O F FSH O R E PL A NNIN G C H E C K L ISTS D A T A B ASE F O R IN T E RN A T I O N A L TA X A ND O F FSH O R E PL A NNIN G TA X PL AN N IN G Tax planning is the process of taking into consideration all relevant tax factors, in the light of the material non-tax factors, for the purpose of determining whether (and if so), when, how, and with whom to enter into and conduct transactions, operations, and relationships, with the object of keeping the tax burden falling on taxable events and persons as low as possible while attaining the desired business, personal, and other objectives. O F FSH OR E AN D IN TER N A TI ON A L T A X PL AN N IN G Offshore tax planning is tax planning in which factors involving more than one country are included in the original database and an offshore element is introduced as an extension of domestic tax planning. THE TERM O F F SHOR E The term offshore applies to countries or transactions: where there are no relevant taxes; Page 1 of 8
where taxes are levied only on internal taxable events, but not at all, or at low rates, on profits from foreign sources; or where special tax privileges are granted to certain types of taxable persons or events (such special tax privileges may be accorded by the domestic internal tax system or may derive from a combination of domestic and treaty provisions). D A TA B ASE R E QU IR ED F OR TH E D ESI GN O F AN O F FSH OR E TA X PL AN The facts Tax factors Non-tax factors TH E FA C TS The particular situation of a taxpayer and the business and other objectives vary from case to case. It is obviously not possible to draw up a correct offshore tax plan without a comprehensive and accurate briefing on the facts. Note: Bad briefing results partly from the lack of awareness that it is possible to take into account all possible solutions to a problem and avoid pitfalls only with access to the full and accurate database containing all the material facts. TA X FA C T ORS In analysing the tax factors of an international tax plan, it is necessary to examine: the domestic internal tax systems of the countries involved in the project; and the manner in which the general rules embodied in such systems are affected by the introduction of the offshore factor. Notet: Given the wide differences in the types of offshore jurisdictions, it should not be assumed that offshore taxes may be ignored. On the contrary, there are a number of classes of direct and indirect taxes and duties that may be encountered offshore. N ON-TA X F A C T ORS Non-tax factors may also have to be taken into consideration for the purposes of a proposed offshore tax plan. These can be every bit as important as the tax factors. Page 2 of 8
Caveat: The tax tail must never be allowed to wag the business dog. B R EA K IN G TH E C ON N EC TIN G F A C TOR Liability to tax is dependent upon the existence of a connecting factor between a taxing jurisdiction on the one hand and a taxpayer or taxable event on the other. The most effective offshore tax plans derive from the ability to sever the nexus or connecting factor with a taxing country in favour of an offshore country or to rearrange the connecting factors in such a way that a lower overall tax burden is suffered. TH E R E LA TI ONSHI P O F T H E T A X PA Y ER T O O TH ER PERSONS The relationship of the parties may determine whether an item is included in the taxable base. It may also affect the rate of tax. The key issue is frequently the controlled foreign company (or corporation) issue, where domestic shareholders may be taxed on the income of a foreign company. Caveat: In most tax systems and tax treaties, special provisions govern parent and subsidiary or otherwise associated companies, as variously defined. There are considerable differences encountered in the definitional content of the term holding company. TA X IN C EN TIV ES IN IN T ER N A TI ON A L TA X PLAN N IN G AN D O F FS H OR E STR A T E GIES Nearly all countries grant tax incentives of some kind as part of their general or regional economic development programs. Tax incentives are tax concessions that are granted to attract local or foreign investment capital to particular activities or areas. Tax incentives may convert otherwise high tax countries into limited purpose tax havens. Caveat: Tax incentives in high tax countries are in the firing line of the international measures to combat harmful tax competition. AN TI- A V OID AN C E As a general principle, there is no obligation, either morally or legally, to suffer a heavier tax burden than is necessarily attendant upon a given taxable event. Caveat: Even though a taxpayer may stay within the letter of the law, there is usually a limit to the tax minimization steps that he may take. Most tax systems contain some general or Page 3 of 8
specific anti-avoidance provisions. The substance versus form rule enables the revenue to disregard appearances and to rewrite transactions so as to reflect the true situation. Sometimes loopholes in anti-avoidance provisions offer comparatively simple solutions to tax problems. Caveat: These loopholes are frequently plugged as soon as the tax authorities become aware of their potential for abuse, and most anti-avoidance provisions become progressively more comprehensive as taxpayers grow more ingenious. Offshore counters to anti-avoidance provisions are structures whereby the taxpayer s affairs are arranged in such a way that, as far as possible, they do not fall within the taxing net. Note: This general principle is, however, being narrowed considerably by the international measures to combat harmful tax practices. FOR E IGN C UR R EN C Y G A INS AN D LOSSES IN O F FSH OR E TR ANSA C TI ONS Frequently, offshore transactions are conducted in whole or in part in foreign currency. The translation of foreign currency into the domestic currency may follow various methods (e.g., the profit and loss method, the net worth method, or the transaction method). In the case of an intermittent user of foreign currency, the transaction method deals with each foreign transaction separately and computes the domestic income at the appropriate exchange rate for that transaction. Caveat: The tax laws of different countries must be applied against the background of foreign exchange markets. T YPES O F TA X ES EN C O UN T ER ED IN F OR EI GN C O UN TR I ES Individual and corporate income taxes Capital gains taxes Special taxes on dividends, interest, and royalties Withholding taxes on salaries, dividends, interest, royalties, etc. Capital taxes (e.g., property, patrimony, net worth taxes, etc.) imposed on individuals and companies Payroll taxes Company duties Business taxes Business license and other trade taxes Stamp duties Page 4 of 8
Transfer duties Registration duties Customs duties and other import and export duties Sales and use taxes Turnover taxes on value added Capital transfer taxes Estate and inheritance taxes Gift taxes TA X C ON N EC TIN G FA C TORS (N E XUS) Residence Ordinary residence Domicile Citizenship (nationality) Management and control Beneficial ownership Place of incorporation Location of the registered office Place of management and control Place of creation of a trust, the applicable law, residence of the trustees or beneficiaries Centre of economic interests Permanent establishment, Effectively connected income Real or deemed source C O M M ON D OM AINS FOR T A X AN D N ON-TA X IN C EN TI V ES Exports Export-related services Technical services including construction, distribution, design, and engineering services Consultancy, management, supervisory, or advisory services relating to any technical matter or to any trade or business Fabrication of machinery and equipment and procurement of materials, components, and equipment Page 5 of 8
Data processing, programming, computer software development, telecommunications, and other computer services Professional services including accounting, legal, medical, and architectural services Educational and training services Technopark Freeport Warehousing and servicing incentives Operational headquarters Management companies Administrative offices The exporting of manufactured goods by a special trading house where the goods are sold by wholesale Repair and maintenance of aircraft and aircraft engines or components Film production Meat processing Remanufacture and repair of computer equipment of subassemblies Defined processes or series of defined processes applied to material acquired in bulk The alteration of articles without changing their character Refurbishment of articles Financial and banking facilities Reductions in corporation tax Foreign currency transactions normally provided by banks International financial activities including global money management, insurance, and related activities and dealings in foreign currencies, options, and similar financial assets Services or facilities for processing, control, accounting, communication, clearing, settlement, or information storage in relation to financial activities; The development and supply of computer software for use in the provision of the services or facilities referred to above or for reprocessing and analysing information on financial activities; Dealing in commodity futures or commodity options on behalf of unconnected persons who are not themselves involved in commodity trading; Trading operations similar or ancillary to any of the above and that contribute to the use of the area as an international financial services centre; Life assurance business with policyholders and annuitants abroad; and Management of the investments of unit trusts Cash grants and other incentives for industrial development Page 6 of 8
Machinery and plant Training of local staff Regional development grants Export sales relief Design and planning services carried out on behalf of non-resident persons in connection with a variety of projects such as chemical, civil, electrical, or mechanical engineering works, carried on abroad Shipping Gold transactions Financial futures transactions Export credit guarantees Pioneer industries Investment allowances Expansion of Established Enterprises Free zones and free ports Venture capital incentives Research and development Patents Urban renewal incentives Joint ventures Film production Capital assistance scheme Operational headquarters Tax shelters D UE D ILI G EN C E A PPLI ED T O T A X AN D N ON-TA X IN C EN TI V ES Are the reasons that influenced the government to introduce the concessions (usually the underdevelopment of the area) likely to constitute a disadvantage with regard to the proposed investment? If the absence of good communications was the principal reason why the region became backward in the first place, has there been an improvement in the situation, or, if not, would this constitute a disadvantage if the incentive were to be used for the purposes of the project under consideration? Is there any likelihood of nationalisation or other political or economic risk attendant upon investment in the incentive area? Page 7 of 8
Are there any exchange controls, and, if so, are there any guarantees with regard to the repatriation of profits and investment capital under the incentive scheme? Are there any special difficulties affecting foreign controlled enterprises? Are there any strings attached to the grant of the concession that may subsequently prove to be a disadvantage? EX C H AN G ES O F IN F OR M A TION The principal formal exchange of information mechanism is the tax treaty. Most tax treaties contain an article providing for the exchange of information between the competent authorities. Frequently, too, provision is made for the contracting states to render to each other administrative and legal assistance in connection with the assessment and collection of taxes. Though no statistics are available, it may be assumed that informal exchanges of information between the administrations are on the increase. FOR M S O F EX C H AN G ES O F IN F OR M A TION Treaty provisions for formal exchanges of information Lack of secrecy of information Compliance steps Informal exchanges of information Mutual assistance Extended scope of exchanges of information Anti-tax avoidance co-operation Anti-tax evasion co-operation Anti-money laundering co-operation Prevention of organized crimes Page 8 of 8