Being a Tax Manager for many years, I have heard of somethings like:
- The company must have business contracts in place because the Tax Authority requests them during tax audit.
- We should check with the Tax Authority if they allow us to apply electronic signatures or contract or not.
- Accounting shall follow the Tax Treatment.
In my opinion, the aforementioned statements are inaccurate and have not yet considered the issue in a holistic manner. Any business activity has faced a certain level of risks. Our work is to identify these risks based on analyzing the company’s specific business activities from different perspectives, but need to take into account the holistic view as well.
In order to facilitate discussion among departments, the problems should be scrutinized though the following structure:
| Target to achieve | Current issue | Relevant Perspective (Legal, Accounting, Finance, Tax, etc..) | Next Action to do |
Target to achieve: As a meeting involves many participants from different background, it should be clear up front about purpose of meeting and what is the target to achieve. In a good discussion, conflict will sometimes arise. However to avoid conflicts escalating, the meeting leader or facilitator intervene throughout the discussion when necessary to ensure the discussion doesn't go far away from the aligned target.
Current issue: This is where the current status or existing facts are informed to all participants without emotion. Thanks to it, everyone is on the same page of understanding before contributing any opinion.
Relevant Perspective: Depending on the degree of significance, the top 5 perspectives normally include operation, legal, accounting, finance and tax. This is a crucial step to identify accurately where the problem originally arise from.
Next Action to do: In order to resolve the problem, we cannot skip specific Action Roadmap. Otherwise, the issue still exist there forever.
Let’s try to apply the holistic approach in analyzing two common business issues as examples:
Example 1:
Target to achieve: Business transaction is recorded precisely in internal system with proper accounting documents (e.g. invoice) as well as relevant original documents (e.g. contract, goods/service delivery minutes)
Current issue: Accounting journal doesn’t match with accounting document (i.e. expense is recorded for head office but invoice under branch name) . There is only correspondence email to confirm the provision of goods/services without signed contract.
Relevant Perspective:
(*)Legal:
Check if the email can be treated as legal agreement between seller and buyer according to Civil Code and Commercial Law. How to protect legal right of the firm in case any dispute?
(*)Accounting:
It is not compliance with regulated Accounting Standard. Which step in accounting procedure should be added to control this inaccuracy?
(*)Tax: Expense is non-deductible expense due to mismatched accounting document.
Next Action to do:
– Enhance local accounting guidance to ensure that the accounting journal match with accounting document and original document. Amend the incorrect information on invoice.
– Standardize the contract template to ensure the right and obligation for each party in business transaction is clearly mentioned
Example 2:
Target to achieve: Payment to overseas suppliers is processed in compliance with current regulations.
Current issue: Transfer money to overseas suppliers without withholding Foreign Contractor Tax (“FCT”). The Contract doesn’t mention any FCT term (i.e. who should bear FCT liability). The suppliers request to receive full amount as their invoice.
Relevant Perspective:
(*) Legal: Tax or legal liability should be clearly mentioned in the contract
(*)Accounting: Check if the current accounting procedure can ensure FCT liability is clarified before transfer money to overseas suppliers? How FCT liability is recorded in accounting book?
(*) Finance: The net margin will be adversely impacted due to increase of expense. Should negotiate with suppliers so that supplier bear FCT liability instead of us? Or negotiate the price to ensure the net margin meets target amount?
(*)Tax: Check if due date to declare and pay FCT is passed or yet? How much is FCT exposure? Any penalty and late charge shall be imposed?
Next Action to do:
– Add FCT term in overseas contract
– Provide accounting guidance in details regarding payment procedures to overseas supplier and accounting book for FCT liabilities for each scenarios (i.e. seller bears FCT liability or buyer bear FCT )
+The value of CIT (FCT) is recorded as additional expense in accounting book.
+ The value of VAT (FCT) is recorded in a separate GL, then can be offsets against output VAT
– Declare and pay FCT as soon as possible to mitigate tax exposure.