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Tax planning: optimization, minimization and avoidance of taxes

Taking into account an extremely unstable tax legislation of Ukraine, more and more business owners are thinking about tax planning for their enterprise or holding. Tax planning is the process of choosing the most optimal form of taxation and reducing the tax burden on business by using certain methods.

Methods of tax planning for business

The methods or ways by which tax planning is implemented can be conditionally divided into:

  • tax optimization;
  • tax minimization;
  • tax avoidance.

The main principle of these methods is that they should not go beyond the legal field, that is, their implementation is carried out exclusively within the framework of the current legislation.

However, not everyone can clearly see the line between the tax optimization, tax minimization, tax avoidance and tax evasion. Many people, implementing tax planning, are guided precisely by the tax avoidance, which has a very fine line with such a concept as tax evasion. And this, in turn, often leads to problems with fiscal authorities and in some cases ends with additional charges, fines, and sometimes criminal cases.

It should be noted that tax planning is widely used throughout the world by both large corporations and small businesses. First of all, tax planning is directed not so much to reducing the payment of taxes, but rather to increasing the profit that remains after the company has paid the taxes.

Optimization and minimization of taxes is achieved by:

  • effective use of the opportunities provided by the tax legislation (benefits by categories of business entities, by economic activity, by type of goods/services, etc.);
  • adjustment of certain areas of economic activity (full or partial replacement of people’s labor with mechanisms which reduces the tax base for the payment of social contributions, contractual policy);
  • choice of accounting methods;
  • use of a foreign element in economic activities, etc.

Tax avoidance should not be confused with avoidance of their payment. The line between these concepts, as we have already noted, is very subtle, and fiscal authorities often try to present the avoidance of taxes as evasion with all the ensuing consequences.

Avoidance of the tax payment, as a rule, is based on the conflicts in national and international law. At the same time, a taxpayer fully maintains accounting and tax reporting and provides it to the tax authority. That is, his actions are not hidden and are not aimed at distorting any information about economic activity or accounting. This is what distinguishes the avoidance of tax payment from tax evasion.

Kinds of schemes for tax optimization

When implementing tax planning, there is often such a concept as a tax scheme. The tax scheme refers to the basic concept of a certain method of tax optimization, its graphic representation, description of the elements that allow you to build and apply the optimal tax regime.

The schemes are conditionally divided into “white”, “grey” and “black”. White schemes include optimization and minimization of taxes. Tax avoidance is the most appropriate for grey schemes, since it formally complies with the norms of the law, but it causes doubts in the control and law enforcement agencies, and requires very careful documentation (and sometimes asserting one’s right in court).

Black schemes are clearly illegal actions to minimize the tax base which may exist before the first checks by the controlling authorities (and sometimes even less). Black schemes, in the short term, create the appearance of great savings, but the subsequent “payment” for the use of such schemes, as practice shows, is much more expensive than it has been saved before.

Taking into account that one or another way of tax optimization can bear tax risks, this issue should be taken very seriously and the relevant specialists should be involved for its settlement.