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Tax Planning

Tax Planning

Tax Planning enables reduction of tax liability using legal and appropriate means. When there are various options to do perform one or other transaction, the tax planner will compare between the tax results of each of the modes of operation and choose the path of action that has the best tax results.

The tax planning method may sometimes result, through proper planning, to bring the tax liability to practically zero , and this is everyone’s constitutional right !

The ruling set by the judgment in the Promedico case is that tax planning done by relying on an expert’s opinion and with full disclosure in the tax reports is legitimate and does not constitute an offense.

An artificial transaction is targeted to reduce the tax burden , while this is the entire purpose of that transaction. Actually taxpayers may take advantage of loopholes in the law for tax benefits.

It is the prerogative of the Tax Assessor to ignore artificial transaction under Section 86 of the Income Tax Ordinance:

“(a) If the Tax Assessor believes that a particular transaction that reduces or that could reduce the amount of tax payable by a particular person is artificial or fictitious, or that a certain transfer is not actually performed, or that one of the major goals of a particular transaction is inappropriate avoidance or reduction of tax , he may ignore the transaction or the transfer, and the person concerned shall be tax assessed accordingly. Avoidance or reduction of tax can be seen as inappropriate even if they are not illegal.”

Aggressive tax planning is reflected in complex and sophisticated planning, and the Tax Assessor will have difficulty to detect it, consequently aggressive tax planning is considered beyond the scope of legitimate tax planning. Today , aggressive tax planning include use of international laws and treaties and also use of “tax haven” States while exploiting tax treaties.

Amendment 147 to the Income Tax Ordinance, has provided the Tax Assessor with tools to deal with aggressive tax planning, by imposing a duty to report the measures defined as aggressive tax planning. If aggressive planning will be discovered during the Income Tax audit – even if obsolete, the taxpayer will be required to pay the tax that should have been paid in the first place.

A tax plan must encompass all taxes,in order to bring optimal tax results. When dealing with international activity, the relevant laws of the States where transactions are carried out should be considered. In addition, even before contracting a deal , the need for legal action should be assessed. Of course considerable weight should be attributed to future plans, and the tax planner should take them into consideration in accordance with the innovations of legislation rulings.

The right tax planning will bring the most profitable deal from a variety of deals offered ,such that the deal eventually taking place will have the lowest tax rate.


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