Strategy is the direction and scope, which the company intends to take in a long time perspective to achieve their goals and gain competitive advantage.
Subject of tax strategy
The subject of tax strategies of company are expenses resulting from having to pay the tax burden and to keep records and accounts. Moreover, it is necessary to take into account the expenses associated with resolving tax problems and tax risk reduction.
Types of tax strategies
Selection of conduct in the performance of obligations and responsibilities imposed by fiscal law is the starting point in formulating and implementing tax strategies. The taxpayer in principle has the choice between two extreme positions:
- Conservative strategy - all actions are limited to fulfilling the obligations arising out of the scope of taxation. Main goal it to avoid disputes with the tax administration. The essence of this strategy is focus on ensuring the safety of the company by identifying the correct tax liability and error-free determination of tax liability. The taxpayer does not take pre-emptive action aimed to determine the effects of fiscal decisions, and is not looking for ways to minimize the tax burden.
- Aggressive strategy - involves fulfillment of fiscal obligations but in the same time it seeks any possible chances of minimizing the tax burden. Adoption of this strategy is determined by the overall business strategy. Minimizing the tax burden is not an autonomous goal of an enterprise. Tax goal is subordinated to other goals of company and can not limit them. Managers should choose such a way of proceeding, that the main objective of company is achieved at the lowest possible tax burden. Filing tax obligations and the various actions to minimize tax expenditures, taking into account the purpose of business and tax risks makes an aggressive strategy typical for companies that effectively manage taxes.
Tax strategy and tax risk
The strategy is a comprehensive plan of achieving the objectives of the organization, and an integral part of the strategy of the economic unit is the tax strategy, which is a consciously created directory of decision-making formulas, including objectives and measures to optimize tax burdens. A tax strategy is one of the forms of a company's reaction to imposed taxes, as the effect of the tax system is that the state takes over some of the results achieved by economic entities. Regardless of taxes, entities are obliged to incur costs related to keeping records and settlements. When developing a tax strategy, entities aim at optimizing tax burdens, which is not always tantamount to minimizing the amount of tax to be paid. The effects caused by the tax environment are a derivative of the tax structure and procedures and the specificity of the taxpayer. The tax law system includes solutions allowing taxpayers to choose tax settlement procedures (e.g. simplified procedures), business locations (e.g. special economic zones) or legal forms of companies (e.g. limited partnership). The specificity of a taxpayer (a business entity) is expressed by its organisation, territorial scope and innovativeness. Risk and uncertainty are constant elements of economic activity and taxation. The essence of tax risk is uncertainty as to the tax consequences of current events, past and future economic operations. The tax risk is caused, among others, by frequent changes in tax regulations and difficulty in interpreting inconsistent regulations and is divided into the risk of identifying the tax obligation and the risk of determining the tax liability5. Some causes of tax risk are independent of the business entity, while others may be managed by the entity. Within the framework of dependent risk, one can separate: risk of abandonment (the entity did not identify the tax obligation or wrongly identified the moment when the tax obligation arose), risk of making a mistake (the tax amount was wrongly determined) and risk of making wrong tax decisions (higher taxes were paid than potentially possible or paid in advance). In conclusion, it should be stated that the reduction of tax risk consists in the undertaking by the entity of actions aimed at eliminating threats from the tax environment and using the opportunities offered by the tax law. In practice, there are three types of taxpayers' reactions to tax risk: paying tax, escaping tax and applying a tax strategy.
- Shackelford, D. A. (2001). Taxes and Business Strategy: A Planning Approach. Journal of the American Taxation Association, 23(2), 80-80.
- Darren Gleeson, Tax Planning Made Simple: Novice to Expert in Six Easy Steps BookBaby,(2017)
- Naoki Matsuda, Tax Strategy Vs. Countermeasures , Xlibris Corporation,(2015)
Author: Gabriel Krzywoń