THE ISSUES OF TAX RISKS CALCULATION AND MANAGEMENT
Keywords:partial uncertainty, tax risk, unstable tax system, financial and accounting policy, acceptable losses zone, probability
In any private company in Latvia there are three main issues in the field of tax risks calculation and management: how to calculate the possibility of tax risks occurrence, how to estimate the amount of reserves for covering unforeseen losses, choice of the optimality criterion for selecting one of the possible solutions. The article deals with three features and two major causes of tax risks, as well as several stages of calculating risks and choosing the best option of possible management solutions. The optimality criterion proposes the amount of probable losses within the limits of acceptable risk. In the Balance Sheet the value of this zone varies around the accumulated profit and reserves.
Tax payments procedure has its own peculiarity: tax payers have to interpret independently statutory provisions, which appear unclear, ambiguous or contradictory to them. Not all taxpayers undergo audit, not all taxation periods and not all taxes are being verified. Tax payers can calculate the probable amount of the claim in advance, if they independently take the decision on tax payment under conditions of uncertainty of tax statutory provisions.
Tax risk diagnostics can be carried out and based on two figures - possible risk cost and probability of the event “X” that there is an audit by Tax Administration Service and its decision on imposing a tax penalty. Tax risks should be an important element of entrepreneurial risks (including financial risks) for the benefit of efficient administration.
Every private company could estimate its tax risk cost. At the first stage it is important to carry out the complex job of analysis of regulatory documents concerning taxation, i.e. applicable laws and rules of. At the second stage the taxpayer compiles all options based upon the structure of of each statutory provision. At the third stage the possible sanctions are calculated (penalty and late payment fee). Then an idea of possible risk costs due to misapplication of statutory provisions is being formed. At the fifth stage chances of lowering tax penalties are estimated. Then the sixth stage follows, where the total possible risk cost and its influence on the tax payers’ financial position is evaluated.The methods and procedures of calculating the probability of an audit and application of the tax penalty have already been described in the literature. The Delphi method, described by V.M.Popov for financial risks, is mainly used for this purpose. But it is also possible to conduct calculation of probability verification’s facts towards taxpayer. The annual statements may be used for this purpose by Tax Administration. Thus, there were approximately 162 thousands active operating tax payers (legal persons) registered with the tax administration in Latvia in 2010. There were only 1682 audits conducted in 2010, that is 2% of all verifications. That means that the probability of audits for each tax payer comes to no more than 2%. Probability of auditcalculated by the same method for years 2005 and 2006 had also come to 1%. So, tax risks management should be conducted under the conditions of uncertainty and instability of tax legislation.