The tax benefit or tax advantage is a legislative measure that allows the taxpayer to pay less taxes legally.
Thanks to the tax benefits, the taxpayer pays a lower tax than what they should have paid if such a tool did not exist. Ultimately, the tax advantage represents a tax saving for the taxpayer.
Characteristics of the tax benefit
There are two fundamental characteristics of tax benefits:
- It is a measure taken by the legislator. This means that the tax benefit must be expressly included in the legislation (that is, through a law, a regulation, etc.). It is not possible to apply tax benefits that are not expressly provided by the legislator.
- The tax benefit is subject to a series of conditions. To apply a tax benefit it is necessary to meet a series of requirements. These requirements can be conditioned on the future; if they are not complied with in the future, the tax benefit will have to be reversed.
- The tax benefit affects in a particular way, not global. In other words, a tax measure that represents tax savings and affects everyone is not a tax benefit. This must be individualized, through the requirements mentioned in the previous section. With an example it will look better:
- Suppose a drop in the tax rate from 25% to 23%. This decrease represents a tax saving, since a lower tax will be paid. However, it is not a tax benefit as it affects all taxpayers.
- Suppose that if a company invoices less than 100 monetary units, the tax rate is 23%, instead of 25%. This is a tax benefit since it can only be enjoyed by companies that invoice less than 100 monetary units. Thanks to this, they apply a tax rate of 23%; the rest of the companies, 25%:
Types of tax benefits
There are three main ways to instrumentalize a tax benefit:
- By exemption. This tax benefit means that the taxpayer is not obliged to pay the tax, although due to the nature of the tax, they should pay it. For example, any company must pay Corporation Tax. However, the legislator may contemplate the following exemption: Those that invoice less than 50 monetary units are exempt from Corporation Tax. So, these types of companies, although they should pay the tax, are not obliged due to the existence of this exemption. The tax savings are total, since you will not pay any of this tax.
- By means of a bonus in quota or tax base. This tax benefit means that the taxpayer can reduce their tax rate or their tax base in the corresponding bonus. For example: In the Personal Income Tax a bonus of 10 monetary units is established for taxpayers who have children under 3 years of age. A taxpayer with a 3-year-old child will pay 10 monetary units less than the rest of the taxpayers, thanks to this tax benefit.
- Through deductible expenses. Usually, direct taxes (Corporate Tax and Personal Income Tax) are levied on the income obtained. There is usually the following tax benefit: It is allowed to deduct (that is, subtract) the expenses incurred to obtain said income. But only the expenses necessary to obtain that income; the rest of the expenses are not deductible.
There are other ways of using a tax benefit, by not subjecting or deferring expenses, for example.