Managing compliance obligations to reduce risk of tax penalties upon audit

Full compliance with these obligations, which include registering with the tax authorities in regard to a particular tax, acting as a withholding agent, filing returns and making payments on time, and keeping proper records, have little to no financial burden on taxpayers; hence, the saying “the best tax planning measure is compliance.” 

This article highlights how taxpayers may reduce risk and exposure through tax compliance, identify typical noncompliance areas in practice, and use certain measures to comply with the tax laws in order to reduce the risk of imposition of penalties. 

Tax audit liabilities 

A standard comprehensive tax audit by the GRA usually covers four main tax types: corporate income tax, withholding tax, employee taxes (under the “pay-as-you-earn” or PAYE system), and VAT. Liabilities relating to withholding tax, employee taxes, and VAT normally constitute a large proportion of the total tax liability arising from most tax audits. These taxes generally are avoidable as they are third party taxes and not intended to be borne by the payor. However, a payor that fails to withhold taxes from payments made to employees, vendors, or other third parties may be liable for the taxes that should have been withheld. 

Withholding tax

Under the Income Tax Act, 2015 (Act 896), residents are required to withhold taxes at specified rates on payments to residents and nonresidents. The applicable withholding tax rate depends on the nature of the transaction and the tax residency status of the recipient. For example, for payments between residents, a withholding tax rate of 7.5% would apply if the payment relates to services rendered, 5% if it relates to works contracts, and 3% if it relates to goods. Payments to nonresidents for services and works contracts are subject to withholding tax at the general nonresident rate of 20%. 

The amount of tax withheld in a month must be remitted to, and a withholding tax return must be filed with, the commissioner-general of the GRA within 15 days after the end of the month. 

The amount of tax withheld in a month must be remitted to, and a withholding tax return must be filed with, the commissioner-general of the GRA within 15 days after the end of the month. 

Withholding tax liability in a tax audit normally results from one or more of the following: 

• Failure to withhold tax: A resident that fails to withhold tax when making a payment will be required to pay the tax not withheld. This is the primary cause of withholding tax liability arising from tax audits.
• Applying the incorrect (lower) withholding tax rate: Tax audits may uncover situations where residents apply the wrong withholding tax rate when making a payment. However, this is an issue only where the incorrect withholding tax rate applied is lower than the correct rate, as this would create a tax exposure for the payor.
• Failure to remit withheld tax by the due date: Late remittance of withheld amounts may result in interest charges.
• Failure to file a withholding tax return by the due date: Failure to file withholding tax returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.

Employee taxes

Employers are required to withhold taxes from payments to employees for the exercise of their employment. The taxes must be withheld on all gains and profits from the employment unless specifically exempted. The employer must remit the taxes withheld to the commissioner-general of the GRA, together with the PAYE return, within 15 days after the end of the month.

Liabilities arising from tax audits result from the failure to fully comply with the PAYE obligations. Below are some of the practical issues that may lead to PAYE liability:

• The omission of certain taxable amounts from the PAYE computation: Almost every benefit earned by employees, whether in kind or in cash, including gifts, is taxable. However, reconciling the taxable staff cost in the audited financial statements to the total amount reported on monthly PAYE returns may show differences that suggest that not all taxable payments to employees were taxed under PAYE. The unpaid taxes then become the financial responsibility of the employer when they are discovered during a tax audit.
• Use of incorrect tax rates: Employers may be applying incorrect tax rates to certain employee payments, such as bonus and overtime payments, payments to temporary and casual staff, and payments related to income earned by foreign nationals who are tax resident in Ghana. For example, payments to temporary staff are taxed using graduated rates, whereas payments to casual staff are taxed at a final withholding tax rate. Also, while income earned by nonresident foreign nationals is taxed at a final withholding tax rate, payments to resident foreign nationals are taxed using graduated rates.
• Late payment: Late remittance of withheld amounts may result in interest charges.
• Late filing: Failure to file tax returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.
  

VAT

VAT is a consumption tax imposed on the supply of goods and services made in Ghana, or imported into Ghana, other than supplies specifically exempt from VAT.

Under the Value Added Tax Act, 2013 (Act 870), persons that make supplies of goods and services (other than exempt supplies) and meet the registration threshold are required to register for VAT with the GRA. 

Most VAT issues arising from a tax audit come from the following areas: 

• VAT registered persons not charging VAT on taxable supplies: The reconciliation of revenue reported on the audited financial statements and revenue filed on submitted VAT returns is a common audit procedure adopted to test the accuracy and completeness of the revenue reported for VAT purposes. Any unexplained difference is treated as a deliberate understatement of revenue, which may result in an additional tax assessment on the taxpayer.
• Failure to remit the VAT charged and collected by the due date: Late payment of VAT may result in the imposition of late payment interest on the outstanding balance. VAT charged on an invoice must be remitted to the commissioner-general of the GRA not later than the last working day of the month immediately following the month in which the supply was made (hence, the due date is not dependent on when the customer eventually makes payment).

1. The goods are removed from the premises of the taxable person;
2. The goods are made available to the persons to whom they are supplied;
3. The performance of services is completed;
4. Payment is received; or
5. A tax invoice or sales receipt is issued.
   

Where a taxpayer issues a VAT invoice for services, the due date for filing and payment of VAT is not dependent on when the customer makes payment. Failure to file VAT returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.

Managing tax compliance

Taxpayers should make a concerted effort to fully comply with the compliance provisions under the tax laws, taking into consideration regular tax health checks and proper recordkeeping.

Tax health checks

Given the sanctions associated with noncompliance, taxpayers should conduct regular tax health checks at periodic intervals to uncover any errors or omissions in a timely manner and, where necessary, settle any additional tax liability to prevent interest charges.A tax health check not only helps quantify the potential tax exposure but also identifies tax risk areas that require extra attention from the taxpayer to minimize the probability of reoccurrence

Proper recordkeeping

Recordkeeping is an obligation imposed on taxpayers by the tax laws, and failure to comply may subject taxpayers to penalties. The Revenue Administration Act 2016 (Act 915) imposes an obligation on taxpayers to maintain necessary records and documentation in Ghana, and any failure to comply may result in a penalty of 75% of the tax attributable to the period where the failure is deliberate or, in any other case, the lesser of 75% of the tax attributable to the period and GHS 250. The commissioner-general of the GRA must use a just and reasonable basis in determining any penalty.

Beyond the tax law requirements and the penalties that come with noncompliance, proper recordkeeping helps to provide evidence that may be required for defending a position during a tax audit. Proper recordkeeping includes:

• Invoices supporting all sales and purchases made during a tax period;All necessary documents supporting sales reversals and associated payments;
• Accounting records with a detailed description of the nature of all transactions;
• Withholding tax exemption letters received from vendors and accurately tracked payments made to such vendors;
• VAT relief purchase orders (i.e., documents that are issued by purchasers for taxable supplies purchased that are subject to VAT relief and that serve as evidence for such VAT relief on supplies made by VAT registered suppliers);
• Documents issued by free zone entities (using form 9) that indicate the description and value of goods and services purchased from local VAT registered providers and that serve as evidence for zero-rated goods and services made by the VAT registered supplier to the free zone entity;and
• Documentation and justification of adjustments passed by the statutory auditor during an audit of the financial statements.

Summary

Any increase in taxes payable (including associated penalties and interest) increases the cost of doing business and has a negative impact on a taxpayer’s cashflow. Accountants, compliance officers, and even senior company executives must work together to ensure that measures are implemented to ensure tax compliance. This requirement is even more important now, due to the challenges faced by taxpayers under the current economic landscape.