Tax authorities have made the enforcement of tax compliance a top priority and this is evidenced by the established audit teams who ensure that they “collect their fair share.” Tax authorities are not only looking for accurate and timely filing of tax returns but also for indications that organizations have effective tax functions and governance structures in place.
Simply stated, tax audits are procedures conducted by the officials of a revenue authority whose primary objective is to ensure that, accurate taxes are paid according to the tax laws and procedures.
Typically, a tax audit is conducted on the company or individual’s income, transactions and expenses and in each instance, the company or individual in question is notified before the process begins. The reality is that, if not well prepared for, tax audits may be time-consuming to deal with, not to mention unexpected pitfalls leading to more scrutiny on the company’s accounts. So then, how should taxpayers prepare for a tax audit?
Taxpayers have to keep abreast with any changes in the tax legislation to avoid any surprises during a tax audit. Recently, the Rwanda Tax laws (for example the Income tax, Value Added Tax (VAT) and tax procedure laws) have undergone several amendments to seal possible loopholes. This, in turn, necessitates a more controlled and organized approach by companies, which will help them handle the audit process as it takes place and ensure that the process is conducted collaboratively.
Perhaps of the biggest challenge taxpayers face today is lack of an in-depth understanding of the whole tax audit procedure, its importance and their role in the whole process. As a result, most taxpayers are not well informed about tax laws and procedures and therefore, penalties and noncompliance charges after the tax audit become an inevitable consequence.
To maximize profits and achieve shareholders primary objectives, such as value, growth and efficiency, companies need to reduce unnecessary expenditure, fines and penalties which are disallowable expenses as per the Rwanda tax law. At a minimum, it is necessary to meet the filing and payment due dates.
It is also imperative to have appropriate administrative procedures that sets out the process under which the computation and declaration is done and the review procedure of the same should form part of the routine process. For instance, an error in the calculation of the income tax liability such as, use of incorrect tax depreciation rates or incorrectly treating an expense as tax deductible will lead to an incorrect income tax return and consequently underpayment of Corporate Income Tax. However a review of the Corporate Income Tax Computation by a senior official may help spot the error and correct it beforehand.
In the same spirit, companies should consider investing in well trained accountants who understand at the very least, the basic principles of taxation. According to the tax procedure law, the description of the assessment procedure without notice states that an assessment without notice may be applied in a period of five years, starting from 1 January, following the tax period and the period shall be of ten years in case of tax evasion.
Logically, five years is ample time for significant changes to happen in an organization and in most cases, during this five year period, accountants may be replaced through restructuring or even attrition. Tax computations should therefore not be an onerous task if they are performed by appropriate personnel who are well-briefed on their responsibilities.
In addition, strong collaboration between tax officials and finance decision-makers will enable the identification of potential issues and opportunities, such as increased capacity to meet compliance requirements. It is therefore a case of having better internal systems in place, than just abiding by the tax laws.
Tax audits are expected to be more enforceable as the government continues to seek more revenue to boost the economy. This mandates that companies establish a robust tax function because tax authorities, through tax audits, will want to confirm upfront the company’s capability with respect to compliance. Companies should therefore take a more proactive approach and ensure readiness for tax audits.
Aimée Dushime is a tax specialist