Monitoring tax risks
Tax risk monitoring is the direction of the tax consultant of the law firm AGTL Kharkiv, Kyiv, Odessa. As you know, any disputes are easier and cheaper to prevent than to prove their innocence later, this applies equally to disputes in matters of taxation. Unlike when we are dealing with a dispute that has already arisen (i.e., usually with a check or trial that has already begun), the situation where a particular transaction or the taxpayer’s activity is tested in advance for the possibility of such a dispute provides a huge opportunity to optimize future risks. At this stage, the taxpayer can still without significant restrictions to produce and collect additional documents, correct their mistakes, simulate the transaction without risk or abandon the transaction altogether, if the risks of financial losses on it are too great.
Due Diligence is a special type of work of tax consultants, which includes three interconnected elements
- Identification and assessment of existing tax risks of the taxpayer-client;
- Recommendations to minimize identified tax risks;
- optimization and minimization of taxation of the taxpayer-client.
Due Diligence tax can be carried out both on individual transactions, and comprehensively throughout the company. Comprehensive Due Diligence is usually the first step in preparing for tax optimization, in preparation for a possible tax audit, when buying or selling a business or part of it (the deal of the M’A). Risk monitoring in a single transaction is particularly important in planning a potentially tax-risky transaction in which substantial funds for the company will be involved.
Who needs to monitor tax risks?
As a rule, this service is especially recommended to taxpayers-organizations (legal entities), but if an individual is actively involved in economic relations, personally participates in large transactions or owns expensive assets, he is also recommended to undergo this procedure.
When should tax risks be monitored?
In our opinion, the monitoring of tax risks in one form or another should be carried out regularly. The general rule is that the more active and complex the activity of the taxpayer is, the more attention it should pay to tax risks and their optimization. However, there are categories of taxpayers and situations where tax risk assessment is certainly necessary.
For example, a comprehensive due Diligence tax is needed by any large company where:
- There is no well-established system for controlling tax risks (due diligence systems for the counterparty, a system of legal work with primary documents and contracts, a system for analysing thresholds for the purposes of benefits or simplified tax regimes, and so on);
- regularly fixed tax losses or profitability significantly deviates from the generally accepted in the industry, companies;
- tax credits are used, substantial amounts are claimed for reimbursement;
- Exit tax audit is expected;
- and any company that has not undergone this procedure for more than three years.
Monitoring the tax risks of individual transactions
As for the tax risks of individual transactions, such monitoring may be especially relevant, for example, before buying a large asset (including another company). We also strongly recommend tax monitoring of transactions if they have one or more of the following:
- this is a large transaction for the taxpayer on the absolute size or relative to the company’s assets and assets (already at the level of 5-10% of the company’s free working assets, we would recommend to consider the transaction large for such purposes);
- It is a transaction implying the right to tax exemption or a large tax credit;
- it is an atypical transaction, not typical of the usual activities of this taxpayer;
- It is a transaction with an interdependent person or with a person applying tax benefits (applying a simplified tax system, residents of special zones);
- It is a transaction with a complex subject of regulation, such as a transaction with securities or financial instruments, land, concession or other transaction with property and non-property rights;
- A transaction made exclusively through the Internet;
- It is a transaction with a foreign company (from an offshore or other jurisdiction) or a transaction subject to foreign law;
- this is a transaction with a counterparty in which you are not sure (if the company-counterparty was created recently, there is no reliable data on the location of the counterparty, the counterparty does not have its own website, there are no permanent contacts, do not know the data on the regularity of reporting to the tax authorities, and so on);
- it is a transaction or transaction made through an intermediary (or several intermediaries) with agents, commissioners and other similar persons.
What does a customer get as a result of the Due Diligence tax?
Based on the results of the tax risk assessment, the client is provided with a report describing the tax burden, assessing the identified tax risks and the likelihood of their occurrence, and recommending their reduction. Due Diligence tax allows you to make a professional opinion on the quality of the system of control of tax risks in the enterprise, to identify hidden tax risks in terms of possible prosecution of the company for violation of tax laws and to reduce the effective taxation of the company. The client receives a written assessment of the probability of claims against the company by the tax authorities, a written analysis of tax risks and a description of options for reducing or eliminating them, as well as describing options for optimizing taxation.
The specific task and scope of future research is always consistent with the client in writing (technical task), where we try to fully and fully consolidate the goals, conditions, volume, timing, stages and cost of work. We always proceed from your needs and tasks, your questions and wishes, trying to always be as useful and transparent as possible for our clients.
Our highly qualified professionals can conduct Due Diligence as an independent procedure, as part of a set of measures to optimize the tax burden of the entire company and systemic reduction of its tax risks. We have a lot of experience working with tax authorities, so we know what weaknesses they pay attention to in the first place, and we will help you avoid claims on their part.