Risk profiling can be defined as an evaluation of an individual or organization’s willingness to take risks, as well as the threats to which a company or organization is exposed.

The risk profile will outline the number of risks, type of risks, and potential effect of the risks. This outline allows a business to anticipate additional costs or disruptions to operations. It also describes how those risks will affect the operational strategy of a company.

TAX RISK MANAGEMENT
Risk has been defined in the European Commission’s guide on risk management for tax administration (fiscal guide) as: “Anything negative that can affect the organization’s ability to achieve its objectives.” On this basis, ascertaining the objectives of the organization in question is critical to the question of risk management. The objectives of taxpayers and the tax administration will not be identical and will sometimes conflict, although at other times they may overlap.

Corporate taxpayers may have a range of tax strategies depending on their tax philosophy. Most large corporations will want to balance profit maximization with other objectives, which include the reduction of risks such as unsatisfactory compliance which might retain reputation and the cost of dispute to the revenue authorities. They will also want to steer clear of too much volatility a reported profit, since this is disliked by the market.

What they consider to be the correct balance between these factors will depend on the overall business and risk philosophy of the board of directors as filtered through to the tax department. The risk outlined will be dealt with by internal risk management and control of decision making within the context of broader controls exercised by the company.

From the perspective of tax administrators, the relevant risk is the institutional risk of the revenue authority not achieving its objective of tax collection. Four broad categories of risk for the revenue authorities and government have been identified. These are unrelated to the risk that the expected level of revenue will not be collected.

They have been identified as:  i. Register risk the risk that tax yield is reduced by inaccuracies in tax registration; ii. Filling risk – the risk that the tax yield will be reduced by failure of taxpayers to file their returns; iii. Payment risk – failure to pay amount due; and iv. Declaration risk – where returns are incorrect due to errors or a deliberate act. All these risks have to be tackled with limited resources so those resources must be allocated efficiently to where they will have the best impact.

It is the last of these risks which is of greatest importance in relation to large corporate taxpayers. The vast majority of corporations will wish to ensure that they have good systems in place for reporting and paying the tax which they believe is properly due within the law.

The key risk for the tax authority lies in system failures and also in the areas of uncertainty and lack of agreement in relation to the amount tax payable. In this context, the risk borne by the tax authorities may be considered by them to include the risk of what the fiscal guides calls “barely legitimate tax avoidance.”

There will be grey areas where the corporate taxpayer may believe that its actions are within the law but where the revenue authority takes a different view. There is a risk to revenue authorities of collecting less tax than they expected on their interpretation of the law, even if their interpretation comes out to be incorrect according to the court. It may be seen by the tax authority as creating a tax gap.

COMPONENT OF RISK PROFILING FOR A COMPANY TO BE OBSERVED BY THE TAX OFFICER.
1.0 Background information; This is the  basic information considered by the tax officer.
Tin Number            e.g.    00000001-00
Name of Company        e.g    International Nigeria Limited
Turnover            e.g    N42,373,115,000
Registered Address         e.g.    Km 16, Yasmin road/ Halifa Express Way, Dutse, JIgawa.
Date of Incorporation         e.g.    29th August 1995
Date of commencement      e.g.    1st November 1995
Nature of Business         e.g.    Provision of oil field transit and supply base facilities to the oil and gas Industry.
Accounting Date        e.g.    31st December
Accounting Year        e.g.    1st January – 31st December
Share Capital (Authorized and Issued)
YOA                e.g.    2012    2011
Director’s Report Attached        Yes
Auditors Report Attached        Yes
Last Tax Audit        e.g.    2008 – 2010 YOA (Criminal Investigation)
1.1 Auditor & Tax Consultants
Auditor            Khairat Muhd & Co.
Address            6th Floor, Sadiq House, 15b Muhd Abubakar Street, Gwarmai.
Phone                234 (1) 22222222
Email                [email protected]
Change of Auditor         No
Old Auditor            No
Date of Change        No
Tax Consultant        Khairat Muhd & Co.
Address            6th Floor, Sadiq House, 15b Muhd Abubakar Street, Gwarmai.
Phone                234 (1) 22222222
Email                [email protected]
Change of tax consultant    No.
Old Tax Consultant        No.

Risk Items: Date of commencement of business:- This means, the date the company started operations Size of business:- This means the capacity of  the business in terms of turnover, level of tax assessed, number of staff, number of branches and or subsidiaries  Change in tax consultant: – This means whether a company has changed the existing tax consultant to another one e.g. from Muhd & Co.  to Abba & Co.  Change in auditors: – This means whether a company has changed the existing auditor to another one  e.g. From Zarewa & Co. To Yesmin & Co.

Qualification in audit report: – Any report called qualified audit report means that the report is not acceptable for tax return purposes. Therefore, the analysis should indicate the qualification or otherwise of the report.

Accounting system computerized:- This is to indicate whether the company is using of computerized system of accounting records or not Accounting system manual:- This is to indicate whether the accounting system of the company is manually computed or not Taxpayer’s compliance submission of returns (timeliness):- this is to indicate whether the taxpayer is complying with submission of tax returns as and when due.  Result of previous tax audit exercise (additional taxes):- this means to indicate whether a tax audit exercise was taken in previous years or not.

(I)      Cost of sales =opening stock + purchase – closing stock or cost of sales = purchases. Therefore, cost of sale turnover=  Cost of sales/turnover x 100/1 = %
(II)     Tax assessed Turnover = Tax assessed/Turnover x 100/1 = %
(III)     Equity Debt Ratio = equity/debt X 100/1 = %
Equity: – means anything belonging to owners of the business
Total Debt: – long time liability + current liability

(IV)  Net profit Turnover = net profit/turnover x 100/1 = %
(v)  Current asset/Current liability = current assets/current liabilities  X 100/1 = %
(VI)    Liquid Assets ratio or acid test ratio
= current assets-stock/current liabilities x 100 /1 = %

(VII)    Gearing Ratio = Equity Ratio. Therefore, Gearing Ratio =      Equity/Assets x 100/1 = %
Turnover: This is to ascertain whether there is a change in the level of turnover between the last year and the year under review; and to determine the level of changes thereon in percentages. Also compare the business turnover with the industrial average.

Cost of Sales/Direct Cost: This is to ascertain whether there is a change in the level of cost of sales between the previous year and the current year and the level of changes thereon. Also to compare the business cost of sales and that of industrial average.

Admin/ Operating Expenses: This is to identify the changes in the admin/operating expenses of the years and make comparism between the current year and industrial average.
Operating expenses:-
Total operating expenses to line of industry average: – This is to make comprises with that of industry average.

Salary and wages to line of industry average: – This is to make comprises with that of industry average.
Interest on loan/Bank charges to line of industry average: – This is to make comprises with that of industry average.

Repairs and maintenance to line of industry average: – This is to make comprises with that of industry average.

Debtors & Creditors
Does the company have high amounts of debtors and creditors in it accounts for the period under review? The gross amounts may increased by some % of the previous years’ figure.

Related Party Transaction
Does the company have huge amounts stated in the debtor and creditors figure as amounts owing and due to associated company. If yes the figures should be critically reviewed as this might be a means to transfer fund to associated companies.