If your company is looking to pay the least amount of tax possible, it takes a lot of hard work, systematic processes and a deliberate objective.
Let’s face it, GST/HST are taxes that few want to deal with. Many people believe it is a flow-through tax, so it doesn’t require a lot of attention. Auditors will review taxes and advise on corrections, and a company will end up paying and recovering exactly what they need to. As long as there aren’t any assessments, a company may believe that the indirect tax is nothing to worry about.
The problem with relying on auditors…
In general, auditors are not trying to make sure you pay the least amount of indirect tax possible. They are also not going to ensure that a company’s systems capture the appropriate tax amount.
A company’s external auditor is hired to make sure that indirect tax reported in the tax accounts is remitted. They may want to know if assessments have been raised so they can confirm that they have been paid and perhaps if the issue has been corrected.
Government auditors, on the other hand, are looking for “revenue”— assessments of tax. In Canada, auditors are required to audit to net tax, but, in general, there is no incentive for them to point out refunds or errors that would result in the payment of less tax.
Therefore, the company being audited needs to determine whether there are any overpayments, which an auditor would then review. You can’t assume that assessments are an accurate reflection of tax payable in the company. By extension, one cannot assume that, just because there has not been an assessment of tax raised by a government auditor, a company pays the correct (read “least”) amount of indirect tax.
So, what are your options?
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.
One of their non-resident clients (NR) entered into an agreement with a Canadian supplier to provide services. NR was not registered for GST/HST purposes. They knew very little about GST/HST and relied fully on their Canadian supplier (CanCo) to determine tax applicability. CanCo was already providing delivery services to NR. The nature of the services was such that the services involved the goods being received by CanCo from other suppliers. CanCo would prepare the goods for shipping and deliver them to NR outside of Canada. GST/HST wouldn’t apply to these services.
As an extension to the services, CanCo agreed to provide repair services to goods that needed it before delivery. CanCo charged GST on the repairs services to NR, who was not able to recover the tax. The government auditors confirmed this treatment. However, when NR reviewed the transaction, it became apparent that the repair services would have qualified to be zero-rated, and no tax should have been charged to NR.
Use the five-step tax design method
The example above highlights the importance of considering indirect taxes independently of auditors. The outcome of the situation would have been different except for the fact that NR used a five-step tax design method for determining whether tax applied on the services being provided.
They got clarity on the transaction in relation to other goods and services being provided. Part of the issue with these transactions was that CanCo considered the services to be isolated when, in fact, they were not.
NR took command of the indirect tax implications of the transactions taking place. In the situation above, the incorrect assessment of GST was highlighted quickly and corrected. However, without being deliberate about the transaction, this tax could easily have been paid and become an added cost to NR.
Communication about the applicability of tax is important to highlight any possible issues that may exist.
They were curious about the transaction and how the indirect tax affected the goods and services provided.
NR has a defined consistent process for determining how tax applies to any transaction with a supplier or other undertaking will help ensure that a company pays only as much tax as required.
If you have any questions for our indirect tax experts, we are here to help! Contact us today for any questions or requests!
