Taxpayers, inherently, tend to incur more tax compliance costs (TCCs) under a self-assessment system (SAS) than under an administrative assessment system. But under certain conditions, SAS can optimize tax collections while minimizing both administration costs and compliance costs. Apart from this systemic issue, some aspects of your business can also influence TCCs. In the previous article, we saw how the choice of vehicle for business doing may affect your TCCs. Also are the types of goods and services you supply, the way you supply them (the distribution model), and the location(s) you choose to operate. For example, providers of professional services (lawyers, architects, engineers, accountants, etc.) are obliged to register for VAT regardless of their taxable turnover. Also, exporters are likely to be in a VAT refund position which may be costly. In this article, we highlight other business aspects that tend to affect TCCs.
Size of your business: In absolute terms, TCCs tend to increase with the size of business. As the number of transactions, for example, increases. However, in relative terms, TCCs, generally, pinch more on smaller businesses. Business size can be measured variously. For example, by turnover (sales), the number of employees, assets or net assets. Also, some tax obligations are based on size. In Tanzania, registration for VAT becomes mandatory at an annual taxable turnover of 100 million shillings. Registration for VAT comes with additional TCCs such as preparation and filing of monthly VAT returns, maintenance of business records and the inherent risks associated with VAT non-compliance. Also, obligations for skills and development levy (SDL) are triggered when the number of employees exceeds four. Presumptive income tax applies to sole proprietors with annual turnover below 100 million shillings. For annual turnover exceeding 100 million shillings, there is a mandatory requirement to submit annual income tax return accompanied by audited books of accounts. Also, you may not be required to buy and use EFD machines if your annual turnover is below 14 million shillings.
Use of technology: The use of technology (especially ICT), for example, to automate business and operational processes is likely to reduce your TCCs, at least on a long-term basis. The initial investment cost in technology may be higher. But the subsequent cost savings resulting from the use of technology may far outweigh the initial costs. The use of technology may give access to various online services that may lower your cost. Using online banking platforms (internet banking) to pay your taxes is a lot cheaper than a physical visit to a bank and queuing to make a tax payment. Likewise, utilizing the possibility of e-filing of tax returns tend to reduce your TCCs.
Tax management approach: Naturally, your business faces various tax risks. The risks of non-compliance with tax due dates, the transactional and operational risks that may lead to underpayment or overpayment of taxes, and the reputational risks resulting from tax non-compliance with tax laws. Tax non-compliance that the tax authority may deem a tax evasion (offence) is likely to a predicate offence leading to money laundering charges. But how you manage tax risks may influence your TCCs. Poor tax management may save you some compliance costs now, but later you may incur heavy costs (interest, penalty, fine or even a jail sentence). Whether you decide to outsource all or some of the tax compliance functions or do them internally will impact your level of TCCs.
By Shabu Maurus, Tax Partner, Auditax International.