Don’t Be Reactive - Be proactive: Solution to Mistake One
01 June 2007
Posted by: TaxFind™
Don’t Be Reactive - Be proactive: Solution to Mistake One
Basic tax compliance is not enough
Most taxpayers try to keep their affairs in order, but what they do not realize is that basic, usual tax compliance is not enough. Invariably there are so many other tax-related issues taxpayers do not recognize as risk areas. If they have never received any queries from the South African Revenue Service (SARS), taxpayers may believe those tax risk areas have not been identified and SARS has either accepted or overlooked them.This is an assumption taxpayers should never make, and yet it is probably one of the most common mistakes. Generally speaking, taxpayers are reactive when it comes to dealing with SARS, and this attitude costs them more in the long run.
Proactive Tax Risk Management
So what should taxpayers do?
The answer lies in the planning, implementing and execution of a Tax Risk Management (TRM) process that is proactive.The idea is NOT to be reactive, and to see tax as some historic event. Control of the tax environment commences with planning before the commencement of a business transaction, financial accounting event or operation.Failure to roll out such a project could result in negative tax consequences which cannot be changed retrospectively.
The tax team
The first step in the TRM process requires the appointment of a tax team.This team will most probably consist of members of the in-house tax department, a representative from each operational division in the business and independent advisors from the taxpayer’s legal team and auditors. The tax team’s initial function will be to determine (together with representatives from each operating division) the tax strategy to assist in establishing their risk areas.
The Tax Strategy
Tax planning strategies include:
•generating profits in low-tax jurisdictions or in tax-loss companies;
•extracting profits from high tax jurisdictions;
•placing expenses and debt in high tax jurisdiction;
•deferring tax payment dates;
•using fiscal and other incentives;
•maximizing benefits of double-taxation agreements;
•optimizing use of foreign tax credits and underlying tax rates;
•maximizing value of cash in local currency and exploiting effective hedging and repatriation strategies;
•recognizing that transfer pricing can add significantly to the bottom line by integrating dependable transfer prices in strategic business decision making such as acquisitions, divestment, mergers, intellectual property management and inter-company services;
•increasing shareholder values through international tax planning.
The SARS representative
Once a TRM strategy has been put in place, the relevant SARS representative needs to be identified as the point of contact between the business tax team and Revenue.It is with this person that all communication, outside the submission of usual tax returns, will take place. The SARS representative will be the recipient of all correspondence, and the taxpayer’s representatives must liaise with this person in order to build a solid working relationship and address its tax affairs.
On-the-radar screen tax issues
SARS should be requested to prepare a list of all outstanding tax issues pertaining to the taxpayer. These items could be referred to as being on the radar.All historical tax issues identified in the business as being problematical but not on the radar, must be highlighted for internal tax audit purposes.Typical historical problem areas will be indirect tax supporting documents (reflecting compliant invoices), tax and accounting provisions, structured finance transactions and transfer-pricing transactions.
Off-the-radar screen tax issues
Being off the radar does not mean these items should be ignored. If anything, the TRM strategy should cater for these issues in advance, before SARS at tempts to challenge something. In this way, the taxpayer will be well prepared to handle any queries.
Gathering the facts
The next step in the TRM exercise is to obtain all the relevant facts surrounding both on-the-radar screen and off-the radar screen issues.This involves procuring agreements (both draft and final), memoranda, minutes of meetings, resolutions,opinions and correspondence (both verbal and written). This is often the most time-consuming part, but it is also the most crucial because frequently a case is won on evidence contained in witness testimony and supporting documentation.
Transactions entered into by the taxpayer involve several role-players and generate significant volumes of documentation, which then end up dispersed in the possession of various persons.Taxpayers should be mindful that this is an inevitable consequence and so if they failed to do so during the negotiation stage then they should ensure the factual procurement is done as soon as possible.This entails obtaining every single piece of documentation, whether the taxpayer believes it to be relevant or not.Should SARS at a later stage request all the evidence, as it is entitled to do, it is the responsibility of the tax team to determine what is irrelevant and need not be disclosed.It is prudent to conduct this exercise sooner rather than later because one finds that with the lapse of time, documents are misplaced and key players move on and fail to inform others or recall where the documentation was stored.
Analysis of the facts
Once all the facts have been compiled, the tax team will be equipped to consider the issue holistically and determine the tax implications, if any. Where uncertainty or contentious issues exist, it is best to obtain expert advice.An objective opinion is useful for a number of reasons.Firstly, it can confirm the taxpayer’s treatment is correct. Secondly, if the taxpayer’s manner of implementation or compliance is not in accordance with legislation, the advice could provide the correct guidance, thus affording the taxpayer an opportunity to rectify its conduct.Thirdly, seeking an opinion will almost always demonstrate good faith and the absence of intention to evade or postpone the payment of tax.This will in turn assist the taxpayer as a mitigating factor in the event penalties and interest are ever raised.
Overall the aim of the TRM process is to address all the taxpayer’s outstanding tax issues in order to resolve them expeditiously with the aid of an amicable interactive relationship with SARS. If this process is managed properly, the result is a competent tax team who are at all times on top of the taxpayer’s affairs and aware of its exposure. Insofar as there is exposure, the team will have followed the correct measures in minimizing this and will be equipped to advance appropriate submissions to SARS.
The ever-present Revenue Service
Ultimately, SARS is not going away, and neither are your tax problems, so if you acknowledge them and put the right people in charge to handle them proactively you will be in a much better position than the unprepared taxpayer,who is caught off guard.
Source: By TaxTALK