Basic rules of tax planning

Every accountant must know, “What is tax planning?”. The essence of tax planning is the recognition by fiscal and other regulatory authorities of the taxpayer’s right to apply all means, methods, and techniques permitted by the current legislation to reduce the tax burden. Tax planning is a set of measures that unite all areas of activity of the company, while it contributes to implementing statutory goals, reduce costs, and profit. There are different tax reduction strategies. The most effective way to increase business profitability is not just to reduce the amount of taxes paid (this can be achieved by reducing the number of transactions and slowing the turnover of capital), but to build effective management and tax planning. That is, reducing the tax burden should not be a tactical move for the company, but a well-built strategy.

Basic rules of tax planning

The efficiency of tax planning strategies 

In today’s business environment, there are basic approaches to reducing the tax burden, which is the primary goal of tax planning:

  • application of all possible tax reduction provided for in the Tax code;
  • development of the correct accounting policy which would allow using all available gaps in the tax legislation to the taxpayer’s advantage;
  • control over the fact that the deadlines for payment of tax payments were not missed.

There are the following types of tax planning:

  • corporate — conducted within a single company;
  • partnership —income tax playing carried out in many companies related to each other in the form of management or business cooperation;
  • national — implemented if the company’s business is conducted only in one country;
  • international — carried out in cases where the business is conducted on the territory of several countries.

To determine whether it is necessary to radically change something in the management system of the company, including tax reduction, you should first calculate the tax burden. Consider different situations and different tax planning strategies:

  • If the total tax burden, including retirement tax planning, does not exceed 15% of the company’s net income for the year, the need for tax planning and forecasting is minimal. The chief accountant or his deputy can monitor the status of tax payments.
  • If the tax burden is between 20 and 35% for small and medium-sized businesses, the need for tax planning and property tax reduction is relevant. For forecasting and tax reduction to be carried out effectively and on time, it is necessary to introduce a staff unit to which these functions should be entrusted. A single specialist and in a large company – a whole team of pros, will monitor all tax liabilities and participate in the preparation of business plans for the next year to implement the business forecast in tax reduction. For the implementation of large or non-standard projects, it will be advisable to involve a specialist in tax planning on an outsourcing basis.
  • If the tax burden exceeds 40%, the company needs to pay close attention to tax reduction. Otherwise, it will merely become uncompetitive and may eventually go bankrupt altogether. In such a situation, tax planning should become the most crucial element of the work of top management. For medium and large companies, the establishment of a tax reduction services is preferable.

Importance of income tax planning 

The importance of tax planning in today’s business environment is challenging to overestimate. Also, you should know, “What is tax reduction?”. Using tax planning, it is possible to legally reduce the tax burden on the business, which will reduce costs and increase the competitiveness of products. You can use tax planning software in this process. It is possible to engage in tax planning already at the stage of business registration because the legal form, structure of the future enterprise, and even its location can play a decisive role in tax optimization and reduction of the tax burden.

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