Background

In the course of administering compliance with Tax laws and regulations, the tax authority may audit or investigate taxpayers’ tax affairs

In most cases, entities are exposed to tax liabilities due to  lack of awareness of procedures followed during such audits or investigations. Hence, it is critical that business owners and finance teams understand the concepts of audit/investigation and key timelines. 

A tax audit or investigation reviews an entity’s or individual's tax affairs to ensure the information reported to the Authority and the amount of tax paid is correct and accurate. Source information for such audits includes but is not limited to returns, accounts and financial records.

Effective audit/investigation process significantly contributes towards tax administration by promoting voluntary compliance, educating taxpayers, identifying non-compliance with laws and regulations, identifying key aspects of the law that require further clarification, etc.

Scope, Nature and Categories:

In Tanzania, the tax audit or investigation process is governed by Section 45 of the Tax Administration Act, Cap 438, and the Tax Administration (General) Regulations of 2015. Based on general practice, the audit or investigation exercise can be grouped into two main categories; namely tax examination of returns, accounts and tax audit or investigation. The key areas covered in each review are explained below.

a.Tax examination of returns and accounts

Desktop reviews conducted on the taxpayer’s affairs based on the information submitted i.e. tax returns, tax computation, financial statements and any other document submitted along with the tax return. The objective of the examination is to review the correctness of self-declaration by the taxpayer by comparing and reviewing all the data available with the Revenue Authority

b.Tax audit or investigation

Review of whether a taxpayer has correctly assessed and reported their tax liability and complied with requirements of the tax laws and regulations. Tax audits or investigations are usually detailed and extensive compared to examination or other compliance reviews.

The tax authority usually conducts a field visit to review information submitted by the taxpayer, understand business operations, and review supporting documents. The exercise may also involve third-party confirmation on critical affairs to derive an accurate assessment of the taxpayer’s liability.

Tax audits or investigation may be carried out in various forms such as:

i)         Comprehensive audit: this typically entails a full review of a taxpayer’s affairs for a given period. The scope of the comprehensive audit is all-encompassing.

ii)        Limited scope audit: this is confined to a specific type(s) of tax/or a particular tax scheme arrangement employed by the taxpayer—for example, direct taxes audit.

iii)       Single issue audits: this involves only one item of potential non-compliance—for instance, post-clearance audit.

In practice, the scope and nature of any audit activity undertaken for a particular taxpayer will depend on various factors such as the taxpayer’s audit history, any available evidence indicating risks of non-compliance or high-risk sector.

Phases and timelines

The following are the brief descriptions for phases of the exercise and its timelines:

Pre-audit phase: Before commencement of the audit, the Revenue Authority issues a notice of commencement of audit, which aims to create awareness of the scope and timelines of the audit.

During this phase, an entry meeting is scheduled for a preliminary understanding of business operations and to discuss the information requirements for the audit.

A taxpayer may request for postponement of tax audit subject to having a reasonable cause for such postponement.    

Inquiry and field reviews stage: This is the critical phase of the tax audit process whereby the tax authority reviews the information in-depth and may involve extensive tests and inquiries. It is of utmost importance that the taxpayers co-operate with the Authority during this phase and ensure regular communication with the Authority regarding the submission of information and any clarifications required. This phase includes the following:

  • Request of documents/information for audit exercise: the taxpayer is usually given up to 7 days to submit the information requested by the Authority. However, an extension may be granted based on mutual understanding and agreement with the Authority.
  • Issue of audit findings:  upon completion of reviews and inquiries, the tax authority issues its preliminary findings seeking responses/clarifications from the taxpayer. A taxpayer is required to comprehensively respond to the audit findings within 14 days from the date audit/examination findings are received. A further extension of 14 days may be requested and granted should there be a reasonable cause.
  • Discussion on the response: Upon submitting the response, the Authority reviews the same and requests a meeting to go through the response and request any further clarification required. When discussing the response, the tax authority may agree or disagree with the taxpayer’s response.

Conclusion phase: this phase comprises of the following

  • Final audit or investigation report: also referred to as notes of discussion. It entails the issues discussed and the final tax position established by the Authority. Both parties are required to sign the document as evidence of the audit proceedings.

Where the taxpayer disagrees with any particular tax position established, it is critical that the taxpayer adequately documents the disagreement in the final discussion notes before signing the same since such documentation will be essential and referred to during further dispute resolution processes.

  • Assessments: upon conclusion of the audit, the Authority issues a system-generated tax assessment for exposures depicted in the final audit report.

The taxpayer is required to pay the established liability within 30 days upon receipt of the assessment if in agreement with the same.

If the taxpayer is aggrieved with the tax decision/assessment issued, the taxpayer is required to lodge an objection within 30 days from receipt of the assessment (“objection due date”) - see other requirements and timelines below.

A taxpayer may apply for a further extension of 30 days. However, such request must be submitted 7 days before the objection due date.

Other requirements and timelines relating to the objection:

  • Payment to validate objection: In line with S.51 (7) of the Tax Administration Act, an objection shall not be admitted by the Authority unless the same is supported by payment of tax not in dispute or one-third of the assessed tax (whichever is greater) before the due date.
  • Application of waiver for one-third deposit or deposit of lesser amount: A taxpayer may request for waiver of one-third deposit or deposit of a lesser amount should there be good reasons warranting the reduction or waiver.

It is important to note that the law does not stipulate what qualifies as “good reasons”. A taxpayer can therefore highlight matters relating to law or finance when seeking the waiver. However, the decision is at the discretion of the Commissioner General.

The waiver must be lodged within 15 days before the objection due date.

Conclusion

It is worth noting the Tax Administration Act provisions require the taxpayers to provide all relevant information and documents to the taxman during the audit and objection stages. Failure to adhere to the requirement revokes the taxpayer’s right to provide such information and documents during the appeal stage (dispute resolution).

Furthermore, section 45(3) of the Tax Administration Act clearly stipulates that “Where a person has been audited or investigated for any particular period, such audit or investigation shall not preclude that person from being audited or investigated in the following period if there are reasonable grounds for auditing or investigating that person.”. Therefore, a taxpayer may be subject to further investigation or audit should there be reasonable grounds warranting the same.

In order to have a smooth and efficient audit, taxpayers should mutually agree upfront with the taxman on the means of submission of information. The entry meeting should be the key point of understanding the scope of tax audit and the requirements.  It is recommended tax consultants are engaged timely to provide support to ensure the requirements of the laws are adhered to and the responses to tax queries adequately addressed should the matter proceed to appeals.

Do you require any assistance in managing the tax audit process? Reach out to us on [email protected] or our office premises at 1st Floor, Plot 1040, Haile Selassie Road, Masaki.