Era of heightened tax controversy risk requires quality data, records

At the country level, many countries have instituted, or are in the process of making, substantial changes to their taxation frameworks.

For instance, the Africa Tax Administration Forum has been at the forefront in building the technical capacity of revenue authorities in the continent. This has led to notable improvement in the approaches adopted by revenue authorities in conducting tax compliance reviews and audits.

It is notable that there is increased focus on the use of various tax administrative measures to increase tax revenue collections.

This is being used to complement the use of other legislative measures, such as an increase in tax rates, removal of tax incentives and exemptions, among others.

This comes amid an appreciation that the application of targeted and appropriate tax administration measures holds immense potential to plug some of the existing gaps in tax revenue collection.

Data privacy has emerged as a central aspect for organisations.

This is more so bearing in mind that the Office of Data Protection has determined various cases relating to data privacy, use and/or misuse, among other aspects of usage of private data by organisations.

The creation of data, accuracy of data sets, proper classification, and declaration, among other critical aspects of data from tax compliance and tax risk management appears not to have been prioritised.

Additionally, documentation of financial and non-financial transactions is the cornerstone of tax risk management.

The quality of documentation is critical in supporting tax positions and declarations, but equally important is ensuring that the practice is aligned with the supporting documentation.

Incongruence between documentation and the day-to-day practice is another major weakness in managing tax risks.

It is not uncommon to find taxpayers who meet all documentary requirements set out in the law, but the financial and non-financial data from their daily business operations does not align with the said documentation. That creates a major loophole for tax controversy that is won by the tax authority due to the lack of coherence in the supporting narrative.

Based on a critical analysis of many tax judgments and cases, it is evident that a large proportion of taxpayers have faced material tax assessments due to issues relating to the quality of their data and documentation.

Preparedness, organisation, harmony and congruence of data and documentation cannot be overstated in the management of tax controversy risks of an organisation. The alignment of data and documentation with daily practice is then the only path for organisations to ensure that they get their ducks in a row in readiness for tax audits.

The use of data analytics and other emerging technologies to process and synthesise large volumes of data has emerged as a key advantage in revenue administration.

Taxpayers have equally enjoyed the advantages of technology through simplified tax filing and payment processes. The automation of certain processes such as the application of tax refunds, tax compliance certificates, payment plans, among other aspects has improved interactions with revenue authorities.

Amid these developments, there has been a growth in technology driven tax controversy as revenue authorities intensify their audits. Revenue authorities have access to large data from different sources but the key source is the self-declarations made by taxpayers when filing their tax returns.

Gone are the days when little or no emphasis was laid to data quality, sources of data, and classification of data, among other facets of data.

While a lot of focus is often placed on technical tax aspects that tend to attract different schools of thought and professional views in many tax audits, data and documentation have emerged as the key determinants of the probability of winning tax controversies.

Inevitably, the interpretation of tax laws is subject to divergence of opinion due to the choice of wording in the statutes, a lack of definitions of key terms, and differing international jurisprudence, among other plausible reasons.

Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY