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					              Chapter 1 Introduction to tax planning         1



                  CHAPTER                              1   TAX
PLANNING

1     TAX PLANNING

1.1    Introduction

    Tax planning is the planning to
    arrange the tax liabilities of a person
    as lower as possible. The tax
    liabilities may arise from business,
    investment, or/and other activities or
    private affairs. ‘A person’ may refer to
    either a natural person or a legal
    person.

1.3 Tax evasion, tax avoidance and tax
saving

    ‘Tax saving’ is introduced to China to
    distinguish between different means
    of reduction of tax liabilities. Tax
2             Chapter 1 Introduction to tax planning



    saving    is    described as      the
    arrangement to reduce tax liabilities
    legally and legitimately.

1.3.1    Tax evasion

    Tax evasion is the reduction of tax
    liabilities by illegal means. It is never
    lawful.

1.3.2    Tax avoidance

    Tax avoidance is the reduction of tax
    liabilities within the framework of the
    law. It may be not illegal, but is not in
    accordance with the intention of the
    tax laws and often results in
    anti-avoidance                measures:
    compulsory adjustments or even
    penalties just like for tax evasion.

1.3.3    Tax saving (mitigation)
          Chapter 1 Introduction to tax planning   3




Tax saving is introduced to denote
the reduction of tax liabilities by legal
and legitimate means, which are
allowed or even encouraged by
government. It is always legal.
4            Chapter 1 Introduction to tax planning



2     OBJECTIVES OF TAX PLANNING

    There are many objectives of tax
    planning. The most important two
    objectives of tax planning are
    described below

2. 1   Maximising tax benefits

    Tax benefits are the benefits a
    taxpayer received from the tax reliefs
    and     incentives    granted       by
    government.

2.2    Minimising tax burdens

    Tax burdens generally refer to the
    taxes borne by taxpayers or tax
    bearers.
             Chapter 1 Introduction to tax planning          5



3     TAX SAVING THEORY

    The most important theory of tax
    planning is tax saving theory. Tax
    saving is the reduction of tax
    liabilities by legal and legitimate
    means.



3.1    Absolute tax saving theory

    Absolute tax saving refers to the tax
    saving that reduces the absolute
    aggregate amount of tax liability of a
    person.

    Absolute tax saving                               may   be
    horizontal or vertical:

      Horizontal tax saving
      Vertical tax saving
6             Chapter 1 Introduction to tax planning




3.2    Example

    The annual VAT-exclusive supplies of
    Blue Ltd are about ¥ 800,000. The
    annual VAT-exclusive purchases of
    the company are about ¥ 600,000
    (VAT-inclusive about ¥ 702,000). The
    company is a small manufacturing
    enterprise. However, it is qualified to
    apply for an ordinary taxpayer status.
    In the case that the company is a
    small-scale taxpayer, the applicable
    VAT assessing rate is 3%. In the case
    the company is an ordinary taxpayer,
    the applicable VAT rate is 17%.
    Assume that the company is your
    customer, advice the company how to
    elect the taxpayer status.

      Example solution
             Chapter 1 Introduction to tax planning   7



      Option 1 (ordinary taxpayer)

     VAT payable = ¥800,000×17%
-¥600,000×17% = ¥34,000

      Option 2 (small-scale taxpayer)

      VAT payable = ¥800,000×3% =
  ¥24,000

      Compare the above two options:

     Option 1: T1 = ¥34,000
     Option 1: T2 = ¥24,000
               S2 = T1 -T2 =¥34,000
-¥24,000 =¥10,000




3.3   Relative tax saving theory

  Relative tax saving refers to the tax
8             Chapter 1 Introduction to tax planning



    saving that the absolute aggregate
    amount of tax is not reduced in a
    period of time, but the taxes paid in
    each period are so arranged that it
    may bring financial benefits relieving
    the tax suffered. It reduces the total
    tax liabilities of a taxpayer relatively.



3.4    Example

    Brown Ltd is expected to earn a
    certain amount of profits at a certain
    cost in a period of three years. It is
    allowed to elect one of three
    deduction methods for a capital
    expenditure: straight line method,
    declining balance method and one-off
    deduction method, and it will result in
    the following three options.

      Option 1
             Chapter 1 Introduction to tax planning   9




       ∑T1 = T1 - 1 + T1 - 2 + T1 - 3
           =      2,00,000         +2,000,000
+2,000,000
           =¥6,000,000
10             Chapter 1 Introduction to tax planning



       Option 2

       ∑T2 = T2 - 1 + T2 - 2 + T2 - 3
           =1,000,000              +1,000,000
+4,000,000
           =¥6,000,000

       Option 3

          ∑T3 = T3 - 1 + T3 - 2 + T3 - 3
              = 0 + 0 + 6,000,000
              =¥6,000,000

      Where:
      ∑Ti     represents the total tax
           liabilities of Option i in a
           period of three years, i = 1, 2,
           3
      Ti-n represents the tax paid of
      Option i in year n, n = 1, 2, 3

     Assuming the internal rate of return
            Chapter 1 Introduction to tax planning          11



  is 10%, how to elect the option?



  Example solution

  Step 1 Calculate the present value of
        the total tax liabilities (PV∑Ti, i
        =1,2,3) of each option

         Option 1
         PV∑T1                     =                 2,000,000
 2,000,000 2,000,000
+ 1.10 + (1.10) 2
                     =¥5,471,100

         Option 2
         PV∑T2       =      1,000,000
 1,000,000 4,000,000
+ 1.10 + (1.10) 2
                =¥5,214,900

         Option 3
12         Chapter 1 Introduction to tax planning



                       6,000,000
        PV∑T3 = 0 + 0 + (1.10) 2

                    =¥4,958,700

 Step 2 Compare and calculate the tax
        relatively saved (∑Si) of each
        option

        Option 1

           Paying most tax.

        Option 2

          ∑S2 = ∑T1-∑T2
              = 5,471,100-5,214,900
              =¥256,200

       Option 3

          ∑S3 = ∑T1 – ∑T3
             Chapter 1 Introduction to tax planning   13



                   = 5,471,100-4,958,700
                   =¥512,400




4     TAX SAVING TECHNIQUES

4.1    Introduction

    Tax saving target may be fulfilled in
    many ways or by many methods
    technically. The ways or methods to
    save tax are called ‘tax saving
    techniques’.

4.2    Tax exemption technique

    Tax exemption technique refers to the
    tax saving by legal and reasonable
    means of enjoying exemption status,
    conducting exempt activities or being
    an exempt person from taxpayer’s
14           Chapter 1 Introduction to tax planning



     aspect, or being an exempt item,
     exclusive item or non-taxable item
     from tax object’s aspect.

  Tax exemption technique is                          a
technique of absolute tax saving.
            Chapter 1 Introduction to tax planning   15



4.3   Tax reduction technique

  Tax reduction technique refers to the
  tax saving by legal and reasonable
  means of enjoying tax reduction
  status.

  Tax reduction technique is                         a
technique of absolute tax saving.

4.4   Tax rates difference technique

  Tax rates difference technique refers
  to the tax saving by legally and
  reasonably taking advantage of tax
  rates difference.

  Tax rates difference technique is a
technique of absolute tax saving.

4.5   Splitting technique
16            Chapter 1 Introduction to tax planning



     Splitting technique refers to the tax
     saving by legal and reasonable
     splitting of income or assets between
     two or more than two persons.

 Splitting technique is a technique of
absolute tax saving.

4.6    Deduction technique

     Deduction technique refers to the tax
     saving achieved by increase of
     deductions legally and reasonably.

     ‘Deduction’ refers here to all the
     items allowed to be deducted from
     the tax base.

     Deduction technique may be used
     both in absolute tax saving and
     relative tax saving.
            Chapter 1 Introduction to tax planning   17



4.7   Tax credit technique

  Tax credit technique refers to the tax
  saving achieved by increase of tax
  credit legally and reasonably.

  Tax credit technique may be used in
  absolute tax saving.

4.8   Tax deferral technique

  Tax deferral technique refers to the
  relative tax saving achieved by
  deferral of tax payment legally and
  reasonably.

  Tax deferral technique may save tax
  relatively.

4.9   Tax repayment technique

  Tax repayment technique refers to the
18            Chapter 1 Introduction to tax planning



     tax saving by obtaining the tax
     repayment legally and reasonably.

     Tax repayment technique may be
     used in absolute tax saving.



5     TAX PLANNING POINTS

     There     are    many    tax  saving
     techniques. We conclude them
     mainly     into   the   above  eight
     techniques. These techniques may be
     used separately and may also be
     used in a combination. In the latter
     case, attention must be paid to the
     interaction of each other.
Chapter 1 Introduction to tax planning   19

				
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