If you asked people who do their routine body health check-ups they will tell you that it is very important to them than having luxurious tours to the most fascinating cities of the world.
Likewise, having a Tax Health Check (THC) for your company is very important in avoiding or reducing potential future tax exposures and accumulation of unnecessary interests and penalties. THC should be one of the key items of a company’s annual tax planning.
Like Warren Buffett once said ‘only when the tide goes out do you discover who’s been swimming naked’, it is advisable that THC be done periodically to establish the level of the company’s compliance with the tax laws and tax procedures.
This is especially because of continuous pressure to amend tax laws and procedures by the tax administration. In Rwanda, a tax audit can be conducted for the past five years and this requires examination of records kept for five years.
After filing tax returns with RRA, the tax administration will conduct a quick review (desk audit) of the returns together with the financial statements (FS) with a view of identifying inconsistencies in them.
If there is any indicator of tax not filed properly in accordance with the law, RRA will issue assessment notice.
Every item of FS is critically analyzed by the tax authority and fully reconciled to be sure whether filing complies with the tax law and tax procedures of Rwanda.
THC in short is about conducting thorough in depth self-assessment in order to establish the compliance status of the taxpayer. The taxpayer engages the services of tax advisers in order to find out whether he/she complies with all tax requirements.
This adds value to the taxpayer in that if there was an oversight or misinterpretation of the law when filing the tax returns, this can be corrected at this stage.
The value added is that the taxpayer will not pay understatement penalties and rectification of the tax return will stop subsequent accumulation of interests which are computed monthly.
It is not convenient to the taxpayer to keep records for five years waiting for the tax audit.
If an error or understatement is discovered after five years, interests are computed from when the error was made. In fact, in most of the assessments conducted by RRA, you find that interests and penalties are heavier compared to principal tax.
This may be one of the reasons\ why people say taxes are higher in Rwanda compared to the rest of the East African Community Partner States. This is not to say that there are no tax penalties in the partner states but because the taxpayers in these countries have embraced the culture of tax compliance, they use tax experts to conduct THC regularly and you find that they pay less interests and penalties in case of a tax assessment.
During a tax health check, attention is paid to key areas that most taxpayers do not pay attention to such as change in ownership of the company structure, importation of services, and use of non-tax residents in conducting transactions.
Sometime the income tax law may not be clear on how transactions should be treated especially with the absence of the Transfer Pricing (TP) rules and regulations in Rwanda.
In determining income tax payable, the law is not clear on what are allowable and disallowable expenses.
The law simply says that for an expense to be allowed, it must be incurred in the normal course of the business. For corporations with corporate governance, expenses are incurred in the normal course of the business in order to maximise the shareholders’ value.
This may not necessarily be in tandem with what RRA perceives to be the normal course of business especially that the tax collectors are not in business and are simply on a collecting end. A tax health check by a tax expert will alert the taxpayer where the smoke may come from and a compliant taxpayer will do all what it takes to rectify the situation before the smoke become fire.
Tax health check should be part of tax planning and tax education. The findings of the THC can assist organisation to train its staff in finance and procurement, HR and internal audit on tax aspects that lead to noncompliance especially that these are the teams that should pay attention on tax matter.
One would conclude that tax is like birth and death. These two things must happen.
Similarly, we must be compliant and pay the proper amount of taxes we are supposed to pay, not waiting for RRA assessments. Rwanda’s tax regime is on a self-assessment basis. You are therefore encouraged to use the services of tax experts if you are to contain your effective tax rate.
Charles Tumusime is a Tax expert at KPMG Rwanda