Don't Make Up Losses To Avoid Tax

Conflicting interests arise for many businesses where decisions have to be made to determine how they consistently achieve profitability, while on the other hand minimise payment of tax. The temptation to minimise profits or even make a loss then becomes a tax risk management strategy.

Some businesses that are aggressive tax planners employ several methods some of which do not resonate with ethical business practices. Many organisations are involved in tax avoidance, which by the way is not very different from evasion. If you ask me; they both involve scheming and dodging.

Creation of tax losses may be seen in some cases where interest payments are made in relation to borrowings from a parent company. In other instances, prices at which raw materials or equipment are transferred to group members are fixed; and in others, the costs charged by shared service centres are too high.

Those, especially not part of a group may, for example, include personal expenditure within the books of the business. These and others are the things companies do to create losses so as to avoid income tax. This is not to discount the fact that ' businesses do incur losses in genuine and legitimate transactions.

In the June 2018 proposed tax reforms, there was a Bill that required consistent. loss makers to pay a 0.50/o income tax on gross income. This would apply to those entities that would have made a loss for seven years running. The tax would become payable in the eighth year of consecutive loss making. This proposal was not passed into law because it was regarded as unfair to struggling but committed investors. There was a feeling too that wider consultations had not been made then.

After a year of shelving it, this proposal is here again and should it be signed into law (which is very likely) effective July 2019, deliberate loss makers will have to rethink their tax strategy.

There are many businesses that "force" a loss so as not to pay tax. It may be better for a business to declare a profit because taxing profits may be more efficient than taxing gross revenue. It is, therefore, possible that the 0.50/o tax on turnover could be way much higher than the legitimate tax of 300/o of taxable profits.

Even if there are still questions around this proposal, for example whether withholding tax is allowed as a credit in these circumstances, consistent creation of a tax loss may no longer be fashionable.

Withholding of VAT

Another reform that had been introduced...

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