At the end of the financial year, companies must calculate their total turnover by means of double-entry accounting and communicate the result to the tax office. In addition to your annual tax declaration, the authorities also require you to report your company’s income and expenses within the annual accounts. The rate of income tax you pay is then decided according to the size of the profit margin.
Provisions are also part of the balance sheet, or more specifically, they represent an impairment of equity, meaning they reduce the company’s profit. This is enormously important for your tax balance; if your profit decreases, you will end up paying less tax. Creating and dissolving provisions is therefore logical, even if it is time consuming; without this, you would have to pay more tax at the end of the financial year.
We’ll use pension payments as an example to illustrate the economic benefits of provisions. If you employ staff in your company, the tax office requires a transfer of the resulting income tax and the employee’s share of the pension insurance. The tax burden is then carried by the employee, rather than the company. As the employer, all you have to do is deduct the salary tax rate directly from employees’ salary and pay it to the tax office.
Creating provisions thus helps employers retain a more precise overview equity and profit, as well as contractual obligations that will arise in the future, which will be paid to third parties.