Tax Planning, Compliance, Investigation and Audit: Implications for Tax Payers

With oil prices in the doldrums to leave Nigeria’s economy in the comatose in the recent years and struggling for a rebirth through diversification from oil to non-oil sources, including taxation, we are beginning to experience frequent tax audits and investigations by the Federal Inland Revenue Service (FIRS) and State Boards of Internal Revenue (SBIR).
The FIRS’ increasing ambitious collection targets and the claimed data of registered and unregistered companies not contributing to the Country’s tax collection indicate the intention to intensify effort at achieving the set targets, a move that would require broadening the scope of tax coverage, continued compliance drive by taxpayers, more aggressive and timely tax audits and investigation and more pressure on entities not currently contributing to the country’s tax collection.
Nothing again would ever make the authorities to soft pedal on the increasing interest on the issue even if oil prices soar beyond unimaginable heights, a situation that would ever be imagined again with the world now on the way to turning its back on oil. Good tax planning, compliance, audit and investigation management remain the stick in hand to properly put us on our stands and avoid being embarrassed and subjugated.

What’s Tax Planning

Tax planning is the analysis of a financial situation or plan from a tax perspective. It is the practice of minimising tax liability by making effective use of all applicable allowances, deductions, exemptions, concessions and rebate within the framework of law to lessen the overall income and/or capital gain of the tax payer. The financial activities of a tax payer or entity are thoroughly analysed to seek the maximum possible tax benefit as permissible by law. Impliedly, tax planning is a legal method of reducing the tax burden that covers all kinds of efforts made by a tax payer to save taxes through ways and means that conform to the legal obligations and never intended to deceive the law by false pretences.

Tax Planning and Compliance

Tax laws regularly change and create new challenges and areas of potential vulnerability. However, having a trusted tax partner as the SSAC Advisory and Professionals to help you develop proactive tax strategies, would minimise your tax burden, keep more of what you make and have the security of being compliant.

Purpose of Tax Planning

To ensure tax efficiency: Through tax planning, all elements of the financial plan work together in a most tax-efficient manner possible.
Reduction of tax liability: Tax planning arrangements are made in a way that maximum possible tax benefits can be accessed by making use of all favourable provisions in the act. This facilitates the tax payer to get rebates and allowances without violating the law.

Tax planning makes you to gain all concessions, reliefs and rebates permissible under the law, makes your affairs arranged in a commercial way to minimise the incidence of tax, makes it possible for you to claim maximum relief when paying taxes in more than one country, you become tax compliant and avoid penalties, prosecutions and interest payments, you become fruitful investment of savings and timely compliant of procedural requirements like tax audit etc.

Tax Audit and Investigation: Implications for Taxpayers

A typical tax audit process entails a review of a taxpayer’s records to ascertain compliance with relevant tax laws. It is usually for not more than six years from the date of submission of the relevant returns or receipt of the audit notice. While a tax investigation is an inquiry into the tax activities of a taxpayer by the tax authority to recover undercharged taxes of previous years that would have been triggered on the suspicion of fraud or wilful default of the taxpayer with regards to non-compliance with tax obligations. There is no time limit for investigations as they can go as far back as the date of the company’s incorporation.
Apart from the routine compliance review conducted by tax authorities, typical tax audits in Nigeria are of two forms—desk audit and field audit. A desk audit usually involves the tax authority, conducting the review of the self-assessment returns filed by a taxpayer to ascertain its completeness and correctness without being physically present at the taxpayer’s business premises. Under desk audits, the tax authorities typically request for clarifications and documents from taxpayers with regards to information contained in a taxpayer’s self-assessment returns.
However, a field audit is a much more elaborate process, involving a physical visit to the taxpayer’s premises. In the case of the FIRS and the Lagos Internal Revenue Service (LIRS), consultants called, Tax Audit Monitoring Agents, are called in to assist with the Tax Audit Process used.

Audit Period

Only the last six calendar/financial years preceding an audit request may be checked during a field audit, if those years have not been previously audited. In the event that audits had been conducted for previous years, the audit is limited to a previous financial year or years. For instance, an audit request in 2017, may only be for 2016 or 2010 – 2016.
A Relevant Tax Authority (RTA) typically does not conduct field audits of the same period twice. However, there are isolated instances where this has happened, but usually on administrative directives by the RTA. Also, where a fraud is suspected, an investigation may be conducted notwithstanding the fact that an audit has been conducted on a previous year.

Audit Notification

A RTA typically notifies a taxpayer of its intention to conduct a field audit exercise at least two weeks before the beginning of the audit exercise by sending an official memo, specifying the period being audited, audit commencement date and audit checklist. Audit timelines may be extended at the request of the taxpayer, and in such a case, another official memo may be sent to the taxpayer by the RTA, communicating acceptance of the new proposed timeline.

RTA’s Audit Selection Criteria

The selection criteria for a tax audit or investigation are usually at the discretion of the tax authority. Outlined below are selection criteria employed by the tax authority in the past to determine a taxpayer’s records to be reviewed:
1. Standard Approach: This approach most often begins as desk audit and may lead to a field audit if the RTA is not satisfied with the initial supporting documents provided by the taxpayer.
2. Target/lndustry Approach: This approach involves a review of a taxpayer’s records based on intelligence gathered internally or from external sources or on peculiarities of the industry, where the relevant taxpayer operates. This approach focuses on specific issues that are of interest to the RTA.
3. Risk-based Approach: Under this approach, the RTA assesses the taxpayer’s records, industry and operational peculiarities based on predetermined parameters. Thereafter, only selected records falling within the predetermined parameters are selected for review.

Audit Causes and Revelations

Current financial reporting in Nigeria is meant to comply with standards issued from time to time by the International Accounting Standard Board (IASB). Impliedly, taxpayers are to review their transactions to comply with the reporting framework and to understand the tax implication of such frameworks under the tax laws so as to determine the tax deductibility or otherwise of such reporting classification which affects the income or profits declared.
The following represent primary audit or investigation triggers and risk exposures to taxpayers:
1. Significant fluctuations in assessable profits
2. Huge and consistent loss situations;
3. Significant capital allowance and unutilised capital allowance claim;
4. High Value Added Tax (VAT) and Withholding Tax (WHT) refund claim situation;
5. Huge cost deductibility claim — for instance, huge bad debts provision or written off situation,
6. High expenses to revenue ratio;
7. Related party transactions;
8. Business restructuring, mergers and acquisition situation;
9. Double taxation agreement claims etc.
While taxpayers are advised to not only maintain proper and adequate records but to ensure that sufficient third-party supporting documents are available as they are vital to addressing any issue raised by the tax authority either during desk audits, field audits or audit reconciliation stage as it helps to ensure timely closure of tax audits and investigations. It’s good also to have a tax manager to provide professional support and representation as they help to ensure an easier audit process.
Tax audit or investigation is generally one that requires adequate planning and preparation. The best approach would be for taxpayers to understand the tax implication of transactions at the point of undertaking them while ensuring adequate compliance arising from such transactions.
Tax audit in Nigeria sometimes last more than a year, and results mostly from the arbitrary approach employed by persons engaged for the Tax Audit, usually Monitoring Agents by tax authorities to conduct the audit process. It results in time wastage and additional cost to taxpayers.
A key point to note in an audit process is that documentation is key! Taxpayers are advised to ensure documents are available to support transactions with regards to the audit triggers mentioned above and more. The role of a tax manager as a support to taxpayer in an audit or investigation process cannot be over-emphasised.

Preparing for a Tax Audit

The Revenue Service, whether Federal or State, will periodically visit your company for tax audit. Some may just be for specific aspect of your business or more. The Federal Inland Revenue Service may give you a notice of carrying out your firm compliance with the Value Added Tax Act only or full tax audit of your business that could extend to the Company Income Tax and lots more.
You may in the same period get a notice from the State Internal Revenue Service, informing you of their intention to visit your office to carry out a tax audit. No point panicking, it could never be as bad as it may seem but always have it in mind that the Revenue Man, no matter what, cannot be your friend but don’t ever make him your enemy. You need to be professional always in handling such situations.
Whether State or Federal tax officials, abide by the following guides to prepare for tax audit:
Acknowledge Tax Audit Notification
Acknowledge receipt of the letter as you receive it. Call the number written on it and seek an appointment with them. If you have all the required documents they intend to examine, agree on a date for the audit with them. But where you don’t have all or most of the documents, give it a thought and determine reasonably when you can have them for the audit and seek an adjustment in the date or reschedule the date. They oblige you an extension of the date if they found your reasons concrete and leave you with an opportunity to prepare.

Talk with a Tax Professional

Seek out the services of a tax professional as SSAC Advisory and Professionals to guide or represent you during the tax audit meetings.
SSAC Advisory and Professionals assists businesses, individuals and tax-exempt organisations with diverse tax-related situations.
Tax remains one of the single largest business costs of most businesses, particularly those engaged in oil and gas exploration and development. Therefore, certainty, equity and fairness as to tax liabilities are critical factors in the business environment. The tax payer’s responsibility and policy is to pay the right amount of tax. To this effect, SSAC supports relevant tax authorities and tax payers to mutually develop a reliable partnership in the establishment of certainty as to the legitimate tax liabilities through its tax related services.
Tax planning, being very important in managing the tax exposure of any organisation, SSAC helps clients to look at the various tax options to determine when, how and whether to conduct business and personal transactions to reduce or eliminate tax liabilities. Similarly, it assists clients to carry out compliance audit in a special way it does to verify whether a company has correctly calculated and filed its tax obligations in accordance with all applicable tax laws, putting to use its highly experienced professionals to identify potential areas of dispute, manage tax audits and tax investigations to resolve tax disputes. The company’s knowledge and experience in this specialised area, which it acquired over the years in the course of assisting many of its clients to reach amicable resolution, has made it to duly understand the key nuances of tax audits and tax investigations. Also, you have a partner in SSAC to help you plan and manage the challenges that come with a global workforce, understanding and responding to tax requirements at home and abroad, being very complicated and time consuming, just as with its vast knowledge of cross-border tax issues, it makes its business partners to be aware of local and international obligations to effectively manage such taxes, including preparation and filing of expatriate tax returns and tax guidance to avoid multiple taxation. On the whole, SSAC Advisory and Professionals offers a range of Tax and Accounting Solutions to Small & Medium Enterprises (SMEs and Established Corporate businesses) and has become a consistent trusty of major businesses locally and internationally on tax planning, compliance, investigation and auditing.
Like other members of recognised professional accounting bodies as the Institute of Chartered Accountants of Nigeria and the Chartered Institute of Taxation are, the SSAC is a grand expert in the Nigerian Tax Laws and will always give you an unequalled professional representation.

Gather Information

The tax audit notification lists the documents the Revenue Service teams will review. Get your financial records ready, including bank statements, tellers, invoices, payment vouchers, general ledgers, financial statements (Balance Sheet, Profit or Loss Statements, Statement of Cash flows), Cashbook, Petty Cash Voucher, Fixed Assets Register, Payroll, PAYE Taxes Paid, Withholding Taxes, Value Added Tax Payments, Rent Receipts, Agreements, Contract Documents, Loan Agreements, Borrowings and any other information that they may have requested.
Organise the documents year on year and arrange them in the order of the schedule of documents the Revenue Service had earlier requested.
Get your Tax Representative like the SSAC if you hire it to stand in for your business to review the documents with you. Their professional advice will guide on the information you can keep and those you must necessarily disclose.

Prepare for likely Questions

Follow your information gathering with a pre-tax audit session with your tax representative, who should prepare an audit guide to help you reduce the stress associated with tax audit.

Be Polite and Professional

Do not answer a question you are not asked and endeavour to provide answers to questions, letting the Revenue Authorities to understand that you take audit seriously and that you are willing to make their job easier by cooperating with them within the law.

Have the following in good order:

Income Audit
The Revenue Team will review your financial transaction, comparing your reported turnover to bank statements, invoices, sales receipts, trace them to your general ledger and final accounts. They hope to find under-reporting. You must have the records that would confirm your position.

Expenses

All expenses that are charged to income will be audited. Particular interest will be expenses that are not receipted. Such include transport and travelling, public relations, entertainments, “general expenses”, normally disallowed, bad debts.

Payroll

The Auditor will review all payroll deductions and obtain satisfaction that appropriate remittance has been made to statutory agencies

Fixed Assets

The Auditor will also look at Fixed Assets acquisition to determine if tax depreciation claimed are in order, particularly when such assets costs exceed N500,000, requiring approval of the Inspectorate Department of the Ministry of Industries.
In all of these, if the SSAC is on the stand for you, it will put you in good stead to get the best position of things with the audit. It is worth it in the long run. Engaging SSAC for tax guidance will cause you to be helped with your tax returns and avoid the unpleasant consequences of poor filings that could expose you in the nearest future.