Managing tax audits and investigations

Are you an auditor or the one in charge of your organisation’s financial affairs? Did you make New Year resolutions to ensure smooth running of the company? I know this is not the best subject to bring-up, especially at this time of the year when you have positive and forward-looking New Year’s resolutions. However, for a chief finance officer of a company that has received a huge tax bill in the past could consider managing tax audits and investigations as one of their New Year’s resolution. A number of accountants I talk to say the prospect of a tax audit is one of the most stressful events that can happen to any business. They acknowledge that for every 2-3 years in business, they expect a tax audit from the Rwanda Revenue Authority (RRA). But why the frequent tax audits? The answer is simple; the tax body has stiff collection targets to meet and is being pressed to squeeze more revenue from its tax base to meet the Government’s financial needs. Further, with the increasing mobility of economic activity, the Government is now keen to defend its tax base against inappropriate profit-shifting and other tax avoidance schemes. Therefore, it is becoming more aggressive in monitoring tax avoidance schemes. Meanwhile, the RRA is also attempting to enhance relationships with taxpayers to improve voluntary compliance. This approach has included establishing open dialogue with the business community through the Private Sector Federation, and attempting to address tax issues in real-time.Companies that opt to embrace open communication with RRA and accord high priority to compliance obligations can greatly reduce the possibility that they will need to defend their tax positions at the audit stage or beyond.However, not every organisation is interested in complying fully with tax requirements. So the tone of your relationship with the RRA depends on your organisation’s philosophy toward taxation and tax risk. Does your organisation take all steps possible to deliberately reduce its tax and, thus accept the toll of harsher audit scrutiny in return for potentially greater tax savings? Or does your organisation take a more co-operative and prudent route, paying potentially higher taxes in return for greater certainty and a lighter audit touch? Regardless of the quality of your relationship with the tax body, appropriate strategies for response and compliance are critical. I believe taxpayers should pay the right tax, not too high, not too low, but the right tax. Therefore, when dealing with the RRA, you need to be well prepared, well-organised and in complete control of your facts and issues. At PricewaterhouseCoopers (PwC) we encourage companies to take a cradle-to-grave approach to analysing and addressing tax risks. Therefore, managing of tax audits and investigation should not be restricted to the period when a company receives a notice of audit from the RRA. This should be an ongoing process.For example, when planning for a major transaction or reorganisation, consider and prepare your possible responses for each stage of the tax dispute continuum. This means developing strategies and supporting documentation for managing tax audits and queries and determining the optional route for resolving tax disputes and controversies- whether litigation or amicable settlement.When executing contracts, and any non-routine documentations, consider how they may be seen from a tax auditors’ point of view. Undertake a thorough tax risk analysis to anticipate and address all possible questions and alternative arguments so you can make sure all your bases are covered. The analysis should assess whether transactions and strategies are in line with the company’s business goals and appetite for tax risk.Taking a comprehensive, proactive approach will ensure you are well-equipped to face any situation and help maximise your chances of a favourable outcome.Have a blessed New Year.The writer is a tax manager at PwC Rwanda.