Common Pain Points that Come Up in a Tax Audit
In 2019, the Ghana Revenue Authority (GRA) begun aggressively auditing companies. That posture will not change soon. Expect an tax audit at some point.
The auditors approach the audit with an attitude – to raise the maximum amount of taxes. If you don’t know the law and don’t have enough documentation, you may end up with additional taxes.
In 2019 we represented some of our clients under audit. In this article, we highlight some issues that recurred in three areas – corporate income tax, withholding tax and pay-as-you-earn (PAYE).
The common issues that came up under corporate tax examination were:
1. Late filings of annual returns
This is a common problem, returns not filed by the due dates. Sometimes the taxpayer put his application for an extension as a defense. This defense is effective only when GRA approves the extension.
2. Under-declared revenue
The tax auditors will match revenue in your financial statements to total revenue computed from the VAT Invoices. They will treat the difference as an under-declaration of revenue.
Canceled VAT invoices are the common cause of this “under-declaration’. When you cancel a VAT invoice, make sure you retrieve the original invoice. If you can’t, issue a credit note that documents the reason for the credit.
The common issue that tax auditors raise on examining withholding taxes are:
1. Late filings
It’s easy to determine if the withholding tax return is filed late. Late filings attract a penalty of GHC 500 plus GHC 10 for each day the returns remain outstanding.
The remedy for late filing is simple – ensure that you know the due dates and give yourself enough time to prepare and file an accurate return before the due date.
2. Underpayment of withholding taxes
A common finding is that either withholding taxes are not paid or are partly paid. Another issue is the use of the wrong rates for withholding.
There are different rates for withholding taxes. It is important that you know the rates applicable to the payment.
To reduce the risk of underpayment, you must reconcile your details of your withholding tax returns to the withholding tax account. If you don’t accrue such payments, then you must set up a system to track all taxes withheld during the month.
1. Underpayment of taxes on staff costs
The common issue is that GRA will calculate an estimate based on the staff cost disclosed in your financial statements. They’ll compare that with the total PAYE paid. They will then claim that the difference between the two is an underpayment.
Staff cost comprises salary, wages and other expense relating to staff. The makeup depends on your accounting policies.
To defend this claim, analyze the staff cost and reconcile the taxes paid on the category of staff cost subject to PAYE.
2. Benefits in kind
The tax auditor will scrutinize any benefits given to staff to see if they are taxable. It is common to find that benefits in kind have not been reflected in calculating PAYE.
The remedy is to ensure that where any staff member is given a benefit in kind, you test whether it’s a taxable benefit.
- File returns on time – make sure you file your monthly and annual returns before their due dates. For annual returns, the law makes provision for requesting for an extension of time. File the extensions early and get an approval letter from GRA.
- Keep adequate records – expenses such as business lunches and conferences will only be allowed if there is enough evidence to prove that it was wholly, exclusively and necessarily incurred for the business.
- Perform a monthly reconciliation of sales per your accounts to your VAT booklet and VAT returns.
- Issue credit notes to replace canceled VAT invoices. You should retrieve canceled invoices from customers and place them in the VAT book. If you can’t do that – document the reasons.
- Ensure that you know the withholding tax rates for different transactions.
Tax audits are here to stay and the likelihood that you will be selected for review is high. The best time to prepare for an audit is long before the audit. Read our article “Surviving a Ghana Revenue Authority (GRA) Audit” for tips on how to prepare for an audit.
We recommend strongly that you always consult a tax advisor when you are under audit.