A recent study conducted by a prominent international accounting firm found that although 87% of South African corporates took tax risk management seriously only 16% had a tax risk management strategy.Daniel Erasmus of DE Professional Consultants talked to TAXtalk about the risky tax behaviour of South African companies and the seven tax mistakes most commonly made in the corporate landscape.
The 7 habitual tax mistakes are dealt with at www.dnerasmus.com where taxpayers can complete a survey to determine how many of the 7 habitual tax mistakes they are making in their businesses.The 7 solutions can be summarised as follows:
•Don’t be reactive, be proactive with tax risk management;
•Don’t do it on your own, get a Tax Team;
•Know where you are going, formulate a tax strategy;
•Insular tax compliance must become more transparent;
•Defective transactions can only be remedied through more facts;
•Faulty financial accounting can only be fixed by internal audits;
•Ineffective interaction with operations can be resolved by communication.
To get a clearer understanding of the issue at hand, TAXtalk asked Daniel Erasmus the following questions:What is meant by tax risk?
DE: Traditionally the tax compliance division of a company deals with tax risk.The tax compliance officer makes sure that the tax returns are 100% up to date and that correspondence with SARS is dealt with. Companies think that if their compliance is perfectly in order, tax risk is not an issue. What they fail to recognise is that approximately 60% of a company’s tax risk lies in other areas.Having worked with a large cross section of companies through the years we have determined that tax risk lies primarily in three areas, discussed below.
Firstly, there is tax risk involved in big transactions such as mergers, acquisitions, financing, structured
financing and transfer pricing. Furthermore there are risks involved in other transactions, as well as in smaller cross-border transactions.
Take the issue of structured financing for example.Say a specialist bank approaches a company with a tailor-made package to deliver lower cost on financing.The deals involved in achieving such a reduction are fairly complicated. After having received all the facts, a prudent taxpayer would seek a tax specialist to get an opinion.The tax advisor sees to it that the company will not fall foul of the law, especially when it comes to tax-avoidance provisions and then gives the deal a thumbs-up However, tax isn’t the only area of concern in such a deal.Documents are developed and drafted and minor changes are made. In the end there is a flurry of activity and great urgency to conclude the deal.Often no one has bothered to take the final agreements back to the tax specialist to make sure that it matches the original tax verdict 100%.
Many of these transactions were executed seven to 10 years ago.No one has conducted a post tax and legal audit to see that all the transactions have been wrapped up completely.Many mistakes are made because everyone’s attention has shifted to the next deal.
The average structured finance transaction would for example result in a R5 million saving.Once the company is exposed to an income tax audit, this R5 million benefit becomes a liability.Add 200% penalties to that, as well as interest and the original benefit could turn into a R30 million tax liability over ten years.
How can a company manage tax risk?
DE: Tax risk management means being proactive. It is imperative that a business should create an in-house Tax Team for tax risk management consisting of the chief executive officer (in a smaller company), definitely the chief financial officer, the tax compliance officer, an outside tax auditor and an outside tax attorney.Tax risk management means that this team is given the authority to proactively brainstorm and determine the tax risk, not just the tax compliance risks, in areas such as transactions, financial accounting and in the operations divisions.Take financial accounting, for example.A company decides to implement SAP and uses the closing balances of the previous system as the opening balances of the SAP system, dumping the old system.SARS asks where these opening balances come from and there is big trouble.Tax risk in the operations divisions should also be considered.Operations are the heart of a business from where profits are generated.Many of the day-to-day transactions in the operations divisions are not communicated to the tax division and this is where problems can creep in.
How would a company implement a tax risk strategy?
DE: The Tax Team should get together with all the relevant facts and brainstorm, determining which tax issues are problems and which aren’t.Depending on nature of the problem the Tax Team will determine what advice to give to executives, who will then take a final decision on the matter.It is of the utmost importance to develop the tax skills base internally.A relationship should be forged between a business and SARS.It often happens that SARS looks at the involvement of an outside consultant with suspicion as though the company has something to hide.A tax risk strategy should also be well documented so that there is a smooth transition, should a new person take over the internal tax compliance job.
What are the issues around legal privilege?
DE: A very good reason exists why one of the key people in the Tax Team should be a tax attorney.If a dispute leads to litigation, the material being investigated falls under legal privilege. This legal privilege is a useful vehicle in the early stages of the tax risk management process because if SARS comes knocking, you can stall the process until all the facts have been properly analysed, and a solution sought.Often qualified accountants are placed in an embarrassing position when they are forced to make information available at a sensitive stage of the enquiry.
Who should attend International Tax Institute courses to learn more about the 7 habitual tax mistakes?
DE: These courses should be attended by CFOs, tax compliance officers, and tax consultants wishing to broaden their field of expertise.These courses are also excellent for SARS auditors to bridge the gap between taxpayers and SARS.In-house tax departments should develop a relationship of co-operation with SARS as SARS is the silent partner in every business.The relationship with this silent partner should not be an adversarial one.Finally, it is the first priority of any business to return maximum value to its shareholders.In fact, a business is duty bound to legitimately minimise tax exposure. But it is important to do it in such a way that you will not constantly struggle with your silent partner, SARS.
Source: By TaxTALK