KPMG in Canada | Business Adviser

Business Adviser Niraj Dawar

Financial reporting is key to managing your private company’s taxes

By Theo Michalarias
Partner, KPMG Enterprise / North York

Taxes can often be the single biggest expense a private company will incur and will affect virtually every transaction it undertakes. Yet in many private companies, taxes can sometimes be treated as an afterthought or a secondary consideration in the decision making process. Private companies need to acknowledge the impact that taxes have on an organization as well as the necessity for accurate financial information used in tax computations for both tax compliance and tax planning purposes. Some vital examples of the link between tax reporting and underlying financial information include:

Corporate tax returns – In addition to the obvious non-consolidated balance sheet and income statement used as the basis for the return, your company’s tax preparers must ensure that the underlying detailed information contained within the financial statements is accurate and readily extractable to facilitate the identification of items that can impact the computation of corporate income taxes including: the non-deductible portion of meals and entertainment, club dues, various reserves, expenses for repairs and maintenance related to capital expenditures, start-up costs, foreign exchange and financing costs.

Tax incentives – All companies are required to perform certain prescribed activities in order to qualify for tax credits offered by federal and provincial tax authorities. These activities would typically be evidenced by the functions performed by your employees as well as any materials, supplies and overheads consumed in the process. Internal information systems that accurately capture this activity are the key to maximizing any benefits available to your private company.

Employees – Private companies are typically good at withholding and remitting payroll taxes related to recurring payroll and periodic incentive payments. However, controls should exist to identify and track other uncommon types of benefits enjoyed by employees from time to time including: automobile benefits, interest free loans, club memberships and the use of any corporate owned assets.

Information Management System--The preparation of tax returns and tax information returns requires detailed and accurate information. Management information systems and underlying general ledgers will often times be unsuitable to gather the necessary tax information from the accounts. As a result, the risk of including incorrect information into tax returns is increased when manual processes are introduced as a necessity resulting from existing management information systems that are not integrated with tax reporting needs.

Exposure to Tax Penalties--Companies can be subject to penalties and interest for filing incorrect or inadequate information with their returns. In addition, your private company can also face reputational risk with your employees and the taxation authorities where employment related benefits are not adequately captured in an employee’s annual income and benefit summary and are subsequently discovered on audit by the taxation authorities. A lack of accurate information can also lead to missed opportunities to benefit from tax credits and other tax incentives.

These risks and missed opportunities can usually be traced to broader issues related to how a company views tax reporting and the tax function.

How tax savvy is your private company’s financial reporting system? Take our tax governance quiz.

Tax governance strategy – Does your company have a formal tax governance strategy for dealing with tax? Is the strategy derived from and aligned with your business strategy and financial reporting systems?
Profile of the tax function – Are taxes a primary consideration when your company is undertaking a transaction? Are there criteria for tax involvement in transactions?
Responsibility for tax – Is it clear who is responsible for the various taxes that your company may be subject to? Do other functions within your company cooperate well with those responsible for the tax function on tax matters?
Control environment – Does your company maintain a control environment around the tax function to manage risks and identify opportunities? Does your financial reporting system help support this objective?
People – Do people responsible for the tax function, both internal employees and external advisors, have the right level of experience and technical skills?
Accounting and technology – Are your company’s tax processes properly coordinated with your financial reporting and management information systems to improve the efficiency and accuracy of your tax function?

The mitigation of risk and the maximization of opportunities are universal goals within any part of a private company – taxation being no exception.

Given the trend toward increased enforcement, transparency and cooperation among tax authorities in Canada and around the world, as well as mounting pressures for governments to raise revenues, we expect private companies are likely to find that tax risk management, tax process improvement and use of technology will become much bigger priorities.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to helping business owners and entrepreneurs build thriving enterprises. For further information about how KPMG Enterprise can help private companies, visit www.kpmg.ca/enterprise.