Tax planning. Taxation planning principles and techniques. Key players in the tax planning process.

What is tax planning?

Any business seeks to generate income. Benefit can be increased in two ways: earn more and spend less. Tax planning is intended to reduce costs in a legal way, lawful measures that business can take to reduce its tax burden: various taxes, duties, and other fees and deductions. This goal can be achieved by choosing the optimal taxation scheme, applying incentives, reduced rates, refunds, and so on. Moreover, this activity shold not go beyond the law.

This is important not only in terms of increasing income but also for increasing competitiveness. Defienetly your competitors use taxation planning schemes, if you don’t, this may be reflected in the value of your products, because the costs are included in the price, which means that your goods may turn out to be uncompetitive, what mighr be a threat to the existence of the business.

To reduce the tax burden of a business, first you need to conduct an initial analysis and choose the best way to optimize your tax expenses legally. Thus, you will need a tax planning accountant to get it right and avoid problems with the tax office and other government agencies.

The relationship between tax planning, tax optimization, and tax evasion

Tax optimization and tax planning are two related processes. In order to achieve the desired result, reducing tax burden, it is necessary plan properly all business processes and financial flows of the company and at the same time choose the optimal taxation scheme with minimum rates.

Thus, tax planning and tax optimization complement the effect of each other, when, on the one hand, the minimum tax rate is chosen, and on the other hand, schemes are applied to obtain benefits and preferences. Sometimes these two actions, using together, can have the opposite effect. That is, you choose the optimal taxation scheme, but at the same time, you lose your preferences. To prevent this from happening, tax preparation and planning actions must be coordinated with each other, and in this way, you get the maximum effect.

So, as part of the tax planning process, a taxpayer has the right, to choose the organizational and legal form of business activity and the applied tax scheme (within the framework of those permitted by law). Besides, a taxpayer can choose the best partners and suppliers, so that the terms of cooperation help to minimize the tax burden.

Tax evasion is an illegal way to reduce tax liabilities, which entails the corresponding consequences in the form of penalties, business closures, or even criminal liability. Tax evasion has nothing to do with tax planning.

Taxation planning principles and techniques

The income tax planning process includes several basic principles:

  1. Knowledge of taxes – needs accurate knowledge of the current tax legislation, and its possible development. 
  2. Compliance with tax laws –preparation of tax returns, reports, notices, and other documents in time, full payment of all due tax payments.
  3. Interaction with tax authorities – sending tax returns, reports, notifications, and other documents to tax inspection, assisting tax authorities during tax audits and at other stages of compliance with tax laws, negotiating with tax and other authorities on violations of tax legislation, reducing taxes and cancellation of tax arrears, representation of the company in the courts in cases of tax offenses.
  4. Tax optimization – planning and managing business operations to achieve the most profitable tax position from a strategic perspective.

In most cases, tax planning accountants use several methods to reduce tax burden:

  • Methods of tax optimization are based on the use of the peculiarities of taxation, which are intended for certain objects of taxation.
  • The method of reducing (or changing) the object of taxation reduces. 
  • The method of replacing a tax subject is based on the use of such an organizational and legal form of doing business, for which there is a more favorable tax regime.
  • The method of changing the type of activity of a tax subject involves the transition to the implementation of types of activities that are taxed.
  • The method of replacing tax jurisdiction is to register an organization in a state that provides, under certain conditions, preferential taxation.
  • Complex and purposeful use of the listed methods of tax optimization to obtain the maximum economic effect is called tax planning. Moreover, it can be successfully applied by both organizations and individuals.

Now let’s look at the main stages of the tax planning process:

  1. The choice of place of registration (territory and jurisdiction). When determining tax jurisdiction and taxation regime, one should not be guided only by the size of tax rates. In some cases, at low 10-15% tax rates, the legislation establishes an extended tax base, which leads to high tax payments.
  2. The choice of the organizational and legal form affects the order of use of profits and the possibility of obtaining benefits.
  3. The choice of the main areas of activity and the peculiarities of the preparation of nessesary documents.
  4. Determination of the development strategy of the enterprise (the number of employees, the internal structure of the organization, and branches). It is used to maximize tax benefits and preferences (for example, small businesses, compamies with the participation of people with disabilities, etc.). The creation of branches in jurisdictions with high tax payments reduces the overall income of the organization.
  5. The choice of the order of formation of the authorized capital.
  6. The choice of the accounting policy of a company.
  7. Building a structural scheme, which allows you to choose the optimal tax mode for a specific transaction.
  8. Application of benefits. Tax incentives play an important role in tax planning. Theoretically, this is one of the ways for a state to stimulate those areas of activity and spheres of the economy that are necessary for it to the extent of their social significance or because of the impossibility of budget financing.
  9. Ensuring the rational use of working capital of the enterprise.
  10. Establishment of the procedure for the use and distribution of the profits of the organization. It is mainly determined by the availability of benefits and preferences provided in the tax jurisdiction at the location of a company.

Key players in the tax planning process

Now let’s look at the main players in tax planning.

  1. A manager provides information about the terms of the transaction and the expected results. This person defines goals and objectives and monitors their implementation.
  2. A financial analyst calculates the options for the financial structure of the transaction and reflects it in accounting, using the norms of the current tax legislation. This person formulates possible procedures that require legal justification and agreement with the counterparty and calculates the number of payments to the budget, taking into account taxes.
  3. A lawyer analyzes the transaction procedure from the point of view of legal protection, as well as prepares the necessary documents, taking into account possible difficulties during its implementation. This specialist helps a financial analyst to justify in advance the interpretation and execution (accounting procedure) of the transaction and reflect its results in the financial statements, taking into account the problems at its conclusion. This person develops or takes part in the preparation of documents of a tax and legal nature, provides methodological guidance for tax and legal work at the enterprise, provides legal assistance to structural divisions and public organizations in the preparation and execution of various kinds of tax documents, participates in the preparation of claims to appeal against decisions tax service or police officials on bringing the enterprise, its management personnel to administrative or criminal liability.

Tax planning – a service of the Valen Group company

Our experts will help you to reduce tax burden. The following ones are among the services of the Valen Group company:

  • full analysis of the current situation in a company;
  • selection of the optimal taxation scheme for a company;
  • development of recommendations for tax planning;
  • identification of possible risks and their assessment;
  • development of a detailed plan for the implementation of tax planning and assistance in its implementation;

You can get more detailed information about the service and the conditions for its provision from our specialists by phone or e-mail or upon request through the form on our website.

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