresident by a resident in India are carrying out business or a nonresident having a permanent establishment (PE) in India. There is, however, a specific carve out for specified services rendered by non residents who have a pe in India, when the services are effectively connected to the pe. payers in India are required to deduct the levy amount from the payments made to non-residents and deposit it with the government. Interest and

penalty would apply for non- deduction / non- payment of the levy. The specified services to which this levy applies are online advertisements, provision for digital advertising space or any other services for the purpose of online advertisements. to avoid double taxation, income arising from payments on which equalization levy has been paid are proposed to be exempted under the Income tax law. only glitch is the Indian levy has been proposed under a separate chapter of finance Bill, not under the Income tax law. this would mean that the levy may not be considered as an Income tax, which would take it outside the purview of tax treaties. this would imply that where an equalization levy is levied on a transaction, the nonresident recipient may be subjected to double taxation, if its country of residence does not give a corresponding credit for the Indian levy.

8. Nepalese Scenario on Taxation of e-Commerce

Chapter 13 of Income tax act, 2002 of nepal deals with International taxation. It is pertinent to note sections 67, 68, 69, 70, 71 and 73 which deal various provisions on international transactions. Chapter 17 of the same act deals with the provisions on withholding taxes.

Value Added Tax Act, 1996 defines the terms “Goods” and “services”. the term “Goods” means tangible or intangible property. the term “service” means the things other than goods. further, as per section 5 of the same act, Value added tax shall be imposed on goods or services

- supplied inside nepal,

- imported into nepal,

- exported from nepal

In this context, sometimes there is dilemma on levying the taxes on digital and e-Commerce transactions and thereby difficulty in collection of taxes by tax authorities.

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9. conclusionthe Information and Communication technology (ICt) is rapidly changing with the advancement of technology. digital and e-Commerce transactions also taking the similar pace making easier to the life of the people around the globe and contributing a remarkable chunk into the global economy.

the need of the hour for nepal on taxation of digital and e-Commerce transactions, both from Income tax and Value added tax prospective, is to develop the clear cut provisions on Income tax act and Value added tax act considering the international principles and practices (oeCd could be the base to step up) on digital and e-Commerce transactions understanding the business models and economic activities.

the clarity on the provisions of taxation could be one step ahead on Foreign Direct Investment (FDI) inflow into the country which can be directly linked to the development of the nation.

References

1. www.oecd.org

2. the economic times

3. www.techlekh.com

4. taxing the virtual world – Indian perspective – the chartered accountant (ICaI)

5. Multinational tax Base erosion problem of the digital economy by Wei peng, school of economics, Jinan university, Guanghou, China.

6. International taxation in digital economy by university of Manheim Business school.

7. International tax review by Mr. rakesh dharawat and Mr. hariharan gangadharan

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Backgroundtransfer pricing is a mechanism adopted in relation to transactions between two related entities, so as to minimize the overall tax liability of the group of companies of which the two entities are members. despite of having existing provisions of the Income tax act to some extent but there is no practice to cover the arm length principle that neutralizes the adverse effect of transfer pricing. It is therefore, proposed to incorporate in our tax statute a comprehensive guidelines and practices to enforce the arm’s length principle.

In 2004, nepal has become the member of world trade organization which has brought major significance and changes in business in the country and

transfer pricing in nepal:

need to have comprehensive guidelines and Practice

To implement Transfer Pricing concept, the Tax Authority has to take appropriate step for coming up with comprehensive manual or guidelines and have to work on war stage without any delay.

global market, although the concept of transfer pricing has been introduced in/with Income tax reforms and act, 2002. But the drastic changes with inflow of foreign direct Investment and entry of foreign company in nepal and some nepalese companies also made an investment outside nepal only after 2004 .nowadays over 60 countries have adopted transfer pricing rules and over 60% of the international trade is carried out within Multinational entities.

there are about 400 to 500 foreign companies associated with nepali Business environment out of which about 282 to 285 are Indian companies. since there are good numbers of business transactions of foreign companies in nepal and lots of foreign direct investments are awaiting of government stability

CA. Kaushalendra JhaCa. Jha is a member of ICan


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and conducive environment, transfer pricing concept is very necessary to have fair taxation practice in nepal.

earlier seminar organized on “International taxation & transfer pricing was also conducted by safa International for implementation of transfer pricing in nepal which I believe must have sensitized the issues. however there is still some confusion and unawareness regarding importance of implementation of transfer pricing provisions in nepal are witnessed.

importance of tPGlobalization and economic growth have driven the level of inter-company transactions to new heights. It is estimated that more than 2/3 of all business, in particular; developing countries are observing immense growth in intra-group transactions due to the fact that their economies are still in the process of opening up and attract large amounts of fdI transactions worldwide take place within groups. therefore, tp is not only of importance to business but also for tax administrations, which have to implement or adapt their national tp legislation and practices accordingly. International consistency in TP is beneficial to create a basic structure of taxable persons and events, which ensures proper application of the arm’s length principle. further transfer pricing helps to identify practical issues in business restructuring and manage risk of double taxation.

global scenariotransfer pricing is one of the most important issues in international taxation. It is a major tool for corporate tax avoidance which is also referred as base erosion and profit shifting. The OECD (Organization for Economic Co-operation and development) has adopted (subject to specific country reservations) fairly comprehensive guidelines. these guidelines have been adopted with little modification by many countries. There are around 70 countries have already been adopting transfer pricing rules and this rules are mostly based in arm’s length principles in most of the countries. the oeCd has published guidelines based on arm’s length principles which being followed in part and whole most of the oeCd’s member countries and non-member countries too. despite of following up oeCd guidelines but Beps(Base Erosion and Profit Shifting) Action 13”Guidance on the Implementation of transfer pricing documentation and Country-by-Country reporting” only 31 countries sign tax co-operation agreement to enable automatic sharing of country-by-country information till 27/01/2016.

the Beps action 13 report (transfer pricing documentation and Country-by-Country reporting) provides a template for multinational enterprises (Mnes) to report annually and for each tax jurisdiction in which they do business the information set out therein. this report is called the Country-by-Country (CbC) report.

to facilitate the implementation of the CbC reporting standard, the Beps action 13 report includes a CbC reporting Implementation package which consists of (i) model legislation which could be used by countries to require the ultimate parent entity of an Mne group to file the CbC Report in its jurisdiction of residence including backup filing requirements and (ii) three model Competent authority agreements that could be used to facilitate implementation of the exchange of CbC reports, respectively based on the:

1. Multilateral Convention on administrative assistance in tax Matters;

2. Bilateral tax conventions; and

3. tax Information exchange agreements (tIeas).

Provision of transfer Pricing in income tax Act, 2058as per section 33, in any arrangement between persons who are associates person, the department may, by notice in writing, distribute, apportion, or allocate amounts to be included or deducted in calculating income between the persons as is necessary to reflect the taxable income or tax payable that would have arisen for them if the arrangement had been conduction at arm’s length price.

In making any adjustment under sub-section the department may re-characterize the source and type of any income, loss, amount, or payment; or allocate costs, including head office expenses, incurred by one person in conduction a business that benefit an associate or associates in conducting a business to the associates based on the comparative uncovers of the businesses.

Associated persons means two or more persons or group of such persons where one may reasonably be expected to act in accordance with the intentions of the other associated persons may act on as permanent Establishment and Subsidiary.

Provision on tax treatyContracting states may conduct the transfer pricing audit and the State in which profit was shifted has to recalculate the taxable income

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challenges of transfer Pricing practice for Regulatory Authority.Not Sufficient number of qualified officers and auditors who lacks accounting techniques or expertise; lack knowledge within the private sectors, lack of provision of advance price agreement, limited number of tax treaties between trading countries, lack of available sufficient data and information to calculate arms length price.

to mitigate these challenges, the department may have to come up with comprehensive guidelines on transfer pricing with capacity building program of the tax officers and tax professionals, establishment of data bank in existing transfer pricing materials and potential transfer pricing materials depending on the trading partners and investing countries and finally raising an awareness among stakeholders.

the Way forward

Need To Have Comprehensive Manual/Guidelines

seeing the business transaction with cross boarders transactions among associates enterprise by foreign company in nepal, the tax authority has very limited tax provision and practice to identify the issue of transfer pricing cases in the country. Absence of catch in transfer ????? pricing shall increase the possibility of transfer pricing to shift profits in the contracting states where tax rates are lower.

to implement transfer pricing concept, the tax authority has to take appropriate step for coming up with comprehensive manual or guidelines and have to work on war stage without any delay. a compressive manual is required for implementation of transfer pricing specially containing:-

g proper study of nepali Business Market.g proper study regarding need of transfer pricing

concept.g study of foreign investors in nepal.g study on top 10 foreign companies for case studies

with available data.g study of top 10 trading partners of the country.g how to integrate transfer pricing into business and

tax strategiesg how to perform the required transfer pricing

analyses

g selection and implement appropriate transfer pricing policies

g study to know which evidence needs to be gathered.

g study to identify and manage transfer pricing risk.g Brief study of international market implementing

transfer pricing.g proper Guidelines and policy regarding transfer

pricing required.g Study regarding difficulties and challenges emerging

from implementation transfer pricing.

adopting oeCd guidelines and complying Beps 13 action is far away in the context of nepal hence the primary and immediate need of the authorities are to touch upon above issues and comprehending it will be the right way in the matter.

Reference:https://www.oecd.org/tax/automatic-exchange/about-

automatic-exchange/country-by-country-reporting.htm

Income tax act, 2058 and rules 2059

Income tax directory 2068 amended;

Various online publications.

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cA. Bhuvan singh chadCa. Chad is a member of ICan


The guidance on transfer pricing documentation requires MNEs to provide tax administrations high-level global information regarding their global business operations and transfer pricing policies in a “master file” that would be available to all relevant country tax administrations. the integration of national

economies activities and markets has increased substantially increased in recent century and an international tax issue becomes high political agenda as before. In an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps and mismatches that can be exploited to generate double non-taxation, which undermines the fairness and integrity of tax systems. this has put a twist on the international tax framework, which is formulated more than a century ago. the current rules have exposed weakness that create opportunities for innovation of Base erosion and Profit Shifting (BEPS), thus requires a bold move by policy makers to renovate confidence in the system and encore that profit are taxed

where economic activities take place and value is created.

According to organization for Economic co-operation and development (oEcd), Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on Corporate Income Tax (CIT), particularly from multinational enterprises (MNEs).

Research undertaken since 2013 confirms the potential magnitude of the BEPS problems. Estimates conservatively indicate annual losses of anywhere from 4 - 10% of global corporate income tax (CIT)

Reforming international tax systems to tackle tax Avoidance -Base Erosion and Profit Shifting (BEPS)

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revenues, i.e. USD 100 to 240 billion annually. the losses arise from a variety of causes, including aggressive tax planning by some multinational enterprises (Mnes), the interaction of domestic tax rules, lack of transparency and coordination between tax administrations, limited country enforcement resources and harmful tax practices. The affiliates of MNEs in low tax countries report almost twice the profit rate (relative to assets) of their global group, showing how Beps can cause economic distortions.

Beps is a global problem which requires global solutions. For the first time ever in tax matters, OECD and G20 countries worked together on an equal footing. More than a dozen developing countries have participated directly in the work and more than 80 non-oeCd, non-G20 jurisdictions have provided input. It will draw on the mandate from the G20 finance Ministers and Central Bank Governors as included in their Communiqué issued in ankara on 5 september 2015:

“… The effectiveness of the project will be determined by its widespread and consistent implementation. We will continue to work on an equal footing as we monitor the implementation of the BEPS project outcomes at the global level, in particular, the exchange of information on cross-border tax rulings. We call on the OECD to prepare a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing…” G20 Finance Ministers and Central Bank Governors

overview of BEPs Package the Beps action plan endorsed by the G20 in July 2013 identified 15 key areas to be addressed. The final BEPS package, which includes and consolidates the 2014 interim reports has been developed and agreed in just two years. this package was presented by oeCd secretary-General angel Gurría to G20 finance Ministers at their 8 october meeting in lima and subsequently be presented to G20 leaders at their summit in antalya on 15-16 november 2015.

Action 1 – Address the tax challenges of the digital Economythe action 1 report concludes that the digital economy cannot be ring-fenced as it is increasingly the economy itself. the report analyses Beps risks exacerbated in the digital economy and shows the expected impact of the measures developed across the Beps project. rules and implementation mechanisms have been developed to help collect value-added tax (Vat) based on the country

where the consumer is located in the case of cross-border business-to-consumers transactions. these measures are intended to level the playing field between domestic and foreign suppliers and facilitate the efficient collection of Vat due on these transactions. technical options to deal with the broader tax challenges raised by the digital economy such as nexus and data have been discussed and analyzed.

Action 2 – neutralise the Effects of hybrid mismatch Arrangements action 2 neutralise the effects of hybrid mismatch arrangements such as domestic and treaty rules. this will help to prevent double non-taxation by eliminating the tax benefits of mismatches and to put an end to costly multiple deductions for a single expense, deductions in one country without corresponding taxation in another, and the generation of multiple foreign tax credits for one amount of foreign tax paid. By neutralising the mismatch in tax outcomes, but not otherwise interfering with the use of such instruments or entities, the rules will inhibit the use of these arrangements as a tool for Beps without adversely impacting cross-border trade and investment. action 2 of the Beps, therefore calls for the development of model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect of hybrid instruments and entities.

Action 3 – strengthen cfc Rulesunder action 3 strengthen CfC rules recommends building blocks of effective Controlled foreign Company (CfC) rules, while recognising that the policy objectives of these rules vary among jurisdictions. the recommendations are not minimum standards, but they are designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from shifting income into foreign subsidiaries. It identifies the challenges to existing CfC rules posed by mobile income such as that from intellectual property, services and digital transactions, and allows jurisdictions to reflect on appropriate policies in this regard. the work emphasises that CfC rules have a continuing, important role in tackling Beps, as a backstop to transfer pricing and other rules. strengthen CfC rules sets six building blocks for the design of effective CFC rules, Definition of a CFC, CFC exemptions and threshold requirements, Definition of income, Computation of income, attribution of income and prevention and elimination of double taxation.

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Action 4 – Limit Base Erosion via interest deductions and other financial Paymentsaction 4 of Beps describes about limit Base erosion via Interest deductions and other financial payment. the influence of tax rules on the location of debt within multinational groups has been established in a number of academic studies and it is well known that groups can easily multiply the level of debt at the individual group entity level via intra-group financing. At the same time, the ability to achieve excessive interest deductions including those that finance the production of exempt or deferred income is best addressed in a coordinated manner given the importance of addressing competitiveness considerations and of ensuring that appropriate interest expense limitations do not themselves lead to double taxation. net interest deductions are directly linked to the taxable income generated by its economic activities and fostering increased coordination of national rules in this space. thus action 4, called for recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense and other financial payments.

Action 5 – counter harmful tax Practices more Effectively, taking into Account transparency and substancethe action 5 report sets out a minimum standard based on an agreed methodology to assess whether there is substantial activity in a preferential regime. In the context of Ip (Intellectual property) regimes such as patent boxes, consensus was reached on the “nexus” approach. this approach uses expenditures in the country as a proxy for substantial activity and ensures that taxpayers benefiting from these regimes did in fact engage in research and development and incurred actual expenditures on such activities. the same principle can also be applied to other preferential regimes so that such regimes would be found to require substantial activities where they grant benefits to a taxpayer to the extent that the taxpayer undertook the core income-generating activities required to produce the type of income covered by the preferential regime. In the area of transparency, a framework has been agreed for mandatory spontaneous exchange of information on rulings that could give rise to Beps concerns in the absence of such exchange. the results of the application of the elaborated substantial activity and transparency factors to a number of preferential regimes are included in the action.

Action 6 – Prevent treaty Abuse Action 6 of the BEPS Action Plan identified treaty abuse includes a minimum standard on preventing abuse including through treaty shopping and new rules that provide safeguards to prevent treaty abuse and offer a certain degree of flexibility regarding how to do so. the new treaty anti-abuse rules included in the report first address treaty shopping, which involves strategies through which a person who is not a resident of a state attempts to obtain the benefits of a tax treaty concluded by that state. More targeted rules have been designed to address other forms of treaty abuse. other changes to the oeCd Model tax Convention have been agreed to ensure that treaties do not inadvertently prevent the application of domestic anti-abuse rules. A clarification that tax treaties are not intended to be used to generate double non-taxation is provided through a reformulation of the title and preamble of the Model tax Convention. finally, action 6 contains the policy considerations to be taken into account when entering into tax treaties with certain low or no-tax jurisdictions.

Action 7 – Prevent the Artificial Avoidance of PE statusAction 7 – describes Prevent the Artificial Avoidance of pe status. tax treaties generally provide that the business profits of a foreign enterprise are taxable in a state only to the extent that the enterprise has in that State a permanent establishment to which the profits are attributable. The definition of permanent establishment included in tax treaties is therefore crucial in determining whether a nonresident enterprise must pay income tax in another state. the report includes changes to the definition of permanent establishment in Article 5 of the oeCd Model tax Convention, which is widely used as the basis for negotiating tax treaties. these changes address techniques used to inappropriately avoid the tax nexus, including via replacement of distributors with commissionaire arrangements or via the artificial fragmentation of business activities.

Actions 8-10 – Assure that transfer Pricing outcomes are in Line with Value creation the work under actions 8-10 of the Beps action plan will ensure that transfer pricing outcomes better align with value creation of the Mne group. the work has focused on three key areas.

action 8 looked at transfer pricing issues relating to controlled transactions involving intangibles, since

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intangibles are by definition mobile and they are often hard-to-value. Misallocation of the profits generated by valuable intangibles has heavily contributed to base erosion and profit shifting. Under Action 9, contractual allocations of risk are respected only when they are supported by actual decision-making and thus exercising control over these risks. Work under action 10 focused on other high-risk areas, including the scope for addressing profit allocations resulting from transactions which are not commercially rational for the individual enterprises concerned (re-characterisation), the scope for targeting the use of transfer pricing methods in a way which results in diverting profits from the most economically important activities of the Mne group, and neutralising the use of certain types of payments between members of the Mne group (such as management fees and head office expenses) to erode the tax base in the absence of alignment with value creation.

Action 11 – measuring and monitoring BEPs action 11 of Beps describes about measuring and monitoring of Beps. action 11 assesses currently available data and methodologies and concludes that significant limitations severely constrain economic analyses of the scale and economic impact of Beps and improved data and methodologies are required. noting these data limitations, a dashboard of six Beps indicators has been constructed, using different data sources and assessing different Beps channels. these indicators provide strong signals that Beps exists and suggest it has been increasing over time. The research also finds significant non-fiscal economic distortions arising from Beps, and proposes recommendations for taking better advantage of available tax data and improving analyses to support the monitoring of Beps in the future, including through analytical tools to assist countries to evaluate the fiscal effects of BEPS and impact of Beps countermeasures for their countries.

Action 12 – Require taxpayers to disclose their Aggressive tax Planning Arrangements the action 12 report provides a modular framework of guidance drawn from best practices for use by countries without mandatory disclosure rules which seeks to design a regime that fits those countries’ need to obtain early information on aggressive or abusive tax planning schemes and their users. the recommendations in this report do not represent a minimum standard and countries are free to choose whether or not to introduce mandatory disclosure regimes. the framework is also intended as a reference for countries that already have mandatory disclosure regimes, in order to enhance the effectiveness of those regimes. the recommendations provide the necessary flexibility

to balance a country’s need for better and more timely information with the compliance burdens for taxpayers. It also sets out specific best practice recommendations for rules targeting international tax schemes, as well as for the development and implementation of more effective information exchange and co-operation between tax administrations.

Action 13 – Re-examine transfer Pricing documentation the action 13 report contains revised standards for transfer pricing documentation and a template for country-by-country reporting of income, earnings, taxes paid and certain measures of economic activity. the country-by-country report requires multinational enterprises (Mnes) to report annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires Mnes to report their total employment, capital, retained earnings and tangible assets in each tax jurisdiction. finally, it requires Mnes to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.

the guidance on transfer pricing documentation requires Mnes to provide tax administrations high-level global information regarding their global business operations and transfer pricing policies in a “master file” that would be available to all relevant country tax administrations. It also requires that more transactional transfer pricing documentation be provided in a local file in each country, identifying relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. taken together, these three documents (country-by-country report, master file and local file) will require taxpayers to articulate consistent transfer pricing positions, will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.

Action 14 – make dispute Resolution mechanisms more Effective under action 14 of the Beps action plan aim to strengthen the effectiveness and efficiency of the MAP (Mutual agreement procedure) process. they aim to minimise the risks of uncertainty and unintended double taxation by ensuring the consistent and proper implementation of tax treaties, including the effective and timely

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resolution of disputes regarding their interpretation or application through the mutual agreement procedure. these measures are underpinned by a strong political commitment to the effective and timely resolution of disputes through the mutual agreement procedure and to further progress to rapidly resolve disputes.

Action 15 – develop a multilateral instrument action 15 of the Beps action plan provides for an analysis of the tax and public international law issues related to the development of a multilateral instrument to enable countries that wish to do so to implement measures developed in the course of the work on Beps and amend bilateral tax treaties. on the basis of this analysis, interested countries will develop a multilateral instrument designed to provide an innovative approach to international tax matters.

BEPS Global and Nepal perspective

Addressing base erosion and profit shifting (BEPS) is a key priority of governments around the globe. the Action Plan aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. It was agreed that addressing Beps is critical for countries and must be done in a timely manner, not least to prevent the existing consensus-based international tax framework from unraveling, which would increase uncertainty for businesses at a time when cross-border investments are more necessary than ever. the oeCd and G20 countries will extend their cooperation on Beps until 2020 to complete pending work and ensure an efficient targeted monitoring of the agreed measures.

the impact of Beps on developing countries like nepal, as a percentage of tax revenues, are higher than in developed countries given developing countries’ greater reliance on CIt revenues. over the years Nepal has made significant strides in promoting itself as an attractive fdI destination in south asia. this journey has not been easy but the optimism is here to stay. Government of nepal has established a high-level fast track agency Investment Board nepal (IBn) with the objective of facilitating the economic development of nepal by creating an investment-friendly environment by mobilising and managing domestic as well as fdI. In a globalised economy, government of nepal need to cooperate and refrain from harmful tax practices, to address tax avoidance effectively, and provide a more certain international environment to attract and sustain fdI. failure to achieve such cooperation would reduce the effectiveness of tax revenues as a tool for resource mobilisation, which would have a disproportionately harmful impact in nepal like other developing countries.

the year 2015 is the beginning of ‘Beps - related actions’ – but it was really just the beginning! Going forward, if these actions take shape as planned, and coherently across most of the world, we are certainly at the threshold of a paradigm shift in the international taxation development. We will, more likely than not, witness a change in the way businesses operate and how tax authorities will look at business transactions. practically, on-the-ground implementation of the plans will undoubtedly take more time, but if there is political will power, and if policies require are developed, these are likely to steadily pave the way for change.

After the final BEPS deliverables government’s tax view and reactions of nepal is yet to be announced and discussed to the outcomes of the Beps project. these provide valuable insights in to the possible transformation of the nepal tax regime that may be in the offing as a result of the BEPS project, and how the nepal Government intends to deal with this.

the four principles of the Beps project underlie nepal’s treaty policy, i.e., avoiding harmful tax practices, dispute resolution, avoiding treaty abuse and country-by-country reporting. although further complexity is inevitable under Beps, it is important for the G-20, the oeCd and the un to break down the new rules into simple, easy to understand tenets that can help to get multinationals on board and help tax administrations to improve the capabilities of their staff. these rules must then be consistently interpreted to give multinationals a fair opportunity to do business.

Beps deliverables are the outcome of two years of intense discussions and deliberations to which nepal has not been an active participant. actions will be taken in nepal – both in legislative and administrative front. Implementation will be crucial. Industry will have concerns about the regulations and laws that will be introduced. Every country will need to develop specific legislation with a focus on minimising subjectivity in them in order to reduce disputes. It will be a challenging task for policy makers in nepal, but at least countries will be sharing their experiences as they draft the new rules and laws, in which nepal shall be active participants.

nepal will certainly implement minimum standards, and will abide by updating existing standards. as for recommendations on best practices, nepal will study and analyse these to decide on when and to what extent they will be implemented. from an overall perspective, implementation of Beps is likely to take place in phases, with the ‘minimum standards’ expected to be put through in the coming years.

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Adeeb h. Khan, fcAVice president, ICaB

the concept of ethics…or ethical principles…is intended to be embedded into human life. as an extension of that, probably every major organized profession on Earth has its own codified ethical standards. ethical standards in accounting or auditing profession is thus nothing exceptional.

to a great extent, that’s where the similarities end. Whilst other professions can also have ethical dilemmas, ours lie at the very bedrock of our profession, and more alarmingly, these are often not understood or recognized by the outside world. a lawyer’s responsibility lies with a very clear individual or body; both legally and in perception, there is generally no ambiguity. same applies to a doctor; his technical skills and professional ethics are to be applied to his patient…there is generally no ambiguity there.

after well over a century of our profession, we still cannot always say with total certainty, in every jurisdiction on earth, who are we exactly responsible to and for what. We can have in place very detailed and legally water-tight engagement contracts, perhaps that will clearly identify under the eyes of the law who we owe our technical and ethical standards to in that assignment, but that is not always aligned to public perception. a statutory audit report may be addressed to shareholders, and perhaps in most reasonably developed jurisdictions, our legal responsibilities can be limited to this group, but public perception and expectation can be very different. on countless occasions, major corporate bankruptcies have followed by accusations of auditors not following required technical and ethical standards. such accusations being made not just by shareholders,

IesBa Code of ethics 2014:

sustaining Public trustKey note speech presented in safa International Conference on "ethical

dimension of accounting profession" held in Kathmandu on 13th august, 2016

codE of Ethics


but by a wide range of stakeholders, from creditors to employees.

In the recent past, cyber crimes have taken on alarming proportions. after many such events, even informed commentators have been heard asking what were the auditors doing? It’s as if regular statutory financial audit is expected to unearth every error, irregularity and weakness in all aspects of a business, and address all major expectations of key interested parties.

our technical and ethical dilemmas do not end there. even the nature of ethical expectations from us are different. a doctor’s primary concern is the health of his patient; a lawyer will protect the interest of his client…the person paying him…even if he is not certain that his client’s stand is legally or morally correct. our situation is not always that clear. sometimes, insisting on the correct accounting treatment can result in worsening of the the results of the company. there is no doubt that is the correct thing to do, but does that accrue immediate positive results for the shareholders? In fact, it is possible that by insisting on the correct treatment and/disclosure, we can at times bring about…or speed up…the demise of a business, which might not be of immediate benefit to the owners of the business.

ethical dilemmas often arise in matters of dispute. a business might be fighting a major tax or other litigation. the correct treatment may very well be provisioning, but if the Cfo does that or the auditor insists on doing that, it might not really help the company in any way, other than showing a truer and fairer view. What would our legal clients…and the many others using our work, or affected by our work… want us to do? strictly follow technical and ethical standards, or protect their more immediate and practical or realistic interests? there is no immediate, practical or realistic answer.

Into this rather complicated mix, we have the all pervasive factor of earning a living. We all went through a difficult education process and rigorous training to achieve a certain qualification. It is now our right to seek maximization of our earning. Yes, we have technical and ethical standards to follow; yes, we have to consider the needs and expectations of actual and perceived clients and stakeholders, but with that we also need to earn an honest respectable living which appropriately rewards us for our hard work. These are difficult waters to navigate, but navigate we must.

In these difficult waters we do indeed have a helpful guide in the form of the IesBa Code. to me, the most important statement in this Code is in section 100.1, which says “a distinguishing mark of the accountancy profession is

it acceptance of the responsibility to act in the public interest”. this one very pragmatic sentence captures the context and sets the tone for the way forward.

as a very quick introduction to the code, it has three parts. Part A identifies the five Fundamental Principles and provides a conceptual framework to be applied to challenges faced in applying these principles; part B explains how conceptual framework can be applied in certain situations in public practice, and part C explains how the framework can be so applied in business.

As we all know, the five Fundamental Principles are:

1. Integrity

2. objectivity

3. professional competence and due care

4. Confidentiality

5. professional behavior

to me, none of the above sets us apart from any other major profession of the world; in fact, one could say, some of these are attributes expected from any decent human being. Yet, why is it that we no longer feel as assured of public trust as we perhaps did few decades ago? Maybe there is more of an expectation gap from the public than there was before; maybe in our race to be major organizations, attracting the best talents and diversifying our areas of operation, we think less as professionals and more as a business.

In this part of the world, we are often accused of not having required professional competence or applying due care. In order to qualify as a professional accountant one must pass exams which are designed to test competence. so the problem probably lies in what happens after qualification.

firstly, we have no doubt heard from professionals like doctors and lawyers or from totally lay persons, that doctors and lawyers have strict rules about post qualification education; I think most people outside our profession do not even know we also have similar requirements. We need to find ways to communicate that to the public, or at least, to our clients and employers.

secondly, and perhaps this is more important, we need to put more focus on this post qualification education. how good is the material or the delivery? Is our approach not “one size fits all”? So the answer here lies not just in quality and enforcement of continuing professional education, but in ensuring the public is made aware of it. that will help in creating some degree public trust.

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What if in spite of that we do not demonstrate the level of competence and care that can be reasonably expected of us? the Code has the answer. section 100.16 says there should an “effective, well publicized complaint system”. Yet, perhaps most users of our service in our part of the world feel either it’s not possible to complain, or that it’s a waste of time and effort.

If a dissatisfied member of public feels there is a clearly laid out process for him to lodge a complaint without incurring excessive costs or effort, and that the system is effective and transparent, not only will he have more trust in us, but we will have enough of a reason to employ necessary competence and care in what we do.

Why wait for a public complaint? If we have inbuilt systems to detect our members who are not applying due care and competence to their work, take them to task, and have it publicized, surely that will make us lot more careful, and greatly assist in sustaining public trust. In house publications of the legal, medical or accounting professions of the more developed countries regularly carry news of fines and penalties of varying degrees imposed on their members. on its own, this is perhaps not good news, but it certainly builds publics’ trust in our system and processes. our professional bodies need to ensure our internal quality review process is adequately manned and empowered and carry out a structured, objective and informed review exercise with adverse results having meaningful consequences for such members.

The Code also identifies five threats in complying with the fundamental principles:

1. self interest threats

2. self review threats

3. advocacy threats

4. familiarity threats

5. Intimidation threats

addressing these by building safeguards is essential to sustaining public trust. Of the five, the first is key: self interest threat. as we do what we do to earn a living, this threat is all too common, perhaps more so in this part of the world where public accountants have smaller operations, opportunities are limited for all, and dependence on an employer or a client or a handful of clients is significant.

this is not just the most common problem, but also the most difficult to solve. As auditors of public companies, we are appointed by shareholders at aGMs, but quite

often a great degree of management goodwill is required to win an audit and for the forum to award a respectable fee. also, as said earlier, insisting on the most correct accounting treatment or disclosure may not always produce the most beneficial result for a company or its shareholders. Realistically balancing our financial interests with our obligations to our clients or paymasters is not always straight forward.

there is no easy solution to this, but the Code is useful in guiding us towards using the forum of those Charged with Governance, audit Committees being the most favoured in this category. If there is a genuine and realistic separation between those who can most influence our appointment and remuneration, and those we report on, perhaps it will be easier for accountants in public practice to keep self interest threats at bay in discharging our duties.

Whilst most jurisdictions in our region require audit Committees in public interest entities, in reality, we have a long way to go before such committees become truly effective. It is not unusual for audit Committee members to be favoured individuals of dominant shareholder, who in turn already is actively involved in everyday operations of the business. It is not unusual for audit Committee members to lack the technical expertise to play an effective role. In general, it is not unusual for independent Board members to be so poorly remunerated that they have no great incentive to put in required time and effort to do justice to the role.

We need to use our powers of persuasion and our influence with businesses and regulators to create much better understanding of the role of those Changed with Governance and how to make the communication between this group and public accountants more free flowing and effective.

In conclusion, the IESBA code correctly identifies the peculiar circumstances within which we operate. It sets out five laudable Fundamental Principles we need to follow, albeit I dare say, they are not vastly different from that applicable to any professional. the Code goes on to identify five very realistic threats to following these principles. It also suggests safeguards. however, as a principle based document, it cannot go into much depth in application. It is our job to take this framework and embed into our professional lives and relationships. as a profession, if we were to choose two focus areas for sustaining public trust, I believe these are a robust internal quality review process and an effective, transparent and appropriately publicized disciplinary process.

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neWsicAi President Visited icAnpresident of the Institute of Chartered accountants of India (ICaI) Ca. devaraja reddy and safa nodal Officer Mr. Mudit Vashishtha paid a visit to ICAN on 14th August, 2016 at ICAN office, Satdobato. CA. Reedy was in Kathmandu to attend safa Board meeting and safa International Conference hosted by ICan on 12th and 13th august, 2016.

during the meeting of presidents of both of the Institutes discussed on the current situation of accounting profession around the world and in the region. they also discussed on how both of the institutes can mutually support each other for the growth of accounting profession and sharing their skill and experiences in both the countries. ICan president Ca. Mahesh Khanal, Vice president Ca. prakash Jung thapa, executive director Ca. Binay prakash shrestha and Joint director Mr. Binod neupane attended the meeting.

ICAN Officials Met Officials of Ministry of finance, BhutanICan president Ca. Mahesh Khanal, Vice president Ca. prakash Jung thapa, executive director Ca. Binay prakash shrestha and Joint director Mr. Binod neupane had a meeting with the director General Mr. Choiten

Wangchuk and General secretary Mr. sonam Wangdi of accounting and auditing standards Board of Bhutan, Ministry of finance on 14th August, 2016 at ICAN Office, satdobato.

During the meeting, ICAN briefed with the officials about the establishment history, laws and regulations and Governance structure of ICan.

sAfA Board meeting 2016the Institute hosted the 44th safa Board meeting and 82th safa assembly meeting on 12th august, 2016 in Kathmandu.

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ICAN Officials with ICAI President.

ICAN Officials with the Representatives of Accounting & Auditing Standards Board of Bhutan.

Group photograph of participants.


during the occasion various Committee meetings were also held. the delegates from safa members’ bodies attended the meeting.

sAfA international conferencethe Institute successfully organized one day safa International Conference on “Ethical dimensions of Accounting Profession” on 13th august, 2016 at hotel soaltee Crowne plaza, Kathmandu. the conference was designed especially for professional accountants in business and services and other interested individuals. the conference was inaugurated by honorable deputy prime Minister and finance Minister Mr. Krishna Bahadur Mahara.

Ca. Mahesh Khanal, president ICan welcomed chief guest, guest of honors, all the national and International delegates and other participants in his welcome speech.

the safa president, Chief Guest and Guest of honor addressed the program. similarly, Immediate past

president and Coordinator organizing Committee Ca. prakash lamsal gave away the vote of thanks to the participants of the program.

safa Committee on professional ethics and Independence Chairman Mr. adeeb hossain Khan, fCa delivered the key

technical session

topics session chairperson commentator Paper Presenter

1 overview of ethics for professional accountants in practice and threats.

session Chairperson: Mr. naeem akhter sheikh, fCa, president, safa

Mr. Madhu Bir pande, fCa, past president, ICan

Ms. Kemisha soni, fCa, Central Council Member- ICaI

2 overview of ethics for professional accountants in Business

Mr. Kaushalendra Kumar singh, fCa, past president, ICan

Mr. anis ur rehman, Vice president, ICMa pakistan

Mr. Madan Krishna sharma, fCa, past Chairman, accounting standard Board, nepal

3. ethical Compliance- Country experience

recently Issued IesBa standard on” responding to non-Compliance with laws and regulations”

Mr. asM nayeem, fCa, Vice president, safa

Mr. reyaz Mihular, fCa, Member, IesBa and Chairman safa accounting and auditing standards Committee

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ICAN President CA. Mahesh Khanal in the speech.

IPP and Coordinator Organizing Committee CA. Prakash Lamsal is giving the vote of thanks.

Honorable Deputy Prime Minister and Finance Minister Mr. Krishna Bahadur Mahara Lightning the lamp in the program.


note speech on IesBa Code of ethics-2014: sustaining public trust.

similarly, three papers were presented in the technical sessions and all the sessions of the conference were focused on the ethics in the accounting profession.

heads of the safa accounting bodies were present in the conference. the representatives of afghanistan, Bhutan and Maldives attended the conference as observer. In these countries accounting institutes are yet to be established.

during the seminar representative of different countries, safa Member bodies and non-members shared the countries experience in the area of ethics of accounting profession. In the Valedictory session safa president and ICan president gave closing remarks and way forward. In fact, the hosting of safa is a key event for the Institute. More than 200 national and international participants attended the conference.

Courtesy call on Officiating Auditor Generalthe newly elected president and Vice president of ICan paid a courtesy call on Officiating Auditor General Mr. sukdev Bhattarai Khatry on 9th august, 2016. the call was made mainly to introduce the newly elected president and Vice president for 2073/74.

during the meeting, several professional issues like strengthening of accounting profession in the country, challenges of implementing nfrs, supporting public financial management, upholding the ethical values etc. were discussed. newly elected president also committed to provide professional services to the oaGn.

interaction Program on nfRs implementation with cfos of commercial Banksthe Institute organized an interaction program on “nfrs Implementation stage in Commercial Banks and problems they are Facing” with the Chief Finance Officer of A class commercial banks on Monday, 1st august, 2016 at ICan premises.

ICan president Ca. Mahesh Khanal welcoming the participants and delivered the opening speech and highlighted the objectives of organizing the program. In the program, Cfo of standard Chartered Bank nepal Ca. suraj lamichhane presented the issues regarding the implementation of nfrs. the participants discussed the ground challenges facing in preparation of financial statements in line with nfrss for the f/Y 2015/16 and shared their experiences.

The CFOs took part in the floor discussion and most of the participants suggested to develop necessary guideline to clarify the ambiguities of some provisions of nfrss. further they also suggested for maintaining proper coordination among the key regulators like nrB, ICan, Cro, tax authorities and others for implementation of standards pronounced. ICan Vice president Ca. prakash Jung thapa, Immediate past president Ca. prakash lamsal, Council member sunil Jakibanja, executive director Ca. Binay prakash shrestha and Joint director Mr. Binod neupane, were present in the interaction program. Cfos of 24 different commercial banks actively participated in the interaction program. ICan has pronounced nfrs for application by the “a” class Commercial Banks from 2015/16.

interaction Program on nfRs implementation with Bank Auditors

the Institute organized an interaction program with commercial bank auditor on “nfrs Implementation stage in Commercial Banks and problems they are facing” on Wednesday, 27th July , 2016 at ICan premises. ICan president Ca. Mahesh Khanal opened the program by

A Glimpse of the meeting.

ICAN Officials with the Officiating Auditor General

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welcoming the participants. In the program president Ca. Khanal delivered the opening speech and objectives of the program.

Auditors of 12 audit firms appointed for conducting bank audit participated in the program and shared their practical experiences and issues in the audit of financial statement prepared pursuant to nfrs for banking sector.

ICan Vice president Ca. prakash Jung thapa, Immediate past president Ca. prakash lamsal, executive director Ca. Binay prakash shrestha, Joint director Mr. Binod neupane and Member asB/n Ca. Mukunda dev adhikari were present in the interaction program.

Meeting with Nepal Rastra Bank Officialsa team of ICan comprised of president Ca. Mahesh Khanal, Vice president Ca. prakash Jung thapa and Immediate Past President CA. Prakash Lamsal met Officials of nepal rastra Bank on 24th July, 2016. the meeting was focused on effective implementation of nfrss by Banks and financial Institutions in the country. In the meeting, areas of mutual cooperation between nrB & ICan to support the government in implementation of national financial policy issues were also discussed.

seminar on “Recent Amendments in nepalese tax Laws” the Institute of Chartered accountants of nepal (ICan) organized half-day seminar on the theme “Recent Amendments in nepalese tax laws” coinciding with Bpa award and oath taking Ceremony on 22nd July, 2016 (2073, shrawan 7) friday, at hotel soaltee Crowne plaza, Kathmandu. the program was commenced with the opening speech of ICan president Ca. prakash lamsal. this seminar was focused on the recent changes in

Income tax and Vat through finance Bill, 2073. a special panel discussion forum on various issues on Income tax and Vat was also held in order to update the knowledge of the participant on the latest changes on tax laws.

seminar was conducted in two sessions. the seminar was designed especially for professional accountants, higher level officials and staff of Public and Private Sector Business organizations, Multinational etc. the details of technical papers, paper presenter, Chairperson and panel chair were as follows:

session 1 Paper Presenter Chairperson/ moderator

recent Changes in Income tax and Vat and Current Issues

Ca. sudarshan raj pandey, past president, ICan

Mr. Chudamani sharma, director General, Ird

session 2

panel discussion on “Current Compliance Issues on tax and Vat”

Ca. sudarshan raj pandey, past president, ICan Ca. Mahesh

Khanal, Vice president elect, ICan

Mr. shova Kanta paudel, Chief, large tax payer’s Office

Mr. dinesh shrestha, fnCCI

8 (eight) Cpe credit hours was granted to the ICan members participated.

national BPA Award-2015 and oath taking ceremony the Institute organized national Bpa award program coinciding with the ceremony for swearing in of newly

ICAN President CA. Prakash Lamsal giving opening remarks in the program.A Glimpse of the meeting.

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on the occasion, the Guest of honors dr. Chiranjivi nepal, Governer of nepal rastra Bank distributed the awards to the winners who prepared best presented for annual accounts of their respective companies.

the following organizations were declared winner and runner up in different catagories.

s. no. sector Winner Runner up

1 Banking sector (private and public)

Citizen Bank International ltd.

first runner up: nabil Bank ltd.

second runner up: standard Chartered Bank (nepal) limited.

2 financial sector (development Banks and finance Companies)

Kailash Bikas Bank ltd.

narayani national finance ltd.

3 Insurance sector

nlG Insurance -

4 public sector entities

employment provident fund

5 General sector Butwal power Company ltd.

first runner up: nepal doorsanchar Co. ltd

second runner up: Bottlers nepal ltd

speaking in the occasion, on behalf of the Bpa winners, Ca. rajan singh Bhandari, Ceo, Citizen Bank International

elected president and Vice president of the Institute on 22nd July, 2016 at hotel soaltee Crowne plaza, Kathmandu.

president Ca. prakash lamsal welcomed the Guest of honors by offering bouquet and batch before formal inauguration of the program. the Ceremony was jointly inaugurated by Guest of Honors Honorable Officiating auditor General Mr. sukdev Bhattarai Khatry and Governer of the nepal rastra Bank dr. Chiranjivi nepal by lightning the lamp on the occasion. the other dignitaries included dr. fatta Bahadur K.C. Chairman, Insurance Board and dr. rewat Bahadur Karki, Chairman seBon were also present in the occasion.

on the occasion president Ca. prakash lamsal highlighted the key achievement made by the Institute during his tenure. he emphasized on the implementation of nfrs and adherence to Code of ethics for the development of the accounting profession. he stressed to prepare annual financial reports in line with international practice in order to make reports transparent and informative. he thanked all the individuals, entities, institutions and other stakeholders for their support in making his tenure successful.

National BPA Award -2015

National BPA awards were given away under five different business categories to those organizations who obtained the highest marks on the competition of financial report of 2015. For the purpose of competition five different business categories were divided that included Banking sector (private and public sector), financial sector (Including development Banks and finance Companies), Insurance sector, public sector entity and General sector.

Officiating Auditor General and Governer of the Nepal Rastra Bank Jointly Inaugurating the program.

Governor of Nepal Rastra Bank Dr. Chiranjivi Nepal presenting the award to the winner.

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Ltd. mentioned that financial statement is prepared in compliance with NFRS, that will definitely help to win such award. he congratulated the newly elected president and Vice president for their success.

Oath Taking Ceremony

In the special function organized for swearing in and Bpa award ceremony, 2015 the newly elected president

CA. Mahesh Khanal took the oath of office and secrecy from the Officiating Auditor General Mr. Sukdev Bhattarai Khatry. thereafter, the newly elected Vice president Ca. Prakash Jung Thapa took the oath of office from the president Ca. Mahesh Khanal.

on 2073/03/31 the Council of ICan elected Ca Mahesh Khanal and prakash Jung thapa as president and Vice- president respectively for 2073/74. the president Ca. prakash lamsal handed over his responsibilities to newly elected president Ca. Mahesh Khanal by garlanding president Medallion to run the Institute. Before being elected as a president Ca. Khanal performed his

responsibilities as a Vice President in the first term of 7th Council.

after swear in as president, Ca. Mahesh Khanal thanked all the Council members for electing him unanimously as a president of the Institute. he appealed and hoped for the cooperation and support from Council Members, past president, staff of the Institute and all other stakeholders to make his tenure successful. he reiterated his commitment to work for the development of the Institute and to give continuity to the unfinished activities of previous Council.

Similarly, Speaking on the occasion, the Officiating Auditor General Mr. sukdev Bhattarai Khatry congratulated the newly elect president and Vice president and wished for the success of their tenure. he appreciated the Institute for the contribution towards the development of the accounting profession in nepal. he assured for providing appropriate support from Office of the Auditor General in development of the accounting profession. he also congratulated the Bpa award winners for preparing best presented annual accounts.

Governor of Nepal Rastra Bank, Dr. Chiranjivi Nepal speaking in the program.

CA. Mahesh Khanal taking Oath of Office with the Officiating Auditor General Sukdev Bhattarai Khatry.

CA. Prakash Jung Thapa taking Oath of Office of Vice- President with the President CA. Mahesh Khanal.CA. Rajan Singh Bhandari speaking on behalf of the BPA Award winner.

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speaking on the occasion, Governor, nepal rastra Bank, dr. Chiranjivi nepal congratulated and wished newly elected president and Vice- president for their successful tenure. he highlighted the role of accounts and accounting professional in the economic development of the country. he appealed the Institute to develop a mechanism for reducing fiduciary risk, monitoring and suggested to follow the International standards in accounting and auditing. lastly, he mentioned that nepal rastra Bank is always ready to support and coordinate with the Institute for the development of the profession.

speaking on the occasion dr. fatta Bahadur KC. Chairman, Insurance Board and dr. rewat Bahadur Karki also congratulated the newly elected president, Vice president of the Institute and Bpa award Winners and wished for every success.

Before concluding the program president Ca. Mahesh Khanal presented token of love to Guest of honors and other dignitaries.

the newly elected Vice president Ca. prakash Jung thapa made his commitment to support the new president. he concluded the program with vote of thanks to Guest of honors, other dignitaries, invitees and all other participants for their graceful presence.

mou between icAn and Pokhara universitythe Institute of Chartered accountants of nepal has signed Mou with pokhara university on 20th July, 2016 with the objective of working together to incorporate nfrs & nsas in the curriculum of Bachelor & Master level in the faculty of Management studies of pokhara university. Mou also includes other areas of cooperation between two institutions such as supporting each other on publication, training, research etc.

Signing agreement between ICAN and Pokhara University.

the Mou was jointly signed by Ca. prakash lamsal, president of ICan & dr. Karna Bir poudyal, dean, faculty of Management studies, pokhara university.

capacity development training on “Auditing system”ra. Member Capacity development Committee successfully organized capacity development training on “Auditing system” on 8th & 9th July, 2016 (2073 ashar, 24-25) in Kathmandu.

altogether 38 registered auditor members participated in the training. details of the program are given below.

s. no topic Resources Person date

1 legal frame work for audit

Ca. Chandra Kanta Bhandari

2073 ashar 23

2 Client acceptance Ca. Chandra Kanta Bhandari

3 audit planning Ca. Mukunda dev adhikari

4 audit evidence Ca. nanda Kishor sharma

5 Quality Control Ca. nanda Kishor sharma

2073 ashar 24

6 audit review & Completion

Ca. Jitendra Kumar Mishra

7 audit report Ca. Mukunda dev adhikari

8 audit related services


9 Miscellaneous(other practical Issues


Officials in the Capacity Development Training on Auditing System.

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this seminar also provided opportunities to share the knowledge and experience among the participants.

nB Bank Extension counter in icAn Premisesnepal Bangladesh Bank extended its counter at ICan building to facilitate banking service to the students and members of ICan as an agreement was entered into between ICan & nB Bank ltd. on 21st august, 2016 to set up a bank counter in ICan building.

a formal inauguration of banking counter was held on 28th september, 2016 at ICan building, satdobato, lalitpur. ICan president Ca. Mahesh Khanal and Ceo of nB Bank Ca. Gyanendra prasad dhungana jointly inaugurated the extension counter. on the occasion, an agreement was also signed to provide education loan to the students of Cap III level. speaking on the inauguration ceremony, the ICan president Ca. Mahesh Khanal briefed about activities of the institute, its members and students; and Ceo of nB Bank Ca. Gyanendra prasad dhungana informed that the bank is ready to provide maximum loan amount rs. 3,00,000/- (three lakhs) for maximum of 5 years period on the basis of CAP II certificate.

the availability of banking services in the ICan premises will relieve the students and the members of the institute from going to the bank to deposit various fees, charges payable to ICan.

In the inauguration of bank counter, ICan staff, staff from nB Bank ltd. and students were present in the program.

formation of standing and non standing committees pursuant to section 13 of the nepal Chartered accountants act, 1997 the Council of the Institute of Chartered accountants of nepal has formed 4 standing and 23 non-standing Committees in order to support in the functioning of the Institute. such Committees should be accountable to the Council of the Institute.

training course on diploma in ifRsthe Institute organized a seven days diploma in Ifrs Course with the technical support of association of Chartered Certified Accountants (ACCA), UK. The Course was designed to provide in depth knowledge of International financial reporting standards (Ifrs) to the members and non-members of the Institute.

the diploma in Ifrs training course was attended by the 46 corporate and individual participants. training was organized from 17th -23rd september 2016. the examination of the course is scheduled to be held on 9th december 2016.

student Affairs

10th Batch general management and communication skill (gmcs) Programthe 10th batch General Management and Communication skill (GMCs) training was successfully organized at ICan premises, satdobato from 21st august to 3rd september, 2016. this training has been made mandatory for getting Chartered accountant membership of the ICan for newly

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Participants of IFRS training with ICAN President and Resource person.

Inaugurating NB Bank extension Counter in ICAN Office.


qualified CA students and it is also mandatory for AT students for obtaining accounting technician (at) license.

this training was organized aiming with enhancing better oral, written skill and non-verbal communication for getting better opportunities. this training is not only confined to enhance the communication skill but also helps to enhance the quality of general management skill required for attaining higher level position. In total 40 students participated in the training of which 39 were CA final lebel students and 1 newly qualified Accounting technicians.

Establishment of new scholarship fundWith the purpose of encouraging students to pursue Ca education, Kuber sharma scholarship fund of nrs. 2 million has been established for awarding scholarship to the students of entry level.

GMCS Participants with the ICAN Officials.

Signing Agreement with CA. Kuber Sharma for new scholarship fund.

In this connection, a bi-lateral agreement has been signed between the Institute and Ca. Kuber prasad sharma on 17th august, 2016 (2073/05/01) as per the agreement, two Ca students of entry level will be awarded Kuber sharma scholarship on annual basis.

Enrollment of the new studentsfollowing is the status of new students enrolled in the Ca course during July 1, 2016 to september 30, 2016.

Level cAP i cAP ii cAP iiinumber 17 274 94

one year internship22 foreign CA qualification holders joined in one year internship for getting Membership and Cop of ICan during the period of July 2016 to september 2016.

crash coursethe Institute of Chartered accountants of nepal conducted the crash course for Cap II and Cap III levels. during the crash course major subjects were taught. the number of participants and the date is given below.

Level from to no of students

Cap III september 4, 2016

september 22, 2016

22

Cap II september 22, 2016

october 4, 2016

90

Publicationthe Institute of Chartered accountants of nepal published revision test paper for december 2016 examination and also published suggested answers of June 2016 questions for Cap II and Cap III level. similarly, the updated the study material of Advance financial management of CAP III level.

career counselingthe Institute of Chartered accountants of nepal organized career counseling program in different colleges in Kathmandu valley to provide the important information to the students and make them aware about chartered accountancy education. during the program, various aspects of Ca education such as the eligibility criteria of enrollment, future prospects, recognition, membership criteria of the Institute and relevant information was

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briefed and discussed. this program was conducted by ICAN Officials. During July 2016 to September 2016 around 120 students got opportunity to get information on Ca education.

Accounting technician (At) Examination conducted in september 2016the accounting technician examination was conducted from september 18 – 22, 2016 in ICan Building, satdobato, lalitpur. details are as follows:

subjects Advanced A/c & management

A/c

Audit & Assurance

corporate & other

Laws

tax Laws

date 2016/09/18 2016/09/20 2016/ 09/21

2016/ 09/22

total applicants

7 7 7 7

appeared 6 6 6 6

examination of accounting technician is conducted on March and June twice in a year.

Result of CA Membership Examination June 2016the result of Chartered accountancy Membership examination held in June 2016 has been published in 15th august 2016. according to the result 20 foreign Ca degree holders were qualified for the membership of ICan. In this examination altogether 178 applied while 154 appeared the exam.

Result of chartered Accountancy Examination June 2016the result of Chartered accountancy examination held in June 2016 has been published in 15th august 2016. as per the result 262 students of Cap I level were eligible to join Cap II level and 104 students of Cap II level were eligible to join Cap III level. similarly, 42 students have passed the Cap III level examination. details of the result is given below

s. no. Level description Both group

first group

second group

total Pass %

1 Cap I total appeared

- - - 376 69.68

pass in exam

- - - 262

2 Cap II total appeared

695 316 314 1325 12.91

pass in exam

50 49 72 171

3 Cap III total appeared

212 168 131 511 22.11

pass in exam

9 25 79 113

member Affairs

membership, coP and firm Renewal statusThe status of total membership, certificate of practice and audit firms and renewal status from July 1 to september 30, 2016 is as follows.

category membership coP firm

total no

Renewal no

total no

Renewal no

total no

Renewal no

fCa/Ca 1002 604 737 345 650 325

ra- B 3379 1701 3147 1312 1669 1314

ra- C 1603 753 1471 636 841 637

ra –d 2283 1115 2091 1004 1210 1001

total 8267 4173 7446 3297 4370 3277

Registration of new chartered Accountantthe Institute registered 16 new Chartered accountant during the period of July 1, 2016 to september 30, 2016 pursuant to section 16(2) of nepal Chartered accountant act, 1997. the list of newly registered chartered accountant members is as follows:

List of ALL cA mEmBERs’

s. no mem no name

1 994 naBIna dhunGana

2 995 raJKuMar KhadKa

3 996 aMar KuMar ChaudharY

4 997 deepaK adhIKarI

5 998 sunIsChIt MoKtan

6 999 aBhIYan upadhYaY

7 1000 suMIta MaharJan

8 1001 sunIl KuMar das

9 1002 sushIla GhIMIre

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mou signed between icAn & icAEWthe Institute of Chartered accountants of nepal (ICan) & the Institute of Chartered accountants in england and Wales (ICaeW) signed on Mou on 3rd october, 2016.

With the effect of this Mou, ICan members who are qualified from ICAN with 2 years post qualification experience in audit firms can apply for the membership of ICaeW just by passing the following papers of professional level and completion of online ethics:

1. Business planning

2. Corporate reporting

3. strategic Business Management

4. Case study

similarly, ICaeW members with Cop, issued from ICaeW, can apply for membership of ICan by passing following two papers of Cap III level and completion of one year internship:

1. Corporate laws

2. advance taxation

on Behalf of the Institute, president Ca. Mahesh Khanal signed the Mou in witness of Immediate past president Ca. prakash lamsal & executive director Ca. Binay prakash shrestha.

10 1003 deepaK Bohara

11 1004 KshItIJ sharMa

12 1005 shuBha KaYastha

13 1006 arun sharMa

14 1007 utsaV Baral

15 1008 santoshI Khanal

16 1009 sarIta shrestha

information system Audit- Assessment test (isA-At) Result Publishedthe result of Isa-at has been published on 4th september, 2016. according to the result published two candidates Ca. Mahal sagar shrestha and Ca. ashim Bhatta were declared pass out of nine candidates. Isa-at examination was held on 25 June 2016

international news

Proposal for founder membershipIn the Initiation of enterprise financial Management association of China intends to establish International financial Management Council. In this connection, enterprise financial Management association of China has purposed the ICan to become a founder member of International financial Management Council.

the function of the Council will be to formulate International financial Management standards, to develop the Standard qualification for certified finance manager etc. once the Institute obtains the founder membership of the Council, the Institute shall be required to lead the matters of financial management in its country. In the initial meeting held on 15th september 2016 for the propose of establishment of the Council president Ca. Mahesh Khanal and Immediate past president Ca. prakash lamsal were present.

Signing agreement between ICAN and ICAEW.

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A glimpse of Activities

Documents

Volume 19 no. 1 hartered aCCountant · Coinciding with B paaward and oath taking Ceremony the Institute arranged half-day seminar on the theme “Recent Amendments in nepalese tax