The True Cost of Tax Compliance

Looking through the press a few days ago, I could not help but read through a headline about a Gwanda mine battling business rescue proceedings being pursued against it. It is reported that the creditor, in their application, claims the same owes the revenue authorities some two US$2 million. Would be interesting to hear how that case develops. Just last year, we saw Pacific Cigarette Company filing for voluntary business rescue over debt to revenue authorities of US$19 million.

The facts and circumstances in both ‘high’ profile cases may be different but what is clear is when the taxman is involved, there is a sure threat to the business’ continuity. Research shows that tax compliance is not considered as a critical success factor in running a business despite non-compliance being regarded as a key regulatory risk. The arguments of whether a tax treatment will result in a disputed position by the tax authorities is said to pop up as one of the key drivers of tax non-compliance, howbeit, this being non-compliance due to lack and/or poor interpretation of the tax laws.?

In my years of running tax compliance programs for businesses, it became clear that business owners and managers care more about reducing the tax risk on their cash flow. This places a motivation for them to demonstrate tax compliance to trading partners while minimizing the tax payable than being truly compliant with the tax laws. Numerous court cases show that taxpayers brush up compliance issues taking advantage of the self-assessment system. However, such an approach becomes expensive when tax investigation and audits unearth the dead bodies.

A focus on understanding the usual costs of tax compliance cheats the intent of rightfully contributing one’s fair share of taxes. These obvious costs include:

• Cost of tax return preparation

The self-assessment system allows for the taxpayer to prepare their own tax return which essentially are one's declaration of tax position. This process takes up effort in the application of tax laws to scenarios, transactions and/or events. Depending on the size, complexity and scale of the business, most employ in-house tax practitioners to create, implement and oversee the interpretation and application of tax laws in their business to achieve tax compliance levels that match with their tax and business strategy. Were the above being a privileged arrangement, some keep tax practitioners on retainer and many others engaging consultants on a need basis. ?However it is structured, it is clear, that apart from the commitment of time and expertise also comes cost in the form of renumeration for these skills.

• Cost of paying tax

The computation of tax has a cash flow impact where there is tax to be remitted to the revenue authorities. It is this impact which necessitates the cost of tax return preparation since responsible taxpayers only need to pay ‘the right amount of tax’. In weighing the cost of tax preparation, careful taxpayers develop key performance indicators. Tax compliance key performance indicators focus on the actual tax cost versus estimated, the quality of tax return filings, observations on the control measures employed around taxes and the effectiveness and efficiency of tax procedures and processes. Assessing these KPIs brings justification to what should be paid for tax preparation and the resulting cash impact on tax payable, if any.

Hidden tax compliance costs are precarious and vindictive in nature. They unavoidable when one gets tax compliance wrong. At the disposal of the revenue authorities is the power to carry out tax audits and investigations which then runs checks on prior tax treatments and measure them against the intent and interpretation of the tax laws – as the revenue authorities interpret. This effectively tells you that no tax treatment should be carelessly applied and its application should be held lawful in at least six years from the date of application.

Tax audits and investigations probe tax treatments done in bids to maintain tax compliance. They become costly exercises which businesses with shacky tax treatments dread. In practice, rarely are tax audits passed without disputed tax treatments which result in additional taxes, fines and/or penalties being levied. The burden of proof is always with the taxpayer - this can be translated as the costs of defending a tax treatment applied in compiling to tax laws applicable is upon the taxpayer.

It becomes important to ensure that one is aware of the true costs of tax compliance by being proactive in their tax compliance programs, seeking sound advice from tax practitioners and ensuring that they can legally defend their tax treatments even when there is no possibility of a formal audit. These hidden costs are what necessitate tax health checks where a taxpayer interrogates their own tax affairs and correct any anomalies well before the revenue authorities bring their own checks. ?