Who doesn’t love a refund? When it comes to taxes, refunds are great because it means a tax consultant has found them for you. However, it also means unnecessary taxes are leaking into your profit margin, and they need to be addressed.
B. Hoffmann & Associates (BHA) are tax accountants that help medium and large corporations minimize the Canadian indirect tax they pay on an ongoing, consistent, and supported basis. They love the stories in an organization that, when put together, become the business.
All refunds are great, right? Wrong!
Indirect taxes can be complicated. If your favourite tax consultant is finding refunds or recoveries missed in the system, you might believe that you have “found” money. Also, because you have now paid for the services out of the refund, the process hasn’t actually cost you anything. On the contrary! You have found money that you would otherwise not have had.
The issue with that thinking is that you should have had that money in the first place. Now, when $1 million should have been recovered from taxes, that number has shrunk to $500,000 because of the TaxFind company’s fees. You might think, well, they could have found nothing, and then my fee would have been $0. That attitude is gambling with the company’s money.
Most systems are designed for indirect taxes
An accounting or ERP system should be designed to pay and recover tax where appropriate.
Generally, these systems are not built with indirect taxes in mind. They have tax calculation modules or even the ability to incorporate other tax calculation software, but these systems are built to calculate tax-given certain parameters. They do not necessarily have the ability to capture tax on transactions that are unique to your business. Also, these systems will not automatically capture tax on transactions that are new to the system.
Case study – ABC Jewellery Company
ABC was a jewellery retailer who, among other things, imported jewellery into Canada. They had been importing diamonds and jewellery for many years. The system had been set up to capture a 10% excise tax on all jewellery entering Canada. Then, the company started making customized engagement and wedding rings on-site.
The system did not have a process for recognizing that some of the diamonds being imported were part of a manufacturing process and that excise tax would not have been payable.
While $650,000 of ABC’s excise tax for a two-year refund period was recovered, around $3 million was lost. This is because there were no processes to capture the tax when ABC first started manufacturing the rings. Having an internal tax system and procedures designed to deal with the business’s specific idiosyncrasies would have saved the-now bankrupt company.
A five-step plan to avoiding the same fate
ABC could have avoided cash losses through a five-step indirect tax design method.
- Clarify the sources of indirect tax in the system to highlight current processes and changes in the business, which could impact indirect tax. Part of the issue for ABC was that changes had happened in the business, and the systems either had not or could not be changed to accommodate the different tax treatment of the diamonds being imported.
- Take command of the indirect tax implications of all transactions that take place. In general, the tax department is not the owner of a transaction. Still, they can control how the transaction is treated for indirect tax purposes, whether that is an excise tax, GST/HST, PST, environmental levies, or customs duties.
- As the tax department is not the transaction owner, it is important to raise awareness within the organization that transactions have tax implications. Open communication about the applicability of tax on transactions within an organization can go a long way in ensuring that cash is not overpaid for indirect tax.
- Be curious about the business and understand its transactions – this can raise opportunities or risks for the indirect tax that can be corrected early so that large refunds or lost cash can be avoided.
- Have a defined, consistent process for determining the implications of indirect tax on any transaction, project, or new business undertaking to ensure that the maximum amount of cash will make its way to a company’s bottom line.
How you can ensure your company has a rock-solid plan
Minimizing the risks and recovering indirect tax takes time, effort, and money. Having a consultant uncover opportunities for “free” will not negatively affect the income statement or the balance sheet because the fees are paid from any recoveries found. While this is true, the service is still not free.
The money paid to a consultant is based on tax that should not have been in the system in the first place. The tax department usually spends a significant effort pointing the consultant toward issues that might exist and then helps them get to the data they need to support any recoveries.
Consultants do not know the business like an internal tax or finance person does. However, the amount of time a business spends uncovering a potential refund that a consultant then compiles and, in some instances, just gives back to the business to recover (as in the case of a GST/HST) can be a significant cost in its own right.
The consultant will also inform the company about what issues were uncovered, but, ultimately, it is the business’s decision to change and fix those issues to ensure they are operating effectively. TaxFind consultants are reluctant to pursue any issues or opportunities they consider contentious because of audit risk.
The problem with this is that transactions and opportunities which can be regarded as contentious are the very ones that are unique to your business. Therefore, the method described above will uncover these risks and opportunities while providing a path to ensure that there is no more tax paid than is necessary.
By following the five-step indirect tax design method, the company will be compliant and audit-ready. You will have peace of mind that tax payments are minimized, and there will be more cash in the door earlier.
What are your thoughts? I invite you to like/share/comment on the above and let me know your thoughts. If you have any further questions about the information above, feel free to contact one of our tax experts today!