Tax Planning and Tax Optimization

Jan, 17 2024


Tax planning and tax optimization is important part of entrepreneurial activity. These are legal measures that business takes to reduce tax burden: fees, duties, mandatory payments. Goal can be achieved through benefits, deductions, lower rates, right to return.

It is important to engage in optimization and tax planning from moment business is founded, at every stage of enterprise’s work. With competent approach, you can develop such organization structure that will meet several requirements at once: efficiency in terms of making a profit, minimizing tax payments and transparent management.

To reduce taxation, it is necessary to analyze current state of affairs of company, study current legislation and choose optimal and legal way to reduce fiscal burden. It is best to hand over this task to specialists, because price of error may be too high for your business.

What is optimization and tax planning

Optimization and tax planning are interrelated processes. To reduce, that is, optimize mandatory payments, it is necessary to correctly plan work processes and financial activities of enterprise.

Optimization tax planning is taxpayer’s actions aimed at reducing payments, as well as substantiating amount of obligations in order to determine and manage real incomes. One of goals in this case is choice of optimal form of taxation and reduction of fiscal burden on business. It is important that methods and methods for achieving goals do not go beyond scope of legislation, otherwise we will talk about tax evasion.

Specific method of minimizing payments is called tax scheme. It includes description of economic actions that allows you to apply favorable regime and save on taxes. Taxpayer is free to choose legal form of economic activity and tax system. He may also, at his discretion, choose suppliers, partners and agree with them terms of cooperation.

Main objectives of fiscal management:

  • legal reduction of fiscal burden;
  • minimization of tax losses on specific tax or on totality of taxes;
  • increasing volume of working capital and, as result, increasing actual opportunities for development of organization and increase work efficiency.

Generally accepted methodology for determining fiscal load is calculation procedure developed by Ministry of Finance. He defines amount of payments as ratio of all taxes paid by organization to revenue. In practice, when reducing fiscal burden, accrued amount for billing period is often used instead of amount of taxes paid.

One of circumstances that may indicate tax evasion and, accordingly, likelihood of verification, tax authorities consider low load indicator compared to industry average. For such cases, there is even special term: tax gap, that is, difference between amount of taxes that theoretically should be paid by taxpayer and amount of actual payments.

Accounting Policies

Well-designed accounting policy has good effect on taxation of enterprise. So, for example, following elements of accounting policy influence volume of expenses, and therefore size of profit:

  • depreciation methods for fixed assets and intangible assets;
  • methods for evaluating raw materials when writing them off into production, as well as cost of goods when they are sold;
  • procedure for assessing balances of work in progress, balances of finished products.

One of aspects favorable for taxpayers is legal permission to create number of reserves, deductions to which can be included in expenses of company. But it is important to take into account that when forming accounting policy, it is possible to consolidate and justify reasonably choice of one or another option for calculating tax base. Why do we pay attention to this opportunity? Because with competent argumentation, it is easy to reduce risks.

When choosing methods for determining income and expenses, their recognition, assessment and distribution for tax purposes, remember that some of them differ from methods and methods of accounting. Therefore, from very beginning, separate accounting and tax accounting.

Strategy and Tactics

Actions aimed at reducing payments should cover all areas and aspects of activity. Qualified specialist will offer strategic and tactical plan for optimizing fiscal burden. Strategy is long-term course, solving large-scale business problems taking into account tax interests. Tactics affect everyday tasks and operations.

Strategic plan includes:

  • review of judicial practice and legal framework in particular area, as well as long-term forecast of changes;
  • review of judicial practice and legal framework in particular area, as well as long-term forecast of changes;
  • forecasting tax circumstances and force majeure, developing action plan for each of emergency cases;
  • schedule for implementation of financial and commercial obligations of enterprise;
  • assessment of risks and probable causes of deviation from calculated indicators;
  • detailed justification of selected scheme, taking into account risks and consequences;
  • forecast of effective optimization tools.

But main objective of strategy is to choose a taxation scheme that is best suited to specifics of enterprise and helps reduce fiscal burden. Tactics is aimed at effectively solving current problems. It implies monitoring of legal acts that affect tax sphere and industry, short-term forecasting, schedule of fulfillment of obligations and changes in assets.

Tactics pay more attention to each specific transaction: researching conditions, forecasting consequences and assessing risks. In order for tactics to remain effective, they are reviewed at least once a month. It is impossible to independently develop an effective strategic and tactical plan; expert support is needed.

Stages of reducing fiscal load

Essence of optimization is to reduce payments and choose most effective, safe tax scheme. If at the time of starting a business you did not think about fiscal burden, with a high degree of probability first step to optimization will be a complete or partial reorganization of enterprise. Because it is necessary to choose a taxation system that best fits goals and objectives of business.

Experts first determine general direction of work, that is, make up a strategy. And only then do tactics reorganize. First steps to choosing a strategy are risk assessment, analysis of fiscal problems, selection of basic planning tools and development of a scheme. Company’s activities are planned taking into account new tax scheme (which is why business reorganization is often necessary).

Tax risks are probability of an increase in payments, possibility of criminal prosecution or control by governing bodies. Sometimes entrepreneurs violate the Law unintentionally, due to a lack of understanding of subtleties or because they do not track changes. Therefore, with any changes in fiscal schemes and payments, it is important to consult with experts to clarify possible risks. It is critical that all decisions are made in legal field.

Before introducing a new scheme, you should compare potential savings and costs, and make sure that all changes are justified in writing. Each operation conducted by company must be documented. In case of verification by regulatory authorities, only thorough documentation will help to prove that all operations were justified and carried out in compliance with letter of the Law.

The Effectiveness of Optimization Tax Planning

The most effective tools to reduce fiscal burden are tax schemes that we already know. With their help, you can significantly reduce total amount of required payments. But it is impossible to evaluate effectiveness of scheme only in terms of reducing the tax burden. Legal risks are equally important. For example, additional charges and penalties after verification can be much more than amount of savings. Not to mention such a serious risk as criminal liability.

Effectiveness of the tax scheme depends not so much on savings in payment of taxes and contributions, but on a well-developed evidence base to justify chosen scheme. Evidence base is based on such a concept as obtaining tax benefits. By this concept is meant a reduction in amount of tax liability due to a reduction in tax base, deduction, benefit, application of a lower rate, as well as obtaining right to return or refund from budget.

It is important to consider that regulatory authorities can question any civil law transaction that affects taxation. That is why reasoned justification of chosen scheme is so important. When dealing with tax planning and tax optimization, it is necessary to take into account not only formal compliance with law, but also other circumstances related to operations and transactions that may affect legal risks.

Validity of benefit may be evidenced by arguments of tax authority confirmed by evidence that such circumstances exist:

  • impossibility of taxpayer to carry out these operations, taking into account time, location of property or amount of material resources economically necessary for production of goods, work or services;
  • lack of necessary conditions for achieving results of relevant economic activity due to lack of managerial or technical personnel, fixed assets, production assets, storage facilities, vehicles;
  • accounting for tax purposes only those business transactions that are directly related to occurrence of tax benefits if selected type of activity also requires execution and accounting of other operations;
  • transactions with goods that were not made or could not be made in amount specified in accounting documents.

When choosing scheme of optimization tax planning, you must follow recommendations:

  • business operations should be economically justified and meet standards of entrepreneurial activity;
  • actual content of business operations and organizational and managerial acts of taxpayer should not be at variance with their documentation;
  • when constructing various tax planning schemes, interdependence of transaction participants should be avoided;
  • when concluding contracts, it is necessary to control prices of goods (works, services) specified in transaction in order to exclude possibility of judicial review of prices by tax authorities.

Qualified Tax Assistance

VALEN company provides a full range of services related to fiscal accounting, substantiation of taxation schemes and reduction of payments:

  • analysis of accounting and legal support of company;
  • identification of risks and their assessment;
  • development of recommendations for implementation of fiscal planning;
  • assessment of economic effectiveness of changes;
  • development of step-by-step plan for implementation of optimization methods;
  • selection of suitable fiscal scheme.

For consultation, leave request on website or dial our phone: +7 (495) 7-888-096!

Author of the article
Tax Planning and Tax Optimization
Valentina Khlavich
Managing Partner
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