How to minimize business taxes: CIT, payroll taxes, VAT

2. How to minimize corporate income tax in your company

Corporate income tax is usually calculated as a percentage of profit.
Profit is the difference between company income and expenses.
So, to minimize income tax it is necessary to decrease income or increase expenses. Let’s analyze this in detail.

2.1 Postpone of booking income
Decreasing income is the opposite purpose of doing business but you can postpone booking it. For example, create an invoice dated next quarter, if you pay CIT quarterly. Or ask a customer to pay a little later if CIT is calculated based on cash received and paid, not an accrual method of accounting.

2.2 Increasing expenses
You can increase expenses in some periods to control income tax size in such ways:

• increasing your salary for your position in the company. It is one of the ways to receive money from the business or return your investments before profit distribution. But you need to compare the salary and dividend taxes to understand what is more appropriate for you ( to receive money from the business as a salary or as dividends).
• requesting invoices and payments processed earlier in the current period not subsequent.

2.3 Reinvestment of profit
In some countries, you don’t need to pay a corporate tax if you do not distribute your profit ( pay dividends ) but reinvest the profit.
This applies to the following countries in Europe:

• Estonia ( the program is E-residency);
• Latvia from the 1st of January 2018.

3. How to minimize payroll tax and other salary deductions

3.1 Transfer a part of employees to self-employed
One of the options for decreasing payroll tax and other salary deductions is to transfer a part of your employees to self-employed.
In the case of self-employment, your employee is a service provider.
Taxes are usually lower for self-employed than those connected to salary.

Advantages:

• Low taxes;
• You are not reliable for self-employed taxes;
• Expenses of self-employed services are included in the expenses of the company and as a result, it decreases the corporate income tax.

3.2 Work with international freelance markets
Another option for reducing payroll expenses is a search a staff on freelance markets.
The most popular of them are Upwork and Fiverr. In addition, you can try Toptal for highly qualified positions.

Advantages:

• It is a great opportunity to work with employees and digital nomads via self-employment all around the world;
• Working remotely with employees it is possible to choose staff with lower rates and higher quality;
• You are not reliable for freelancers’ taxes;
• You can choose fixed or hourly payment to freelancers;
• Expenses of freelancers’ services are included in the expenses of the company and as a result, it decreases the corporate income tax. For example, a hiring company receives automatically generated invoices from Upwork, confirming provided freelancers’ services.

3.3 Decrease salary expenses for a company
Salary taxes and deductions are usually calculated as a part of the salary. So, a decrease in wages leads to a decrease in taxes and deductions related to it.

You can use different ways of salary reduction:

• work with international market of employees
• transfer a part of work to service providers
• transfer a part of employees to hourly payments instead of fixed monthly payments.

4. How to minimize VAT payment in your company

VAT payable is calculated as the difference between outgoing VAT( from sales ) and incoming VAT (from VAT payers’ purchases).
So, to minimize VAT payable it is necessary to decrease the outgoing VAT and increase the incoming VAT. You can see below the ways how it can be done.

4.1 Check if you must be a VAT payer
When your business is new or the company’s revenue (turnover) usually is not high, you don’t have to be a VAT taxpayer.
But local legislation should be checked for every case.
So, if you are not a VAT payer you don’t need to pay VAT included in your sale price, but you also lose a right to receive compensation for your incoming VAT ( from purchases of goods and services).

4.2 Selling abroad goods and services
The general rule is you don’t need to pay VAT if you sell goods and services abroad. But you still have a right to receive compensation for the incoming VAT ( in case of purchases of goods and services from VAT payers).
Local legislation should be checked for every case.

4.3 Increase incoming VAT
As was mentioned above, VAT payable is calculated as the difference between outgoing VAT( from sales ) and incoming VAT (from VAT payers’ purchases).
So, if you increase part of VAT payers of your service providers and goods sales, your VAT payable will decrease.

5. An example of taxes optimization for your company: income tax and salary taxes

Let’s consider the example. The company has the following data for the previous year:

• revenue of $1300 000.
• expenses of $800 000, including payroll with connected taxes and deductions of $300 000.
• corporate income tax ( hereinafter – ‘CIT’) rate is 20%.
• salary taxes and deductions are 40%
• the company is not a VAT payer.

The task for the next year is to decrease the tax burden using the next steps:

• from the 1st of January, transfer 3 positions in the marketing team from a monthly salary of $2000 (including all salary taxes and deductions) to self-employed freelancers with a payment of $15 per hour and a monthly limit of 100 hours;
• the company has signed off a contract of providing services to a new client. It will be started from the 1st of January and will give monthly revenue of $8000. For this project, the company needs an additional project manager. Two options were available: a full-time position in the office with a monthly salary including taxes of $2500 or a remote position with access to a global labor market with a monthly payment to self-employed of $1600. The second option has been chosen.

Let’s analyze the future effect on the tax burden using data from the previous year.
So, you can see a calculation below.

Year	Revenue	Expenses	Profit before tax	CIT	Net profit	Salary expenses/ Total expenses	Profitability
Previous year	1300000	800000	=1300000 – 80000= 500000	= 500000 * 20%= 100000	= 500000-100000= 400000	=300000/ 800000 *100%= 37,5%	=400000/ 1300000 ×100% = 31%
Next year	=1300000+ 8000 * 12months= 1396000	= 800000 – ( 20003+ 15100*3+ 1600) * 12 months =801200	= 1396000- 801200= 594800	= 594800 × 20% = 118960	= 594800 – 118960 = 475840	= ( 300000 – 2000×3×12)/ 801200 = 28%	= 475840/ 1396000 × 100%=34%

As you can notice using the example above, transferring a part of the employees to self-employed and remote workers gives the possibility to decrease a percentage of salary expenses in total expenses from 37,5% to 28%. Although, amounts paid to self-employed are included in general expenses in this case, not salary expenses.
In addition, you can see that the profitability of the company increased from 31% to 34%. This happened because of the decreasing salary expenses and rising revenue, as a new contract was signed off.
As a result, CIT also increased.

6. An example of taxes optimization for your company: VAT

Let’s consider the example. The company has the following data for the previous year:

• revenue of $ 900 000, including the VAT of $ 150 000;
• VAT rate for sales internally in the country is 20%;
• VAT rate for export is 0%;
• purchases of goods and services from VAT payers are $ 300 000, including the VAT of $ 50 000.

The task for the next year is to decrease the tax burden using the following steps:

1. Start export of services. An agreement of intent was signed with a foreign company for the next year with planned sales of $ 300 000 per year. Local sales are without changes for the next year.
2. Increase incoming VAT from purchases to $ 10 000.

Let’s analyze the future effect on the tax burden using data from the previous year.

You can see a calculation below.

Year	VAT from sales	Incoming VAT	VAT payable	VAT payable/revenue
Previous year	=900000/120%× 20% = 150000	50000	=150000 – 50000= 100000	=100000/900000 100% = 11%
Next year	=900000/120%×20%+3000000%= 150000	=50000+10000 = 60000	=150000-60000=90000	=90000/( 900000+300000) *100% = 7,5%

As you can notice using the example above, sales abroad with a VAT rate of 0% and an increase in incoming VAT give a possibility to decrease the tax burden from 11% to 7,5%.

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