Corporate tax is an unavoidable part of running a business. It is a compulsory contribution paid to the South African Revenue Service (SARS) calculated on the revenue and profits of a company in a financial year. There is a lot of confusion surrounding the terms “corporate tax planning” and “corporate tax management.” To the average person, they may seem like two sides of the same coin.
However, there is a big difference between the two. Corporate tax planning is the process of minimising a company’s tax liability through legal means. This can be done by taking advantage of ambiguities and deductions. Corporate Tax management, on the other hand, is the process of ensuring that a company pays its taxes in a timely and efficient manner. While both corporate tax planning and corporate tax management are important for businesses, they serve different purposes.
What is Corporate Tax Planning?
Corporate tax planning is the process of legally minimising a company’s taxes. This may involve finding ways to deduct tax credits and make use of other tax breaks that can lower the amount of taxes owed. It can also involve structuring business transactions in a way that minimises taxes.
Put simply, tax planning is the legal way to reduce corporate tax by considering all available provisions of the tax legislation, without intending to break these laws or produce dishonest financial information. The main goal of tax planning is to either reduce your tax liability or avoid litigation in the event of non-compliance.
What Is Corporate Tax Management?
Corporate tax management is the process of ensuring that a company pays the correct amount of corporate tax. This includes making sure that the company files its corporate tax return correctly and on time, and that it pays any corporate taxes owed.
It is important for companies to have a good corporate tax management system in place, as this can help to make sure that the company does not get penalised for late or incorrect payments of corporate tax.
The importance of tax management and the implications of non-compliance
The implications of non-compliance because of poor tax planning and management practices are quite severe and can potentially be damaging to a company’s bottom line. Penalties can either be a fixed monthly amount or a percentage-based amount which is charged monthly until the penalty is paid to SARS. This can end up being hundreds of thousands for corporates which will end up costing the company a lot more than simply investing in better tax management processes.
The CIPC can also potentially deregister and shut down a business for non-compliance which means a company will cease to exist. While this may not seem like the end of the world, if an office building is registered in the company name and is deregistered, the assets can be forfeited because the entity does not exist.
If a business neglects to fulfil its annual tax obligations, it can make securing business loans and finance harder down the line. Banks and lenders often require a business to be tax compliant in order to be considered for a loan because it is less risky to lend large amounts of capital to ethical, responsible business owners. Tax compliance certificates may be requested in the event of a project tender, as well as from suppliers, to again minimise their risk.
Lastly, when a business is not tax compliant, it makes it harder to sell the business because the new owner will have to take on all the financial headaches caused by poor compliance.
These potentially disastrous consequences and the reputational damage caused by non-compliance highlight the importance of tax planning and tax management for corporates.
Corporate tax obligations in South Africa
There are many factors to consider when it comes to corporate tax obligations in South Africa. It is important to understand the tax obligations of corporates in order to appreciate the role of tax planning and tax management in the financial management of a business.
When it comes to current taxes, companies must pay corporate income tax, value-added tax (VAT), Provisional Tax and payroll taxes. Companies must also comply with the Corporate Income Tax Act and the Tax Administration Act. These laws cover everything from how taxes are calculated to how they are paid.
Corporate Income Tax (CIT) is the most important corporate tax obligation. This is referred to as the ITR14. It is calculated at 28% of the company’s income in a given financial year, and 27% for companies whose financial year end falls after the 31st of March. Companies must file their corporate income tax returns every year and pay any taxes owing by the due date.
Value-added tax (VAT / VAT201) is another type of consumption tax that is charged on most goods and services sold in South Africa. VAT is typically included in the price of goods and services, so consumers do not see it as a separate charge. Companies must register for VAT if their annual turnover exceeds R1 million per annum. VAT submissions can get complicated as the VAT cycle (i.e. the frequency with which a business must file VAT returns with SARS) depends on turnover, with 6 different categories a business could fall under.
Read more about how to register to become a VAT vendor and pay VAT201.
PAYE, or Pay As You Earn taxes, are deducted from employees’ salaries and paid to SARS. In addition to PAYE, companies are obligated to contribute to the Unemployment Insurance Fund (UIF) for full-time and temporary employees. Employers must withhold these taxes from their employees’ salaries and pay them over to SARS or UIF on a monthly basis.
Provisional Tax is a way for individuals or companies earning an income from more than one source to pay their tax liability in increments over the year, instead of being hit with a large amount during the normal filing season.
These taxes need to be planned for in advance in order to ensure there is adequate cash flow to pay them out. Tax management ensures they are paid on time and a record of each is kept on file.
Overview of Key Differences
|Key Differences||Tax Planning||Tax Management|
|Scope||Focused on the taxable income of a company and the management of its assets.||Revolves around the systematic maintenance of a financial record, timely filing of returns, audit of accounts and timely payment of taxes.|
|Objectives||To reduce company tax liability and systematically plan company investments. This includes taking advantage of the legal deductions, allowances, exemptions and rebates available to companies.||To adhere to existing rules and regulations prescribed by SARS. To maintain corporate tax compliance in the eyes of SARS|
|Emphasis||Tax planning emphasises the reduction of a company’s tax liability in a given financial year within the boundaries of South African tax law.||Tax management emphasises achieving the above while adhering to tax submission requirements and deadlines, avoiding non-compliance or tax avoidance.|
|Obligation||Tax planning is not a compulsory component of the tax management process. It is at the discretion of a company’s accounts department to engage in tax planning or not. While the law makes provisions for various rebates and deductions, it is not compulsory to make use of them.||Tax management on the other hand is non-negotiable for businesses. It is mandatory for every business to fulfil its tax obligations and comply with the relevant tax laws. This includes filing regularly throughout the year on time, paying taxes timeously and conducting audits.|
|Timing||Tax planning is related to future and long-term objectives as well as short-term goals||Tax management is focused on short-term goals but is rooted in the past, present and future: |
Past – financial records, auditsPresent – tax submissions, payments Future – corrective action
Tax Planning Tips
There are a few key things to keep in mind when it comes to tax planning for your corporation.
- Keep your financial records
The first step to better corporate tax planning is to keep a paper trail and keep a record of all your financial transactions. Your invoices, bills and other relevant financial records should be kept in a secure cloud-based filing system, organised into months to make it easy to find records to support claims in the event of an audit. In addition to a cloud-based filing system, you could opt to have hard copies too which are safely stored away as a backup.
- Use every possible deductible expense you can find
Corporates are given the opportunity to claim various deductions come filing season. These deductions include any expenses that contribute to generating revenue. This can include:
- Bond or monthly rental for business premises
- Company vehicles
- Company petrol
- Office equipment such as furniture, technology and stationery
- Look out for tax exemptions
There are certain instances where corporates may be exempt from tax. This can include dividends income and capital from government grants.
- Get professional help
If you’re a business owner trying to do it all on your own, you don’t have to be a jack of all trades. Sometimes it helps to get professional advice from a tax consultant or accounting firm to ensure you are making use of all the deductions and exemptions available to you.
- Time your returns carefully
By planning corporate taxes in advance, businesses have more control over the timing of their tax submissions. This ensures they meet all deadlines and avoid costly late submission penalties.
Benefits of Corporate Tax Planning
There are a number of benefits to corporate tax planning which we have touched on briefly already. The most important benefit is by taking advantage of the maximum deductible expenses and tax credits, a business can significantly reduce its annual tax liability.
When a business is actively planning its taxes, they are analysing company assets and estimating tax liabilities well in advance. This forward planning allows a business to reshuffle its finances in order to capitalise on tax breaks and therefore pay less tax by the time filing season arrives. If this were done in a hurry close to the deadline, it’s unlikely a business would be able to reduce its tax liability as significantly.
Tax planning gives businesses both big and small a 360° view of their tax obligations to avoid any unexpected expenses or cash flow problems. For example, if your business has a large new project or contract coming in, tax planning can help you understand the tax implications well in advance. This can aid in the proper planning of your expenses and capital budgets. When a company knows what its tax obligations will be, cash flow can be managed better to pay the taxes due and cover day-to-day operational expenses.
How To Improve Corporate Tax Management
Tax management can become a very costly and time-consuming process when not handled efficiently. In fact, a research project found that the average business spends over R63 000 and over 255 hours on tax management and tax compliance every year. This is because they often miss deadlines and end up paying penalties or try to manage their taxes manually, which with SARS stringent and complex regulations, makes tax season very stressful for the average business owner.
It pays – in time and money – to digitise the tax management function by automating your tax management processes as much as possible. For example, you may want to reallocate some of the tax and finance budget to a more strategic activity like marketing or sales. You need a comprehensive tax management system in order to do this because manual tax management just doesn’t cut it anymore. Not only does SARS keep introducing new rules and regulations, but they have become stricter and more adept at weeding out non-compliance, making getting on top of managing your taxes more important than ever. They conduct more audits than in the past, so it is essential that everything is well documented and ready to hand over if your company is selected for an audit. A prompt and confident response can lead to better outcomes in the event of an audit.
So what is the solution? Konsise offers businesses a comprehensive tax management software that is perfect for business owners, in-house finance teams and accountants to use to stay on top of corporate tax submissions. Some key features include:
- Direct integration with SARS to file IRP6, VAT201 and ITR14 directly
- Notifications from SARS so a business never misses another email again
- Cloud-based record keeping
- Statement of Account from SARS
- Deadline tracker and alerts
- Document uploads for contextual record keeping
- Tax reporting for compliance, tax filings and requests/audits
For a full list of features, you can read our recent blog post here. If you would like to book a demo and find out more about how digitising your tax management processes can save you time and money, get in touch with our team to run through the features with you.