Three themes to help avoid an unnecessarily huge tax bill

Unfamiliarity with tax legislation has been a common problem leading to huge tax bills. A small mistake and your tax bill grows. Nevertheless, if you plan accordingly you can save on the amount of taxes your business must pay. But how?  Well, I would focus on three thematic areas: (i) ensure effective internal controls (ii) communication, and (iii) “prevention is better than cure”!

In terms of internal controls, I would firstly highlight the importance of regular reconciliation of numbers. For instance, monthly sales reconciliations between your accounts, VAT returns, EFDMS, etc. are a must if you do not want the Tanzania Revenue Authority (“TRA”) or City Councils to impose taxes and/or interest on unexplained differences identified. So do carry out regular reconciliations to resolve differences ahead of time, so that you are one-step ahead. Whilst the sales reconciliation is particularly important, consideration should also be given to other areas e.g. cost of sales, imported goods, employment costs.

It is also vital to institute appropriate controls to ensure the maintenance of proper documentation. For example, it can be terrifying if you come to realise that most of your input VAT claims are disallowable due to invalid supporting documents. Many businesses have suffered significant losses when the TRA have disallowed their VAT input tax claims due to the absence of relevant details on a supplier invoice (such as the Taxpayer Identification Number (TIN) and VAT Registration Number (VRN) of both the supplier and the customer). Are you sure your suppliers are giving you the right documents?

It is a truism to say that communication is important and this holds for taxation matters. As much as your adviser should be proactive in keeping you updated, you also need to be proactive – for example, you may be considering undertaking a big transaction but unless you alert your adviser then you may overlook some important tax implications.

Effective communication with TRA is also key; especially the need to ensure TRA understands your business.  For example, the start of a TRA tax audit is an opportunity to explain the key aspects of your business. If your business is unique in terms of technology, accounting, or operations – make it clear in advance to avoid unnecessary future queries.

Throughout the TRA audit, effective communication is imperative. Some key tips: do not leave TRA auditors at your office unattended; so as to minimize risk of misunderstanding, do not provide raw data without giving it context; schedule a meeting after you have formally responded to their findings to discuss areas of disagreement – the objective being to ensure more issues are resolved at the audit findings stage and so reduce the number of disputed items when assessments are issued.

You have heard it said that “prevention is better than cure” – and the same can be said for taxation. In this regard, I would highlight the importance of (i) tax training for staff and (ii) tax “health checks”. Tax laws change more often than not, so just when you are starting to get comfortable with the current code, things change. It is therefore a good idea to ensure your staff are abreast with changes; otherwise, you risk making a mistake. You can do in-house training if you have the capacity or consult your tax adviser for such training. Some advisers circulate regular tax updates, so why not subscribe. The aim is to avoid a wrong law application, which could cost you money. 

But even if you have had the training, and read the newsletters, mistakes or misunderstandings will still take place.  Accordingly, an additional measure to consider is to have your tax adviser carry out a tax health check – a similar idea to a medical checkup only that it is a checkup of your tax affairs. Such a checkup can identify areas of non-compliance so that you can rectify them at the earliest opportunity. It can also identify areas of tax savings which you did not think of before. Generally, this is a proactive approach that will highlight areas of improvement so that action is taken beforehand. As they say, “a stitch in time saves nine”!

As much as taxes may be the least favorite topic, it is one of the most important in a business. So do not take the “kesho” (procrastination) approach.  Instead, take intentional steps throughout the year to ensure you properly manage your taxes, so that your business does not wind up in tax trouble.

By Annasia Tarimo, Senior Associate - Tax Services

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