Requirements for optimal tax planning

January 22, 2024

As we know, the goal of a business is to generate profit, making it crucial to understand the legal environment of the jurisdiction it operates in. Tax planning is a tool that optimizes business performance and tax burden, utilizing local and international tax regulations. Due to globalization, we increasingly observe tax planning structures of multinational groups, often scrutinized for potential tax fraud, which can negatively impact business operations and the tax authorities of involved countries.

In this article, we’ll address key requirements for effective tax planning:

1. Local Environment

Understanding the current regulatory framework is crucial, including knowledge of applicable taxes based on the company’s constitution (e.g., Public Limited Company, Closed Corporation) and potential fiscal benefits based on the location of its fiscal domicile (preferred tax regimes within the country).

Given tax authorities’ focus on revenue protection, staying informed about local legislation changes and tax-related pronouncements is essential.

2. International Environment

If dealing with related or affiliated parties, tax planning should consider transfer pricing regulations, not only complying with the arm’s length principle but also enhancing business expansion strategy and operational structure. Additionally, consideration should be given to Double Taxation Treaties (DTTs) applicable to jurisdictions involved in international transactions.

3. Identification of Benefits

In tax planning, identifying incentives, exemptions, deductions, and other benefits in local legislation and international tax law, such as the aforementioned DTT, is crucial.

4. Accounting

Proper understanding of accounting and tax concepts plays a significant role in tax planning. Optimal accounting records help prevent errors in declarations, minimizing the risk of fines or penalties.

5. Conclusion

Effective tax planning must consider various local and international factors to legally optimize the tax burden. It is advisable to consult professionals with expertise in tax, legal, and accounting matters.

Reflecting on the discussed topic, due to aggressive tax planning by multinational groups and challenges posed by globalization, precise and sophisticated international mechanisms are being developed to combat evasive practices. Nevertheless, it is important for tax authorities to maintain a balance between measures adopted and the security and incentives for taxpayers.