Tax compliance

Submitting correct tax return statements and paying due taxes in time.

DESCRIPTION

Tax compliance refers to fulfilling all tax obligations as specified by the law freely and completely.¹ Tax compliance means submitting a tax return within the stipulated period, correctly stating income and deductions, paying assessed taxes by due date and paying levied taxes.

PURPOSE & LINK TO INTEGRITY

Through the correct declaration and paying on time of an SME’s taxes, the company ensures budget transparency and prevents itself from being legally prosecuted¹. The complexity of tax laws, the high discretionary powers of tax officials, the low cost of punishment are only some factors creating opportunities for corruption in revenue administration². An SME can resist bribery demands from tax officials only if it is in fact declaring correct revenues and paying taxes on those revenues.³

KEY REQUIREMENTS

• Does your organization have an accounting system in place and is your staff trained on accounting issues (See also tools Accounting & finance manual, Reconciliation of accounting records, Computerised accounting and Accounting training)?
• Does your organization have compliance management in place that tax compliance has to be aligned with (See also tool Compliance management)?
• Does your organization have external auditing in place that tax compliance has to be aligned with (see also tool External auditing)?

HOW TO

Good tax management starts with good record keeping, especially financial records.⁴ Make sure your financial staff is trained in accounting such as classification and recording of monetary transactions and compilation of statements.

One possibility to ensure tax compliance is to use tax compliance software. This is software that ensures tax compliance for income tax, corporate tax, VAT, service tax, customs, sales tax, use tax, or other taxes its users may be required to pay. The software automatically calculates a user’s tax liabilities to the government, keeps track of all transactions (in case of indirect taxes), keeps track of eligible tax credits, etc. The software can also generate forms or filings needed for tax compliance. The software will have pre-defined tax rates and slabs and can allocate income or revenue in the right slab itself. The aim of the software is to provide the user with easy way to calculate tax payment and minimize any human error. Tax compliance software has been present in developed countries for long in the form of tax calculators mainly for direct taxes, such as income tax and corporate tax. Gradually some more complex and customized tax compliance software were designed and developed by organizations around the globe.”^5,6

If the nature of your business is fairly consistent from year to year, you may be able to manage your business taxes by yourself. However, you may be better off the first year to hire a tax advisor, e.g. in order to manage the accounts during big projects or to review tax declarations.⁴ Of course the impartiality, professionalism and integrity of the external accountant needs to be ensured.⁷

KEY GUIDING DOCUMENTS

Atawodi, O. W., Ojeka, S. A., 2012, Factors That Affect Tax Compliance among Small and Medium Enterprises (SMEs) in North Central Nigeria, International Journal of Business and Management Vol. 7, No. 12, http://www.ccsenet.org/journal/index.php/ijbm/article/download/15251/12028Ojochogwu, accessed 07.12.2015

Bridi, A., 2010, Corruption in tax administration, Transparency International, U4 Expert Answer No. 229, U4 Anti-Corruption Resource Centre, http://www.u4.no/publications/corruption-in-tax-administration/, accessed 04.12.2015

Del Rosario, R. V., 2011, Anti-Corruption Manual for SMEs, Hills Program on Governance, http://csis.org/images/stories/hills/110715_Anti-Corruption_Manual.pdf, accessed 07.12.2015

FURTHER  READINGS

Schmidt et al., 2007, Legislation and SMEs retailers—Compliance costs and consequences, International Journal of Retail & Distribution Management, 35, 256-270.

Bitzenis, A., Nito, E., 2005, Obstacles to entrepreneurship in a transition business environment: The case of Albania, Journal of Small Business and Enterprise Development, 12,

FULL REFERENCES

1. Atawodi, O. W., Ojeka, S. A., 2012, Factors That Affect Tax Compliance among Small and Medium Enterprises (SMEs) in North Central Nigeria, International Journal of Business and Management Vol. 7, No. 12, http://www.ccsenet.org/journal/index.php/ijbm/article/download/15251/12028Ojochogwu, accessed 07.12.2015
2. Bridi, A., 2010, Corruption in tax administration, Transparency International, U4 Expert Answer No. 229, U4 Anti-Corruption Resource Centre, http://www.u4.no/publications/corruption-in-tax-administration/, accessed 04.12.2015
3. Del Rosario, R. V., 2011, Anti-Corruption Manual for SMEs, Hills Program on Governance, http://csis.org/images/stories/hills/110715_Anti-Corruption_Manual.pdf, accessed 07.12.2015
4. Free Management Library, no year, S. Business Taxes for Small For-Profit Businesses
5. Wikipedia, no year, Tax compliance software, http://en.wikipedia.org/wiki/Tax_compliance_software, accessed 04.12.2015
6. Perez, W., no year, Top 7 Tax Programs, AboutMoney, http://taxes.about.com/od/preparingyourtaxes/tp/2004taxsoftware.htm, accessed 04.12.2015
7. Murray, J., no year, Who Can Prepare My Business Income Taxes?, AboutMoney, http://biztaxlaw.about.com/od/helpfrombusinessadvisers/f/Who-Can-Prepare-My-Business-Income-Taxes.htm, accessed 04.12.2015