Viacheslav S. Kutuzov
Десять стратегий минимизации налоговой нагрузки
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New York, New York 10006
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Ten universal strategies to reduce tax burden
In this article I will discuss some universal strategies to legally minimize your overall tax burden which are available in the majority of developed jurisdictions. Since each strategy usually has its own limitations, please consult with the tax professional of your jurisdiction before exploiting it.
Shifting income to individuals
This strategy allows taxpayers to present their income as if it were obtained by another person. Not every person qualifies as the eligible individual. Usually, the tax law limits the list of eligible persons to family members and particular relatives. In many jurisdictions shifting the income to nominees is prohibited if the person who is entitled to the income continues to enjoys it after forwarding the income to the nominee. For example, using your employee’s debit card for personal purchases normally will not help to requalify your tax liability to your employee’s.
2. Shifting income to legal entities
Similar to the first strategy, in some instances the taxpayer may shift the income to legal entities, which have a separate taxpayer status. So-called pass-through entities, which are not taxed on the company level, but only on the level of its shareholders or members, such as the U.S. LLCs or S Corporation, do not qualify for this strategy. Secondly, it is important to check out whether the applicable tax law levies any taxes on undistributed profit of the entity. Thirdly, keep in mind that in many developed tax jurisdictions there are numerous provisions on taxing the holding companies, controlled by the same owners. Hence, the income and losses may be required to be calculated not separately, but in regard to the group of the controlled entities.
3. Shifting income to another jurisdiction
Undoubtedly, shifting income to another jurisdictionis the most complicated strategy often associated with political, legal, economic and social risks. For small and medium size businesses, this strategy may be useful predominantly for Internet businesses and service providers, whose assets are not physically bound to a particular soil. Most international tax law studies are dedicated to the issues of managing cross-border taxation.
4. Corporate restructuring and assets restructuring
Having intermediaries between the taxpayer and the source of income may cause both advantages and disadvantages. Since in most cases, each transfer of money increases the overall tax burden of the final (controlling) taxpayer, it is expedient to simplify the corporate structure. You can simplify a corporate structure by excluding unnecessary intermediaries or by choosing the right type of entity for each intermediary, suitable for a particular financial management model. In the case of assets it might be expedient to divide them into parts (for example, car manufacturers decrease import and export duties by shipping components separately) or the opposite: to group items into a package with tax advantages like special depreciation or amortization rates.
5. Assets and liabilities reallocation
This strategy may be valuable for the needs of a group of entities, since careful allotment of assets (including intangible assets and licenses) and liabilities between amongst members may reduce the overall tax burden.
6. Exemptions. Deductions. Credits
Exemptions, deductions, and credits are fundamental elements of tax burden minimization, available to nearly every single taxpayers in most jurisdictions. When income is exempt from the taxation, it means the taxpayer does not even have to mention it on his tax return. Also, there are normally few documents requirements in order to prove exemption. Deductions allow the taxpayer to reduce the taxable income while credits offset the amount of tax dollar to dollar For this reason, tax credits are generally preferable. Usually all these elements are exhaustively covered in the tax law and come with many limitations, so make sure to check consult the tax law while doing your planning.
7. Bunching deductions
In many instances the tax law sets forth limitations on the number of tax deductions in a specific calendar period, called a financial year. Therefore, it might be expedient to group (or bunch) deductions in the specific year to fully leverage this instrument.
The same business results may be achieved with different types of legal instruments. For example, taxpayer may use the same property under different types of contacts, such as sale contract, rent contract, exchange contract and many other legal forms. And each of it could have entirely different tax implications. Choosing proper legal form or even retroactive re-qualification of such form (if permitted by tax law) may give a taxpayer additional tax benefits.
This requalification strategy may be useful for both individuals and businesses, although usually business taxpayers have many more methods than do individuals to reduce taxes. The good news is that in many cases nondeductible personal expenses can be converted into deductible business expenses.
9. Income deferrals and expediting
Timing is a key element in taxation. There are situations when it is beneficial to defer or expedite the taxpayer’s income or expenditures to adjust final tax liability in a particular financial year. The possibility of deferring and expediting strategies depends on a variety of factors like accounting methods, the relationship between the taxpayer and the source of income, corporate structure and many more.
10. Product-based strategies
Many jurisdictions offer additional tax benefits to socially and environmentally responsible taxpayers. Normally they include using environment-friendly vehicles or equipment, choosing the specific type of financing of your insurance, education, aging, or providing extra benefits to your employee’s family members. Often such measures cost the same and yet result in tax breaks.