Title: Optimizing Tax Costs Relating to a New Business
Abstract: 1. IntroductionTax optimization includes any decision which leads to tax cost reduction. Tax costs are related not just to the taxes due, but to the deadlines and recovery of claims or losses too. Tax optimization solutions aim at making taxable operations in areas where the level of taxation, tax risks and costs are lowest for the taxpayer.Newly formed businesses have an important tax planning opportunity. A start-up has several options when it comes to the legal structure of the new business. For a small business there are usually two options in Romania: Authorized Natural Person (ANP) and Limited Liability Company (LLC).The aim of this paper is to identify which of these options is the optimal solution from a fiscal point of view, in accordance with the conditions of the new Romanian Fiscal Code valid from 01.01.2017. For this purpose we identify which are the steps of tax optimization and when to apply it (section 2).Section 3 compares companies'taxes (separately for micro-companies and ordinary companies) with freelancers'taxes. We analyze only those taxes that are different for each type of entities: micro-companies income tax / corporate income tax / personal income tax, tax on dividends and mandatory social contributions related to commercial incomes. We do not treat value added tax and social contributions related to wages, because their value is the same regardless of the type of entity (ANP or LLC).Forecasting incomes and expenses is very important since the start-up. To make use of tax optimization strategies, it is essential that the entrepreneur estimates the revenues and the expenditures for the next few years. This forecast will help him to estimate the overall tax burden and to choose the most effective form of business organization (the one that involves the minimum overall tax burden). The practical examples from section 4 illustrate this process.In the 5th section we highlight the advantages and disadvantages of each form of organization, taking into account not only the fiscal aspects, but also other specific issues such as: setting-up and split-up conditions, liability for business debts in the case of insolvency, legal status, accounting status etc.2. What is tax optimization and what are the risks of applying it?Tax optimization means any activity carried out in compliance with the legislation in order to reduce the tax obligations through:* Relief, reducing or postponing tax liability;* Possibility of recovering tax losses;* Interpretation of the tax legislation in order to obtain the maximum tax deductions and minimize situations where tax deductions are not accepted;* Carrying out taxable operations in areas where the level of taxation, tax risks and costs are the lowest. There are five stages of the tax optimization:1) If the ANP/LLC is already set-up we have to analyse the current tax position of the taxpayer. We are looking for:- Tax reserves that were not used and that can compensate for the obligations arising from future taxable transactions: tax losses, claims, tax deductions allowed by law;- Unreported tax obligations due to incorrect interpretation of the fiscal law or to the legislative changes.2) The second stage is to understand the way in which the taxpayer carries on its operations: the specificity of the activity, the tax obligations, the strategy and the long-term intentions of the taxpayer etc.3) Only after completion of the first two stages will can develop a tax diagnosis which involves the identification of the fiscal strengths and weaknesses related to the current position and the determination of the tax position for at least two years (given that the tax legislation will not be changed).4) In the fourth stage will develop proposals for tax optimization, with an indication of relevant risks and their feasibility.5) The final stage is implementation of the proposals of tax optimization. …
Publication Year: 2017
Publication Date: 2017-01-01
Language: en
Type: article
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