International Tax Planning
For individuals that want to grow into new countries, need cash flow for their business abroad, or manage their treasury globally, international tax planning is crucial. Also, it is required to respond to a tax authority challenge, such as one with thin capitalization.
- Outbound and inward investment transfer price structure
- international cash management
- Repatriation of dividends, funding, and currency problems
- Trade and Customs Indirect Tax
- Worldwide Employment Services
International Tax Planning
International tax planning, also known as international tax structures or expanded worldwide planning (EWP), is a component of foreign taxation designed to carry out instructions from various tax authorities. International tax planning is the art of structuring cross-border transactions with an understanding of international tax rules to achieve a tax-effective and legal routing of company activities and capital flows.
The planning process travels with the money flows in cross-border transactions as it moves from the host country where it can ultimately end to the home country.
Compared to separate tax incidence in the nations where the transaction flows, tax planning aids in lowering the overall impact of taxation. The main goal in this situation is to obtain the post-tax flows of foreign income legally, at the lowest possible cost and risk.
Domestic tax planning primarily addresses the national regulations governing tax deductions, allowances, and exemptions as well as the varying tax rates assessed on different sources of income within a single jurisdiction.
International tax planning examines the interactions between two or more tax systems, the effects of double taxation on the law and economy, as well as the requirements for tax compliance in various nations. Further issues like tax breaks and exemptions for overseas income, the accessibility of foreign tax credits, the usage of tax treaties, and anti-avoidance measures are also involved.
What is Meant by International Tax Planning?
International tax planning examines the interactions between two or more tax systems, the effects of economic and legal double taxation, as well as the standards for tax compliance in various nations. It also encompasses several additional issues, like tax breaks and exemptions for income earned abroad, accessibility of international tax credits, application of tax conventions, and anti-avoidance measures.
What is the Need for International Tax Planning?
Tax is not the main or deciding factor when deciding whether to invest or conduct business abroad. These choices are typically based on variables including market accessibility, resource availability, business viability, and market potential. Other considerations include corporate infrastructure, geographic location, the availability of skilled and reasonably priced labour, political and economic stability, government subsidies and incentives, and stable currency. Economic, commercial, even social and political aspects are used to guide the judgements.
After choosing, though, the tax issue becomes a crucial factor for the firm. The tax rate on business profits is a key consideration for many multinationals when choosing the nation in which to launch their enterprise. The availability of treaties and the standard of tax administration are two further major difficulties. These elements have an impact on the company’s long-term financial stability and the final investment return.
Cross-border activities typically have a higher global tax liability than domestic or single-country transactions. They have to pay taxes in several places. Also, taxpayers must deal with erratic tax rules, unreliable tax officials, and excessive rates in different jurisdictions.
Hence, in order to minimise misrepresentation brought on by a lack of harmonisation in home tax systems, adequate tax planning is crucial in international commerce. It will suffer from excessive tax payments and increased tax compliance costs in the absence of appropriate international tax planning.
Impact on Cross-Border Transactions in International Tax Planning.
The following are some examples of tax impact levels on international transactions:
- Source or Host Country
Taxes must be paid in either the country of origin or the country of residence on income obtained through foreign subsidiaries or branches, as well as withholding taxes on payments made by them.
- Intermediary Country
In a country serving as an intermediary, taxes must be paid on foreign revenue as well as withholding taxes on the return of capital or profits to the country of origin.
- Residence or Home Country
In a residence or home country, the taxes are payable on the profits and the capital received at home, and sometimes even if it is not received from the organizations in the other countries.
What are the Opportunities for International Tax Planning?
At every level, there is the potential for international tax planning. For illustration:
The taxation in the Source Country can be reduced by way of:
Local tax planning maximises the tax benefits provided by domestic legislation and tax treaties, including tax deductions, tax losses, incentives, and personal tax concessions.
Tax exemptions from the corresponding tax breaks with the source or the residence state (or both).
utilising a variety of tax planning strategies to make sure that the taxable gains are generated outside of the country.
the application of new planning strategies and tax treaties to lower withheld taxes or secure tax exemption.
Selecting the right legal structure and finance method (debt or equity).
The Intermediary Country Taxation on the remitted Income Flows can be Reduced Through:
- reducing the withholding taxes in the host country through tax treaties.
- choosing the right offshore financial institutions to reduce or completely eliminate corporate and withholding taxes.
- Tax arbitrage by altering the nature or character of payments paid to the nation of origin.
- Using different tax breaks, such as the participation exemption and European Community Directives.
- maintaining cash overseas for international reinvestment or obtaining tax deferral on transfers made to the country of origin.
- The Taxation on Profits that are Repatriated to the Home Country may be Reduced Through:
- utilising multinational corporate structures properly to avoid, minimise, or postpone tax liabilities.
- making the most effective use of any relevant overseas tax credits and exemptions to lower domestic tax obligations.
- International tax planning has countless possibilities. They are based on a number of strategies to reduce, remove, or postpone the tax burden after taking into account the transaction costs, management systems, and company hazards. Across the entire transaction flow, from the source to the final destination, they seek to lower the foreign tax liabilities and raise the total income after taxes.
What are the methods of International Tax Planning?
Taxable income is multiplied by the tax rate to determine the amount of tax due; a decrease in either of the two variables lowers the amount of tax due.
The majority of current techniques for foreign tax planning are based on the following ideas:
- The Review of the Tax Provisions and Compliance Rules under the Domestic Law
The first step in any overseas tax planning is to become familiar with local tax laws and procedures. Who must pay taxes and how to pay taxes are determined solely by domestic law and custom. Tax treaties are unable to increase the tax base or in general specify how to calculate it.
- The Reduction of Pre-tax Profits through Deductible Expenses
In order to promote savings, encourage investment, and address other social and political factors, the domestic law of many countries includes additional tax deductions and exemptions. Using tax credits wisely can lower one’s tax burden.
- The use of Special Tax Concessions for Foreign Capital technology
Many nations offer unique tax breaks for international investment and technological advancement. To entice them, the host nations may offer advantages like tax holidays or the usage of tax-free zones for export. Many of these tax breaks are exclusively available to non-residents.
- The optimal use of the Tax Loss Carry-Overs
Tax planning can assist in maximising the utilisation of tax losses, which are benefits that can be claimed at a later date. Many nations permit carrying forward losses for predetermined periods to offset future profits. Some of them allow losses to be carried back. Companies are allowed to net their taxable earnings and losses in a number of countries according to the tax consolidation regulations.
- The Provision of Special Deductions or Exemptions to Qualifying Dividends
Many nations offer partial or whole exemptions for foreign dividends under the dividend-deduction or participation exemption laws. Indirect credits for domestic dividends or the underlying international taxes paid by the subsidiaries may also provide relief.
- The Tax Deferral of Foreign Profits
Delaying taxes results in tax savings in terms of both time and cost. The establishment, use of various legal entities, and accounting periods of the intermediary firms may be used to achieve the postponement.
Checklist of International Tax Planning
Analysis of Existing Database
establishing the facts and relevant tax and non-tax considerations.
Examine the transaction in detail with the host nation.
examining each jurisdiction’s domestic law and tax treaties.
Calculate the other costs and the tax obligation.
Cost-benefit analysis should be done.
Design of Tax Planning Options
introduce global or multilateral tax planning.
deciding on the best international intermediary nations.
Choose the type of relationship, transaction, or operation,
Investigate pertinent non-tax elements.
examining whether advance rulings are available
Make a list of all the possibilities for tax planning.
Evaluate the Plan
If: The proposal has not been adopted, ascertain the non-tax costs and tax savings.
The strategy is implemented and works.
The chosen plan’s failure.
calculating the overall expenditures for the host and the residence.
choosing the optimal tax strategy
Debug the Plan
acquiring local tax law and practise advice.
getting advance decisions wherever possible.
Verify whether treaties and protocols are applicable.
Check to see if the groups are legitimate in the jurisdictions.
Look at how the anti-avoidance rules are being followed.
Analyzing any substantial risks or drawbacks.
Assessment of expenses and long-term advantages.
Update the Plan
Review of alterations to tax laws, treaties, and procedures on a regular basis.
Adjust the plan as necessary.
How to Reach Enterslice?
Frequently Asked Questions
What is international tax planning?
Expanded worldwide planning (EWP), often known as international tax planning, is a component of international taxation that was created to carry out orders from various tax authorities.
Can there be difficulties in the implementation of the domestic law rules?
The model domestic laws are intended to work in harmony with the laws in other jurisdictions. In order to demonstrate how the regulations must be applied, examples and advice are now provided to support the suggestions. Without further action from the tax office, the regulations will automatically apply to the taxpayers and arrangements once they are put into place.
Do taxpayers need to disclose their tax planning arrangements?
The taxpayer is not required to reveal their tax planning strategies. Disclosure of the regime that all transactions involve avoidance is required. The transactions that fit within the given descriptions must be disclosed by the taxpayers.
How does the IRS know about foreign income?
The Foreign Account Tax Compliance Act, or FATCA, is one of the primary ways that the IRS learns about unreported foreign income. FATCA states that more than 300,000 FFIs (Foreign Financial Institutions) actively disclose account holder information to the IRS from more than 110 countries.
What is Country-by-Country reporting?
The goal of Country-by-Country Reports is to give tax authorities the ability to analyse high-level risks associated with transfer pricing and other BEPS-related issues. Multinational companies (MNEs) are required to submit the country-by-country reporting template every year. aggregate data relating to the global allocation of the MNE’s income and taxes paid jointly for each country in which they operate.
Can the Country-by-Country information be used to issue a transfer pricing assessment?
No, a comprehensive transfer pricing analysis of individual transactions and prices based on a completely functional analysis and a fully comparable analysis should not be substituted with the information from the country-by-country report. The data in the country-by-country analysis does not, on its own, provide clear proof of the appropriateness or otherwise of transfer prices. Tax administrations should specifically refrain from using the data to suggest adjustments based on an income allocation formula.