How does tax accounting work in companies?

Every company, when developing its economic activity, is obliged to comply with the legal provisions defined by the country where it is established.

There are different types of accounting and it is through tax accounting that companies are able to generate the financial reports inherent to their activity. It is on the basis of these reports that the competent authority will subsequently determine the company's tax obligations.

Let's take a closer look at what this branch of accounting is all about, its purpose and main characteristics.

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What is tax accounting and who uses it?

Tax accounting: definition and purpose

The term tax refers to everything related to the system of taxation and the tax authorities.

In this sense, tax accounting consists of keeping a record of the financial operations of an entity, so that it can file the corresponding returns that will lead to the calculation of taxes payable. Its starting point is the tax regulations established by the law of each country.

In Spain, the taxes paid by companies can be classified as:

• Direct: Those that apply directly to the taxpayer, on a direct or immediate manifestation of economic capacity, such as a patrimony. This type of tax includes
  • Personal Income Tax ( IRPF).
  • Corporate Income Tax.
• Indirect taxes: Those applied on an indirect manifestation of economic capacity, such as consumption. The most common tax of this type is:
  • Value Added Tax (VAT).

In Spain, the Tax Agency is the entity in charge of collecting taxes. So, while companies are obliged to comply with tax regulations in order to comply with their tax returns, tax inspectors are responsible for processing these returns to determine the taxes they will have to pay.

What does a tax accountant do?

The role of the tax accountant is to provide advisory services to companies or individuals regarding the payment of taxes. In order to do this, the tax accountant who advises a company must:

• Know and review the accounting books and balance sheet,
• perform accounting audits,
• calculate and record transactions for the filing of tax returns and payment of taxes (VAT and corporate income tax),
• generate reports together with the corresponding spreadsheets for tax returns,
• define strategies to evaluate a possible decrease in the payment of taxes, making use of their knowledge in the field.

Tax accounting: characteristics

Depending on the type of accounting we are talking about, different aspects, procedures and deliverables will be considered. The most characteristic aspects of tax accounting can be summarized as follows:

• Accounting being a legal obligation in itself, it is common that the actions of the Accounting Department or the company's accounting professional are aligned with those of the Legal Department. Updates in tax regulations and their liquidation, for example, are matters that a company must follow closely and not neglect.
• It is mandatory in that it is necessary for the entrepreneur or self-employed to base his procedure on the guidelines and procedures established by the Public Administration. In this way it is ensured not to incur in serious faults that entail a sanction.
• Always in the spirit of complying with a common regulatory framework (tax declaration), each country determines its tax provisions and the tax regime to which companies must adhere. They also define the competent authority responsible for ensuring compliance.

For example, they act as the Tax Agency in Spain:

• The Tax Administration System in Mexico,
• The Directorate of National Taxes and Customs in Colombia,
• The General Tax Administration in Argentina.

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Differences with financial accounting

Financial accounting records and classifies the daily transactions or operations of a company, with a view to consolidating its financial statements. This document, of an internal nature, is important insofar as it constitutes a source of valuable information for third parties.

Among the objectives of financial accounting are:

• Keeping investors, strategic allies, partners and shareholders informed about the company's performance.
• The possibility of demonstrating interest in investing in the company, in the event of a future investment need.
• Demonstrate financial soundness in front of banks for possible loans and in front of public tenders (public bids), etc.

According to the above, we could say that although both types of accounting record and monitor the company's transactions, financial accounting deals with more global aspects, while tax accounting concentrates on complying with tax regulations.

tax accounting concentrates on complying with tax regulations.

A similarity between the two, however, may arise when, for legal reasons, tax reporting must be done during a specific period (fiscal year), as is established for financial reporting.

To ensure the correct declaration of income, the veracity of the data and to comply with current regulations, many companies choose to rely on accounting software.

The advantage that this tool offers is the fact of considering updates in the legislation, in order to adapt its functionalities and offer an adequate service and support at all times. In this way, the management can fully dedicate itself to the management of the business and not worry about the fulfillment of its obligations.