Lately, there has been a lot of discussion about the fairness of paying corporate income tax (CIT) in advance on profits that have not yet been earned (and may not even be earned this year). Nevertheless, such a procedure is stipulated by the law, and until it changes, the question remains: how can businesses take advantage of the opportunities provided by the current system?
Under the currently applicable law, a legal entity whose revenue for the previous tax period exceeds 300,000 euros must pay advance CIT. The tax is paid four times a year, on the 15th day of the last month of each quarter. The company is given the right to choose one of two methods for calculating advance CIT:
1. Based on the results of the previous year's activities (e.g., in the first and second quarters of 2023, the company pays 1/4 of the 2021 CIT, and in the third and fourth quarters, 1/4 of the 2022 CIT).
2. Based on the estimated amount of CIT for the tax period.
According to data from the State Tax Inspectorate, in 2022, 82% of companies chose the first method and paid advance CIT based on the previous year's results. The second method is unattractive for many companies because estimating the taxable income for the entire year in March can be a complicated task. Additionally, if the actual advance CIT paid during the year is less than 80% of the finally calculated annual CIT, the company will have to pay late payment penalties on the difference between these amounts. The late payment penalty rate is 0.029% per day, or when calculated annually, it amounts to 10.59% (also penalties are not deductible from taxable income, which would increase the “annual interest rate” to 12.2%).
Opportunity Provided by Legislation
Under the current law exist significant opportunity which often remains overlooked. The State Tax Inspectorate allows a company to change its chosen method of advance CIT payment once per tax period (until September 15th). Unlike in March, it is much clearer in September what the financial results will be and how significantly they will differ from previous years. In cases where a company chose to pay advance CIT based on the previous year's results in March and then changes the calculation method to one based on a forecast, if the forecasted amount is lower than what was actually paid (for the first and second quarters), the overpayment can be offset against other taxes or refunded, and the amount paid for the third and fourth quarters would already match the company's forecast.
When it's Worth Changing the Calculation Method
In summary, there are three situations where it would be rational for a company to take advantage of this opportunity and change the method of advance CIT payment:
● When the company plans to finish the current year with losses and not pay CIT at all.
● When the CIT will be significantly lower than in previous years, making it more cost-effective to potentially pay a 12.2% annual interest rate on a mistake (e.g., on an error of 10,000 euros) rather than freezing 100,000 euros of working capital, which for most companies costs at least 7-10%.
● When borrowing options in the market are limited or the interest rate exceeds 12.2%. Paying advance CIT based on the forecasted result (assuming a 0 CIT) can be an attractive method of financing operations.
It is important to note that you can only evaluate your business situation and choose the most suitable method of advance income tax payment until September 15th. Often, this decision can help save a significant amount of working capital and put it to more meaningful use in the company's operations.