Tax risk management still remains an alien term for many businesses in East Africa including Rwanda. This is because it is often given a backseat. In most cases, the finance director or finance manager becomes involved in tax issues when there is a notice from Rwanda Revenue Authority (RRA) planning to undertake an audit or worse still, when a huge assessment has been raised by RRA and requires to be addressed. However, tax risk management goes beyond merely filing monthly tax returns and annual returns or having a tax officer who deals with local tax compliance issues.
Tax risk management requires a clear strategy to manage tax risks and a tax function that is involved in providing technical tax insights for a wide range of business issues. This value adding service can also be provided to the organization through a strategic partnership with an external tax advisor. Today’s business environment forces businesses to deal with multiple challenges and tasks that requires a change in approach to managing tax.
Research has shown that over 95% of business transactions have tax implications. In addition, revenue authorities worldwide are becoming more vigilant and have devised effective methods for collecting back taxes as a result of non-compliance. With the business environment becoming increasingly complex, the traditional role of tax officers (whatever title they may have in the organization e.g CFO) which tends to largely involve managing ongoing compliance matters and defending technical positions during tax audit cannot fully manage tax risks. The present role of tax officers mainly focuses on the past, but in most cases they lack systems to manage the present or the future. In most instances, there is no insufficient consideration the tax implications of non-routine business transactions when making business decisions.
At the global level, tax risk management is gaining more attention and prominence than it received a few years ago. A number of recent global surveys of CEO has consistently ranked tax and compliance with regulations, among the top 5 risks that business face. As a result, businesses are adopting a proactive approach to management of taxes to mitigate future risks that may arise. Without proper management, tax risk can quickly erode a company’s profitability. For example, an RRA assessment that results in significant tax liabilities would mean that prior year profits were overstated and that any dividends declared may not have been correct.
To assess whether you have a tax strategy for your business and whether you are able to manage your tax risks, you need to ask yourself the following questions: Do we know what taxes we pay/collect (our total tax contribution) to Rwanda Revenue Authority? Do we have a documented tax strategy? Is the role of finance department and tax officers clear as related to dealing with tax? Do we have sufficient staff resources with appropriate skills to deliver on the tax strategy? Do we understand where the major tax risks in our business reside? Do we have a process for evaluating tax planning ideas or identifying tax implications of new or unusual transactions in our business? Do we have reliable tax advisors whom we seek advice from when required?
If response to any of the above questions is no, then your tax risk management process is not adequate and requires review. This means that a visit from Rwanda Revenue Authority to review your financial and affairs would not deliver good news. Over the next articles, we will look at tax risk management in more detail including how to identify the potential risk areas and to have an effective tax function.
The author is a Senior Manager, Tax at PwC Rwanda