Communication to Eliminate Tax Risk –

Numbers Get You into Trouble

TAKE THE CASE of Equinox Ltd. (a fictitious name for the real company). It had garnered up thousands of VAT input tax credit invoices, with which it had claimed millions of dollars worth of input tax credits. The VAT legislation required Equinox Ltd. to ensure that the VAT number of suppliers was on all tax invoices. This also meant that the VAT number had to be correct.

After a while, the IRS conducted a VAT audit and reviewed a batch of tax invoices for a specified period. It became obvious quite quickly that all the tax invoices from one particular supplier in the review period were invalid. The VAT number of the supplier was incorrect. In fact, the supplier had fraudulently given the wrong VAT number—a fictitious one. As a result the IRS pulled all the tax invoices given by that supplier. All the VAT numbers were wrong, and all the tax invoices were invalid for claiming input tax credits. All the previously claimed input tax credits were added back in a revised assessment, plus penalties and interest. The end assessment totaled up a considerable sum in dollars.

Equinox Ltd. had not got to know its supplier properly—so it seemed. On a deeper analysis, it became apparent that the general manager of the operating division in question had terminated the supply relationship with the supplier in question, under suspicious circumstances. Another supplier replaced the dodgy supplier in question, but no communication had taken place between the tax manager and the general manager. There was no facility in place for this to happen. Besides what more had to be said? The supplier had been replaced, and no apparent harm seemed to have been suffered by Equinox Ltd.

Had any competent tax manager been made aware of the suspicious circumstances around the termination of the relationship with the supplier, they would most likely had double-checked all relevant information at hand of the supplier to ensure that it was correct. Had a self-discovery been made of the false VAT number, criminal charges could have been pursued. The IRS voluntarily approached Equinox Ltd. as they had been on the receiving end of a fraud. A soft outcomes result could have been negotiated with full cooperation between the two to see the perpetrator paying for its fraud. Instead, the IRS, as it always does, goes for the soft target, i.e., Equinox Ltd. or its equivalent.

If a regulated and regular communication system existed between the tax manager and the operations division, the negative tax consequences would have been averted.

In accordance with Circular 230 Disclosure