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The Warsaw Voice » Law » September 30, 2009
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Tax Efficiency and Risk Management in Difficult Times
September 30, 2009   
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When the financial climate turns harsh, every little helps. But when times are tough, the taxman gets more vicious as he fights for every last drop of revenue and as a result your tax risk goes up. But never fear, there is room for careful and smart tax optimization projects.

Tax optimization is the achievement of the lowest possible tax burden by legal means. If tax regulations offer options, taxpayers are fully entitled to choose the best one. Tax optimization has three possible goals:
(i) cutting the tax due,
(ii) improving cash flows (e.g. through deferring tax payments),
(iii) cutting the administrative work connected with settling taxes.
There are a number of ways to reduce your company's tax liabilities. One common method is to generate higher tax-deductible costs to reduce taxable income. But you can also look to cut other taxes (e.g. real estate tax):
- Accelerate write-offs by using higher depreciation rates on fixed assets used in difficult conditions, or more intensively, or that become obsolete through rapid technological progress. Tax depreciation might be increased by 20-100 percent over and above the standard depreciation rates quoted by income tax regulations.
- Property-accelerate tax depreciation rates by separate treatment of individual elements such as elevators, air conditioning systems etc. Cost segregation projects usually accelerate the tax depreciation of separated assets by 400 percent (2.5 to 10 percent per annum).
- Increase the cost base of fixed assets and intangible values via restructuring steps (e.g. contributions in kind)-the initial (tax) value of such assets and values might be increased up to their market value, which creates an opportunity for assets with no or low book value but a high market value.
- Decide on a VAT-exempt sale of real estate where the purchaser conducts VAT-exempt activity and the value of the real estate increases the historical acquisition cost.
Tax optimization can aim at deferring the payment of tax or accelerating a tax refund. Examples of optimization programs include:
- Use shortened deadlines for direct (cash) VAT refunds-standard, 60-day refund deadlines might be shortened to 25 days at the taxpayer's request, provided that the invoices showing the input VAT have been settled in full.
- Apply the postponed accounting system to goods imported into Poland under the simplified customs procedure rules, where the reporting period is the calendar month-here the VAT due on the import may be declared (and deducted) in a VAT return, which produces a non-cash settlement of the VAT due on the import of goods.
- Use the simplified CIT advance calculation method. Monthly CIT advances might be calculated in a simplified way, based on tax profits achieved in previous years. This method might result in deferring the payment of CIT until the annual CIT return is filed, if the current year results are higher than profits from previous years.
- Double-check payment deadlines in business contracts. In the provision of services where the VAT point depends on the payment deadline (e.g. lease/tenancy services), smart determination of the payment deadline allows you to postpone recognition of the VAT due on services until payment for these services is received.

As regards cutting administrative costs, the following examples may be given:
- E-invoicing instead of standard paper invoicing. This slashes data entry work.
- Quarterly VAT returns instead of standard, monthly VAT returns.
- Simplified CIT advance calculation method.

Do remember that change is dangerous. Implementing a tax optimization program that has not been properly prepared may give rise to various risks. Deciding on what optimization concept is best in your particular circumstances should always be preceded by careful analyses of your business priorities, ownership structure and tax position. Taking into account the safety of the taxpayer, a prudent strategy should be formulated as a safeguard against adverse tax implications. In particular, the implementation of a chosen concept may be preceded by obtaining a tax authority ruling confirming the favorable tax consequences of your chosen concept. In essence, it is your "Get out of Jail Free" card.

Cezary Przygodzki certified tax adviser, counsel at Salans Tax Advisory Team
Paweł Sylwestrzak attorney-at-law, senior associate at Salans Tax Advisory Team
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