A tax audit (or tax review) is a critical examination, conducted by an independent professional to assess the tax situation of a company.
Indeed, in Morocco as elsewhere, it is a structured approach based on :
- First, the identification of the tax risks to which the company is exposed;
- Second, conducting controls, cross-checks and verifications to ensure that the company has covered these risks;
- Third, the identification of the actual impacts of these risks (errors, omissions, positions, etc.);
- Finally, the proposition of solutions and adapted recommendations.
The tax review mission aims, in general, to quantify the tax risks of a company.
Why perform a tax audit ?
In the context of day-to-day management:
Running a business almost automatically exposes it to tax risks. As the famous saying goes, the best way to avoid exposure to risk is to do nothing.
These risks can have different origins:
- First, situations inherent to the company’s activity
- Second, human errors or omissions
- Third, a lack of mastery by the internal team of certain tax aspects
- Fourth, management choices
- Finally, an operational or control malfunction leading to poor risk management
A tax audit aims to conduct a series of tests to assess the tax situation of the company. These tests aim to:
- Ensure compliance with the tax schedule;
- Verify special requirements related to the nature of the business;
- Recalculate tax bases and rates used;
- Cross-check accounting records and tax returns;
- Perform targeted tests on aspects usually identified in the event of a tax audit.
The tax audit is usually also the ideal occasion to identify possible tax optimization opportunities.
Indeed, the objective is not only to minimize the impact of a possible tax audit. It is also an opportunity to propose value-creating levers for the company.
In the context of an operation on capital or a company acquisition
In the event of an operation on capital, there is generally a transfer of risk from the former shareholder to the acquirer.
Indeed, a company can be subject to a tax control following an acquisition which may reveal significant adjustments.
As such, for a potential buyer, the tax risk must be one of the areas to check. Indeed, this is an area where potential liabilities may be concealed.
One the one hand, proven tax risks generally result in a direct decrease of the purchase price. On the other hand, possible risks are expressed through the insertion of a liabilities guarantee clause in the acquisition agreement (or in a separate agreement).
The pre-transfer tax audit:
- Helps in the drafting phase of the liability guarantee clause ;
- Can be part of the determination of the acquisition price.
Main tax risks to analyze during a tax audit
The scope of a tax audit is discussed in advance with the company’s management. Indeed, it depends a lot on the objectives assigned to it. The determination of the scope must take into account the objective of global efficiency of the mission. In no case should the means implemented be decided upon separately from the tax audit.
However, it is often necessary to perform a set of minimum controls (which will always be part of the scope):
First, a general critical review
Nowadays, tax administrations (including the Moroccan administration) have IT tools to flag high-risk indicators.
These indicators are part of the usual list of letters of explanation that the administration in Morocco sends to taxpayers.
As such, the tax audit should cover these controls to prevent them from being identified by the Administration.
These common controls include:
- First, the consistency between the tax bases of different taxes:
- Turnover reported on VAT returns VS Turnover reported on C.I.T. return
- Fixed assets in the annual financial statements VS those reported on the business tax return
- The tax base of IR on wages VS the base of CNSS (social security fund)
- Salaries on the 9421 statement VS salaries on the income statement
- Second, the existence of accounts with abnormal balances:
- Presence of an abnormally high shareholder current account
- Abnormally high accounts receivable
- Inconsistency between the invoiced VAT balance and accounts receivable balance
- Third, comparative profitability indicators
- The company’s gross margin rate compared to the sector’s
- Net income / sales ratio
The Tax Administration generally uses these indicators to better allocate its resources to taxpayers with high risks.
Second, a review of the respect of tax schedule
This phase’s objective is to ensure that the company has met all its reporting obligations. Indeed, sometimes, even in the absence of a tax base, certain tax returns must be filed.
The non-filing of these returns can expose the company to the risk of penalties.
Identifying them in time and regularizing them spontaneously can be a financial benefit for the company.
Third, avoid the rejection of accounting in the event of a tax audit
Under article 213 of the General Tax Code, the tax authorities have a discretionary power.
This power can be used in 4 situations described in the same article, namely:
- First, if serious accounting irregularities are identified. In this case, the Administration must prove that the serious irregularities call into question the probative nature of the accounting ;
- Second, the existence of a transfer of profits in the presence of a relationship of dependence with companies located in Morocco or outside Morocco ;
- Third, the existence of significant expenses incurred abroad by foreign companies having a permanent activity in Morocco without justification ;
- Finally, in the case of abuse of rights.
In the event of a tax control, it is crucial to conduct tests to ensure that none of the situations above exist.
When one or several of these situations are identified, it is necessary to procced with adjustments to reduce the risk of accounting rejection and/or the impact of automatic taxation.
Fourth, other tests part of a tax audit
A tax audit must also carry out detailed tests on the accounting entries and documents. We can mention, for instance, the following tests:
- Ensure that deductible expenses are backed up by supporting evidence ;
- Review the VAT deduction tables ;
- Verify that the reintegrations required by law have been made ;
- Check that the invoices of important suppliers show the required information ;
- Ensure that payment methods comply with tax regulations to benefit from the deduction ;
- Verify the absence of duplicate expenses, duplicate tax deductions ;
- Review the rules for calculating withholding taxes ;
- Recalculate the depreciation rates used by the company ;
- Verify that deductible provisions comply with regulations.
Obviously, this list is non-exhaustive.
Need a tax review ? Contact Upsilon Consulting.