Why is an expense-by-vendor report essential for tax compliance and passing a tax audit?

Introduction

During the tax year, both businesses and NGOs must tag each purchase transaction with the vendor’s name whether it relates to operating expenses recorded in the Profit & Loss accounts or fixed asset purchases recorded in the Balance Sheet accounts.

This practice allows the accounting system to generate a year-end report of all expenses categorized by vendor.

The vendor-wise expense listing is essential for supporting two key tax compliance requirements:

1. Article 72 of the Income Tax Law requires withholding the specific rates of contractor’s tax from payments made to certain vendors (applicate rates, here). To properly support or prove the calculation of total annual gross payments subject to this tax, organizations and companies must keep detailed records of each vendor’s accumulated transactions within their overall expenses.
2. As per Article 72.4 of the Income Tax Manual, to ease taxpayers’ compliance burden, a withholding exemption applies to contractor’s tax on payments below AFN 500,000 within each tax year (details here). To monitor and calculate whether a vendor’s total purchases fall below or exceed this threshold, tracking expenses by vendor is an effective approach.

Useful Areas

During the annual initial tax clearance process, the expense-by-vendor list is often not thoroughly reviewed at the taxpayer’s office. However, during a tax audit, this list becomes a valuable tool to demonstrate that contractor tax was correctly withheld throughout the tax year. It allows the taxpayer to prove that contractor tax was withheld and paid to all vendors whose annual payments exceeded the AFN 500,000 threshold under the law. You can read Quest’s blog post on Managing Tax Audits in Afghanistan to gain an understanding regarding the importance of maintaining an expense-by-vendor list.

Supporting Documentation

To validate the expense-by-vendor list, it must be backed by valid vendor bills for each batch of purchases and valid business licenses for the vendors. Quest provides resources defining what qualifies as valid vendor bills and business licenses.