The effects of tax avoidance and tax planning on the society has been a controversial issue for a long time yet governments the world over still have difficulty addressing it. It is believed that all these started from the beginning when business agreements were written by the government or associates of government to favour their family, friends or associates that are in business. Unfortunately, tax planning schemes are a legally accepted business practices for which tax professionals are paid huge sums of money to offer tax planning advisory services for both personal and corporate decision making.
According to Investopedia, tax planning is the analysis of a financial situation or plan from a tax perspective. It is an exercise undertaken to minimize tax liability through the best use of all available resources, deductions, exclusions, exemptions, etc. to reduce income and/or capital gains (businessdirectory.com). Tax planning therefore encompasses many different considerations, including the timing of income, purchases and other expenditures, the selection of investments and type of retirement plans etc. However, tax fraud or evasion unlike tax avoidance is not tax planning scheme and hence considered illegal in the tax professional.
Firms, both domestic and international employ numerous tax planning strategies to reduce their tax burden. An exhaustive review is impossible because known strategies are numerous and many strategies are likely unknown to tax analysts. Some forms of tax planning include (a) reclassifying business income as non-business income (b) using transfer pricing to shift income from high tax to low tax jurisdictions (c) employing passive investment companies (d) exploiting tax credits, exemptions and/or concessions in Tax Laws (e) treaty shopping (f) use of hybrids etc.
Judge Learned Hand in the case of Commissioner v Newman in 1947 stated:
“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere can’t”.
Indeed, tax planning has invariably become an integral part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for business success as it has gained prominence in today’s business planning strategies, all because Tax Laws have different provisions relating to entities based on location, type of activity or time period, thus invariably, every difference offers a planning opportunity to a taxpayer.
Then the question that arises is, does tax planning comes with any benefits?
Proper tax planning is essential in both domestic and international business to reduce the distortions that arises for instance due to the lack of harmonization in domestic tax systems. Without tax planning, entities are likely to suffer from excess tax payments and additional tax compliance costs. Among the reasons argued for tax planning are:
(a) Offers the opportunity to lower the amount of taxable income i.e. where a taxpayer’s financial and tax planning strategies are targeted at structuring expenditures to fit into the category of allowable expenses.
(b) Serves as a catalyst to reduce the tax rate at which you are taxed i.e. siting business operations at locations or business to take advantage of the little or no tax rate prevailing in that jurisdictions e.g. tax havens.