Our country is currently undergoing a financial crisis of monumental proportions, a fact that the majority has refused to acknowledge. This financial situation has contributions from various sources, both global and domestic.
There is a global economic crisis from current global upheavals from wars between Russia and Ukraine, the war between Israel, Hamas, and Hezbollah, plus the ever-threatening 3rd World War.
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There is spillover from the wars on our economy in the global supply chain disruptions from the food basket in Ukraine, supplies from Russia, and oil from the Middle East.
The World experienced the COVID-19 pandemic between 2020 and 2021. The pandemic had far-reaching effects, including the global shutdown, which affected global finance, global supply chains, etc. Some of the pandemic’s effects are still being felt globally.
Closer home, our inability to manage our domestic economy, mainly because of over-concentration on politics, has thrown the country into a financial crisis.
Unfortunately, we seem unwilling to acknowledge this at the business and country levels. Many businesses have closed down, while others are struggling to survive.
When a country experiences a financial crisis of any proportion, tax obligations are likely to suffer. Financial crisis, often characterized by severe economic downturns resulting in cash-flow shortages, can profoundly affect business operations. One area that is particularly affected by such a crisis is tax compliance.
During the financial crisis, businesses face financial strain and uncertainty. They are often tempted to prioritise the little cash flow they have on other financial obligations over tax obligations. This affects their tax compliance.
This article will discuss the effects of the financial crisis on business tax compliance. It will also explore certain simple strategies any business can adopt to navigate challenging financial times while fulfilling its tax obligations.
What is a Financial Crisis?
Financial crisis are disturbances in the monetary economy. Some ways financial crisis can be observed are a decline in asset prices, failure of financial institutions, disruption in foreign exchange markets, insolvency of businesses, and debt crisis.
The observation of the indicators triggers a financial crisis. It is important to note that there are various levels of financial crisis.
The Effects of Financial Crisis on Business Tax Compliance
Any disturbance from whatever corner of the economic environment will adversely affect business operations. Financial crisis can significantly disrupt any country’s economic environment and normal business operations.
The financial crisis will cause decreased revenue, increased operational costs, and cash flow shortages in the business. These challenges will create ripple effects that will affect tax compliance.
In the following sections, we will discuss five ways financial crisis will affect business operations, which ultimately affect their tax obligations:
1. Decreased Revenue and Profitability: When a country experiences a financial crisis, all economic activities decline. Hence, most businesses are likely to experience a decrease in sales.
A decrease in sales will lower revenue and reduce profitability for businesses. It will also make it difficult to generate sufficient cash to cover tax liabilities. This will cause delayed or partial tax payments.
2. Increased Costs and Expenses: The financial crisis often result in higher costs, such as borrowing interest rates, input prices, and operating expenses. These increased costs will reduce consumption, cash flow, and overall profitability, making it challenging for the business to allocate funds for tax payments.
3. Cash Flow Shortages: Financial crisis result in decreased business activities, revenue, and costs, leading to severe cash flow shortages. Businesses may struggle to meet their day-to-day operating expenses, and they will not prioritise their tax obligations.
4. Economic Uncertainty: Financial crisis creates an environment of instability, which leads to uncertainty. The future has yet to be determined. Therefore, businesses may be hesitant to invest in expansion and growth activities.
This will cause reduced economic activities, less money for businesses, and lower tax revenues for the government.
5. Reduced Taxpayer Morale: Finances are the heart and soul of businesses. The economic hardships experienced during the financial crisis can erode taxpayer morale and trust in government institutions. This can result in an increase in non-compliance and even tax evasion, as businesses and individuals seek to minimize their tax burdens to stay afloat, likely lowering taxpayer morale.
Those are five ways that financial crisis affect businesses and their tax obligations. In the following sections, we will explore four strategies that businesses can adopt to mitigate the effects of financial crisis on their tax obligations.
Four Strategies to Manage Financial Crisis and Improve Tax Compliance
Financial crisis can quickly bring down any business. However, despite the challenges, there are simple, proactive steps that businesses can take to mitigate the impact of the financial crisis on their tax compliance. Countries resolve financial crisis through crisis management. As a business, you are not in a position to prevent financial crisis.
However, you can mitigate some of the adverse effects on your business. You can implement simple strategies to manage the financial crisis at the business level. You will need to plan, perform, and practice the strategies. Here are four simple strategies that any business can implement:
1. Financial Planning and Forecasting: Every business should engage in financial planning and forecasting. This will help the business expect and manage the potential adverse effects of any financial crisis. By developing forecasted financial projections, businesses can identify any possible cash flow shortages and take pro-active measures to address them.
2. Tax Planning and Optimization: Many businesses mistake tax planning for tax avoidance. However, in tax planning, the meaning of the term “planning” remains the same old meaning: to plan is to “arrange.” When businesses plan their tax affairs, they are simply arranging their tax affairs, for example, when to lodge tax returns, pay taxes, etc.
Effective tax planning can help businesses minimise tax liabilities and improve cash flow during challenging economic times. Tax planning activities will involve exploring the use of tax credits, deductions, and incentives available to businesses operating in specific industries or regions in the country.
3. Improve Documentation and Record Keeping: Accurate and up-to-date documentation and record keeping are essential to demonstrating compliance with tax rules, regulations, and laws. By keeping, maintaining, and retaining detailed tax documents and records on income, expenses, and transactions, businesses can provide the necessary documentation to support their tax returns.
During a financial crisis, it is essential to ensure that you have in place all tax documents and records.
4. Communication with Tax Commissioner: Communication between taxpayers and tax Commissioners is important when handling tax matters. Open communication with the tax Commissioner can help businesses navigate the complexities of tax compliance during financial crisis.
Businesses can proactively engage with the tax Commissioner to seek guidance, clarifications, and potential deferrals or payment arrangements. The tax Commissioner understands taxpayers may be willing to pay taxes but need more money.
Conclusion
Financial crisis can significantly negatively impact business tax compliance, resulting in delayed, reduced revenue, late tax payments, and increased costs. However, by implementing effective, simple strategies, businesses can mitigate these challenges and maintain their tax obligations.
Financial and tax planning, improved documentation and record keeping, and open communication with the tax Commissioner are critical elements in navigating the complex financial crisis. By prioritizing tax compliance and adopting a pro-active approach, businesses can enhance their resilience and position for long-term success.
References
1. How Does Financial Stress Affect Your Life And How To Cope With It – Atchuup! – Cool Stories Daily. https://www.atchuup.com/how-does-financial-stress-affect-your-life-and-how-to-cope-with-it/
2. Realizing the Potential of Payments Technology – Payments Journal. https://www.paymentsjournal.com/realizing-the-potential-of-payments-technology/
3. Responsibility for cyber security stops and starts at Board level, says APMG -. https://securitybuyer.com/responsibility-for-cyber-security-stops-and-starts-at-board-level-says-apmg/
4. What Taxes Must A Business Pay?. https://basadvisory.com/what-taxes-must-a-business-pay/
Note: This article provides a general overview of the topic and does not constitute legal or tax advice. It is recommended to consult with tax professionals for specific guidance tailored to your business’s circumstances.
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