Six guidelines to year-end CIT planning
Indeed, if you haven't done so already, it is still not too late to take a closer look at your tax affairs. I will assist you in the most difficult part of it - identifying hidden tax saving opportunities - by providing you with "a guide to year-end CIT planning for dummies."
Step 1 - Review your loan and lease agreements.
If you have taken out a loan, you may consider accelerating the accrued interest payments into 2003 to utilize the respective cost deduction at 27 percent rather than 19 percent. This is a rather simple exercise - provided you have the cash to afford it - as interest costs are accounted for tax purposes on a cash, i.e. upon payment, vs. accruals basis. Although temporarily detrimental to your cash flow, paying the interest you have accrued for 2003 should improve your overall financial standing in 2004.
If you are not careful, the above tax saving effect can be distorted by an unintended foreign exchange gain taxable at 27 percent, if the loan was drawn in a foreign currency that had a weak performance in 2003. Conversely, maximum tax savings can be realized on, for example, euro loans, the repayment of which now will give rise to exchange rate losses in this year.
The above planning techniques will also hold true for lease agreements. This is the time to try to negotiate new terms with your lessor. However, while your aim will be to maximize the amount of tax-deductible rental costs in 2003, as it's a zero-sum game, it will be in the interest of the other party to postpone recognition of the same as income until after January 1 2004 - when the tax rate will be lower. It may be that your lessor made a loss in 2003 but is expected to become profitable in 2004, in which case this may not be an issue at all. What you must remember is to do your homework and prepare for the negotiations.
Step 2 - Review your bad and doubtful debts.
Periodically reviewing your receivables is good business practice. Doing so before the end of 2003 will not only increase the chance of their collection, but can also deliver tax benefits. More specifically, companies can decrease their 2003 tax bill by 27 percent by writing off debts that can be shown as bad - depending on sufficient documentary support - or likely to be impossible to collect. Even if the debt is repaid in 2004, the respective income will still attract lower taxation, i.e. 19 percent, thus achieving optimum tax results.
Step 3 - Review your depreciation/amortization policy.
Where possible, depending on legal requirements and company policy, depreciation can be accelerated (low-value fixed assets) and the statutory rates can be increased by coefficients to utilize the respective cost deduction at the higher tax rate in 2003.
Companies planning to purchase qualifying fixed assets (e.g. production machinery and equipment) should do so now. This will allow for a 30 percent write off of the purchase cost in the year of acquisition, which, if it is 2003, will make the purchase more tax efficient.
Step 4 - Review sales transactions.
With most sales transactions, the best approach is to postpone the recognition of the income until 2004, when the applicable tax rate will be 19 percent. This concerns sales of goods (including those designated for export) and assets, when a capital gain is realized on their disposal. Conversely, expected capital losses on the sale of assets would be more efficiently utilized in 2003, provided the taxpayer is profit-making.
Step 5 - Ensure that suppliers charge their costs.
If they read this column, most of your suppliers will be tempted to postpone taxable revenue until next year. As noted earlier, the acceleration of all expenses into 2003, to the fullest extent possible, will optimize your overall tax position. So, grab those phones and start chasing your suppliers to send their invoices in.
Step 6 - Consider the effect of tax planning on the company's financial performance.
There is always a price to pay for creative tax planning and I am not referring to tax avoidance. Sometimes it is our auditors that point this out to us when it may be too late to change anything. The trouble is that taxes are also reported on the company's financial statements. It is possible to get carried away with perfecting the mechanics of fiscal fine-tuning and to forget about the basics.
An obvious example of this is deferred taxes, which have an impact on the balance sheet position and hence the financial performance of the company. So, an increase in costs (to benefit from their acceleration into 2003) can have a negative effect on overall financial performance, something that is guaranteed to displease shareholders and to jeopardize the distribution of performance bonuses.
The above guide provides, as the name implies, only rough guidelines to issues that companies may want to consider for year-end tax planning ideas, and is by no means exhaustive. It should not be the sole source of information to rely upon when taking important business decisions.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
Step 1 - Review your loan and lease agreements.
If you have taken out a loan, you may consider accelerating the accrued interest payments into 2003 to utilize the respective cost deduction at 27 percent rather than 19 percent. This is a rather simple exercise - provided you have the cash to afford it - as interest costs are accounted for tax purposes on a cash, i.e. upon payment, vs. accruals basis. Although temporarily detrimental to your cash flow, paying the interest you have accrued for 2003 should improve your overall financial standing in 2004.
If you are not careful, the above tax saving effect can be distorted by an unintended foreign exchange gain taxable at 27 percent, if the loan was drawn in a foreign currency that had a weak performance in 2003. Conversely, maximum tax savings can be realized on, for example, euro loans, the repayment of which now will give rise to exchange rate losses in this year.
The above planning techniques will also hold true for lease agreements. This is the time to try to negotiate new terms with your lessor. However, while your aim will be to maximize the amount of tax-deductible rental costs in 2003, as it's a zero-sum game, it will be in the interest of the other party to postpone recognition of the same as income until after January 1 2004 - when the tax rate will be lower. It may be that your lessor made a loss in 2003 but is expected to become profitable in 2004, in which case this may not be an issue at all. What you must remember is to do your homework and prepare for the negotiations.
Step 2 - Review your bad and doubtful debts.
Periodically reviewing your receivables is good business practice. Doing so before the end of 2003 will not only increase the chance of their collection, but can also deliver tax benefits. More specifically, companies can decrease their 2003 tax bill by 27 percent by writing off debts that can be shown as bad - depending on sufficient documentary support - or likely to be impossible to collect. Even if the debt is repaid in 2004, the respective income will still attract lower taxation, i.e. 19 percent, thus achieving optimum tax results.
Step 3 - Review your depreciation/amortization policy.
Where possible, depending on legal requirements and company policy, depreciation can be accelerated (low-value fixed assets) and the statutory rates can be increased by coefficients to utilize the respective cost deduction at the higher tax rate in 2003.
Companies planning to purchase qualifying fixed assets (e.g. production machinery and equipment) should do so now. This will allow for a 30 percent write off of the purchase cost in the year of acquisition, which, if it is 2003, will make the purchase more tax efficient.
Step 4 - Review sales transactions.
With most sales transactions, the best approach is to postpone the recognition of the income until 2004, when the applicable tax rate will be 19 percent. This concerns sales of goods (including those designated for export) and assets, when a capital gain is realized on their disposal. Conversely, expected capital losses on the sale of assets would be more efficiently utilized in 2003, provided the taxpayer is profit-making.
Step 5 - Ensure that suppliers charge their costs.
If they read this column, most of your suppliers will be tempted to postpone taxable revenue until next year. As noted earlier, the acceleration of all expenses into 2003, to the fullest extent possible, will optimize your overall tax position. So, grab those phones and start chasing your suppliers to send their invoices in.
Step 6 - Consider the effect of tax planning on the company's financial performance.
There is always a price to pay for creative tax planning and I am not referring to tax avoidance. Sometimes it is our auditors that point this out to us when it may be too late to change anything. The trouble is that taxes are also reported on the company's financial statements. It is possible to get carried away with perfecting the mechanics of fiscal fine-tuning and to forget about the basics.
An obvious example of this is deferred taxes, which have an impact on the balance sheet position and hence the financial performance of the company. So, an increase in costs (to benefit from their acceleration into 2003) can have a negative effect on overall financial performance, something that is guaranteed to displease shareholders and to jeopardize the distribution of performance bonuses.
The above guide provides, as the name implies, only rough guidelines to issues that companies may want to consider for year-end tax planning ideas, and is by no means exhaustive. It should not be the sole source of information to rely upon when taking important business decisions.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
