MOST people are familiar with the phrase “if you fail to plan, you plan to fail”. Well, the same is true for tax planning.
What is tax planning? Tax planning involves the various activities and/or strategies that a taxpayer can undertake to reduce tax liabilities by making optimum use of all permissible allowances, deductions, concessions, exemptions, exclusions, incentives and rebates, that are available under the various laws.
In contrast, tax planning is not an attempt to hide information or income from the tax authorities or to ignore your legal obligation to pay taxes.
This kind of strategy would be considered tax evasion, which is illegal.
While not illegal, some arrangements that taxpayers use to reduce their liability may be disdained by the tax authorities, especially if they view these arrangements as in contradiction with the intent of the tax laws and as solely for the purpose of tax avoidance.
Notwithstanding the tax authorities' position, it was Lord Clyde who noted that “No man in this country is under the smallest obligation, moral or other, to arrange his legal relations to his business or to his property to enable the Inland Revenue to put the largest possible shovel into his stores.”
This means that no one is obligated to pay a penny more in taxes than is legally required.
However, a tax plan must be prudent to reduce or mitigate tax risks while employing strategies, within the law.
Like a solid financial plan, a tax plan can fundamentally make or break a business.
Furthermore, there is no business too small or too large that cannot take advantage of robust tax planning.
A tax plan can encompass (i) preparedness for potential tax risks or exposures (ii) a proactive approach for the management of cash flows for tax liabilities and/or (iii) strategies that identify opportunities geared towards implementing tax-efficient ideas or initiatives for individuals and businesses, including consideration of the business structure and transactions.
The Institute on Taxation and Economic Policy noted that in 2018, the 30 most profitable fortune 500 companies in the world paid no US federal income taxes. While this is incredulous, the reality is that these companies take full advantage of rigorous tax planning, including tax arbitrage opportunities.
A tax arbitrage occurs when the tax rules governing a particular transaction or structure differs sufficiently between two jurisdictions and this conflict results in tax benefits that would not exist had the transaction occurred entirely domestically in either country.
Arbitrage opportunities can also occur when there are differing rules for different types of entities.
Whether your business is micro, small, medium, or large, a good tax plan can make the difference in the survival of your business.
For many businesses, labour cost is typically the highest cost followed by tax costs. Therefore, ignoring taxes is not a tax plan, instead proactively addressing tax matters is the first step in protecting your bottom line.
Dionnie A Headley, CPA, BBA, MSc (Taxation), is the managing director of Sygnus Tax Advisory Limited.