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Tax Planning

What is Tax Planning?

Tax planning refers to the financial planning of taxes. It aims to lower a person's tax liability and optimize the use of tax exemptions, tax rebates, and perks. In tax planning, financial and business decisions are made to reduce tax incidence.

Tax planning involves developing strategies to decrease your tax burden as much as possible. Typically, this involves locating This usually means identifying opportunities for tax incentives, tax breaks, tax credits, and others.

For example, the Philippine government has established a number of programs to stimulate investments in export industries, such as Business Process Outsourcing and IT-related services. Investors receive tax holidays, tax credits, and exemptions from customs duties as incentives.

In tax planning, these incentives and the company's eligibility for them will be considered. This could affect important issues, including how the company will be structured and where to locate the business.

There are also opportunities for tax savings in other aspects of conducting business, such as the manner in which transactions are conducted or how employee pay is handled. Good tax planning can enable your business to take advantage of tax-saving rules, beginning with the selection of fiscal and capital structures at incorporation.

What are Tax Planning Strategies?

Tax planning strategies assist you to organize your finances so that you pay less in taxes. Using the tax code, current tax regulations, and your financial data, tax planning identifies the best way to legally minimize the amount of income you declare and/or the best way to invest or spend your money to reduce your tax liability.

Without effective tax management, it is simple to become lost in this labyrinth of tax requirements and processes, risking costly fines and penalties for late or incorrect filings.

The financial strategy could involve mergers, acquisitions, dispositions, and spin-offs. When assets are transferred through these actions, applicable taxes must also be planned for and managed. For example, in mergers and acquisitions, taxable tangible assets have to be distinguished from non-taxable intangible assets.

Below are some strategies you may consider:

  • Maximize allowable deductions

Documents such as official receipts and sales invoices must be used to substantiate deductibility. For instance, particular documentation is required for some deductible expenses, such as a board decision for bad debts and a BIR notification for casualty losses.

In addition, if an expense is subject to withholding tax, the right tax must be withheld; otherwise, the expense may be rejected as a tax deduction. Utilize the net operating loss carryover (NOLCO), if available, for taxpayers claiming itemized deductions. This must be stated accurately on past year's financial accounts and tax returns. NOLCO can be claimed on a first-in, first-out basis within three tax years after the year of the loss.

  • Take advantage of available tax credits

Consider minimum corporate income tax from prior years which may be credited against the standard income tax due. Similar to NOLCO, this can be claimed within three taxable years immediately succeeding the year in which the same is paid. 

  • Know your donees

Under certain conditions, charitable contributions made to authorized institutions may be entirely deductible. Donors claiming charitable contributions as deductions are required to file a Certificate of Donation (BIR Form 2322) that includes a donee certification and a statement of values from the giver. These contributions may also qualify for a tax exemption for the donor, subject to certain circumstances.

  • Decide which method of deduction is more advantageous, Optional Standard deduction (OSD) or Itemised Deduction

OSD pertains to an amount of deduction not exceeding 40% of the gross income of corporate taxpayers during the taxable year. OSD would be better when there is less cost of sales/service because it uses a higher tax base for OSD computation resulting in lower income tax due. 

If your proof of allowable deductions is insufficient or you have no documents at all, OSD is the prudent choice. Note, however, that your choice of method of deduction to adopt in the first-quarter return shall be irrevocable for the same taxable year.

  • Decide which option to take concerning excess Income Tax Payments

Taxpayers who have incurred excess income tax payments may opt to (1) carry over the excess credit to the next taxable year/quarter; (2) refund the excess amount of taxes paid or apply for the issuance of a tax credit certificate (TCC). 

Once you choose the option to carry over it becomes irrevocable. Consider the cost of the refund in relation to the amount to be reimbursed, as well as the time it will take to process the refund. Be warned that any taxpayer who requests a refund will be subject to an audit investigation.

  • Avoid taxing the Non-Taxable Income

Check the proper treatment of the items of income in your gross sales or gross receipts to avoid paying taxes on non-taxable items like unrealized foreign exchange gains and others.

  • Monitor unappropriated retained earnings concerning your paid-up capitalization to avoid penalties

Unappropriated retained earnings are not allowed to exceed paid-up capital. The Tax Code imposes a 10% penalty tax on improper accumulations.

  • Avail of Tax Treaty relief for transactions involving residents of tax treaty countries

Transactions covered by a tax treaty may avail of tax exemption or preferential tax rates as the case may be. However, this is subject to the requirement of the tax treaty relief application (TTRA) to confirm the taxpayer's entitlement to the relief. 

In addition, a recent Supreme Court ruling argues that failing to strictly comply with the filing of a TTRA prior to the taxable event would not deprive a taxpayer of the tax treaty's benefits. To prevent difficulties with the BIR, it remains best practice to file a TTRA even after availing of the tax treaty benefit.

What Makes Tax Planning Important?

  • A tool for retirement

Putting money aside for retirement is difficult under any circumstances, but it can be significantly more challenging after taxes. Fortunately, a variety of retirement savings choices allow you to set aside funds tax-free.

Once that money has been placed in a separate account, it can gain value based on interest or investments. You will not be charged taxes on that money until you remove it from the retirement account. By that time, it's likely you'll be in a lower tax bracket and need to pay significantly less.

  • Take a long-term approach

Tax planning offers short and long-term benefits, but you'll want to take a long view of your financial situation to maximize savings. According to CNBC, if you anticipate an increase or decline in your income during the next few years, start catering your financial plan to the upcoming shifts ahead of time. Figure out if it's best to pay taxes on that increased income right now, or if you should try and put it all into tax-deferred accounts that may incur taxes later on.

  • Consider every part of your financial life

Taxes affect so many parts of your life that you may forget different ways to save. If you fail to consider the tax implications of a significant financial decision, you could end up wasting a lot of money.   According to MarketWatch contributor Bill Bischoff, the tax laws surrounding home sales can be particularly painful for uninformed buyers and sellers. 

  • Go itemized or standard

Whenever you file your taxes, you can take the standard deduction given to all filers or create a custom deduction by listing your expenses for the year. Depending on your financial situation, either option can offer better savings, so you'll want to evaluate exactly how your financial life changed during the past 12 months. With proper tax planning, you can make your financial life much easier and pocket additional money along the way.

How Can We Help?

Our financial know-how, combined with our legal expertise, allows us to assist businesses in coming up with an effective tax strategy that will reduce tax expenses, and comply with relevant tax laws.

Westwise Consult Inc. promises to provide you with better & smart financial advice.

Let us discuss how we can help you in Tax Planning. Contact our knowledgeable Consultants now!