Over the past decade, the “bad boys” of the tax world have been a constant fixture in the mainstream media so much so that tax can be regarded as a dirty word. Nevertheless, the Australian government encourages tax planning for businesses, with former Treasurer Wayne Swan contending that it is every citizen’s duty to minimize their tax. More recently, former PM Malcolm Turnbull highlighted the relevance of tax planning by asserting that “the object of having taxes is to support excellent services! The lower good taxes can be achieved the better!” The ACSA supports strategic tax planning, with the need to control the two lines of business permitted by the Act. In a similar vein, the Engineering Taskforce calls for greater consideration of the tax consequences for Australian businesses if R&D is to be conducted offshore. Discussions and debates surrounding tax planning are not new and the debate about when tax planning becomes aggressive continues, encompassing a wide spectrum ranging from the benign to the malicious. Recent events such as the Panama Papers have led to an era where aggressive tax is widely denounced.
Strategic tax planning is an objectively valuable strategy for businesses. Management is charged with maximizing the value of the firm, and effective tax planning is a tool that can add additional value. Taxes are a significant cost for most businesses, as seen in the Productivity Commission’s 2014-2015 Report on Government Services. The data reveals that taxation is a significant cost for businesses, with more than $50 billion allocated as a business tax expense. This significant taxation cost is exacerbated for Australian businesses by way of the high corporate tax rate and the tax implications of imputation. Research indicates that for some companies, the difference between effective tax rate can be as high as 9.5 percent, underscoring the need for and potential benefit of strategic tax planning.
Benefits of Corporate Tax Planning
Corporate tax planning affects various factors of the economy. These are harder to discern than simply higher after-tax returns to investors, but the impacts are significant. Holding corporate average returns to capital and investors’ tax rates constant, a ten-point reduction in corporate marginal tax rates is associated with a 63-point increase in fixed investment. These tax-induced changes in investment are larger in more innovative and R&D-intensive industries. These impacts are also present on the level of information production. Moreover, corporate tax incentives change employee wages, corporate investment, and industry productivity estimates.
Executives are under increasing pressure to manage profitability in order to survive and prosper. Commitment and planning are the keys to success. By tracking and examining these yearly tax figures, both externally and internally, firms can gain an understanding of how tax strategies and execution have changed over time, in addition to the tax characteristics of their reported earnings. Beginning in 1934 when the U.S. tax code was officially adopted by Congress, firms have continued to develop strategies to manage this tax burden. The economic motivation for these actions is straightforward. When corporate managers reduce taxes, society generally benefits. Companies gain and are rewarded by investors for maximizing after-tax returns. This promotes more corporate formations, more new strategic tax planning ventures by existing organizations, and increased innovation by entrepreneurs.
Strategic tax planning seems to be the antithesis of a fun and forward-looking growth strategy. At best, most investors consider it an anxiety-inducing necessity, and many companies fail to give due consideration to the costs of inattention. Like many business functions, planning and insight often lead to better outcomes. At worst, they can mean the difference between making money and leaving it on the table for competitors. Despite the implicit importance, many organizations do not track how complex tax rules impact the income they report to shareholders. This can lag increases or decreases in income that result from managerial action and provide shareholders with insight into the effective tax rate a firm currently uses. Companies need to find the strategic insight and attendant growth opportunities that exist in the shadows of their tax function.
Reducing Tax Liability
The aim of reducing the tax liability is realized by tax planning activities. Companies establish a strong financial structure thanks to tax planning. Corporate taxpayers want to minimize their tax liabilities. Corporate taxpayers use tax planning activities within the framework of avoiding seizures. The taxpayer’s main goal is to transfer an interest from his/her personal tax bill to unaware people. It has been evaluated that such tax planning activities are realized in the black economy or tax-free countries where almost no tax remains. For a robust corporate structure, it is important to reduce tax burdens and increase accumulated income. There are two different types of tax disputes, which tax planning approaches are applied under, either transfer pricing specials or fiscal public finances. As of 2017, it is estimated that many firms will enter into purchase and merger activities. The important disadvantage of this framework is mainly caused by the high taxation of the value generated by these transactions. Defect decreases in utility are seen with high taxes, making this plan more effective.
Many managers perceive corporate tax as an inevitable expense that causes costs. They don’t pay enough attention to the positive effects of tax planning activities and the contribution of tax planning to income as a result of the reduction in tax expense. However, one of the significant financial management issues is that a significant amount of annual profit belonging to the companies is not realized due to the high tax paid on their revenues, but this is also a problem that can be eradicated by tax planning activities. Maximizing the performance of tax planning activities and providing the opportunity to return high returns also provides job security for the tax advisor and his/her agency.
Enhancing Cash Flow Management
Cost-wise, the scheduling of semi-annual or quarterly reviews is manageable but can be burdensome concurrently to reviewing accounts payable information. Moreover, analysis of schedule M-1 on the tax basis balance sheet may be necessary to correctly document the movement of the company’s tax position for auditors or lenders. If the company qualifies for the hybrid tax return filing process, it is advantageous to plan and review debts, assets, and tax payments on a regular basis. Solid business decisions and strategies should be in place prior to the implementation of a proper tax return filing method.
Cash and income return obligations are not the only variables to consider when implementing a tax return filing strategy. The hybrid approach to tax return preparation rests on a blend of the traditional income and cash methodologies. Potential benefits and drawbacks do exist with the hybrid approach. By allowing the company to prepare quarterly tax data, as with the cash approach, some tax payments are predictable on a cash basis. Yet, the hybrid approach provides better financial accounting for tax obligations by reconciling tax differences in the income approach quarterly. Furthermore, it allows for better year-end reconciliation of the actual tax return.
In the cash approach, an accounts payable system is set up and maintained on an accrual basis, providing for the process of disallowing deductions for expenses not paid at year-end and for multi-jurisdiction compliance efforts. Conversely, tax liability payment, estimated computations, and payments prior to the required due dates are charged against undisputed current liabilities. The income approach relies on after-tax income computations for financial statement purposes, supported by permanent and temporary entries to reconcile with cash tax payments.
At the other extreme, because of business decisions, these strategic tax planning tools can be employed with no tax impact. Simply put, increasingly more companies must face a myriad of complex tax planning issues in their decision-making process. Some might argue that the long-term health of companies is also a function of strategic cash flow management. Corporations can choose from three tax return filing strategies when determining their organization’s readiness to plan and prepare the tax return: a cash approach, an income approach, and a hybrid approach.
A primary goal for any organization is to maximize return to shareholders. Sometimes, minimizing short-term taxes can yield long-term benefits if the cash flow is reinvested at a rate of return that exceeds the cost of capital. Companies following this belief develop and utilize strategic tax planning in an attempt to minimize their tax obligations. In addition to the regulatory laws and regulations, some companies strive to obtain cash tax savings above and beyond their competition via sophisticated tax planning, tax research, tax credits, and deductions.
Increasing Profitability
Overall, this chapter proves that the negative tax effect exists in strategic tax planning to manage firm benefits-related constraints and informational environment associated with level 3 European GAAP. It also helps manage managerial equity ownership and seek financial benefits when there is monitoring of investment information. Aligning with these significant objectives, the discussion extends beyond Table 2 and looks at how the relationship between ROA and ETR changes depending on the European GAAP disclosure level. This helps explain why investors react negatively to weak accounting disclosure and shape how investors should predict firms’ future ETR regarding strategic tax-related constraints.
Empirical results show that the fall in return on sold assets accelerates when firms experience an increase in their tax liability for an increase in sales. Level 1 European GAAP firms report a higher level of earnings per share (or return on sold assets) and have lower effective tax rates, specifically when compared to level 3 European GAAP firms. The study finds evidence in support of information and financial disadvantages providing convincing evidence that the impact of taxes on business value is affected by French GAAP levels, information asymmetry, monitoring benefits, and debt constraints.
One relevant body of literature finds that shareholders prefer cheap monitoring of projects under uncertainty, especially when there are information asymmetry. Shareholders also prefer the negative tax-shield effect of debt to minimize potential agency costs of higher managerial equity ownership (an equalizing-type effect). Another branch of the literature identifies the possibility of overinvestment for levered firms when extensive investments have longer payback periods and higher risk. This is because it develops a positive relationship between tax shields benefits and over-investment.
Researchers and managers generally agree that taxes affect firm value and, therefore, firms are interested in maximizing the after-tax profits while minimizing the after-tax expenses. While increasing revenues and decreasing costs can be an obvious way for the firms to do so, only a few firms realize that strategically planning their taxes can increase their globalization. This can increase a firm’s industry-adjusted return on assets by 6.46%. The study uses multiple proxies for globalization such as foreign sales, the number of foreign subsidiaries, and foreign assets. It is successful in finding a positive correlation between a firm’s level of globalization and its after-tax profitability. Empirical findings show that being lightly taxed has an amplifying effect on return on sold assets and is positively related to the number of foreign subsidies (a direct measure of capital).
Strategies for Effective Corporate Tax Planning
In view of the obvious need for management to base its plans on a tax policy designed to minimize excessive levies, it is surprising that so few companies both small and large have formally adopted such a policy. For many corporations, this results from a policy of placid acceptance of the various levies which are imposed upon them. Many others see taxation chiefly as a legal and perhaps a public relations problem. Still others subscribe to the theory that corporate activities are less circumscribed if conducted within the private sector, which can offer the advantages of income tax and liability reduction, sometimes accompanied by other demonstrable economies.
Every corporation, if it is to operate effectively, must include within its scope of consideration all the taxes which public authorities impose upon it. Part of the successful conduct of corporate activities lies in the effective capitalization of current market prices. The term “cost,” therefore, is meaningful only as it is measured in dollars and cents. Taxes necessarily form a part of this cost, for even if the corporation desires the tax including its effect on the dividend to remain an expense to the stockholder and not to the corporation, it has an untoward effect on the quoted market price for the stock and thus part of the corporate cost. In order to function successfully in a free enterprise economy, corporate management must recognize and accept.
Utilizing Tax Deductions and Credits
A sole proprietor should keep a file folder as well for filing all paper records of expenses, such as gas and oil receipts, property tax bills, vehicle registration fees, office supplies receipts, and utility bills or tenant leases. Itemized categories in the file folder would be appropriate based upon the standard Schedule C categories: Part II for expenses which are separate and distinct from all other deductions, and Part V for expenses which must be apportioned. A home office deduction requires keeping a record of all home expenses, such as rent or mortgage interest, house or building taxes, homeowners or renters’ insurance, utilities, and vehicle expenses attributable to business use.
The two easiest ways to minimize taxes are to take all of the deductions that a corporation is entitled to and to take advantage of all of the tax credits that it qualifies for. Complete and accurate record-keeping is vital to the proper recording of expenses and tax credits on an income tax return. The more records that are kept, the greater the number of deductions that a tax preparer is likely to find at tax time. The easiest way for a sole proprietor to keep good records is by opening a separate bank account for the business and never using it for anything but business expenses. Even if the business is conducted under a fictitious business name, as in a retail or wholesale business, using a separate bank account or credit card for business purposes makes good record-keeping easy.
Implementing Tax-Advantaged Structures
Modern tax planning over the past generation or so also means devoting considerable professional efforts and attention across the entire compliance spectrum. Embracing the digital world means detecting potential compliance issues in the age of electronic discovery, keeping up with courts that continually simplify transparency resolutions by electronic evidentiary methods, and matching expenses with all elements of revenue sourcing to facilitate loss-James income setting. From a staff development standpoint, implementing principles-based planning prudence requires a heightened emphasis on factual and economic precision among seasoned and developing accounting professionals alike. Staff should construct tax-advantaged transactions whose details assist in satisfying the necessity for both efficient and lean corporate-wide and transaction-based controls. Here, plan development increasingly must emphasize capturing beneficial financing interest expense from new regulations, aligning new foreign tax rules with BEPS and other driver-based initiatives, garnering mineral investments from sector exchanges, and being mindful of limiting inoperative international benefit clauses.
Although the operational focus on tax-advantaged structuring has become quite commonplace in the tax world, the implementation details over the last thirty years have changed considerably. A modern tax planner must carefully consider the many statutory and regulatory doctrines that could lower or negate the efficiency gains inherent in a structuring project. Moreover, changes related to income sourcing issues necessitate a continual review of such tax planning projects. Entities with material intellectual property continue to shift towards principles-based structures that interrelate substance and legal tax positions by emphasizing the benefits of local skilled labor based on patented products produced or marketed. For larger multinational corporations, this interrelationship between substance and IP-related tax results remains a central tax planning consideration to the extent that their intellectual property presents opportunity and risk alike.
Managing Transfer Pricing
Looking at its statutory embodiment generally, the use of the term “reasonable” leaves transfer pricing matters ripe for what has become known as the “unitary treatment” where, to be consistent with the arm’s-length requirement, only relevant aspects of comparable and/or contemporaneous uncontrolled transactions and “actual commercial relations” between third parties are to be considered relevant to the setting of an arm’s length price. The federal government, in a significant departure from the contemporaneous nature of Canadian law and practice, threw a major wrench into case law and OECD guidelines, enacting, as of the 2008 taxation year, the broadest and most far-reaching long-term transfer pricing proposal ever witnessed in Canadian tax history. In a country that has been well aware of the weight of its transfer pricing requirements, and despite even earlier stalemate in legislative gain that prevented its passing into law in 1977, the enactment of the first made-known internal transfer pricing inclusion was most perplexing.
In Canadian tax law, the requirement for any transactions (especially transactions that are not at arm’s length) to reflect objective standards of fair market value is well established. Historic and ongoing, numerous cases over the delightful hundreds of pages of the Income Tax Reports attest to the central importance of the issue. The current statutory embodiment of transfer pricing rules leaves much power in the hands of the Minister in making assessments, with the Minister enjoying very wide discretionary power to increase (or decrease) income or loss with respect to any particular transaction, its existence, its terms and conditions, income payable, income accrued, debts in issue, or with respect to services rendered or properties transferred or provided. The exercise of this discretionary power by the Minister can only occur with regard to a number of factors, including the limitations contained within the arm’s-length standard.
Leveraging International Tax Planning
The position strategically held by the master tax plan in the total corporate hierarchy offers multinational corporations the opportunity to integrate all of the developing tax ideas and to generate the incidence-proof tax planning position for the whole organization. The tax plan should therefore have the potential to establish an incident-proof big picture master plan to ensure global corporate tax minimization and international tax avoidance. How is this possible? Generally speaking, two tax planning methods are available to manage corporate profit: use of intercompany expenses/charges; use of transnational corporate investment in intangible or a tax investment/servicing facilities. Both are allowable and offer intercompany expenses that can shelter finance income and provide opportunities for international corporate tax minimization.
Leveraging international tax planning: Multinational corporations operate in various countries, and there are rules that apply to international transactions between the various branches/subsidiaries of the said corporation. This discussion is called international tax planning, and it is the opposite of domestic or local tax planning that involves generating tax planning ideas that will work within a specific country. The goal of tax planning in an international setting is to minimize the tax liability of the whole organization, given the rules that apply to cross-border transactions, while reducing the risk of interest, penalties, or legal actions being triggered because of any tax avoidance schemes that may have been used. How is this possible? The answer is for multinational corporations to use “as a weapon” the master tax plan or the big picture master plan for the whole organization. Such planning requires that we consider and understand three main concepts: (1) worldwide/total corporate income; (2) worldwide/total corporate expense; and (3) worldwide total corporate benefits.
Best Practices for Successful Corporate Tax Planning
– Compensation structure: Effective compensation plans are a major way to protect family companies from taxes and to reduce tax rates for business owners. The tax rate can rise when dividends are paid or decrease if capital gains are anticipated. You should also guarantee planning for employee stock plans and benefit payments so that neither the skepticism of employee shareholders nor their understandable tax concerns rise. In order to achieve the most tax-efficient treatment possible, special attention will be given to pay structure and benefits for key employees. Severe tax fallout and exemption issues could also result if the company is international legal in any way. It is appropriate to postpone remittances so that the minimum amount is calculated depending on a company’s surpluses and the final partnership income decisions.
– Acquisition and Sales: Timing is everything. The act of pushing back or pulling forward a particular transaction or additional payment can have significant impacts on taxable capital. Top tax may be incurred or avoided by doing so. In order to reduce the total tax rate, the company also needs to make taxation considerations as soon as possible. This will depend on future capital gains. By using tax arguments, the sale side can be improved by showing a company’s true worth. Pre-acquisition adjustments to the newly acquired business should be made as well to avoid significant future legal or tax issues. When purchasing or selling inventory for public corporations, timing also impacts taxable income. Sales can be moved between reporting and taxation years and bases can be increased or reduced. Especially in the context of the capital cost allowances or income decision, such decisions are important, as whether or not to move from capital to income. Therefore, you will want to negotiate an M&A deal before the end of the year in the field of tax planning to determine how this will impact the buyer and seller in terms of taxation next year.
Small corporations often lack the resources to create dedicated tax planning teams, which is why professional management and the expert advice of finance professionals or consultants is crucial. Below is a list of some of the basic principles that should be employed by public or private entities, both large and small, in order to achieve successful corporate tax planning and optimal tax efficiency.
Regular Review of Tax Regulations
The complexity of business operations is bound to make such a review of tax planning more frequent than was the case in recent times. A corporation with international operations now has to factor in, if not more, at least the number of tax codes in the country where it operates. What happens, for example, if three tax codes apply to an income in three separate countries and the income is more than a particular threshold in each of the countries? It then becomes necessary for a corporation with a threshold level of income to apply the three different tax codes and prepare separate returns for each of the different corporations. Making such filing requirements more onerous is the fact that corporations might be used to file one return for several subsidiaries in these countries but have to file separate returns for each corporation with these qualifying thresholds. Such increased complexity is an inevitable consequence of the world we live in, and it is spearheaded by the increased competition between governments. It is a time when shrinking tax base makes it that much more important for countries to maximize the tax liability of taxpayers within their country.
In planning their taxes, businesses typically rely on the in-house and consulting expertise of professional accountants who help design tax-planning strategies that optimize statutory tax liabilities and free up revenues for activities that enhance the company’s market positioning. Recent tax regulation changes in most parts of the world have necessitated a reassessment of existing tax planning strategies – such reviews are indeed recommended by several professionals, contingent on any new regulations that may be enacted in the countries where corporations operate.
Collaboration with Tax Professionals
Also, some suggestions are based on personal experience. There are no strict rules as every firm has its way. Given the specifics of the corporate governance, taxation system, etc., a firm chooses to engage in operational and tactical tax planning to ensure its tax flexibility and react from various standpoints to an increasingly dynamic business and tax environment. Also, it has to be determined that Tax Planning itself does not represent a homogeneous batch of strategic measurements that require a variety of responses from the Tax Office. For example, the so-called Tax Strategy Team advises the Tax Office on its reporting initiatives and monitors the impact of regulations on planning.
Successful tax planning is encouraged to a large extent by the collaboration between tax professionals and corporations. Such a liaison is necessary to fully access technical and financial know-how and guarantees a close linkage between corporate tax planning and strategy. The vast knowledge of tax professionals in the tax field and of corporations about their tax operations provides a comprehensive basis for deterministic strategic corporate tax planning. None of the two partners alone, but the two acting together, develop a cultural understanding of how taxes may influence value creation. Collaboration does not mean that only structures, but ways of handling taxes really matter. The sharing of interests between a firm and its accountants in tax know-how thus will lead to an increased taxation of corporate tax planning. It gets clearer and more competent; for corporate tax planning, more elaborate from a firm perspective is needed.
Maintaining Accurate Financial Records
Let us be clear: financial statement lacks the information that is required; it contains the essential data; and it needs to include only what information is necessary. When it doesn’t contain or has the incorrect data, undesirable consequences can occur. Some financial statements present accounts that are based on tax numbers. An entirely different financial report that is committed solely to management, contains most recent data. When tax planners operate from incomplete, or non-existing financial statement prepared monthly, the financial results may be appalling, and could even include filing for bankruptcy in worst scenarios. When tax planners are able to use a Statement that is most recent, prepared monthly, have up-to-the-minute figures and ratios, to have a clear understanding of income, expenses and assets, they can suggest an appropriate solution or strategy for the problem: either as part of the company’s daily operations, or as a part of the company’s general activities. In this manner, the financial statement provide opportunities to allocate the messages and objectives that are essential and convey this data clearly to defined groups.
– Creates a level playing field. It is often simple to fall behind in a financial report review, but once you are caught up to date, everyone has access to the same information. A level playing field is created for you and your tax planner, other managers and staff. Everyone will know what to do and when to do it producing the needed and desired results.
– Effective tracking technique. Once upon a time, a company sold a type of general merchandise, for example, groceries. Now we have companies that cater to just a specific market niche, such as fruits and vegetables, meat, seafood, and so on. The concept of stock administration has fundamentally changed since the commencement of specialization. How do firms keep in check their stock of a particular product? By conducting a complete and thorough review of financial records.
– Creation of tax efficiency and profit ideal. Planners will work from your updated financial statements, and proper and timely planning allows creation of the most tax efficient strategies and solutions. Initial implementation of strategies will allow you to maximize profit.
The savviest of tax planners do not wait for tax season to plan for filing taxes. Their best advice is to have up-to-date and accurate financial records. If you perform a report’s review after each and every closing, your financial statements will yield the following benefits:
