Tax risk management strategy - The 7 Habitual Tax Mistake Solution 3
01 July 2007
Posted by: Author: Allen Ross
Tax risk management strategy- The 7 Habitual Tax Mistake Solution 3
Compile a tax risk management strategy - know where you are going
The majority of the decisions a company make will have some kind of tax implication.Knowledge and understanding is the key in managing a company’s tax liability.So what does this involve? This company’s tax team needs to develop a strategy with clear goals in order to direct the organisation in the most efficient tax manner.Understand that developing a tax strategy does not mean avoiding taxation; it is a means of identifying where the risk lies.Without a clear strategy that everyone is aware of, miscommunication will result.
In all organisations there will be decisions that have been made in the past, those currently being made and decisions that will need to be made in the future.These decisions need to be carefully analysed and certain tax-risk exposure areas must be identified and prioritised.In order to develop such a strategy, a SWOT (strengths, weaknesses, opportunities, and threats) analysis must be conducted. One should focus primarily on the threats and weaknesses and then take a look at the strengths and opportunities.
On the radar screen
It is important to identify the different areas where the risk lies.This is the job of the tax team which has to look at all aspects of the organisation. Start off by looking at the current risk exposure.The obvious starting point would be to assess anything that is currently on the radar screen.For example, are there any audits under way? Are there any investigations into any aspects of the business? Are there any outstanding queries with SARS? These will all be matters that SARS will be aware of.The team should then go further: take a look at company records and compile the information that you gather.In all likelihood there will be other aspects that SARS has not picked up on where you may lie exposed.Once the current standing of the organisation has been assessed, take a look risks that are off the radar screen.
Off the radar Screen
Of f-the-radar-screen activities are of particular importance here, i.e. activities that were never picked up by SARS or you, for that matter. Make a note of risk or possible risk that you are aware of and things that concern you.They will also be risks that you are aware of but have simply done nothing about.These risks must be assessed and prioritised with a clear strategy developed for each risk area.The risks must also be prioritised with the most pressing risk being dealt with as urgently as possible.
Strengths and opportunities
Don’t forget the strengths and opportunities that have been identified.On the positive side of tax risk management an organisation can look at its effective, tax rate compared with other similar businesses and determine whether it is paying more or less the same tax in South Africa and abroad.If the tax paid is significantly higher, something needs to be done! Start by scrutinising the expenditure and allowance for assets to ensure that you can take advantage of any benefits allowed to them by legislation.For example, practice note 19 and 39 issued by SARS states that small items of less than R5000 can be written off for wear and tear purposes in the year of acquisition.Thus, through careful planning some businesses may be able to claim a full wear and tear write off on small items that cost less than R5000 in the year of acquisition, as opposed to writing them off over five years, for example.
Generate a report to develop a strategy of the road ahead
Now that you have unpacked the past and current affairs of the organisation you will start to have an idea of what your strategy is and know where you are going.It is the knowledge and information gained that dictates the future.A report must be generated on the knowledge that you now have of your risk and objectives must be set.The following tax risk areas may have been identified:
•Financial accounting risk;
•Management risk; and
The objectives that you set must be with reference to the above risk areas.High- level objectives and secondary objectives are set. Finally, also with a strategy going forward, review the appropriateness of the current accounting firm, tax advisors and recommend changes to the relationships and firms, if necessary.Also don’t forget to communicate and involve the entire tax team in this process and communicate the results to them.In this way the company will make moving forward a risk-free activity.
Source: By Allen Ross (TaxTALK)