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Errors made in tax calculations
Errors made in tax calculations
“Companies entrust their financial and tax accounting to accountants. Accountants, in turn, use all their knowledge and skills to carry out this responsible task properly. However, sometimes certain errors occur in the calculation of taxes.”
While speaking about mistakes made in tax calculations, Ismayil Baghirov said this. According to him, for taxpayers operating under the cash method, there are specific exceptions in the calculation of income and expenses. When taxpayers are unaware of these exceptions, it leads to errors in their calculations:
“We are used to the idea that under the cash method, when funds are deposited into the taxpayer’s bank account, it is considered income; when funds are withdrawn, it is considered an expense. However, there are situations related to rental income and loan obligations that contradict this general rule. For example, Company A rented an office in November 2024 for 10 months and paid the total rent of 20,000 manats in advance. According to the rule, this amount should be treated as an expense under the cash method on the date it was paid. But this rule does not apply to rental income. In our example, the monthly rent is 2,000 manats. For 2024, only 4,000 manats (for November and December) will be recorded as expenses. The remaining 16,000 manats will be recorded as an expense in 2025. Thus, the accountant can only record the portion relating to 2024 as an expense in that year, and the remaining 16,000 manats must be accounted for as an expense in 2025.”
One of the points where accountants most frequently make mistakes is related to Article 166 of the Tax Code. Many accountants believe that when money enters the company’s account, tax must be calculated and paid. However, Article 166 clarifies many issues: the key point is that not only the inflow of funds, but also offsetting transactions and donations are considered taxable transactions.
“According to Article 166.1.2 of the Tax Code, in cases of mutual settlement, the moment when the obligation is settled or cancelled is considered the moment of the taxable transaction. Suppose taxpayer A supplies goods worth 100,000 manats to B, and B supplies goods worth 130,000 manats to A. If they offset these amounts mutually, A will only need to pay 30,000 manats. In this case, no funds enter A’s bank account, yet a tax obligation arises. Despite this, such offsetting transactions often escape the attention of accountants.”
Baghirov added that such cases are identified during VAT audits and emphasized that taxes must also be calculated for these transactions:
“According to Article 166.1.2 of the Tax Code, the funds do not need to enter the bank account. In cases of free-of-charge transactions, the moment of the VAT-taxable transaction is also recognized. For example, if a company gives a free gift to an employee in March 2024, the taxable moment for VAT is March 2024, and the tax must be paid in that month. No money enters the bank account here. For this reason, taxpayers believe they do not need to pay tax on such transactions, but this is an incorrect approach.”
He also noted that such issues are usually discovered not during desk (camera-based) audits but during field tax inspections. As an example, he mentioned deferred payments granted by taxpayers:
“Sometimes taxpayers grant additional time to the buyer to make a payment. For instance, in a sales contract signed in January, it may be stated that payment for the goods will be made in May. However, in May, the buyer may say they are unable to pay and request extra time. The taxpayer may give an extension until September. However, according to the law, VAT must still be calculated and paid to the state budget in May.”
“Companies entrust their financial and tax accounting to accountants. Accountants, in turn, use all their knowledge and skills to carry out this responsible task properly. However, sometimes certain errors occur in the calculation of taxes.”
While speaking about mistakes made in tax calculations, Ismayil Baghirov said this. According to him, for taxpayers operating under the cash method, there are specific exceptions in the calculation of income and expenses. When taxpayers are unaware of these exceptions, it leads to errors in their calculations:
“We are used to the idea that under the cash method, when funds are deposited into the taxpayer’s bank account, it is considered income; when funds are withdrawn, it is considered an expense. However, there are situations related to rental income and loan obligations that contradict this general rule. For example, Company A rented an office in November 2024 for 10 months and paid the total rent of 20,000 manats in advance. According to the rule, this amount should be treated as an expense under the cash method on the date it was paid. But this rule does not apply to rental income. In our example, the monthly rent is 2,000 manats. For 2024, only 4,000 manats (for November and December) will be recorded as expenses. The remaining 16,000 manats will be recorded as an expense in 2025. Thus, the accountant can only record the portion relating to 2024 as an expense in that year, and the remaining 16,000 manats must be accounted for as an expense in 2025.”
One of the points where accountants most frequently make mistakes is related to Article 166 of the Tax Code. Many accountants believe that when money enters the company’s account, tax must be calculated and paid. However, Article 166 clarifies many issues: the key point is that not only the inflow of funds, but also offsetting transactions and donations are considered taxable transactions.
“According to Article 166.1.2 of the Tax Code, in cases of mutual settlement, the moment when the obligation is settled or cancelled is considered the moment of the taxable transaction. Suppose taxpayer A supplies goods worth 100,000 manats to B, and B supplies goods worth 130,000 manats to A. If they offset these amounts mutually, A will only need to pay 30,000 manats. In this case, no funds enter A’s bank account, yet a tax obligation arises. Despite this, such offsetting transactions often escape the attention of accountants.”
Baghirov added that such cases are identified during VAT audits and emphasized that taxes must also be calculated for these transactions:
“According to Article 166.1.2 of the Tax Code, the funds do not need to enter the bank account. In cases of free-of-charge transactions, the moment of the VAT-taxable transaction is also recognized. For example, if a company gives a free gift to an employee in March 2024, the taxable moment for VAT is March 2024, and the tax must be paid in that month. No money enters the bank account here. For this reason, taxpayers believe they do not need to pay tax on such transactions, but this is an incorrect approach.”
He also noted that such issues are usually discovered not during desk (camera-based) audits but during field tax inspections. As an example, he mentioned deferred payments granted by taxpayers:
“Sometimes taxpayers grant additional time to the buyer to make a payment. For instance, in a sales contract signed in January, it may be stated that payment for the goods will be made in May. However, in May, the buyer may say they are unable to pay and request extra time. The taxpayer may give an extension until September. However, according to the law, VAT must still be calculated and paid to the state budget in May.”