7 Key Things a Company Should do Before Tax Audit

By: Tigest Geremew

The tax audit process in Ethiopia is the most challenging process for business owners. There are a whole bunch of reasons for this, not least the lack of clear process set by the tax office, inconsistent application of the international accounting standards by the tax auditors, and poor quality translations of the tax regulations and directives. The most common reasons to be called in for a tax audit include: a) Time - If a company operates for 5 years without being audited, the tax office deem the company to be high risk and b) when the tax office is tipped off to investigate a company. There are a number of actions business owners can take to minimise the burden of a tax audit.

What are the key things that a company should do before the tax audit?

1. Pay your tax on time to avoid penalty and interest.

2. Keep the financial record and documentation as per the standards, tax regulations, and directives. Make sure all documents are sequential and saved by their reference number.

3. Make sure all transactions have legal supporting documents as per the regulation.

4. Support and encourage your finance team to update their understanding of the tax regulation and directives on an ongoing basis and follow the tax audit websites, because directive and circulars may be released anytime.

5. Get a tax audit expert to liaise with your team, who always check the tax issues, clear the records, and has the capacity to explain and challenge the tax office.

6. Review your records and reports to the tax office, if there are any errors in the previous recording and reports, report to the tax office immediately and make a quick correction to the payments.

7. Make sure common issues in the tax audit (like allowances paid to employees, office coffee and tea for staff, advance payment and collections, withholding tax, imported item costs) are cleared.

What needs to be done when a company is called for a tax audit?

• Deliver the requested documents on time.

• Get tax specialists to engage with the tax office auditors (instead of the Finance Manager).

• Your tax specialist should take a note and list out all questions and points raised by the tax office auditor.

• Make sure you have a legal supporting document for each question raised by the tax office.

• Check every question in detail and refer to the tax regulation and directives. If the regulation and directives support the transaction and have a legal supporting document, challenge the tax office auditor with the issues and deliver the supporting documents.

• If the decision is not changed by the tax auditor, go to the Tax Complaint Committee by writing a detailed letter which explains the ongoing challenges with supporting documents.

As Will Rogers said, “don’t let yesterday take up too much of today”, and this remains very true for financial management and tax. We can’t emphasise enough the importance of a) proper planning and ordered preparation and b) getting expert help. When the tax auditors come calling, companies need to have their house in order before they arrive...or they will risk tomorrow taking up not just today, but tomorrow as well.