Incorrect planning of accounting transactions not only results in the outflow of additional taxes, but can also result in cash accounts being deleted at the time tax bills are due.
The last year has changed the way the world order works. But as they say, “Chaos is a ladder”. The upheaval opened up many opportunities. We saw the rise of innovative business models, many startups updated their models, the compliance environment has changed a lot, a number of laws remain, and global barriers have decreased. Opportunity and risk are two faces of the same coin. In this volatile compliance regime, founders must be prepared for an accelerated and ongoing planning process in order to be successful.
The first meaning of tax planning lies in the structure of a company. It is very important for global new age businesses to decide where to reside / reside. Most startups today have or plan to have multiple business centers in global markets. Structuring the business in accordance with tax and FEMA / RBI laws in relation to related party transactions, cross-border transactions, avoidance of double taxation, benefit of favorable tax rates and various such aspects is extremely important. Failure to adhere to these regulations or establish a flawed system can have detrimental consequences such as insurmountable penalties, lost revenue, inaccessibility of funding, and sometimes even startup shutdown.
The next benefit would be managing / maintaining positive cash flows. Cash is king in any business. Unfortunately, startup founders often do not plan their transactions and taxes. There are several ways to plan your transactions to better manage taxes. Incorrect planning of accounting transactions not only results in the outflow of additional taxes, but can also result in cash accounts being deleted at the time tax bills are due. An ideal tax plan will anticipate future tax regulations and strategize cash reserves so that they can be set aside for timely payment of taxes.
Avoid penalties and litigation. Global tax laws are complex and there are several facets that need to be considered. Tax planning is necessary as this is the first line of defense against tax claims. The tax planning method helps you to optimize your current tax situation and to align everything with the tax laws. This in turn helps increase the startup’s conformity rating.
Help with fundraising. It’s an obvious fact that a tax-compliant, healthy startup is always preferable to global investors. Apart from that, the latent benefit of tax planning lies in the structuring of investments. Indian laws have been heavily criticized for theirs
complicated and sometimes draconian regulations. As a result, global investors prefer other regions such as Singapore, Hong Kong, etc. for their investments. Effective tax planning can help startups take up this call – whether they want to move their base (taking into account the benefits of finance in terms of business economics), if so, where to move, etc. On the other hand, Indian laws also have latent exceptions such as Angel Tax’s. An effective tax plan also makes it easier to take advantage of such exemptions.
Structuring related party transactions. Transactions that a startup has with its directors, shareholders, group companies, relatives of directors, etc., may fall under the scope of related party transactions. For example: Mr A is a shareholder in Company B and holds 22% of its shares. The company has accumulated a profit of Rs. 37 lakhs as of March 31, 2019 and has granted A a loan of Rs. 150,000 via a payee’s check. He repaid the amount on May 4, 2019. In this case, even if A’s loan has been repaid, the loan amount granted in the amount of the accumulated profit is treated as a dividend. This in turn has its own tax consequences. Effective tax planning helps to avoid such loops and to better optimize and structure transactions.
That being said, the daily benefits would be avoiding penalties, disqualifying directors for violating, reducing the outflow of funds, etc.
In conclusion, global startups, especially those dealing with borderless internet and e-commerce transactions, outsourcing intellectual property development, and so on, must address issues of tax jurisdiction. In order to navigate this maze of complicated laws, an international tax advisor must be part of the advisory team.