Tax planning

Tax planning - A note to business leaders

Do tax authorities assess “artificial” tax liabilities on businesses during tax audits to meet their collection targets as commonly perceived or is it the case that companies do not know what taxes to pay in their normal course of businesses and end up paying huge sums in interest and penalties due to non compliance?

Today, I would like to highlight some of the inefficiencies in business operations that, in my view, lead to unnecessary tax burden on businesses in Tanzania and probably in other developing economies and offer some suggestions on how to mitigate them.

You have most probably heard of the cliché that “if you fail to plan, you plan to fail”? Yes, this applies in the business world as well. This forms the foundation of the discussion of what I will describe as “Tax Planning”. This missing ingredient in businesses today is one of the main reasons most companies end up paying excessive taxes and the associated interest and penalties. The core meaning of tax planning is the analysis of a company's financial affairs/strategy from a tax point of view so as to plan a business' finances in the most optimised manner. When discussing tax planning the pre-conception is often about companies seeking to legally structure arrangements so as to reduce tax liabilities. However, the reality particularly in an environment such as Tanzania is that the real focus of planning is simply in relation to understanding all the tax obligations and related economic cost (so that you price your activities appropriately) and compliance responsibilities (to reduced undue tax liabilities in the form of penalties and interest) and thereby ensure the stability of the company cash flow and ultimately its profitability.

In other words, planning your tax affairs includes understanding your business from a tax point of view. This means understanding your daily transactions, tax implications of those transactions, and if there are taxes to be paid, when are they due and other compliance requirements such as filing and disclosure.

For example, if a company plans to undertake a big project and expects to contract with third parties to perform various services or source materials, then business managers (specifically tax managers) should ensure that there are well written contracts in place that specify the contractual obligations of each party, contract amounts, clear demarcation of services and goods to be supplied and other relevant disclosures. The manager should know and plan ahead on what taxes could arise as a result the project (e.g. stamp duty, withholding taxes and VAT) and which party will be responsible for settling the tax liabilities. Planning your tax affairs, helps businesses be aware of the nature of tax obligations that the company might expect to face in the future, where relevant how to legally minimise the tax liabilities (for example, if importing capital goods making use of the VAT deferral mechanism), how to properly document the transactions and the tax paid, and ensure that you know your statutory obligations ahead to avoid non compliance and minimise the risk of being penalised. All these contribute to the stability of business operations and reduce unnecessary costs.

From my experience in assisting clients during tax audits, tax authorities expect businesses to provide enough documentation to support various transactions. This starts with how transactions are recorded in the ledgers (i.e. narration of entries which in my experience are not usually provided focus and therefore lack clarity), consistency in record keeping, documentation of invoices, purchase orders, contracts, various reconciliations in the books of accounts (which in my view company ought to do on a regular basis such as revenue in VAT return to financial statements) , proof of tax payments that match relevant transactions and other disclosures that support and prove that various transactions really happened. The absence of such documentation more often than not results in significant disallowance of otherwise deductible expenses, double taxation and imposition of interest and penalties. Overall, from the tax authority’s point of view, the tax audit processes will be seamless if businesses organise and plan their tax affairs ahead.

From a business point of view, I must add that is not solely the responsibility of only tax managers or finance staff to mitigate risks that arise from tax matters. Personnel from operations, procurement and marketing departments in one way or the other make daily decisions that have tax implications but seldom think of informing their tax/finance counterparts until it is too late. So they need appropriate guidance or training. Lastly, given the materiality of taxation issues I would highlight the need to keep members of a company’s Board properly briefed on tax matters. As they say, “forewarned is forearmed”!

By Colman Korosso Senior Associate at PwC – Tax Line of Service

The views expressed do not necessarily represent those of PwC. For PwC updates on tax and other matters do follow @pwc_tz or visit our website www.pwc.com/tz

Article first published in The Citizen (21.03.2019).