How does tax accounting work in companies?

Every company, when carrying out its economic activity, is obliged to comply with the legal provisions on fiscal accounting 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 us take a closer look at what this branch of accounting is about, what its purpose and main characteristics are.

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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 taxation system 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 submit the corresponding declarations that will lead to the calculation of taxes to be paid. 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 follows:

• Direct: Those that apply directly to the taxpayer, on a direct or immediate manifestation of economic capacity, such as assets. This type of tax includes
  • Personal Income Tax (IRPF).
  • Corporate Income Tax.
• Indirect taxes: Those that are 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, taxes are collected by the Tax Agency (Agencia Tributaria). 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 in order to determine the tax 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 on the payment of taxes. To do this, the tax accountant advising a company must:

• Know and review the accounting books and balance sheet,
• perform accounting audits,
• calculate and record transactions for tax returns and tax payments (VAT and corporation tax),
• generate reports together with the corresponding tax return schedules,
• defining strategies for assessing a possible decrease in tax payments, making use of their knowledge in the field.

Fiscal accounting: characteristics

Depending on the type of accounting being discussed, different aspects, procedures and deliverables will be considered. The most characteristic aspects of tax accounting can be summarised as follows:

• Accounting being a legal obligation in itself, it is common for the actions of the Accounting Department or the company's accounting professional to be aligned with those of the Legal Department. Updates in tax regulations and their settlement, 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 person to base their procedures on the guidelines and procedures established by the Public Administration. This ensures that they do not incur in serious misconduct that could lead to 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 Agencia Tributaria 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, which is internal, is important in that it is 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.
• Demonstrating 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 focuses on

tax accounting concentrates on tax compliance.

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

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

The advantage of such a tool is that it takes into account updates in legislation, in order to adapt its functionalities and offer 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 fulfilment of its obligations.