## ST. KITTS AND NEVIS—Strengthening Core Business Functions Audit Capacity (RTAT)

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**Canonical URL:** [ST. KITTS AND NEVIS—Strengthening Core Business Functions Audit Capacity (RTAT)](https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023001.pdf)

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### Executive Summary
- CARTAC provided capacity development (CD) to the St. Kitts and Nevis Inland Revenue Division (IRD) under the Regional Tax Audit Team (RTAT) training program.
- Main objective: strengthen capacity to audit and verify accuracy of reporting by taxpayers in the Financial Sector.
- CD delivery: series of short targeted virtual interactions with IRD staff during the period from November 15, 2021 to April 20, 2022.
- Initial delivery: five days of training of IRD auditors to prepare authorities to implement good practice in auditing the Financial Sector.
- Training content included:
  - overview of the financial sector and business processes;
  - assistance to auditors to understand various financial products/instruments;
  - guidance in auditing banks and insurance companies;
  - awareness of key tax risks within the sector;
  - review of financial statements and tax returns for several banks and insurance companies;
  - development of an audit schedule and guidance preparing audit notification letters.

### Main Findings — Training of the Financial Sector Audit Team
- The Financial Sector Audit Team attended all training sessions: five days in total.
- Training provided (high-level list as delivered):
  - (i) an overview of the Financial Sector industry;
  - (ii) an insight into how a financial institution records transactions;
  - (iii) how these transactions are reflected in the profit and loss account and the balance sheet;
  - (iv) guidance on how to carry out an audit on a financial institution, including how to prepare for the audit;
  - (v) an outline of the key risks in this sector;
  - (vi) how to establish key controls that should be in place within an institution, which may give the IRD guidance regarding the details provided in the accounts.
- Attendees received documentation supporting each area, including a template for an audit test work sheet.
- Additional auditor capabilities developed:
  - (i) techniques to help develop audit test schedules;
  - (ii) understanding of various financial products (e.g. futures, options, derivatives etc.);
  - (iii) understanding of how a bank or insurance company would calculate and book any profit or loss on the provision of these services;
  - (iv) the importance of a program of profile meetings for deeper understanding of sector operations.

### Main Findings — Review of Returns and Drafting an Audit Program
- IRD auditors were assisted in reviewing a number of audit cases; assistance resolved issues discovered during previous audits.
- Specific issues discussed included:
  - (i) the operation of withholding tax;
  - (ii) helping auditors overcome lack of experience and understanding banking operations and their IT systems;
  - (iii) uncertainty on what sample size should be used for effective audit testing;
  - (iv) application of VAT on leasing.
- The IRD presented four tax returns which were reviewed.
- Outcomes of the review and exercises:
  - (i) identify potential tax risks for these two companies and the industry as a whole;
  - (ii) draft a set of audit test schedules for these companies, applicable to other companies within the sector;
  - (iii) develop a list of potential tax issues for audit team discussion with these banks;
  - (iv) obtain an understanding of the issues and transaction(s) identified;
  - (v) understand the accounting and tax treatment adopted by the banks and the tax implications of this treatment;
  - (vi) decide whether to initiate an audit on some (accounting) issues or accept the account and tax treatment adopted by the taxpayer.

### Main Findings — Effects of COVID-19
- CD raised awareness of COVID-19 effects on banks:
  - (i) some banks were granting “repayment holidays” to help cash flow of companies and how this affects interest income;
  - (ii) banks may need to upwardly adjust their level of bad debt provisions;
  - (iii) IRD will need to establish how adjustments are reflected in annual accounts and anticipate lesser revenue from the sector.
- CD raised awareness of COVID-19 effects on the insurance sector:
  - insurers may have had to return some premium income to policy holders due to reduced level of covered risk from the economic downturn;
  - IRD needs to establish how reduced premium income is reflected in insurers’ accounts;
  - it is important that reductions in premiums are reflected in the accounts of the insured, especially if claimable as deduction from taxable income.

### Main Findings — Profile Meetings
- Concept: “Profile Meetings” — annual informal information-gathering meetings between the audit team and financial sector companies.
- Purpose and benefits:
  - gather information about companies’ operations and key transactions outside the audit forum;
  - discuss business operations, key transactions recorded on returns, future plans, key issues in annual accounts, and controls in place;
  - enhance IRD’s compliance risk management processes and complement work on identifying key risks and building risk profiles.
- Recommendation: IRD encouraged to set up a program of Profile Meetings with financial sector companies and companies from other industries.

### Agreed Next Steps (Policy Recommendations and Implementation)
- IRD will build on this training and CD when designing future audit programs.
- Given the importance of the Financial Sector in St. Kitts and Nevis, further support to ensure compliance in the sector would be beneficial.
- IRD will need further assistance to:
  - strengthen the audit program of the Financial Sector; and
  - support review of tax returns of companies in that sector.
- First step recommended: the audit team should develop a program of profile meetings to gather relevant information on the operations of various businesses in the sector.

### Appendix — List of Training Topics
1. Introduction into the World of Banking  
2. Overview of the Financial Sector (Banking, Insurance, Treasury and Lending)  
3. Financial Instruments explained  
4. Concept of Transfer Pricing  
5. Inter-Company Charges  
6. Inter-Company Loans  
7. Leasing  
8. The Audit Function
   - Planning an audit (sources of information available)
   - Performing the audit (the different types of audits)
   - Finalizing / Closing the audit
   - The Audit Report
9. Fee / Commission Income  
10. Cost of Equity / Tier 1 Capital  
11. Bad Debt Provisions / Bad Debts  
12. Accounting for Provisions  
13. Accounting Standard IFRS 9  
14. Foreign Tax credits  
15. Group Relief  
16. Life Assurance & General Insurance  

*Source: IMF Country Report No. 23/96, Technical Assistance Report—ST. KITTS AND NEVIS, APRIL 2022.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1knaea2023001.pdf_