What role does value added tax play in relation to corporate tax?
June 22, 2022 | 50,00 EUR | answered by Ulrike Voigt
Dear tax advisor,
My name is Babette Klett and I am the managing director of a small GmbH. Currently, I am intensively dealing with the topic of corporation tax and have noticed that value-added tax seems to play a crucial role. However, I am unsure of how exactly these two types of taxes are interconnected and how they affect each other.
Currently, my GmbH regularly pays VAT on its income. We make sure to correctly declare all revenues for tax purposes and submit the VAT returns on time. Now I am wondering to what extent these VAT payments affect corporation tax and if there are ways to optimize these effects.
My concern is that I might be making unnecessarily high tax payments or not fully utilizing tax benefits. Therefore, I would like to learn from you how VAT and corporation tax are linked and if there are strategies to operate more tax efficiently.
Can you please explain to me the role of VAT in relation to corporation tax and what measures I can take to optimize my tax situation? I look forward to your expert assessment and thank you in advance for your help.
Best regards,
Babette Klett
Dear Mrs. Klett,
Thank you for your inquiry regarding corporation tax and value added tax. It is good that you are delving into these topics intensively, as they are indeed closely linked and have a significant impact on the tax situation of your GmbH.
In essence, value added tax and corporation tax are two different types of taxes that interact together in determining the tax burden of a company. Value added tax is levied on a company's sales and must usually be paid directly to the tax office. It affects the revenues and expenses of the company.
On the other hand, corporation tax is a profit tax levied on the profits of a GmbH. The profit of the company is taxed after deducting certain operating expenses. Therefore, corporation tax is calculated based on the profit generated by the company.
While value added tax does not directly affect the amount of corporation tax, as it is a consumption tax and not levied on a company's profit, the payments of value added tax can have an impact on the company's liquidity since they must be regularly paid to the tax office.
To optimize your tax situation and potentially avoid unnecessary tax payments, there are various measures you can take. Firstly, ensure that your value added tax returns are submitted correctly and on time to avoid possible late payment penalties.
Furthermore, you can consider whether it is beneficial for your company to switch from cash accounting to accrual accounting. With cash accounting, value added tax is only paid when the invoices are actually paid, whereas with accrual accounting, value added tax is due at the time the invoice is issued. Depending on the payment behavior of your customers, this switch can bring tax benefits.
Additionally, review whether you are making optimal use of the input tax deduction entitlement. By deducting input tax amounts, you can reduce your value added tax burden and improve your tax situation.
It is advisable to work with your tax advisor to develop a customized tax strategy tailored to the specific characteristics and goals of your GmbH. Your tax advisor can help identify and implement tax optimization potentials.
I hope this information is helpful to you, and I am available for further questions. Thank you for your interest and trust.
Sincerely,
Ulrike Voigt
