Hint: You CAN manage your tax cost intelligently.
Best of all, this is not illegal. Here we will be looking at taxation on company profits and (for the purposes of this article) will not consider partnerships or sole trader situations. Primarily, I would like to focus on 5 steps (which I feel are relevant and applicable across countries) that you can take in order to minimise your tax burden.
1. Match Your Revenues & ExpendituresFirstly, ensure that your profit calculation is right. Have you included all the costs (whether paid or not – whether invoiced or not) incurred in generating the revenue shown in your sales report for the period? Your sales need to also relate to the tax period in question, not earlier and not later. Pay particular attention to the sales at the very beginning of the period and the ones at the very end. In other words, and using accounting jargon: check your cut-off dates.
2. Check the Tax-Deductibility of Your CostsNot all costs are tax-deductible. We will not consider detailed tax rules relating to personal use of cars and entertainment costs that may vary from country to country. If your company has revenue streams coming from different activities you need to look at this in greater depth. It is not necessarily the case that all costs are tax-deductible from all revenues. Certain costs related to a particular activity may only be tax-deductible from the income generated from that same activity. Managing this situation attentively may maximise the tax-deductibility of losses and costs, and (most importantly) can save you tax.
3. Can You Defer Revenue? Tax is paid on profit and profit is sales less costs.If you have overstated your sales, you will pay more tax unnecessarily. Has your company invoiced for a service, part of which will be delivered in the next tax period? If the answer is “Yes” and this is a material value, then you should be deferring that revenue to the following year, thereby reducing your profit and tax in the current year. If you have a policy of deferring revenue, this should of course be done consistently, year after year.
4. Invest in Your BusinessI don’t have to tell you about the difficulties faced by investors nowadays when it comes to investing in safely and getting a reasonable yield from their investments. In the EU, for example, term deposits in banks are yielding ridiculously low interest rates (under 1% or 2% in most cases). Moreover, investing on the stock exchange involves currency, bank, economic and political risks. Your company has profit and has liquidity – invest in your own business. There is certainly something to be said for having your money where you can own it, see it and touch it. Also, it will create tax-deductible costs as you set about spending it for the generation of future income and profit.
5. Pay Your Taxes on Time – Avoid Penalties & InterestTake the time to know all of your tax filing deadlines. Ensure that you have the liquidity when you need it to pay your taxes. You may have appointed an accountant or a tax agent to handle your tax matters. Fine, but do not lose sight of it. Missing your tax filing or payment deadline can be an expensive exercise indeed. Penalties and interest can accrue daily, weekly or monthly. Moreover, penalties can be incremental or scalable depending on whether this is your first default or not. To Sum It All Up... There is of course much more to be said about this. I have however one last piece of advice for entrepreneurs and CEOs, whether they are running large or small companies that are either local or multinational: Your company’s tax computation and accounting policies need to be managed. You need to understand the basic principles and take time to review how this function is being handled within your organisation. It is an area that needs your common sense and broad view. You do need to be careful. Even big corporations can get it wrong at times. Previously acceptable business practices may no longer be welcome, as Apple has recently found out at a probable cost of USD 2.5bn in penalties.
Reference:Written By: David Marinelli
Director & CEO at Portman International Holdings Ltd
For more please visit: Pulse/How to Manage Your Company Tax in 5 Steps