12/09/2023

BỘ GIÁO DỤC VÀ ĐÀO TẠO

TRƯỜNG ĐẠI HỌC KINH TẾ - TÀI CHÍNH
THÀNH PHỐ HỒ CHÍ MINH

TAX PLANNING

Chapter 4: Maxims of Income Tax Planning

TRẦN NGỌC THANH

thanhtn@uef.edu.vn

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Đại học Kinh tế - Tài chính thành phố Hồ Chí Minh www.uef.edu.vn

Table of contents

Tax evasion, tax

avoidance and tax
planning

What makes income tax

planning possible?

Some application in
Vietnam

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1. Tax evasion, tax

avoidance, tax planning
Tax evasion

Tax avoidance

Tax planning

Tax evasion
• Tax evasion is the illegal practice of not paying taxes, by not reporting
income, reporting expenses not legally allowed, or by not paying taxes owed.
• Tax evasion is a crime—a offense punishable by severe monetary fines and
imprisonment
• For example:
o Providing false information to the General Department of Taxation (GDT)
about business income or expenses;
o Deliberately underpaying taxes owed;
o Substantially understating your taxes;

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Tax avoidance
• In a broad sense, tax avoidance could include
any legal method of reducing your tax burden.
• In a more narrow sense, tax avoidance could
be ingenious arrangements designed to
produce tax advantages.
• For example:
o Using tax deductions for decreasing tax bill.
o Applying tax incentives
o Spending on employer-sponsored savings
schemes for retirement keeps open to tax
deductions.

Tax avoidance

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Tax planning
• Tax planning is the analysis of a financial
situation, or plan, from a tax perspective.
The purpose of tax planning is to ensure
tax efficiency.
• Through tax planning, all elements of the
financial plan work together in the most
tax-efficient manner possible.
• For example
o Choice of business entity
o Timing of income
o Structuring transactions

Tax planning

• The difference between tax planning and tax

avoidance largely comes down to intent.
• Tax planning is organizing your clients’ tax
affairs in the most tax effective way within the
intent of the law.
• In contrast, tax avoidance schemes involve the
deliberate exploitation of the tax system.

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Summary

2. What makes income tax

planning possible?
Different tax treatment

The entity variable

The time period variable

The jurisdiction variable

The character variable

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Different tax treatment

• The tax system is replete with rules

affecting only particular transactions,
entities, or time periods.
• In every case in which the law applies
differentially to a certain dollar of
business profit or cost, a planning
opportunity is born.

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Different tax treatment

• The tax consequences of a transaction depend on the interaction of four variables:

• Which entity • During which

undertakes tax year does
the the
transaction? transaction
occur?
Time
Entity period

Jurisdiction Character
• In which tax What is the tax
jurisdiction character of the
does the income from the
transaction transaction?
occur?

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1. Entity Variable

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Entity Variable

• Individuals and corporations are the two entities that pay tax on
business income.
• The tax law is essentially neutral across entities with respect to the
tax base.
Tax revenue = Tax base x Tax rate
 Potential difference between applicable tax rates.

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Entity Variable
For example: The personal income tax rate structures are progressive

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Entity Variable
• The 1st tax planning maxim:

“Tax costs decrease when income is generated by an

entity subject to a low tax rate”

• If tax rate structures are progressive, the tax on a given dollar of

income depends on the marginal rate of the entity earning that dollar.

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Entity Variable
(1) Income shifting
• The tax on business income can be reduced if that income is shifted
from an entity with a high tax rate to an entity with a low tax rate.
Case 1: Entity H and Entity L both receive $100 cash that represents taxable income.
Entity H has a 37% marginal tax rate while Entity L has a 21% marginal tax rate. How to
optimize tax efficiency?
 Entity H could redirect its $100 cash receipt (and the income represented by the
cash) to Entity L
 Tax costs before income shifting: $37+ $21 = $58
 Tax costs after income shifting: $200 x 21% = $42

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Entity Variable
(1) Income shifting
• Because income-shifting transactions involve transfers of value from
one party to another, they usually occur between related parties.
• Tax authorities are vigilant in policing related party transactions
involving beneficial income shifts
• Assignment of Income Doctrine:
“Income must be taxed to the entity that renders the service or owns the
capital with respect to which the income is paid.”

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Entity Variable
(2) Deduction Shifting
Entities with different marginal rates can also save tax by shifting deductible
expenses.

Taxable income = Revenues – deductible expenses

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Entity Variable
(2) Deduction Shifting
Case 2: Mr. An and Mrs. Hoa have a 10-year-old daughter.
• Mr. An has an income of 30 million VND, while Mrs. Hoa has an income of
17 million VND.
• The marginal tax rate:

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2. Time Variable

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Time Variable

• Tax costs or savings from a transaction depend on the year in

which the transaction occurs.

What makes tax costs or savings from a transaction vary

from year to year?

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Time Variable
Case 3: Consider a transaction that takes place over two taxable years.
Calculating the NPV:
• In the first year (year 0), Firm R receives $220 in revenues and pays
$40 in expenses.
• In the next year (year 1), it receives $280 in revenues and pays $80 in
expenses.
• If the revenues are taxable when received and the expenses are
deductible when paid.
• It has a 21% tax rate for the two-year period and uses a 6% discount
rate

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Time Variable
Case 3:

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Time Variable
Case 3.1: Assume that Firm R could restructure the transaction in a way
that doesn’t affect before-tax cash flows but allows it to report the entire
$380 taxable income in year 1.

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Time Variable
• The 2nd tax planning maxim:

“In present value terms, tax costs when a tax is deferred

until a later taxable year”

 THE TAX DEFERRAL STRATEGY

• Important note: A tax deferral strategy that affects before-tax cash
flows may not improve NPV.

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Income Deferral and Opportunity Costs

Case 3.2: Assuming that Firm R avoids taxable income in year 0 by
delaying the receipt of $180 of revenue until year 1.

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Income Deferral and Opportunity Costs

• The 2nd tax planning maxim:

“In present value terms, tax costs when a tax is deferred

until a later taxable year”

=> Only true when a tax payment can be deferred independently of

before-tax cash flows or when the value of the deferral exceeds any
opportunity cost of a coinciding change in before-tax cash flows.

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Income Deferral and rate changes

• The deferral of taxable income into
future years creates uncertainty as to
the marginal rate that will apply to that
income.
• The value of the deferral could be
reduced if
+ Government increased the statutory
rates
+ The firm moved unexpectedly into a
higher tax bracket.

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Time Variable
Conclusion: The tax costs or savings from a transaction depend on the
year in which the transaction occurs:
• The time value of money: A tax dollar paid this year costs more than a
tax dollar paid in a future year
• If tax rate changes from one year to the next, the tax costs and
savings fluctuate accordingly
• If income tax systems change periodically, a tax benefit available in
one year may disappear in the next.

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3. Jurisdiction
Variable

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Jurisdiction Variable
• Because of the differences in tax systems among
countries/regions/states, a firm’s aggregate income tax liability depends
much on a function of the jurisdictions in which it conducts business.
• The 3rd tax planning maxim:

“Tax costs decrease when income is generated in a jurisdiction

with a low tax rate.”

=> Minimizing the total tax costs by conducting business in jurisdictions

with favorable tax climates.

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Jurisdiction Variable

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Jurisdiction Variable

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4. Character
Variable

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Character variable
• Income is usually characterized for tax
purposes as:
+ Ordinary income: The income generated
by routine sales of goods or services.
+ Capital gain: The sale or exchange of
certain types of property, referred to as
capital assets, gives rise to capital gain.

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Character variable

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Character Variable
For example: Mr. John, who has a 35% regular marginal tax rate, has three different
items of income.
• $1000 wage as an ordinary income with no other special characteristic
• $1000 from selling stocks as a capital gain eligible for the 15% favorable tax rate
• $1000 from municipal bond interest (exempt from income tax)

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Character Variable
• The 4th tax planning maxim:

“Tax costs decrease when income is taxed at a preferential rate

because of its character.”

• The tax character of any item of income is determined strictly by law.

 Prohibitions against artificial conversions of ordinary income into capital
gain

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Character Variable

• Important notice: The tax cost

may not be the only cash flow
affected by the tax-favored
character of the income. TAX
NPV
COSTS
• The decision to engage in a
transaction should be based on
the NPV of the transaction.

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Character Variable

Case 4: Ms. Sunny has $40,000 to invest in either

• A tax-exempt municipal bond with 3% interest per year
• or a corporate bond with 5% interest per year
Required: Which is the best investment option?

Although Ms. Sunny

pay no direct explicit
tax on the interest
from the municipal
bond, she must
accept a reduction in
the pretax.

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Implicit Tax

• An implicit tax represents a reduction in the pretax return available from

investment in a tax-favored asset.

An implicit tax in
investing
in munipal bond is
$800

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Summarize the four tax planning maxims

• Tax costs decrease (and cash flows increase) when income is

generated by an entity subject to a low tax rate.
• Tax costs decrease when a tax is deferred until a later taxable year.
• Tax costs decrease when income is generated in a jurisdiction with a
low tax rate.
• Tax costs decrease when income is taxed at a preferential rate because
of its character.

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Summarize the four tax planning maxims

Case 5: Firm K&T operates as two separate taxable entities, Entity K and
Entity T. The firm is negotiating a transaction that will generate $25,000
cash in year 0 and $60,000 cash in year 1. There are two availabe options
for firm K&T to construct the transaction:
• Option 1: Entity K undertakes the transaction, it must report $25,000
and $60,000 taxable income in years 0 and 1.
• Option 2: Entity T undertakes the transaction, it must report the entire
$85,000 taxable income in year 0.
• Entity K has a 32% marginal tax rate, while Entity T has a 21% marginal
tax. Firm KT uses a 5% discount rate to compute NPV.
Required: Which option should Firm K&T choose and under what tax
planning maxim?

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Summarize the four tax planning maxims

Case 5:
• Tax costs decrease (and cash flows increase) when income is
generated by an entity subject to a low tax rate.
OR
• Tax costs decrease when a tax is deferred until a later taxable year.

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Summarize the four tax planning maxims

Case 5:

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3. Some application in
Vietnam
Additional Strategic Considerations

Some cases in Vietnam

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Additional Strategic Considerations

• Strategic goal is not the reduction of tax costs  NPV maximization.
• Should consider other factors:
 The expense of implementing the strategy.
 Unilateral tax strategy
 Assumptions about the future.

Tax planning is the structuring of transactions to reduce tax costs or

increase tax savings to maximize NPV.

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Case 1
• Bank A has purchased 01 package of A4 paper from Bright Co., Ltd.
to serve its business activities.
• The shipment has a total value of payment by banking transfer of
VND 220 million and has a VAT invoice. Bank A has declared a
deduction for input value-added tax of VND 20 million and declared
a deductible expense of VND 200 million when calculating CIT for
the year.
• When the tax authority checked the tax at the bank, it concluded that
the VAT invoice of this A4 paper shipment was illegal.

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Case 1
• However, there is sufficient documentation to demonstrate that:
- This violation is due to the professional error of the accounting
department of bank A.
- This is completely unintentional in the implementation plan of bank
A.

SHOULD THIS BE CONSIDERED AS A TAX EVASION?

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Case 1
• However, there is sufficient documentation to demonstrate that:
- This violation is due to the professional error of the accounting
department of bank A.
- This is completely unintentional in the implementation plan of bank
A.

SHOULD THIS BE CONSIDERED AS A TAX EVASION?

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Xử phạt trốn thuế ở Việt nam

NGÀY 24/10/2016 NGÀY 15/03/2018
(1) (2)

TRỐN THUẾ (3) KIỂM TRA THUẾ

1 TỶ ĐỒNG THANH TRA THUẾ
(4)

PHẠT BIÊN
TRỐN BẢN
TRUY THU + THU CHẬM NỘP =
+ THUẾ XỬ
THUẾ 1 TỶ 0,03%/NGÀY
1 – 3 LẦN PHẠT

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Xử phạt kê khai sai

• Phạt 20% số tiền thuế thiếu + số tiền thuế được hoàn
• Phạt tiền 2.100.000 đồng, nếu có tình tiết giảm nhẹ thì mức tiền
phạt tối thiểu không thấp hơn 1.200.000 đồng hoặc có tình tiết tăng
nặng thì mức tiền phạt tối đa không quá 3.000.000 đồng có hành vi
khai sai
• Tham khảo Thông tư 166/2013/TT-BTC.

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Case 2:

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Case 3:
• Pharmaceutical company C has an inventory of 1 batch of medicines
worth 1.2 billion VND and will expire in 3 months.
• When the expiry date of the drug expires, the company must destroy
this batch of drugs with a prescribed cancellation cost of VND 44
million.
• Faced with this situation, company C donated this batch of drugs to
Children's Hospital 1. . At that time, the company did not incur the
cost of 44 million VND for canceling overdue drugs and 1.2 billion
VND for the batch of drugs that will be included in the cost of goods.

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