Tax is seldom straightforward. Tax regimes and compliance regulations change rapidly. The Revenue Authorities around the world are increasingly becoming aggressive as they seek to achieve and/or surpass their set revenue targets. In pursuit of this tax audits are now commonplace often resulting in backdated tax demands that may be significant- in many cases running into millions of shillings as evidenced by the numerous reported cases in the media. The risks lie in principal taxes, penalties, fines, interest and in some limited cases criminal prosecution for economic crimes.
It is imperative therefore, that businesses should be proactive and take all the necessary steps to minimize non- compliance risks and tax exposures.
Audits will normally fall into three categories:
- Compliance audits: are spot check reviews that take the shortest time. The review team will focus mainly on compliance with regard to returns filing and payments without much attention on how the figures were arrived at. The target records for inspections are not many and the exercise will last just a few days.
- Comprehensive in-depth audits: are reviews covering many tax heads and multiple issues recorded in the books of accounts. As the name suggests it involves a scrutiny in detail of all transactions to determine correctness or otherwise of the reported taxes. It calls for production of almost the entire records kept the business including director’s personal bank accounts. The review period may extend from a few weeks to several months.
- Investigative audits: Are audits conducted as a result of a report of unusual, suspicious or fraudulent activities.
A tax health audit – usually conducted by external auditors other than the revenue officers involves carrying out a detailed tax compliance review of all, or specific in-house taxes borne and administered by a company. Common taxes under this category are: Payroll taxes, withholding tax, VAT, corporation tax, customs and excise. It gives confidence in the level of risk a business has in relation to taxation in the following three ways:
- Establish any inherent tax risks through an in-depth and systematic review of your books of accounts;
- Establishing any risk of, and quantifying any potential back-taxes discovered during a review; and
- Providing advice on the mitigation and settlement of any such liabilities including engagement with the revenue office for a favourable settlement plan.
The tax authorities encourages voluntary/self- disclosure of back taxes and will in most cases exercise leniency by way of extending amnesty on fines, penalties and interest. This is possible where a voluntary disclosure is made, principal taxes paid in full and a formal application for waiver is lodged with the Commissioner by the defaulting taxpayer.