Increasing tax collection through tax audits - what are the tax audit approaches?
June 16, 2014 00:00 By Benjamas Kullakattimas
The rising pressure to generate more revenue to compensate for the shortfall in collections has caused the Revenue Department to strengthen and expand its tax base, resulting in more audits.
Currently, tax authorities tend to not issue a summons for a formal audit of a taxpayer’s accounting and tax records but instead conduct an informal audit through an invitation letter to provide the specific information for the tax authorities’ audit.
An audit under an invitation letter, also known as a “general tax audit”, can be either a pre-filing or post-filing audit of a corporate income tax return. A pre-filing audit is generally imposed on companies under the close supervision of the Large Business Taxation Office and whose prior year’s tax returns may have already been audited. For the pre-filing audit, the company will generally be asked to provide draft financial statements and the tax calculation.
A comparative analysis of revenue and expenses for the current and previous year may also be requested. Tax authorities are unlikely to conduct a detailed review but rather analyse revenue and expenses to evaluate the level of operating profit. The authorities may provide suggestions for tax adjustments, which the company may or may not agree to. A possible negative impact is if the company does not agree with the tax authorities’ suggested tax adjustment. This may lead to a post-filing audit or a formal tax audit, as the authorities will already have the information on hand.
A positive is that a pre-filing audit will give the company an opportunity to discuss any uncertain tax treatments with the authorities before filing the income tax return, which should help to avoid exposure to the risk of surcharges and penalties due to underpaid income tax.
While pre-filing audits rarely occur, post-filing audits are common. Depending on a company’s business and size, it may be subject to a post-filing audit every one to three years.
For a post-filing audit, authorities conduct a desk review of the filed income tax return together with the audited financial statements as filed. The company is asked to meet with authorities by invitation letter to clarify the transactions and/or provide supporting evidence for any issues.
If the authorities conclude that adjustments to assessable income or allowable expenses are required, the company is requested to voluntarily amend the income tax return and pay any additional tax together with a 1.5-per-cent surcharge per each month of additional tax payable up to the amount of tax due. If the company disagrees with the authorities’ proposed tax adjustments, the authorities cannot conduct a tax assessment until a summons for a tax audit is issued.
If the dispute cannot be settled during the post-filing audit, the authorities will use the approach of a summons-mandated tax audit, or a formal tax audit.
In performing a formal tax audit, the authorities may expand the audit to other tax areas. Thus the company should consider whether it is worthwhile to settle the specific case at the level of the general tax audit.
In addition, if an assessment is made under a summons for a tax audit, a penalty of up to 100 per cent of additional tax payable, which shall not be imposed if additional tax is settled under voluntarily filing of an amended tax return, will be imposed in addition to the surcharge.
An interesting trend is the increase in investigations of inter-company transactions, which could lead to a transfer-pricing audit. Nowadays, tax authorities across the country are equipped with basic transfer pricing knowledge and have been trained by the transfer pricing specialist with the Revenue Department.
It should be noted that there is cooperation within the Revenue Department. During a general tax audit, authorities may identify the transfer pricing issues or refer the cases to the transfer pricing audit specialist if the case is more complex.
A tax audit will definitely be conducted in the case of a tax refund request and it might not be limited to the type of tax for which the refund is requested, but expanded to an audit for other types of taxes.
Therefore, before requesting any tax refund, a company should review whether it is exposed to any tax risk that may result in an additional tax payment as opposed to the tax refund desired.
_ Benjamas Kullakattimas is the tax partner in charge of KPMG Phoomchai Tax.