In the last article, I reviewed why management of tax risk is critical to business in their quest to protect their profitability. In this article, we will look at some of the mistakes that companies make which result in significant tax risks for business.
Irrespective of the views you hold, tax will always remain a large expense for any successful business. This expense becomes significant depending on the size of the company. Revenue authorities will always focus on their most successful or large taxpayers to collect 80 per cent of their revenue.
The trend always follows the 80:20 rule, where 20 per cent of taxpayers contribute about 80 per cent of the taxes.
Governments place major focus on tax collection because taxes are critical to state building. Governments need to collect taxes to fund social programs and for public investments to promote economic development. Tax is very important to Governments and this is the reason why they have imposed stiff penalties for those who do not pay their taxes.
There are a number of mistakes that taxpayers make in dealing with tax, which creates significant tax exposures for the company. Taxpayers tend to be reactive to tax problems and risks. In other words, they wait for tax problem before they react. If their action is triggered by an RRA audit, they start from a weakened position.
Being proactive involves a number of steps such as having a tax team (this would be people in the organization who can review company’s tax compliance), having a tax risk assessment strategy and determining potential tax risks that business face on an ongoing basis.
The objective of the process is to eliminate tax risks before they become disputes. Other forms of being proactive include annual tax health checks to identify tax exposures.
The second mistake that taxpayers make is to manage their tax risk without outside professional assistance, except on reactive basis.
This contributes to the mistake discussed above. As a result, the business is deprived of an opportunity to get professional advice or gain from tax experts’ wider experience.
Having a qualified tax consultant can act as a sounding board and provide guidance to the company in their quest to manage risks.
Most businesses also lack a road map on how they want to manage the tax risks. They believe that they are compliant without a tax risk management strategy.
Failure to involve key stakeholders such as the CEO, CFO, the board committee, tax advisors and legal team is another mistake that enhance the level of risk.
Tax officers/managers are often left alone and required to be on top of tax compliance and be conversant with tax and regulatory changes.
However, their ability to be effective is stifled by the fact that most lack the authority to access key areas of business in order to provide the required input. All stakeholders should be involved in managing tax risks. This will ensure support for the programs put in place to manage tax risk.
There is also lack of communication between the tax team and rest of the business. The tax manager mainly focuses on processing of the returns and relies on numbers supplied by financial accounting.
This disconnect is the reason why research shows that tax compliance (i.e filing of tax returns) only covers 40 per cent of total tax risks in business.
The other 60 per cent is hidden and can only be exposed through system process of people – to –people communication and not just numbers. This calls for new communication channels to be installed in business to put an end to this disconnect.
Next week, we will consider how corporate social responsibility applies to tax.
Nelson Ogara is a Senior Tax Manager, PwC Rwanda