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The Process of International Tax Planning

in Tax

It’s human nature to look for advantages. Businessmen as well look around to see which states offer advantageous conditions for businesses, they relocate functions and take advantage of tax treaties, they invest where the authorities are less strict and they consider alternatives when there are too many rules and taxes.

If state A offers many advantages but demands high taxes and state B offers few advantages and demands low taxes, then it makes sense to receive the advantages in state A and pay taxes in state B. However, high taxes do not automatically mean high benefits, many countries need money to pay off old debts, other countries pay large parts of the budgets for social transfers to people who can work but are unwilling to work, while the economy hires migrants to meet the demand.

Hierarchy in tax law

National tax law

It takes into account the taxation of international transactions.

Double Taxation Agreements (DTAs)

DTAs are bilateral agreements that limit the taxation rights of the contracting states. This limitation depends on whether the DTA is applicable, how the DTA defines residence and permanent establishment (tie-breaker rule: is stronger than the national definition) and how the states define the taxation rights for different types of income.

Multilateral agreements

These agreements usually refer to a few areas for a group of agreement states. For example, the EU Directives (Merger Directive, Parent-Subsidiary Directive, Savings Taxation Directive).

Fundamentals of international tax planning

Normally, active income (wages, corporate profits) is taxed in the source State, while income from short employment and passive income such as dividends, interest and royalties are taxed in the State of residence, although there may be a withholding tax in the other State.

International tax planning involves steps to maximise total net income, including not only tax rates but also regulations, costs of change, structural costs and the tax base.

The possibilities offered by the laws of different countries can be combined to create models that result in higher overall benefits. Such models may involve, for example, the application of double taxation treaty provisions, but also differences in company law or national tax laws.

International tax planning process

This is how the tax planning process works:

  • Definition of the existing business processes, the relevant tax subjects (who pays tax) and tax objects (what tax is paid for), the tax bases and tax rates;
  • Possible scenarios, including the relocation of functions:

> To benefit from more liberal rules;

> To take advantage of lower-wage levels;

> To reduce the tax base (allowed deductions and exceptions);

> To take advantage of low tax rates;

> A holistic approach should be applied when planning changes.

  • Testing of alternatives;
  • Non-tax issues:

> Relocation costs and structural costs;

> Audit and publicity requirements;

> Labour law and work permits;

> Authorisations;

> Legal enforceability of contractual agreements;

> Asset protection;

> Marketing considerations (proximity to customers, language);

> Costs and availability of personnel;

> Differences in legal structures and their qualification across borders: hybrid instruments can be used to create deductible costs in one country that arrive in another country as tax-free income.

  • Taxes and social security contributions:

> Profit tax;

> Taxation of profit withdrawals;

> Withholding tax;

> Social security contributions on employed and self-employed income;

> Taxation of investment income;

> Inheritance tax;

> Real Estate Taxation;

> Value-added tax;

> An attitude of the tax authorities;

> Reliable publications of the tax authorities and possibilities of tax ruling;

> Degree of centralisation and service level of the tax authorities;

  • Recommendation, taking into account objective criteria and subjective preferences.

This process of tax planning and structure planning is the first step and is carried out before the company is established in the appropriate location.

The implementation

Tax planning options require real implementation including good documentation. It is not the model, but the implementation is the real success factor.

Furthermore, professional support also concerns the increase in turnover and profit.

In any case, everything has to be worthwhile for you – and that is when all costs including your time expenditure are offset against the advantage.

How do I pay less taxes?

If you want to save taxes, you need tax advice that will enable you to find the best way to save taxes and increase your profits. GMTax Consultancy, financial and tax consultants, will investigate your case to provide you with the best tax planning. Contact us by email or phone.