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International tax planning

Business is getting increasingly international today. With transnational corporations on the scene for quite a long time, more and more medium- and even small-sized businesses are coming to the international arena in our age of globalization and the Internet. Once there, they find out that not only natural, labor and financial resources vary substantially from country to country but their tax systems as well, sometimes quite dramatically. And the difference lies not only in tax rates, but the principles of tax administration.

In international commerce, tax issues are governed by national legislations as well international treaties concluded between individual countries.

In designing its operations, international business, doubtless, takes into account different countries’ attractiveness in terms of taxes. Moreover, sometimes tax considerations play a decisive role in selecting the venue for a company’s various units to operate in.

Sometimes, a corporation may completely re-design its international structure on the basis of tax considerations. This constitutes international tax planning, that is lawful activity to minimize taxes in international business.

Obviously, to design a tax-wise optimal international business structure, companies need to have an in-depth knowledge of corporate and tax legislation in different jurisdictions and provisions of international tax treaties.

Obviously, companies registered in different countries are a key element in designing corporate structures. Those operating in tax-free or low-tax-rates zones may be used to reduce the tax burden, for example, off-shore companies or those enjoying tax concessions in ‘regular’ countries. There is a variety of ways to minimize taxes in international business. The simplest way to use an off-shore company in trade is to transact import and export operations through it. Regulating the contract price, the company owner will thus regulate the tax and charges amounts. This is called transfer pricing.

Many at the grassroots level believe that an ’offshore company’ and ‘money laundering’ are almost synonymous. In fact, an off-shore, (like a ‘regular’) company is just an instrument to achieve lawful or, regrettably, illegal aims, like, for example, a hammer. A clear distinction should be made between tax planning and tax evasion.

Tax planning is a tax minimization activity which does not contradict law while tax evasion constitutes a violation of law and a criminal offence in serious instances. It is even worse when tax evasion is accompanied by other offences, especially money laundering (a different type of criminal offence) which has nothing to do with tax planning.

However, due to the dubious nature of the legal provisions, the border line between tax planning and tax evasion may sometimes be vague. And observing this borderline to comply with law is a top priority in all tax planning efforts. Only qualified experts should design tax schemes to ensure both their efficiency and legal compliance.