Many corporations see taxes as a huge burden as they usually eat deeply into an organization’s profits. Taxes are legally enforceable, however, many corporations seek ways to avoid tax payments legally.
They do this by looking for loopholes in the tax laws that they can take advantage of to reduce the taxes payable. Since taxes are charged on profits, one way to reduce taxes is by reducing profits. Read on to see other ways to avoid paying taxes.
Take advantage of tax credits
Tax refunds and credits are tax considerations given to certain organizations based on certain criteria. These considerations are meant to promote a certain type of investment. For instance, a country that wants to drive investments in sustainable energy could grant a periodic tax holiday for companies in that industry.
Some companies are granted tax relief based on their size. These tax incentives are meant to allow small businesses to reinvest their profits to grow the business. Businesses take advantage of this by splitting into smaller segments to appear small.
Some countries grant new companies tax relief for a certain period to enable them to stabilize financially. Companies take advantage of these by incorporating their branches as subsidiaries to benefit from such incentives. Also, corporations that have e-businesses could take advantage of the E-business Tax Credit (CDAE)
In a bid to reduce the tax, a corporation has to pay, many businesses move their business segments where higher revenues are generated from to countries or states with higher tax rates to those with considerably lower tax rates, especially areas with reduced business activities.
For example, a company that manufactures and sells textiles may choose to break down its activities into manufacturing and trading. It may choose to manufacture in the US, where there is adequate access to electricity and marketing is easier. However, because profits in the US, are significantly higher than in Mauritius, it registers its trading or sales division in Mauritius.
By doing this, they will have substantially higher profits in Mauritius where tax rates are lower and lower profits or even losses in the USA where tax rates are higher. This enables business owners to reduce their payable tax by a considerable amount.
Depreciation is the loss in value of an asset over a particular period of time. For example, if a company buys an asset worth $20,000 and expects to use the asset for four years, it will divide the value of the asset over the four years. Hence, for each year, it will capture $5,000 as its depreciation costs. This allows the values of the asset to be spread across its use.
Accelerated depreciation of assets is a method a company employs to charge depreciation over a shorter lifespan. They do this because depreciation is an expense that is allowed for tax purposes in some countries.
As discussed earlier, when expenses are high, the net losses are also high. Hence, having high depreciation charges in a year allows you to have large losses and pay less tax.
Some countries have developed laws to control accelerated depreciation. Rather than allowing each company to decide the amount of depreciation to be charged for tax purposes, they issue a standard rate of allowance at a certain percentage to be charged to assets.
Losses carried forward
Net losses are the total deficit a business corporation incurs as a result of its total expenditure exceeding its revenue.
For example, if a company’s total income for the year is $20,000. And the expenses they made throughout the year which might include buying of products, advertising, utilities, salaries, and repair costs, amount to a total of $23,000.
The total income for the year, which is $20,000, is then subtracted from the total expenses they incurred for that year. Hence, $23,000 minus $20,000 equals$3000. This means the company’s net loss for that year is $3000.
State governments allow business owners to bring forward or carry over their net losses for the year into the next year. Carrying over net losses allows a business to turn in a lower taxable income.
As many companies struggle to minimize their taxes, the fight against tax avoidance has been fierce. Many international and regional bodies have been set up to curb tax avoidance.
Tax avoidance is not illegal. Hence, the primary way of fighting it is by continually updating tax policies to cover loopholes. Transfer pricing regulations are being enforced in many countries to control profit shifting.