Tax Compliance Guide
What Is Tax Compliance?
For a business, tax compliance is complying with the taxation requirement of the country in which you are operating. The primary components of tax compliance are:
- Filing/reporting the taxes as per the country and jurisdictional tax laws (state, province, city, etc.).
- Accurately calculating the taxes.
- Paying the taxes.
The tax laws of each country are different, but the three components above are universal to all tax laws.
Tax compliance becomes more complex for businesses that are operating in multiple countries and are subject to the tax laws of each country. This is influenced by bilateral tax relationships between the countries, which aim to ensure that a business isn’t subjected to double taxation, i.e., paying taxes in two countries for the same income.
A business may also have to adhere to the tax laws of the country it sells products and services in, even if it doesn’t have any physical presence in the country.
How To Ensure Tax Compliance?
Tax compliance is different for businesses operating in just one country and businesses that have a presence in multiple countries.
For businesses that are working in just one country, ensuring tax compliance would entail:
- Registering your business with the primary tax authority of the country. It’s the IRS in the US, HM Revenue & Customs in the UK, and ITD in India. This is typically a department of the federal government (or under the federal government) responsible for collecting taxes from individuals and businesses and ensuring that all the tax laws are followed.
- In some countries, you may have to register with a state/province or a local government tax authority.
- Learn the tax laws of the country you are operating in or hire an attorney/certified tax expert to do your business’s taxes for you.
- It’s essential to understand your taxation responsibilities associated with different stakeholders in your business, i.e., employees, consumers, investors, etc. For your permanent employees, you may have to withhold taxes when paying their salary and submit the collected tax to the tax authorities. This is the bulk of “income tax” levied upon individuals in a country. As a business selling products and services, you may also be responsible for collecting consumer taxes. The tax laws will also influence how you reward your investors. Dividends might be taxed differently than direct shares of the profit.
- Document every financial transaction. If your tax reports are challenged, the tax authority/tax officers may need to audit you, which will entail a comprehensive analysis of your business’s finances.
- Make sure you know which business expenses you are allowed to deduct. Not all expenses qualify.
- Make sure you adhere to any changes in the tax code.
If you have a business that operates in multiple countries, make sure you comply with the steps mentioned above. In addition, you also have to ensure you know the following:
- How do the taxes of the country you are operating in and your home country interact? If your profits are taxed in the country you are operating in, you should (ideally) not pay any taxes on it in your home country because the money is already taxed. This is achieved through a bilateral tax agreement between the two countries.
- Make sure you understand the tax implications of running the payroll in one country and paying salaries in another.
- Every country may have different tax requirements for independent contractors and freelancers.
Even small businesses can outsource the filing and paying of their taxes to an expert/agency. Most organizations (once they are large enough) have dedicated tax experts, attorneys, or accountants responsible for filing the taxes.
However, if you want to do it yourself, make sure you understand the tax code and adhere to the best practices like filing early, making periodic payments to the tax authority instead of one large tax bill at year-end, and reaching out to tax experts/tax officers to clarify any confusion you may have regarding how to file and pay your taxes.
Why Is Tax Compliance Important?
Every business and individual should pay the taxes levied upon them. These taxes are used to sustain, maintain, and improve essential services and infrastructure, which is crucial for everyone. However, this moral and social obligation is insufficient to get companies and businesses to pay their taxes. Therefore, tax laws are some of the strictest and most forcefully imposed laws in any country.
Not complying with the tax laws, which include not paying your taxes on time and not setting aside enough sum to meet your tax obligations, can result in financial penalties, which increase the sum from what you needed to pay in the first place. But that’s the mildest of penalties incurred.
If you are accused of tax fraud, you may see far more excessive financial penalties, as well as jail time. Claiming wrong deductions and purposefully mischaracterizing your expenses to lower your tax bill can also be classified as tax fraud. In extreme cases, failure to adhere to tax compliance regulations may result in a court closing down your business and seizing your assets to recover the taxes. If the business owner/partners don’t have an adequate corporate veil, these penalties can also reach their assets.
Taxes are a fact of life for most individuals and businesses worldwide. They are a necessary financial obligation, priced into every major financial decision a business makes. There are plenty of lawful ways to reduce your tax bill and good practices that allow you to manage your tax obligations better. A business should try and avail the tax benefits they are entitled to and eligible for, but the goal should always be to adhere to the best tax compliance practices. If you are planning on operating in a different country, it’s crucial that you understand the tax laws and rates in that country before making that decision. Book a free consultation here with Aadmi to discuss your compliance solutions.