Is your finance function tax-effective?
At the heart of every organisation is a finance function. It is equivalent to an engine room, or even a factory floor, and when things go wrong in finance, an entire organisation can shut down. At times, C -suite executives and management, worry about how effective their finance function is. Questions often arise such as: Are there enough staff? Do staff have the requisite accounting and finance qualifications? Are financial reports in correct order and format? Are the figures factually correct and reflective of the current state of affairs of the business?
As someone who works closely with finance professionals and CEOs, and also having occupied a similar role in the past, I appreciate how important these questions are. However, one question which needs to be asked but is often ignored is: "How tax-effective is your finance function?"
Tax is wonderful and strange at the same time. Without having an in-depth understanding of the subject matter, it is nearly impossible to see the impact of an organisation’s finance related actions on its tax affairs and therefore its total tax cost.
For clarity, let me set the scene with a fictional finance team in three different scenarios. The team is made up of a qualified and very experienced CFO, a finance manager and four finance executives all with various responsibilities within the team.
Executive A is responsible for updating and maintaining the fixed asset register with all acquisitions and disposals. The executive enters all the information in the accounting system as required, however, sometimes he incorrectly categorises the office furniture along with the laptops and printers. He doesn't think this is an issue as it is all going to the same place, and doesn't bother to report his error to his supervisor.
Tax impact: Assets have specific categorisations for capital allowances purposes which tend to be different from accounting norms. Incorrect postings such as the one stated above, have the impact of the organisation claiming more capital allowances than they should and therefore paying less corporate taxes. The larger the amounts and number of transactions involved, the higher the risk of tax underpayments occurring. Sometimes, the inverse could occur and the organisation could end up paying more taxes than necessary. Neither outcome is desirable.
The finance manager is in charge of the monthly payroll calculations and she has been doing this diligently for the last two years. However, she is not aware that the tax bands have recently been widened and also that the training and clothes allowances given to senior staff are taxable.
Tax impact: Widening tax bands means that the amount of income taxed at a particular level is increased which effectively means people end up paying marginally less tax. Not taxing allowances of any kind (no matter what they are called) is incorrect and effectively in this instance, taxes are being underpaid.
One of the finance executives within the finance team resigns. As a result of this, there is a backlog in the collection of all the withholding tax credit certificates from suppliers. A rough estimate indicates that this could be in the region of GHS 2 million, however, there is a chance that the amount is much higher as there is no effective tracking system in place.
Tax impact: Withholding tax is effectively tax paid in advance and should be offset against future corporate tax payments. In essence, the company has GHS 2 million in taxes paid in advance which they are not using. This is a cash-flow nightmare which no serious -minded CFO should entertain or encourage.
As we can see from the three scenarios, tax is not something that should be ignored, but rather considered as an essential part of the corporate, finance and governance strategy of an organisation. Seeing things through a tax lens could save an organisation thousands or even millions of Ghana Cedis in tax payments, as well as plan their future tax transactions efficiently.
Formal tax strategy documents, tax risk policies and tax process manuals for management and staff, are necessary in order to ensure that everyone is on the same page and working towards the same goal. These documents are also required to ensure minimal knowledge is lost when inevitable staff attrition occurs.
So the next time you measure the key performance indicators in your organisation's finance function, let tax be a key one in order to make your finance function become not just effective but tax- effective.