International Tax Planning

As the business and financial world becomes increasingly global and interconnected, international tax planning is vital to a business’ continued success. Many business owners h employees and assets all over the world, making the tax laws confusing and difficult to navigate.

International Tax Planning: The Basics

International Tax Planning
International Tax Planning

If you or your business possess offshore holdings, such as bank accounts, warehouses, employees, or inventories, it is mandatory that you understand international taxation, to make sure you get the best possible deal.

Tax planning is the lifeblood of a flourishing multi-national corporation. The principle of international tax planning is simple – that the revenue laws for any given country are mostly restricted to the domestic economy. Tax officials have a hard time crossing borders while businesses don’t.

There are three main changes a person or business can make in their tax situation, to take advantage of overseas tax jurisdiction. They are:

  • Changing residence
  • Changing the geographic source of their income
  • Changing the tax entities that they use

Some of these changes allow for a person or business to move their income to a tax haven – a country that imposes no taxes on the income of companies or other entities. A treaty-haven jurisdiction is a country that has an agreement with the United States or other high tax nations.

The best way to take advantage of international tax planning is to accumulate wealth and income streams in as many different countries with low tax laws as possible, to minimize what is owed. It could look something like this – the income or profits are generated in the United States, but it belongs to a company based in another treaty jurisdiction country. The income moves with little interference, due to the tax treaty, requiring a lesser rate of withholding. If a person or financial entity is paying income to a country with a tax treaty with the US, 30% must be withheld, for US taxes. Once it’s in the tax haven country, it is moved to a non-taxable entity, such as a trust, and allowed to accumulate.

There are two main reasons for utilizing international tax planning: shifting profits and avoiding US taxes.

Shifting profits involve different parts of the same multi-national corporation with border crossing transactions.

Some reasons for this include:

  • Transfer pricing: Whether it’s because of a lower overhead, due to low wages or taxation, or simply a streamlined and efficient process, transfer pricing allows a multinational corporation to conduct business where it will cost less, and will be taxed at the lower tax rate.
  • Cost sharing: Cost sharing allows for corporations to set up businesses in smaller to countries with lower tax rates, and then “buy in” to the larger corporation. This means that although most of the profits will be made in the US, they are subject to the lower tax rates.
  • Intercompany loans: Intercompany loans allow multinational corporations to shift loans from a country with a low tax rate to a country with a higher tax rate. The company in the lower tax nation lends enough to cover the profits from the company in the higher tax nation. This means the profits go straight to the lower tax nation, where they will be taxed at the lower rate.

Is International Tax Planning Ethical?

As the saying goes, all is fair in love and war. The same could be said for business, especially in today’s hyper competitive market. In fact, to thrive in today’s business climate, businesses might have to learn to thrive in international waters. Businesses are expected to be as competitive and profitable as possible, using every tool at their disposal.

The problems only arise when businesses begin exploiting tax programs that are not meant for turning a profit, such as tax haven countries.

Some things to consider, while considering your tax planning include:

  • Taxes are a social responsibility: While it might not always feels like it, taxes are a way to give back to the countries that have made our businesses possible. It’s our civic responsibility to give back.
  • Paying your dues: Corporations are only taxed on their profits. If there are none, there are no taxes. However, this could come about from under-reporting, or moving the profits to other regions. You probably feel it, if you’re paying too late of a rate. Do the right thing.
  • Clarity: International tax laws are notoriously convoluted. It can be hard to tell what’s ethical and what’s not. Towards this goal, the British government issued a document, the Government Anti-Avoidance Rule (GAAR). Read it to get a sense if you or your company are in compliance, or are part of the problem.

Do you have questions about international tax planning? Or about international tax laws and finances in general? If so, contact us today, to see how we can help!