Matters related to someone’s survival and paying taxes have historically drawn comparison. For instance, in his letter to Jean-Baptise Leroy, 1789, Benjamin Franklin earmarked that “in this world nothing can be said to be certain, except death and taxes”.
The importance of regular medical check-ups to track someone’s health has been told over and over again by doctors and other health experts. These check-ups enable identification of potential health problems at early stages and ensure prevention of long-term health illness which can sometimes lead to loss of life. Similarly, regular tax health checks can ensure the survival of a taxpayer’s business or organization.
Tax health check refers to the review of taxpayer’s tax and accounting records to establish the degree of compliance with applicable tax laws. Tax health check can lead into a number of benefits to a taxpayer which are discussed below.
Why Tax Health Checks?
With the increased tax risks i.e. (audit risk, compliance risk, operational risk etc.); frequent changes in tax laws, complexities of tax laws; ambitious revenue targets by the Government; recent rulings on tax cases etc. the need for tax health checks cannot be overemphasized. Tax health checks can help taxpayers to achieve the following:
i) Preparation for a Potential TRA Audit
Taxpayers can undertake a tax health check as part of preparation for a potential tax audit by the revenue authority. This is a house keeping exercise to identify areas of non-compliance with tax laws e.g. returns not filed, taxes not paid, reconciliations not being done etc. and correct them before a visit by tax officers to avoid interests and penalties or manage cash flows on tax payments. For instance, the recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 exclude interest or penalty established from a tax audit or investigation from remission. Thus, identifying areas of non-compliance before a TRA audit may enable application of remission of qualifying interest or penalty.
ii) Identification of Tax Risks and Instituting a Robust Tax Risk Management Framework
Tax risks refers to the risk of losses resulting from overpayment of taxes (principal taxes, interest and penalties) or failure to take advantage of tax savings opportunities in the tax laws. Tax health check can identify areas of high-risks so as controls can be instituted to mitigate the risks. These can be on areas of non-compliance with tax laws e.g. on corporate income tax, withholding taxes, VAT, excise duty etc. weak tax controls on tax management e.g. lack of policies, adequate staff etc. This can provide an opportunity to strengthen tax internal controls by evaluating the effectiveness of the existing tax risks management framework and instituting a robust framework. This will enable systematic identification, assessment and mitigation of tax risks.
iii) Opportunities for Tax Savings
Tax health check can identify areas where the organization is not fully exploiting tax saving advantages. These can for instance be failure to take advantage of tax benefits in tax laws e.g. on incentives, allowances etc.
iv) Done as part of Tax Due Diligence
Tax health check can save as a tax due diligence for cases where a potential investor is intending to acquire an entity. It will help to identify potential tax liabilities of the acquiree business and form one of the considerations in deciding whether to acquire the entity or not.
v) Assist in VAT and other Tax Refunds
Tax health checks can be undertaken as part of a process to obtain tax refunds. The health check will confirm whether the amount the entity expects to be refunded is genuine in terms of being fully supported and in compliance with the requirement of tax laws regarding refunds. Measures can be taken to ensure missing evidences are obtained to ensure appropriate refund is obtained.
Just as regular medical checkups for a person before illness is important, proactive regular tax health checks for taxpayers to avoid or minimize the costs associated with financial losses and missed tax savings opportunities are as important. The recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 which exclude interest or penalty established from a tax audit or investigation from remission has also raised the importance for taxpayers to regularly undertake tax health checks to avoid paying unnecessary interest and penalties among other advantages.
Mr Straton Makundi is a Partner with Auditax International