What is Tax Planning?
Tax Planning is considering the tax implications of individual or business decisions with goal of minimizing the tax liability. The process of setting goals, developing strategies to reduce tax liability of the business or individual. Tax laws provide reliefs to its citizens and to be eligible for such reliefs, one need to comply with the provisions of the law and a slight mistake, results in a different story altogether; you lose the case or you are at fault.
In tax planning, the planners are always reviewing their plans as events unfold with the passage of time. Just like any plan, tax planning may be for the short-term period or for the long term.
Tax Planning Techniques.
Tax planning mirrors on the respective piece of tax legislation despite its area of jurisdiction. Below is a compilation and analysis of the
techniques that are used in international tax planning.
Timely Filing of Tax Returns.
Most tax legislation penalize taxpayers for failing to file some tax returns in time and this creates an additional unnecessary cost to the business. This can be avoided by simply filing the relevant tax returns in time even though the company is experiencing some cash flow problems as future outflows would have been saved. Tax due dates should therefore be observed.
Paying Taxes on / before due date.
When the situation permits, it is advised to pay all taxes well before the due date and in the event that the due date falls on a weekend such as Sunday when the revenue authority offices are closed or on a holiday. The law silently stipulates that the due date is a day preceding the holiday or such non-working day.It is not a defense to say that the due date was on a holiday. It is a well-settled law in most tax jurisdictions.
Failure to pay taxes when they fall due attracts some heavy penalties from defaulting taxpayers. Taxpayers are reminded that the business of the government mainly depends of such taxes as their main sources of income. Civil servants need to be paid over and above other government priorities. A penalty in Zimbabwe for late payment of taxis 100% of the principal amount.
Utilization of Tax Credit.
For the purpose of reducing one’s actual tax liability, taxpayers should claim all available tax credits as fixed in the relevant charging Act which in Zimbabwe is the Finance Act. Tax credits are common with employment income or taxation for individuals.Examples include the elderly persons’ credit, blind persons’ credit, disabled persons’ credit and medical expenses credit.
Capital Allowances.
Section 15 as read with the 4th Schedule to the Income Tax Act permits a taxpayer who acquires or purchases a new or unused article, implement or machinery to claim either Special Initial Allowance or the Wear and Tear Allowance.
Carrying Forward of Assessed Losses.
Assessed losses can be carried forward for a period not exceeding six years, but in the case of a mining operation, the loss can be carried forward indefinitely and accordingly an entity can make a lot of tax savings by utilizing and carrying forward assessed losses.
Tax Holidays.
Tax holidays means an entity enjoying it may be paying nothing in taxes or some preferential tax rates within a given time frame. Examples include companies operating in Export Processing Zones (EPZ). Taxpayer is not taxed during the first 5 years of their operations and subsequently the rate is elevated until the tax becomes normal just like any other business through the passage of time.
Build Own Operate Transfer (BOOT) are also common strategies in international tax planning and at one time in Zimbabwe Industrial Park Developers were also being given some preferential tax rates just like the companies operating in an EPZ.
Double Taxation Reliefs (DTR)
DTR is available in cases of double taxation arising where there is or there is no double taxation agreement and it operates more like a tax credit.
Tax Incentives
Tax incentives are meant to attract investors and some of these could be an additional allowance equal to 100% of the expense actually incurred and at the end of the day, the taxable income is reduced giving rise to a less tax liability.
Creation of a Group of Companies.
This strategy is mainly used by entities that normally are subjected to high taxable incomes due to the nature of their industry. As part of the tax planning strategy, this may mean giving some loans to such entities from other sister companies that will be used to acquire some assets where capital allowances will be claimed or incurring legitimate business expenses that the Act recognizes even as qualifying for tax incentives. The strategy is also commonly used under value added tax.
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