Negotiating contracts? Consider these three tax planning angles

If you think negotiating contracts has nothing to do with tax, you're wrong. You also need to plan from a tax perspective.

Revealed: Three important tax planning angles to consider when negotiating contracts

Consideration #1: Check the tax benefits

In many cases, one party to a contract can gain some tax benefits, but they'll probably get these benefits at the expense of the other party. In some instances the contractual method chosen can result in tax liabilities or losses for both the contracting parties, says the Practical Tax Loose Leaf Service.

So while it's important to focus on the contractual outcome of the agreement, it's also worthwhile to consider the tax consequences for both parties.

If the other party is scoring a tax benefit at your expense, ask yourself if you can you use this as leverage to get another benefit in terms of the contract.

Consideration #2: Involve the drafter

You must involve the drafter of the contract in negotiations from the beginning. That way, he can identify possible taxation issues from the start. This way the agreed terms won't hold any unexpected tax pitfalls.

Your drafter must include the identity of the parties and what benefit accrues to which party at what time. You must also instruct your drafter to help you determine the value of that benefit.

The contract terms will determine if the transaction is, for instance, one of sale or lease, service provision of sales and will involve many other rules such as the 'duplum rule' to ensure tax compliance, says the Practical Tax Loose Leaf Service.

Essentially, an understanding of what the tax liability will be is an important step in drafting your contract. Remember, the contract is your insurance; it could be a vital element for you to discharge your burden of proof requirement in terms of section 82 of the Income Tax Act (ITA).

Consideration #3: Beware of tax evasion

A well drafted contract can help you rebut a claim of tax evasion by SARS.

You can refer to a sound contract as evidence of your business or commercial purpose, which would be a good defence against an attack in terms of section 103 of the ITA.

Taking these points into account when negotiating contracts will ensure you're covered from a tax perspective.