Perhaps, The Ghana Revenue Authority (GRA) has audited you and hit you with an unexpected assessment. Or you have heard of other companies that GRA has audited and hit with surprising tax bills. The risk that GRA may hit you with an unforeseen tax is now a major concern for Ghanaian businesses.
It is not enough to be concerned about the risk of unexpected taxes; you must do what you can to reduce the risk. In this article, we explain tax risks, how they arise and what you can do to reduce them. This article is a primer to whet your appetite to understand and manage tax risk.
What are tax risks?
Tax risks are the risks that:
- Businesses may pay or account for an incorrect amount of tax (including both income and indirect taxes).
- You will incur monetary loss through increased tax liabilities and penalties.
The paradox of risk is, it may or may not happen, so people ignore it.
How do they come about?
Tax risk can arise when businesses misinterpret or disregard tax laws or regulations. There are several ways in which these risks can arise. Some of the principal ways in which they arise are:
Operational tax risks:
Operational tax risk is the risk of loss because of the failure of internal processes, people, and systems. Such failures may cause errors, omissions in tax processing, reporting, or compliance. It exposes the business to penalties and increased taxes.
Examples of operational risk:
A simple example is the instances where, in processing a payment, you do not apply the correct withholding tax rate to the transaction.
A complex example is intra-group cross-border products sales. The tax risk linked with connected party cross-border transactions is greater than such transactions with unrelated parties.
Transactional risk
Transactional risks are associated with the application of tax laws, regulations, and decisions relating to specific transactions. Complex transactions (e.g., mergers and acquisitions, restructurings) raise the risk of noncompliance because of ambiguity in interpreting complex laws and regulations.
Transactional tax risks can arise from failures, such as:
- The tax department is not involved in the transaction or gets involved at the last minute.
- No framework against which to judge acceptable risk.
- Failure to document and implement agreed plan/strategy.
Failure to document and properly implement agreed plans could be a major cause for tax authority challenges, e.g., non-maintenance of transfer pricing documentations.
Tax risk is a financial risk that may cause an unfavorable cash outflow that results in a financial loss arising from the taxation process.
Impacts of tax risk on your business
Tax risk impacts on businesses include financial, brand & reputation, circumscribing business operations, and legal sanctions.
How can you reduce your exposure?
As businesses today are facing increased exposure to tax risks, it is important to reduce their exposure. You can reduce tax risks by:
- Keeping accurate and up-to-date records.
- Understanding and complying with tax laws.
- Working with a qualified tax advisor.
- Keeping up to date on tax laws-stay informed of changes to tax laws and regulations.
- Adopt best practices for tax compliance and regularly review your tax situation.
- Keeping open communication channel with tax authorities.
Businesses can avoid unexpected costs and legal disputes by taking these steps to safeguard their finances and reputation.
Conclusion
Tax risk is a significant issue that can impact your business. You must manage it to minimize exposures and avoid costly errors.
If you have any questions about tax risk, contact in**@sc*.gh
Collins Boateng
