Ensure fair and just audits and avoid abusive taxation

5 Sep 2017 at 04:00 / NEWSPAPER
SECTION: BUSINESS

Ensure fair and just audits and avoid
abusive taxation

The Revenue Code provides various
tools to tax officials to ensure that taxes can be collected with a high level
of efficiency. These tools can serve as a double-edge sword, ensuring tax
compliance while also imposing punishment on defaulting taxpayers.

Questions often arise about whether assessment officials
are free to apply these tools against taxpayers at will, or if they need to be
applied within the context of fairness and justice.

Let's look at a specific example. If a corporate taxpayer
fails to provide adequate information or documents to support the calculation
of net profits, Section 71(1) of the Revenue Code allows an assessor to apply
5% tax on gross revenue in lieu of 20% tax on net profits. This is often a
problem for taxpayers, since cooperating with the taxman's request for more documents
could land them in trouble or weaken their existing position.

The 5% tax on gross revenue is high in light of the decline
in corporate tax rates in recent years. Back when the rate was 30% of net
profit, a 5% tax on gross revenue implied a profit margin of 16.6%. At the
current rate of 20% of net profit, 5% of the gross implies a profit margin of
25%. Not only is Section 71(1) an effective tool to force taxpayers to open
their books, but it also lets authorities collect more than the taxpayer would have
paid if non-compliance had not occurred.

If a taxpayer has income of 100 and expenses of 90, the
normal tax is 2 (20% of the net profit of 100-90) but tax assessed under
Section 71(1) is 5 (5% of 100). In the worst-case scenario, Section 71(1) could
result in tax being imposed even if the business is sustaining losses — plus
surcharges of 1.5% and penalties of either 100% or 200%, depending on whether a
tax return was filed.

In this context, it's necessary to understand the level of
cooperation that will be sufficient to save taxpayers from the abusive
imposition of the 5% tax.

Section 71(1) states that an official may apply the 5% tax
if a company fails to file a tax return or a financial statement, or to submit
documents or evidence requested in the course of a tax audit. Until 2009,
however, it was unclear whether Section 71(1) applied in all cases of failure
to file a tax return or financial statement by the normal deadline of 150 days
from the end of the accounting year. The court ruled that providing all the
required documents requested in a formal summons could save the taxpayer from
additional financial punishment. It states:

"The spirit of Section 71(1) was not only to punish
those who fail to comply with legal provisions, but also to encourage taxpayers
to file tax returns with the correct information and submit the financial
documents necessary to prove their income and expenses. … The assessment
official must consider suitability and fairness in applying Section 71(1).

"Thus, even though the assessment official had
authority to assess tax under Section 71(1), due to the taxpayer's cooperation
in filing a tax return and submitting evidence after receiving the letter of
summons, which enabled the assessment official to calculate the amount of actual
net profits, the assessment under Section 71(1) was not legitimate even if it
was approved by the director-general of the Revenue Department."

This view was reiterated in a recent court case involving a
more complex situation in which the taxpayer failed not only to file a return
by the deadline but also failed to cooperate during the tax audit process.
Would the taxpayer still survive Section 71(1) in this case?

In this case, after failing to file a tax return, the
company failed to send a representative to a meeting that a tax official
requested to discuss the issue. The official then issued a summons to which the
company did not respond until it received a second warning letter. It finally
started to cooperate, saying the delay had occurred because the accountant who
had audited the books for the years in question had resigned.

The assessment official compared the tax calculated on net
profits and on gross income, and decided to apply Section 71(1) since it
resulted in a higher amount of tax. The company also faced a 20% surcharge for
the half-year tax default, based on the year-end tax amount derived under
Section 71(1).

The court said the assessment was illegitimate, based on
these reasons:

While the Revenue Department has the
authority to make an assessment under Section 71(1), its primary duty is to
adopt the normal assessment based on actual net profits. In this case the
department conceded that it was able to calculate net profits based on the
information provided by the company during the audit process.

The department could not prove how
the documents, which it claimed the company did not provide, affected its
ability to compute tax on net profits.

It appeared that the company had
filed tax returns and provided documents sufficient for the calculation of net
profits to the assessment official before the assessment letter was issued.

It's clear from this example that the tools provided to
officials for tax collection must be enforced with fairness and justice. To
ensure that this principle is upheld, taxpayers should always prove their
innocence by explaining the causes of any delay in submitting documents.

By Rachanee Prasongprasit. She can
be reached at [email protected]