What is tax optimization?
Creating a universal definition of tax optimization poses some difficulties due to the negative connotations the term evokes. So let’s be clear: tax optimization is a legitimate activity. We are talking about situations in which companies act within the framework of the current law to reduce the tax burden or avoid it altogether.
Tax optimization methods
There are many methods for companies to reduce their tax burden. As a rule, three areas of legal tax optimization are mentioned – tax planning, tax saving and tax avoidance. In addition, a division is often made between international tax planning and optimization under Polish law. We will explain each of these issues in turn.
International planning vs. optimization under Polish law
International tax planning is an activity in which an entrepreneur establishes a company abroad or relocates an existing company to a country with lower taxes. However, such a procedure is fraught with risks and certain limitations.
It is worth mentioning here that despite the establishment of a company abroad, the entrepreneur may have to pay income tax in Poland. This is mentioned in Art. 3 paragraph. 1 of the PIT Law, which introduces the concept of a center of personal or economic interest. Thus, if an entrepreneur has a center of personal or business interest in Poland and stays in the territory of the Republic of Poland for more than 183 days a year, Poland is considered the country of his tax residence.
Optimization under Polish law requires conducting a thorough analysis of tax law and using this knowledge to avoid taxation.
Tax planning
This term is used to describe activities that are designed to enable data-driven tax reductions. The idea is to use the information you have: current and historical, in such a way that you can protect yourself from additional tax burdens. Forecasts are also used for this purpose.
Part of tax planning can also include temporarily increasing the tax burden, for example, to obtain more favorable credit terms.
Tax saving
This is an optimization method of using different billing methods. Examples include opting for a simplified advance payment of income tax, as well as postponing the tax liability date, for example, by issuing an invoice for services rendered at the beginning of the next month instead of at the end of the ongoing month.
Tax avoidance
Among other things, this term includes the use of tax credits, exemptions and deductions available to the company, which reduce the generation of tax or allow it to be avoided altogether.
In order to avoid taxation, companies often carry out restructuring transactions and use, as we mentioned earlier, diversified forms of business. However, it is worth remembering that changing the form of taxation is allowed once during the tax year.
Tax optimization methods – examples
Tax optimization takes on many different faces – it is impossible to list all the methods entrepreneurs use to avoid taxation, but we can list a dozen examples:
- restructuring and merger of companies,
- relocating business overseas,
- establishment of offshore companies
- Creation of new holding or European companies,
- Choosing a partnership over a corporation,
- Choosing a favorable form of taxation,
- combining sources of income,
- depreciation,
- Changing billing from monthly to quarterly,
- accounting for tax losses,
- Use of tax credits, exemptions and deductions (e.g., VAT exemption, bad debt relief).
Tax optimization – risks
Tax authorities can challenge a company’s optimization efforts if they have grounds to do so. Since there is no closed list of activities that may interest the tax authorities, entrepreneurs are concerned – often rightly so – about tax optimization. This is not surprising, especially when one considers that if the company’s action is classified as tax evasion (and therefore a crime), there are consequences in the form of fines and/or imprisonment.
It is worth recalling here the individual interpretations issued by the Director of National Tax Information. In case of doubts about a specific optimization case, as well as the planned optimization activities, a company can ask the NIS to issue an individual interpretation. The interpretation issued by this authority provides an umbrella of protection – the taxpayer has the right to consider it binding and comply with its contents.
Thus, if the tax office has doubts about the optimization measures taken by the entrepreneur, while he has an individual interpretation indicating that his actions are in compliance with the law, the company can rest assured – there will be no negative consequences of the audit.
What are the differences between optimization and tax evasion?
Tax optimization involves, among other things. on using forms of taxation that are more favorable to the company, depreciating the company’s assets, choosing the right time to account for expenses and similar activities. All are aimed at reducing the burden, but within the limits of the regulations.
Tax evasion is an illegal practice in which a company exposes the state treasury to losses by failing to pay taxes due in part or in full. Tax evasion is a crime, so it risks criminal and punitive consequences.
What activities are treated as tax evasion?
There are many examples of illegal activities interpreted as tax fraud. Among the most distinctive are:
- Failure to report income – this is most often a situation where the entrepreneur reports only part of his income in order not to pay tax for the rest.
- qualifying expenses that are not deductible – for example, a situation in which an entrepreneur qualifies private expenses as company deductible expenses.
- Accounting cover-ups – broadly speaking, unreliable bookkeeping.
- arranging insolvency – this is such a fraudulent scheme to demonstrate the insolvency of a company in order to evade taxes, but also to avoid paying obligations to creditors, including contractors, banks and other financial institutions.
- Non-payment of taxes – although this is not a very fine method, some companies simply do not pay the taxes due, which of course is a violation of the law and is treated as tax fraud.
Summary
While there seems to be a fine line between tax optimization and illegal tax evasion, it is worthwhile to analyze a company’s situation and consider implementing optimization measures. The potential for tax optimization is enormous, although of course a lot depends on the current market situation, the turnover your company generates or the industry in which it operates.
However, if you have doubts about whether a particular optimization method is legal, seek advice from professionals and analyze tax interpretations issued by the NIS in similar cases. However, you will only get complete certainty by applying for an individual tax interpretation.
