Back in the XVI century, Sun King Louis XIV’s First Minister Jean-Baptiste Colbert declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
In this respect, little has changed since those days. Domestic taxmen sometimes get way too carried away while “plucking” and there is nothing else left to do but to “hiss” in return. The taxpayers, however, still have some room for maneuver i.e. either optimization within the limits of the law by using the permitted mechanisms or minimization through application of so-called gray schemes.
Tax optimization and evasion of the taxes are very different notions and one should not get them confused. Evasion is the use of clearly illegal mechanisms, whereas optimization is a minimization of the tax burden in the legal environment only.
If we consider a specific example, the use of fake companies to obtain VAT tax credit is a criminal offense in its pure form. Also, if the total amount of “saved” taxes exceeds 1 thousand tax-exempt minimums (in criminal law, the tax-exempt minimum is equal to tax social privilege and not 17 hryvnias), you may find yourself charged with crime followed by all sorts of consequences. On the other hand, the use of offshore jurisdictions, in and of itself, is not deemed to be a crime.
Methods of legal tax saving can be demonstrated through actual examples from the legal practice.
Relations replacement method. The essence of it consists in the fact that a business transaction is replaced by another one which is different in terms of its legal content, but at the same time allows to achieve the expected economic benefits, while using a more sparing taxation procedure.
Example: use of housing associations for the sale of housing under construction. Since the sale of apartments which are being built is firstly, a VAT-taxable activity, and secondly increases the tax base of the profit tax, the real estate developers often wonder how to reduce tax liabilities. Solution to this problem is the housing association which does not sell the apartments but the shares entitling to receive an apartment in the future. Since the shares, according to their legal status, are corporate rights, the VAT is not charged when they are exercised and the taxable income does not increase. As a result, a double purpose is achieved; the company receives the necessary investment, while optimizing taxation legally.
Relations division method. It is based on the previously-described method. The difference is that only a portion of business transaction is replaced by another one.
Example: the developer ensured construction of a small office building, having decided to sell its non-residential premises prior to commissioning. It is easy to figure out that selling those at a market price would result in a) significant VAT tax liabilities and b) taxable income.
To optimize taxation, it was decided to divide the sale and purchase of non-residential premises into 2 parts, namely 1) conclusion of Sale and Purchase Contracts with controlled individual entrepreneurs (single tax, Group 3, tax rate of 5% excluding VAT) at the cost price of premises with a deferral of payment and the transfer of premises upon commissioning; 2) conclusion of Assignment Agreements between the said individuals and ultimate buyers. By doing so, the ultimate buyer paid one portion of premise’s value directly to the developer, and the other one to individual entrepreneur. The latter portion was subject to the single tax at the rate of 5% excluding VAT.
Method of tax payment deferral. The idea is to postpone the date when the taxable item emerges.
Example: according to general taxation system in case of expiration of the limitation period for accounts payable, a company shall include them in its income. However, the deadline for expiration of the limitation period can be extended as per law. Therefore, if the creditor is willing to do so, you can sign an Agreement on Extension of Limitation Period, for example, from 3 to 10 years, delaying the hassle for another 7 years.
Method of direct reduction of taxable item. This method consists in getting rid of any transactions and assets negatively affecting the taxation, without actually harming the business.
Example: in accordance with the simplified tax system, individual entrepreneur is not allowed to lease out the premises, the total area of which exceeds 100 sq.m. Here’s a situation: an entrepreneur owns two apartments with an area of 92 and 98 square meters which he wished to lease out. Unfortunately, under the law he may officially lease out only one of them. However, there is a trick: the problem can be legally solved, if the second apartment is registered in the name of entrepreneur’s spouse who is also an individual entrepreneur subject to the single tax. Thus, the joint income of the spouses who are both entrepreneurs will be subject to a single tax rate of 5%.
Offshore method. This method is on everyone’s lips, especially since offshore scandals occur here and there very often. In fairness, it must be noted that that these scandals often involve public figures who normally get only public disapproval, because they pay taxes “somewhere overseas” and not in their home country.
This can be illustrated by the most common transaction, i.e. supply of the goods to a foreign counterparty through an intermediary registered in the offshore or a country with liberal taxation regulations. For example, Ukrainian seller undertakes to supply the goods to an ultimate buyer, a EU resident. However, according to the legal instruments, the goods are supplied to the company registered in one of the “tax havens”, and so the latter will be the direct supplier of the goods to the ultimate buyer. Needless to say, the goods will not enter any "harbor" whatsoever, heading straight to the consignee. Yet the major portion of the payment for the goods will remain with the intermediary company with all possible tax preferences.
In view of this, tax optimization can offer broad options, if one knows how to properly use them. Successful implementation of optimization mechanisms requires not only deep understanding of the tax laws, but also unconventional approaches and unique solutions. Development of such mechanisms and schemes is one of Jusguard’s special focuses. Company’s statistics speaks for itself: solutions offered by us have saved our clients at least $ 7 million over the last year.