Huge tax liabilities and how to avoid them: The role of external auditing

TAPERA MAGAYA

Tax compliance is a critical aspect of corporate governance, and failure to adhere to tax regulations can result in substantial tax bills.

Tax bills usually arise in the form of additional principal amounts, penalties, interest and fines.

Tax laws in place empower the Zimbabwe Revenue Authority (“ZIMRA”) to levy these tax charges where non-compliance has been detected.  Huge tax bills have dire consequences on a business’s cashflows and viability. External auditing plays a pivotal role in helping organizations avoid these costly consequences. This paper explores how external auditing can mitigate the risk of huge tax bills through efficiency in tax compliance.

Understanding common causes of tax liabilities

Tax liabilities typically arise from several common issues, including:

• Late filing: Missing tax filing deadlines can result in significant penalties. For instance, ZIMRA imposes a penalty of USD30 for each day that a tax return remains outstanding, up to a maximum of 180 days.  After this period, ZIMRA may apply to the Courts for prosecution of the non-compliant taxpayer.
• Under-payment and non-payment of taxes: Failing to pay on time the full amount of taxes owing can lead to penalties and interest. For example, this could be caused by underestimating provisional income tax (“QPDs”) or not withholding enough PAYE from employee remuneration.
• Inaccurate law interpretation and reporting: Errors on tax returns, whether intentional or accidental, can trigger tax liabilities and or prosecution. These include intentional understating of income, and overclaiming deductions, or credits. This can also be caused by wrong interpretation of tax laws. The risk of wrong interpretation is elevated by the fact that Zimbabwe tax laws are changing regularly.
• Maintaining parallel records: Keeping parallel records i.e. one for management decision making and another for ZIMRA purposes is a form of tax evasion. This practice may result in prosecution and imposing of heavy penalties of up to 100% for unpaid taxes.

The role of external auditing in mitigating tax risks

External auditors provide an independent assessment of a company’s financial statements and tax compliance, offering several key benefits:

• Ensuring accurate financial reporting: External auditors review financial statements to ensure they accurately reflect the company’s financial position and performance. This includes verifying that all income, expenses, and deductions are correctly reported, reducing the risk of errors that could lead to tax fines. Auditors can carry out a tax health check as part of the audit procedures in order to establish an accurate position of the company’s tax affairs.
• Evaluating internal controls: Auditors assess the effectiveness of internal controls related to tax compliance. Strong internal controls help prevent errors and fraud, ensuring that tax obligations are met accurately and on time.
• Identifying and mitigating risks: External auditors identify potential risks related to tax compliance and recommend measures to mitigate them. This proactive approach helps companies manage tax risks before they expose the business to tax liabilities. Businesses can also mitigate tax risks by actively engaging ZIMRA for clarity on tax practices and requesting payment plans on periods where cashflows are low.
• Ensuring compliance with tax laws: Auditors, under International Standards on Auditing (ISA), are not responsible for ensuring companies comply with all tax laws. Instead, their role is to obtain reasonable assurance that financial statements are free from material misstatement, including those arising from non-compliance with laws and regulations. Management, not auditors, holds primary responsibility for compliance. This includes staying up to date with changes in tax codes and implementing necessary adjustments to maintain compliance. External auditors help in confirming the tax compliance levels of Company.
• Regular tax health checks: Auditors and tax practitioners, when engaged can provide scheduled and regular tax health checks which ensures that the Company has a healthy tax status and no skeletons in the cupboard. Tax health checks help in identifying tax opportunities and risks and managing these for the benefit of the business.

Best practices for taxpayers  to minimise tax risks

To effectively minimise tax risks, taxpayers  usually referred to as Business Partners by ZIMRA, should adhere to several best practices:

• Maintain transparent financial records: Ensure that financial records are accurate, complete, and transparent. This helps auditors assess the company’s financial health and compliance with tax laws.
• Establish robust internal controls: Implement and regularly review internal controls to ensure they are effective in preventing errors and fraud. This includes controls over financial reporting and tax compliance. Internal controls review can be done with the help of external audit.
• Engage reputable audit firms: Choose external audit firms with a proven track record and expertise in tax compliance. Experienced auditors bring valuable insights and objectivity to the audit process.
• Clear communication: Maintain open and clear communication with the audit firm. Provide all necessary information promptly and address any queries or concerns they may have
• Regular internal audits: Conduct regular internal audits to identify and rectify issues before the external audit. This proactive approach helps ensure that the company is always prepared for external scrutiny

Conclusion

External auditing is a critical tool for mitigating huge tax liabilities and ensuring compliance with tax laws. By providing an independent assessment of financial statements, evaluating internal controls, identifying risks, and ensuring compliance, external auditors help companies avoid costly penalties.

Adhering to best practices in external auditing further enhances the effectiveness of this process, safeguarding the company’s financial health and reputation.

DISCLAIMER

The views and opinions expressed in this article are those of the author, Tapera Magaya , an Audit Manager at BDO Zimbabwe CA (Z)  and do not necessarily reflect the official policy or position of the firm. This article is intended for informational purposes only and should not be construed as legal, tax, or financial advice. Readers are encouraged to consult with qualified professionals at bdo@bdo.co.zw  for advice specific to their individual circumstances.