Is tax planning important?
It is important to think about taxes in advance. This way we gain:
- tax security, or peace of mind
- savings because it is cheaper to plan than to save
- the most thought-out tax structure for your business, giving you even more security and even more savings
What is tax planning?
Without much theory, tax planning can be simply described as:
- analyzing the actions you intend to take,
- choosing the most advantageous solution, i.e. a solution that provides tax security and benefits for your business in the right proportions
- implementing this solution in practice in your business, in a specific transaction or in establishing an appropriate organizational structure.
The point is to think through the actions you are taking in advance and carefully analyse them, assessing the tax implications, so that business decisions are made with full awareness of the tax implications.
An example of tax planning in practice, perhaps?
An example, please.
You have landed a very lucrative business, where you are the middleman between a seller from Taiwan and a buyer from Spain. The goods are to be shipped to Europe, you are to buy from the seller from Taiwan and sell to the buyer from Spain.
Prices are set, all you need to do is sign the contracts.
Okay, but what about VAT and customs? The goods are to be delivered to the EU, someone has to settle the import of the goods, therefore both customs and VAT on import. Okay, but what about VAT taxation of two deliveries of goods, consecutively? Will someone have to settle the Polish VAT? Are any taxes included in the prices of the goods? Well, yes, but when the goods reach the EU and have to be imported, maybe you have to register in advance in an EU member state to be able to allow the goods to be traded in the EU? Maybe you have to look for a customs agency?
It turns out that a simple buy-sell business becomes very complicated if we do not think about taxes properly. A possible scenario is that an oversight of the formalities will result in a delay of the goods at the destination port, where the costs of storing the goods will burden someone's earnings on the transaction. Registration for VAT purposes can take several weeks.
Okay, so let's plan this transaction so that it is carried out in the most advantageous and tax-safe way. It can probably be arranged this way transaction terms, such as Incoterms, place of import, obligations of individual parties, so that there is no EU VAT on the supply of goods at all and that settling VAT on the import of goods is painless, i.e. without spending any money.
Without a plan, you could end up in the field
If there is no tax plan developed at the outset and the business moves forward, there may be neither time nor opportunity to clean up the tax mess.
An example from my practice:
The partners founded company X. Company X was to find properties with specific features, prepare them so that they were ready for very profitable investments. The work consisted mainly of arranging permits and various administrative activities. When this work was completed, company Y was created, whose only asset was this investment property.
Company X issued an invoice to company Y for consultancy services related to obtaining permits, etc. The invoices were for large amounts, company Y deducted input VAT and had tax costs.
This arrangement lasted for quite a long time, there were many companies prepared for sale. At some point the business structure fell into the hands of tax advisors. And it turned out that:
- company X issued empty invoices, as company X did not provide any services to the appointed companies, such as company Y, the invoices were issued after the fact, sometimes several months after obtaining the permits
- Company Y and other companies referred to, deducted a lot of input VAT and included a lot of tax costs from empty invoices
- the whole structure turned out to be tax-misled
- undoing the mess was very expensive, a decision was made to completely reorganize the business structure, but the skeletons remained in the closet and made it very difficult for interested investors to enter the business.
I recommend tax planning
The folk wisdom that if you pay cheaply, you pay twice also holds true in the world of taxes.
However, folk wisdom is quite lenient compared to the world of taxes, as it does not mention such consequences as:
- fiscal criminal liability,
- additional tax liabilities, i.e. sanctions, where in VAT the sanction can be up to 100% in arrears
- business consequences, such as problems with the sale of a troubled company or the entire margin being absorbed by an overlooked tax.
I highly recommend tax planning 😊
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Zbigniew Makowski
Tax advisor
