A Principled Approach to Avoiding Common Pitfalls in Management of Tax Risks
One of the key resources in any organisation is funds. It is the objective of every organisation to channel its resources for best usage. In many cases, organizations have suffered financial losses due to unforeseen tax risks, resulting into divergence of resource usage from the original course. Tax risks could be substantial depending on several factors such as the base value or
principal amount involved, time delayed to identify and resolve the risk, the type of tax in question, or the nature of the risk (deliberate or an error). In addition to tax risks emanating from organisations’ day to day operations, there is also uncertainty on how tax systems will respond to continued effects of globalization on businesses– and this exacerbates the problem.
The concept of tax risks is familiar to many organizations, as witnessed by the large number that have in place tax compliance strategies. However, there is still a significant number of cases of financial losses resulting from tax risks. This begs the question; why do organisations suffer from substantial tax risks if they have tax compliance strategies? The possible answer lies in the three principles that I will discuss below:
Our experience has shown that most tax strategies designed by organisations are not comprehensive enough to cater for common tax risks, let alone tax risks associated with our fast-paced world. Most tax strategies are set to monitor tax compliance in the narrow spaces of payment of taxes and filing of tax returns to meet due dates.
Many organizations have historically considered tax issues to be within the purview of tax specialists and therefore they are not embraced across the board. This compromises the evaluation of tax in various business ambits. With increasing attention on tax in Tanzania, the potential impact of tax risks reaches far beyond the tax department or tax specialists, highlighting the need for tax issues to be handled collectively.
In several circumstances, organisations have become aware of tax risks upon TRA audits or other internal or external reviews. At such point in time, the risk of a financial loss has far materialized as such audits or reviews are usually based on historical data. It is also common for organisations to self-assess their taxes upon computation of respective taxes for purposes of meeting the taxman’s deadlines. These assessments are based on already-booked transactions and may attract additional tax liabilities in cases where all applicable taxes were not taken to
account when the transactions were undertaken. For instance, there is a risk when any new business activity is carried out without being evaluated from tax perspective. Specifically, the risk here could be incorrect alignment of applicable taxes hence leading into over or under payment of tax. Many organizations suffer financial losses simply because a tax specialist is not involved in reviewing activities at their initial stages.
Additional tax liabilities may further translate into deterioration of shareholders’ returns, organisations’ investment plans and staff bonuses, among other things. Tax risks may also result into reputational risks depending on how they are handled. It is against this backdrop that organisations need a shift in their tax compliance strategies to tax risk management systems that evaluate business processes with a 360 degrees’ view. Organisations must also frequently review their tax risk management systems in order to maintain their relevance in this fast-paced world.
A comprehensive tax risk management system has at least three crucial elements which will be covered separately.