Tax optimization - goals

Service-Tax

Tax optimization is a very important and yet controversial concept. However, it is fully legal, as taxpayers have the right to make decisions favorable to their companies.What is tax optimization and what are its goals? How can you optimize taxes legally, which even small entrepreneurs often use, but not everyone is aware of it?

Tax optimization - what is it?

The very concept of tax optimization does not have a specific definition in the provisions of tax law. However, this is a series of completely lawful activities aimed at minimizing the tax burden or avoiding the payment of taxes, if permitted by law. It consists in planning and implementing such tax-related activities that are the most optimal and most beneficial for the enterprise. The essence of optimization is the compliance of the taxpayer's activities with applicable law.

Tax optimization goals

The immediate goal of tax optimization is to take measures that will result in the reduction of the fiscal burden to the most favorable level for the taxpayer, while remaining within the legal limits.

Effective tax optimization concerns all areas of the company's operations, including proper tax analysis, income and cost analysis, taking into account future economic events and tax burdens.

Tax optimization examples

Legal tax optimization includes:

  • tax planning - depends on the personal expectations of a specific taxpayer. Most often it is a series of activities aimed at minimizing taxes, but also eliminating the risk and stabilizing despite higher tax burdens, and even increasing the tax burden, and thus the financial result, e.g. for credit purposes (higher creditworthiness);

  • tax saving - behaviors that result in a tax reduction, but are neutral from the point of view of tax law (e.g. the cash method in VAT, i.e. shifting the payment of tax to a small taxpayer to the period in which the payment for the transaction is due),

  • avoiding taxation by using legal possibilities (e.g. using reliefs and exemptions, deductions, restructuring transactions, or various legal forms of running a business, and even using legal loopholes, for which knowledge of the law is necessary).

Attention!

In July this year. An amendment to the Tax Ordinance entered into force, which eliminates the possibility for taxpayers to take legal actions if they are aimed solely at avoiding the payment of tax.

Pursuant to the amendments, tax avoidance is an activity performed in order to obtain a tax advantage, which in the given circumstances is contrary to the object and purpose of a provision of the tax act, and the manner of the taxpayer's operation is artificial.

As an artificial method of operation, it may be considered, inter alia, unjustified splitting of operations, engaging intermediaries or undertaking activities where the economic or economic risk exceeds the expected benefits.

If the activity is considered to be tax avoidance, the tax consequences will be determined as if the taxpayer made the so-called appropriate activity. An appropriate action is an action that the entity would have performed if it had acted reasonably and was guided by lawful goals other than obtaining a tax advantage.

Tax optimization includes:

  • operating in the form of a partnership instead of a capital company, thus avoiding double taxation;

  • creation of foreign holding companies;

  • creating tax capital groups;

  • operating in a special economic zone;

  • establishment of a European company;

  • restructuring and mergers of companies.

Other examples of tax optimization include:

  • in income tax:

    • combining sources of income (general rules),

    • choosing the form of taxation favorable for a given activity (general rules, flat tax, lump sum, tax card),

    • depreciation (one-off depreciation under de minimis aid),

    • settlement of tax losses,

    • simplified advances for income tax,

  • in VAT:

    • determining the moment when the tax obligation arises,

    • subject exemption from VAT (due to not exceeding the limit of PLN 150,000 net turnover),

    • reduction of output tax (bad debts),

    • deduction of input tax,

    • quarterly VAT settlement,

    • bad debt relief.

Important!

The most controversial method of tax optimization is the use of the so-called tax havens (tax havens, offshore financial center).

In order to avoid taxation, corporations set up offshore companies in tax havens. Offshore is a colloquial term for a company registered in a legal system that is foreign to its founder. The offshore company is in the form of a limited liability company and is used legally by individuals and enterprises for the purposes of international tax optimization consisting in the accumulation of profits in countries with a favorable tax level. In these countries, taxation is often close to zero or there are multiple tax exemptions for various categories of income.

The list of countries and territories applying harmful tax competition (so-called tax havens) is contained in the Regulation of the Minister of Finance on the determination of countries and territories applying harmful tax competition in the field of personal income tax and, respectively, the Regulation of the Minister of Finance on the determination of countries and territories using harmful tax competition in the field of corporate income tax.

Tax avoidance and tax evasion - differences

Tax avoidance (i.e. tax optimization) and tax evasion are seemingly the same concepts. However, there are significant differences between them, and while tax optimization is fully allowed and legal, tax evasion is a prohibited and punished act.

Tax evasion is treated as tax fraud. It is a deliberate misleading of the state, illegal reduction of tax burdens or their complete elimination. In other words, it is any tax-related activity detrimental to the State Treasury.

A taxpayer who evades tax is exposed to criminal or penal fiscal liability for failure to pay the tax that he should have paid in the given circumstances.

Tax evasion is primarily treated as:

  • concealing the subject of taxation (not showing a part of the income),

  • concealment of accounting (unreliable bookkeeping, e.g. failure to issue a sales document, understatement of the amounts of tax due),

  • false qualification (crediting expenses that do not constitute tax deductible costs, qualifying private expenses of owners as company expenses),

  • organizing insolvency,

  • blatant non-payment of taxes.

In summary, the goal of tax optimization is to reduce tax liabilities by using actions permitted by tax regulations, which are sometimes even stimulated by the legislator. The regulations give the taxpayer the possibility of, for example, a form of taxation (general rules, flat tax, registered lump sum, tax card). Some taxpayers may also decide whether they want to be active VAT taxpayers or take advantage of the VAT exemption, taking advantage of the subjective VAT exemption.