Some Questions Businesses Must Answer
Businesses need to understand that a tax audit or investigation by tax authorities does not necessarily have to result in additional tax to be paid by the business if appropriate investment is made in the right things
It is expected that ramping up tax collection would be one of the default options to make up the deficit in revenue arising from the crash in crude oil prices. Thus, in the same manner that the tax authorities would feel the heat, businesses would not be spared. More than ever before, businesses will have to adopt a risk-based approach to managing their tax affairs.
Businesses, the world over, face different kinds of risks which may be intrinsic to the business or geographical due to location. Common risks that businesses face regardless of country of operation include market risk, liquidity risk, resource risk, material risk, asset risk etc.
Businessmen are often more concerned with the foregoing risks and pay scant attention to tax risk or the need to manage it. Avoidable tax liabilities which encroach on a business represent a leakage in the profits of such businesses. The level of such liabilities determines the significance of the leakage and impact on bottom line as well as cash flow. While it is impossible to divorce business from risks (since the mantra is “no risk, no reward”), knowing the risks provide opportunities to manage them and improve the probability of creating and/or enhancing value to shareholders and other stakeholders in that business.
It is the discretion of managers of businesses to determine whether to carry out an enterprise wide review for risks or adopt a disaggregated approach which focuses on addressing each risk as identified or as they arise. Whatever the approach, what is not in doubt is that the assessment of tax risk triggers in the business may be preoperational and/or post-operational.
An unmitigated or unaddressed tax risk must be recognised for what it is: a threat to cash flow and leakage to the bottom line. This imposes a duty on managers of businesses, to acknowledge this risk and take steps to address it.
In this regard and with the anticipated increase in revenue drive by tax authorities (through greater frequency of scheduled tax audits and investigations), managers of Nigerian businesses must challenge their approach to the business tax affairs with the following questions:
- What is the strategy of the business? Such a strategy would define the business's focus and dictate the resource requirements. This would drive an acknowledgment of the tax function as an important part of the business and avoid catch up on tax issues by ensuring that appropriate sensitivity to tax is in the company's DNA.
- What is the fiscal profile of the business? That is, tax position; actual tax risk triggers; tax assets on the books (unutilized tax credits, unutilized capital allowances; unabsorbed losses); tax audit open years; adequacy of tax provisions etc.
- What is the compliance level of the business – is it high or low? Businesses need to understand that a tax audit or investigation by tax authorities does not necessarily have to result in additional tax to be paid by the business if appropriate investment is made in the right things.
- What is the level of debt in the business and is it optimal? Cash is the oxygen of business. It therefore matters how the business is funded and whether optimal mix and sources are being leveraged.
- What is the level of fiscal incentives in the business? It is possible from a wholistic review of the business operations to determine whether or not the existing incentive framework is adequate for the business.
- What is the effective tax rate of the business relative to competition? This is important as it may reveal where the business is dropping the ball relative to its competition. It may also confirm or deny whether tax efficiency is a priority for the business.
- Is the business eligible for tax refund? Yes, tax refund is now possible upon application and successful completion of the claim verification tax audit exercise by the tax authorities, in this instance, Federal Inland Revenue Service (FIRS).
- Does the business have a competent tax function? The in-house tax function must be anchored by a competent and experienced tax professional supported by other able staff. And where the tax function is outsourced, then the business must ensure that appropriate service level expectations are defined.
- Does the business have a proper documentation & retrieval system? A proper documentation and retrieval system is necessary. The business' filing and retrieval system/process for supporting documents in respect of its transactions must be adequate. A business that has challenges in retrieving the relevant supporting documents for its transactions in particular years of assessment already lets itself down for tax audit/investigation purposes.
- Who is advising the business on tax? Whether or not the company has a competent in-house tax function, it must periodically engage with competent tax advisors and tap into their experiences on the tax issues facing the business.
Given the changes in the current business environment, it is only prudent for businesses to be proactive in managing the incidence of tax risks in their operations to avoid bleeding of scarce cash.
According to an ancient but relevant wisdom: A stitch in time saves nine.