Understanding tax audit by entities is one of the ways to reduce one tax burden. Taxpayers who are not prepared because of poor tax planning always see tax audit as witch-hunt. In the same way judgement day is repulsive to others, so also is any audit conducted by external bodies including tax audits.
The purpose of tax audit is to monitor the compliance level of the taxpayer in respect of the provision of the tax laws. All tax decisions made are in reference to the tax laws and therefore fundamental understanding of the provisions of the laws will assist the taxpayer to plan beforehand.
In this article, I will share audit risk taxpayers and tax officers should paid great heed to when assessing. Before I share, it is imperative to embrace these salient points;
- All documents in relation to the company especially those with monetary or contractual arrangement should at all times to be kept for at least 6 years before destroying with the commissioner general’s permission. This is important because tax auditors will disallowed payments or agreement that cannot be independently verified.
- As much as possible, tax audit shouldn’t be prolonged beyond 15 days from the date the tax officers begin authenticating the records. One of the reasons for this is interest or penalties that may be accrued due to the audit will be computed to the time the audit was initially completed and the draft report issued.
- GRA does not audit group of companies as one separate entity but rather the individual entities that made up the group. In this case, taxpayers should always make sure transactions and arrangements between these groups should be within the arm’s length standard. The arm’s length standard stipulate that those transactions or arrangement should be done as if they were two independent persons.
- In tax audit, all allowable deductions shall satisfy the wholly, exclusive and necessary principle before it can be allowed.
- Penalties and interest are computed independently of the tax offence committed. Example; when a taxpayer fails to file PAYE returns for January and March, the penalties and interest computed on January returns is different for the one computed on March returns.
Now let’s look at the risk areas of concern to the tax auditor.
- Sales:
It is mostly said that one of the strategy tax evaders do is to suppress sales and increase expenses in order to reduce the tax payable at any given time period. As a result, authenticating sales figures quoted by the taxpayer in the financial statement is high risk that tax auditors consider. It must be known that from the sales amount, the tax auditor can estimate the VAT/NHIL/GETFund/Covid-19 Levy/ Excise/ CST/ VFRS payable.
In authenticating the sales value, the tax officers may demand the following documents:
- VAT invoice: This is mostly the first document to demand when the person is registered under the VAT act. However, for those who have been given permission to issue their own generated invoice/receipts by the commissioner general, the data set of the computer sales is demanded. The tax auditor in analyzing the computer-generated data always pay attention to the chronological arrangement of the serial number, date, time, the amount involve, TIN.
- Sales book/receipt: Most entities issue their sales receipts including some of the persons registered under the VAT act.
- Way bill: This is mostly demanded from entities who are into wholesale and manufacturing or production.
- Import/export documents: This has reference to entities who import/export goods for both production, wholesale or even retailing.
- Stock book: This helps to calculate the actual stock sold during the period under consideration.
- Bank statement: This is the least dependent document however it gives clue of the cash flow of the company and also used to verified the finance cost or gain (to be discussed later).
A tax auditor may use all concurrently or choose specific depending the risk nature of the taxpayer. A person who is required to provide these documents but failed may give more discretionary powers to the tax auditor to project “just” amount depending on the information available at the time based on section 72 of Act 915. The tax officer may in addition impose penalty based on section 74 of Act 915.
- Purchases:
One major risk area is verification of purchases by the taxpayer. Just like the sales verification, this is mainly done to ascertain the authentication of the purchases done during the period under consideration. Documents demanded includes:
- Invoices: The taxpayer must provide receipts to cover all purchases made.
- Purchase book/voucher: This book shall be used to verify purchases made from the open market but the amount should be at a controlled level.
The taxpayer must provide evidence of purchases including carriage inwards otherwise the tax auditor may limit it to those records available based on section 9, 34 of Act 896 and section 99 of Act 915
- Staff cost and PAYE computation:
The taxpayer should understand that salaries or wages paid to casual workers are to suffer final withholding of 5percent marginal rate on the gross amount (Regulation 6 of L.I. 2244). Fees or allowances paid to resident directors, top management, trustee or board member shall attract a withholding of 20percent on the gross amount (Section 116(1) of Act 896).
Payments paid to a part time teacher, invigilator, examiner, sales or insurance commission shall attract a withholding 10percent on the gross amount (Section 116(1) of Act 896). Salaries or wages paid to temporal, contract and permanent staffs shall be graduated using the applicable rates after deducting the allowable deductions as prescribed by regulation and the tax laws. Bonus paid to staff as well as overtime paid to qualifying junior employees during the year shall be computed in accordance with regulation 5 of L.I. 2244.
Taxpayers must know that staff cost (including payments made directly or indirectly, SSNIT, health insurance, uniforms, general breakfast/lunch subsidies) are allowable deduction for tax purposes. The tax auditor will verify these expenses to establish whether the right amount has been deducted.
A tax officer after establishing an over stated staff cost may either choose to add the excess to the re-computation of tax payable based on section 9 of Act 896 or imposed a penalty under section 74 of Act 915 or both. In the case of under paid PAYE for staff, interest is computed on the balance as stipulated in section 71 of Act 915.
- Limit on deduction of financial loss:
A financial loss shall be allowed deduction to the extent there is a financial gain based on the formulae: Financial gain + 50percent of chargeable income calculated without including both financial gain or financial loss. The financial loss shall be limited to the amount from the formulae. The excess amount disallowed shall be carried forward to the next period as stated in section 16 of Act 896. The Financial gain or loss verification is done from the bank account statement provided by the taxpayer as defined by section 131 of Act 896.
- Carry over losses
A taxpayer who makes losses during the year shall carry forward the loss to five years in specified priority sector and three years in all other sectors. Section 17 of Act 896; Regulation 19 of LI 2244.
- Repairs and maintenance:
The repairs and maintenance of all depreciable assets are allowable deduction to the extent the amount deducted do not exceed 5percent of the pool to which the asset belongs. Before the tax auditor will grant as allowable deduction, the taxpayer is to provide documentary evidence of receipts or payment voucher. The excess amount disallowed is added to the depreciation basis of the pool to which it relates and granted capital allowance instead. Section 12 of Act 896.
- Capital allowance:
Depreciation of fixed assets are excluded expenditure for tax purposes as stated in section 130 of Act 896. However, capital allowance is computed in place based on section 14 and third schedule of Act 896. Gains made on the realization of depreciable assets are added to the income of the business. In the same vein, loss made on the realization of the depreciable assets are allowable deduction.
- Withholding taxes:
A taxpayer should ensure all payments made in respect of works, services, or supply of goods to a supplier suffers withholding tax as well as rent payments. This is to prevent the taxpayer from being surcharged by the tax auditors. Mostly these withholdings are found in the general and administrative expenses. The taxpayer should be able to identify them and withhold to avoid penalties for non-filing or interest for non-payment. Section 115-117 of Act 896; section 71 & 73 Act 915.
- Bad debts:
Except for the banking industry, a person shall not disclaim an entitlement to receive an amount or write off a debt claim as bad debt unless the commissioner general is satisfied that the person has taken reasonable steps in pursuing payment and the entitlement or debt claim cannot be satisfied. Section 23 (7) of Act 896.
- Capital assets:
The tax treatment for capital asset is different from depreciable assets. Cost on improvement of capital assets are not allowable deduction from the business income. They form part of the general cost of the asset in case the asset is realized in the future or the underlying ownership changes by more than 50percent at any time within a period of three years. However, gains made in realizing capital assets are added to the business income and tax at the corporate rate. Section 35-39 of Act 896.
In conclusion, the tax auditor after establishing all these risk parameters now recompute the tax liability as these;
| GH₵ | GH₵ | |
| Net profit before tax | XXX | |
| Add back | ||
| Understated sales | XXX | |
| Depreciation | XXX | |
| Overstated purchases | XXX | |
| Overstated staff cost | XXX | |
| Limit on deduction of financial loss | XXX | |
| Excess repairs and maintenance | XXX | |
| Other disallowed expenses | XXX | |
| Bad debts disallowed | XXX | XXX |
| Less capital allowance | (XXX) | |
| Adjusted profit | XXX | |
| Tax @25% thereon | XXX |
>>>the writer holds MSc in Economic Policy and a member of CITG. He can be reached on 0242033009 and or [email protected]
