Pro-active compliance to manage Tax Risk
Before the lockdown due to the Covid-19 pandemic, the URA was carrying out tax audits by way of requesting taxpayers to submit information in both soft and hard copy to their offices to support the income tax declarations or raise assessments.
This request is not different from the approach that the URA deployed in the last 3 years by requesting for clarity from taxpayers regarding filed income tax return and these include the following types of reviews;
* Return Examination
* Return Review
* Compliance Advisory
The URA has resumed the tax audits for the particular tax heads which are usually portrayed as short audits. While these short audits may seem isolated and unharmful, we understand that they are based on specific risks raised by the URA IT system. These short audits usually trigger comprehensive audits if they are not managed well or if the compliance is not managed in advance for the taxpayer.
These short audits are generally expected to last for 1 month, and beyond that, the URA starts to threaten the possibility to raise assessments based on the variances raised by their IT system or comprehensive tax audits. However, in practice, the short audit takes about 3 to 4 months for taxpayers to deal with the URA requests and perform the necessary reconciliations. The delay is generally due to the lack of understanding of the clients' businesses on the URA's side and limited exposure to the practical aspects of managing particular operations. The above shortcomings coupled with the low number of tax officers compared to the taxpayers are making the short audits harder to conduct and expensive to manage.
If the current practice is maintained, the URA may not have sufficient capacity to conduct audits for all taxpayers within the 5 years that are stipulated in the tax laws. However, recently, we have seen the URA involving Audit firms and tax lawyers to assist in managing compliance. The URA is requesting taxpayers to seek tax health checks from the tax agents and upon completion of the health check, the client is required to share a copy of the report with the URA. This is a good move!
The URA hopes to rely on the reports prepared by the tax agents to establish if there is a risk to be investigated further. This is, therefore, going to increase the request of tax health checks from clients especially those that are not ordinarily in our tax portfolio since there is a level of independence expected while performing a tax health check.
As a tax team, we are emphasizing the review of the tax risks during the preparation of the income tax computation. As the URA increases the checks on taxpayers, we are constantly amending the tools that we use during the preparation of the tax computation to keep up to speed with tax changes and newer risks.
We will be conducting training sessions for our clients so that we improve on the engagement with current tax risks and not to wait for the statutory audits or tax reviews to flag the non-compliance. This will be done via a training session to our clients since they need to be more aware of the potential exposure via an interactive presentation and to potentially introduce a quarterly review session for high-risk clients to increase the engagement with clients and their compliance in real-time.