Cash should not be used to pay unnecessary additional taxes

Only by paying a lower monthly advance on corporate income tax can cash flows be improved immediately instead of waiting for a tax refund after filing the annual tax return

Written by: Gerald Lambert, Deloitte

The current financial crisis and the slowdown in economic growth at both global and local levels will motivate most companies to revise their financial and business plans. Company management is under immense pressure to minimize costs, focus on the essentials, and increase overall business efficiency. As they can reasonably predict difficulties in obtaining loans, maximizing cash flow utilization becomes increasingly important for management.

An area that is often overlooked, but which, if managed properly, can significantly contribute to cost reduction and improvement of cash flows, is taxation. Large amounts of money are often paid out as a certain type of tax, whether as VAT, customs duties, corporate income tax advances, or income taxes, and so on. Careful monitoring of related cash outflows is likely to prove beneficial precisely because focusing on such items can create certain tax planning opportunities that could completely neutralize tax expenses or at least minimize or defer them. All of this brings advantages concerning cash flows.

Corporate Income Tax

For example, companies in Croatia are required to pay an advance on corporate income tax for the current year, which is determined based on the tax obligation for the previous year. The advance is distributed into installments paid each month. If it can be estimated that the company will likely have a lower tax base in the current year than in the previous year when assessing the tax obligation for the current year, it would be advisable to submit a written request to the tax authority for approval to pay lower monthly advances on corporate income tax instead of continuing to pay the advance for the remaining period until the end of the year. This would immediately improve cash flows instead of waiting for a tax refund after filing the annual tax return, that is, until April of the following year.

The aforementioned example also emphasizes the importance of tax planning in the remaining months until the end of the current year, primarily to minimize the corporate income tax obligation for that year, which will then also affect the amount of the advance for the following year. In this context, tax planning also includes considering any additional items that reduce the tax base, which the company could realize, such as incentives for research and development and education incentives. It is important to ensure that all necessary bases and documents exist to support such items.
Careful maintenance of appropriate documentation is crucial to substantiate daily expenses that may be tax-deductible. The last thing companies need is to use cash to pay unnecessary additional taxes because they have been denied the right to recognize otherwise legitimate expenses due to poorly maintained documents. Good documentation management is very important, and all efforts in this direction will impact a significant amount of dividends.

Value Added Tax

As with corporate income tax, planning for value-added tax provides significant opportunities that companies could consider to achieve the greatest effect on their cash flows. In this sense, it is best to urgently request a VAT refund and leave no unproductive amounts with the tax authority. It should be noted that a taxpayer who has claims against the tax authority based on overpaid taxes, or tax refunds, as is the case with VAT, can request a set-off of claims against another tax obligation, such as corporate income tax.

The taxpayer generally controls the timing of delivery, which allows for good planning of when to calculate and ultimately pay VAT, which is also one of the planning options. For example, if a taxpayer makes a delivery worth 1,000 kuna on the last day of October, they must pay VAT of 220 kuna to the tax authority by November 30. However, if the delivery is made on November 1, the VAT must be paid only by December 31. It may not be a significant convenience, but every little detail can be valuable. This is planning that could prove particularly useful for large amounts or one-off transactions. Generally, companies claim back 25 to 40 percent of input tax later than they are entitled to do. Accelerating the claiming of input tax brings obvious advantages and can be achieved by collaborating with suppliers or more timely invoicing.

Income Tax

Revising the compensation policy can also provide an opportunity to optimize cash flows. Among the more popular examples is providing a car to an employee as part of their salary, which, if properly structured, also contributes to improving cash flows. Another example would be allowing an employee additional vacation days instead of a salary increase, of course, if it suits both the employee and the employer.

Companies within a group can better utilize cash flows through careful management of transfer pricing, but in this case, too, by maintaining appropriate documents, including comparative analyses, which can support prices among related companies.

Finally, taxpayers should certainly avoid wasting money by paying fines to tax authorities for late filing of tax returns and late payment of taxes. In this context, implementing appropriate systems and monitoring their effectiveness will greatly help.

In these circumstances, management will pay much attention to ways of doing business. Insight into operations is always valuable, which equally applies to insight into systems and procedures related to tax management, and the benefits of this should not be underestimated.