Creating and implementing a sound tax strategy is often easier said than done within the world of finance. Not only is it necessary to embrace an innate sense of transparency, but appreciating unique reporting requirements for individuals and businesses must never be taken lightly.
These observations signify that the entire process of tax planning may need to be modified while some approaches could even be ablated altogether. What types of recommendations are pertinent, and what benefits can they provide? Although tax planning for companies can sometimes represent a decidedly complicated issue, there are still a number of takeaway points to highlight. The same holds true in regard to individuals hoping to remain ahead of the game. Let’s take a look at both sides of this proverbial coin.
Tax Planning for Businesses and Corporations
Many tax planning experts will argue that a new set of regulatory guidelines is already having an impact on the corporate sector. These are commonly referred to as Base Erosion and Profit Shifting (BEPS) principles. Although the BEPS framework is somewhat complicated, one regulation immediately stands out.
BEPS tax strategy legislation is heavily concerned with country-by-country reporting. At the time that this article was written, all G20 nations had committed to this programme. Many have likened such a move to taxation obligations “on steroids“. While there is no single law which encompasses the G20, nations can still incorporate BEPS principles into their domestic tax strategies.
So, what does this signify in regard to tax transparency and corporate turnover? This question is pertinent for any entity that hopes to remain in compliance.
Enhanced Reporting Requirements
Firms will now need to augment their current reporting strategies in order to satisfy the country-by-country (CBC) requirements outlined throughout the BEPS framework. Certain tax policy professionals feel that this could impact as many as 9,000 companies around the world. As a result, several in-house ledger and accounting systems will likely need to be streamlined. Some relevant metrics in this sense include (but might not necessarily be limited to):
- Transactions being tagged with a country of origin.
- The streamlined sharing of information.
- A closer examination of previous tax deductions in order to appreciate if these are still valid.
- Cross-departmental accountability.
It is now clear to see that some organisations will have to take drastic steps in their approach to tax strategy legislation. This level of transparent tax governance is even more relevant when discussing multinational firms due to the CBC reporting requirements mentioned previously.
Of course, we also need to remember that traditional business tax planning techniques need to be addressed. Some core concerns include metrics such as:
- Income (capital gains) tax
- Employment taxes
- Excise taxes
- Sales taxes
In-house variables such as receipts, purchases, business-related travel costs, a proprietary tax technology strategy (such as accounting software platforms) and assets will likewise need to be recorded and reported. Note that these examples might not always encompass the needs of every business. Additional concerns may exist. This is why it is often a good idea to leverage the expertise of a third-party firm so that transparency is never called into question.
What About Personal Tax Planning?
Many individuals struggle to keep one step ahead of modern guidelines, and as a result, tax transparency may be called into question. What steps are required to develop a sound and transparent approach to this understandable concern? Here are some general guidelines:
- Clarify your dependency status.
- Be sure to obtain all of the relevant tax forms.
- Take into account any tuition-related tax credits and/or student loan deductions.
- Become familiar with any potential tax sheltering strategies associated with your region.
- Account for other approaches that may no longer be valid such as a bunching tax strategy.
Having said this, there are several additional ways in which an individual can create a sound and transparent strategy. Let’s take a look at some recommendations.
Learn the Difference Between Deductions and Credits
Deductions are incurred expenses that can be subtracted from your annual income (they define how much of this income is subject to taxation). Tax credits are simply reductions in the overall amount that is required to be paid at the end of the fiscal year.
Know Your Tax Bracket
It is also prudent to appreciate your tax bracket. Simply stated, those who earn more are subject to higher rates of taxation. This is known as a progressive tax system.
Taxation and Retirement
Any sound tax strategy will take into account retirement plans. For example, many of these bundles will allow regular tax-free contributions (intended to provide a source of liquidity later in life). Both individuals and businesses will often benefit from such approaches. Note that many of these plans exist (such as the 401K model in the United States), so it is wise to speak with an expert to learn more.
All of these tax strategy examples will require time and effort to implement. However, the long-term financial benefits cannot be overstated. A modicum of preparation will certainly go a long way towards long-term financial success.