THE IMPORTANCE OF TAX RISK MANAGEMENT

       Although we may be turning the corner on the economic downturn, the public still has lower purchasing power and businesses are facing a lower net profit,or even a net loss. Consequently, many companies are attempting to achieve the same goals: a reduction in expenses and an increase in liquidity. A possible strategy for them to consider in pursuit of these goals may be to go about obtaining a tax refund from the Revenue Department.
       Tax is an unavoidable expense that affects a company's cash flow and is generally applicable in all business transactions, including those that occur during periods of economic downturn.Examples of such transactions include expenses in respect of compensation paid to suppliers for order cancellation,sales promotions, employees' severance pay, as well as transactions related to mergers, acquisitions or even liquidation.In addition, accounting entries such as the write-off of accounts receivable or obsolete inventory, the setting up of provisions or accrued expenses and depreciation of a factory or machinery may have adverse tax implications if not handled correctly.
       No one wants to pay tax needlessly but many companies applying for tax refunds find that, after the resulting tax audit, they have to pay more tax than the original claim.
       As a result some companies forgo the right to claim refunds to avoid an audit,because of uncertainty as to whether or not their tax submission was prepared fully in compliance with the Revenue Code. We note, however, that one of the department's strategies includes the investigation of companies that do not claim tax refunds, based on the logic that they perhaps have something to hide.
       Tax risk is a significant business risk and should be managed properly regardless of whether a company chooses to pursue a tax refund or not. Tax risk assessment is an important part of good risk management. It can be likened to having an annual health check-up so that disease may be detected and treated at an early stage. The following checklist can help a company judge the extent of its tax risk:
       Complicated transactions, or transactions with a large number of suppliers and/or customers;
       Significant transactions with related companies;
       Tax risk assessment has never been performed before;
       Frequent changes in staff responsible for tax function;
       Risk taker (when unsure how to pay tax, chooses not to pay or pays the least possible);
       Tax tasks are assigned to staff with insufficient tax or legal knowledge;
       Poor or unsystematic maintenance of documentation supporting the tax filing;
       No tax manual or the tax manual is not maintained up-to-date, or there is a good manual but its procedures are not properly implemented;
       Late submission of tax, problems with audited financial statements or tax computation;
       Previous record of additional tax payments or the department's tax assessments.
       Some suggestions are provided below to be included among the procedures for handling tax risk management:
       Step 1) Tax risk assessment
       Regularly review tax compliance status to identify potential risk.
       Step 2) Solving problems
       Take timely corrective action to mitigate identified tax risks and minimise related tax liabilities.
       Step 3) Dealing with tax audit
       Understand the tax audit approach and the Revenue officers' point of view;
       Analyze the tax issues raised by the Revenue officers;
       Consider a strategy for dealing with the Revenue officers in order to speed up the tax refund process;
       Make available sufficient and reliable documentation to support the defence.
       Step 4) Implementing "Best Practice"
       Raise levels of awareness of tax procedures and compliance requirements;
       Put in place proper internal controls and referral systems in organisation;
       Make sure that every tax position taken is supported by a credible basis in law.
       Our experience suggests that the efficiency and ability of the tax department's investigations have improved significantly in recent years.Procedures are more thoughtful and information technology systems have been introduced to assist in retrieving tax documentation online from all over the country, including obtaining information from other government departments (e.g. customs duty and excise tax). Consequently, it is easier for today's Revenue officers to detect or identify any non-compliance by taxpayers.
       It is therefore time for companies to pay greater attention to the concept of tax risk management so that whenever a tax refund is claimed or the companies are visited by a Revenue officer, they will have confidence that no unexpected tax liability will be discovered.
       PricewaterhouseCoopers'11th annual Tax and Legal conference,"Redefining Success: Managing Tax through Turbulent Times - Maximize Shareholder Value through Effective Tax Planning 2010"takes place in Bangkok on 12 November 2009. To register, please visit www.pwc.com/th