International tax planning – its essence and definition
International tax planning involves conception and implementation of such solutions in economic and entrepreneurial activities, which enable to reduce the existing tax levies. It should be noted that tax planning is an important aspect in the general financing activities of the company or enterprise. In fact, tax planning is the working out the set of measures, which reduce the tax liability within the framework of the existing legislation. Various mechanisms and tools can be used for tax optimization. Naturally, minimization of the tax liability may not be carried out to the detriment of profitability of the company. For this reason, effective tax planning implies optimization of the tax base.
Choosing the most appropriate system of state taxation is among the main tasks, which are intended to be solved via tax planning. As a rule, choosing a favorable taxation regime provides available opportunities for tax optimization within the fiscal legislation of the country.
It is recognized to division types and classifications of schemes of taxation not only on the temporary basis (periodicity), but also on the basis of area of implementation.
The following tools can be singled out among the most popular and fundamental tools of taxation planning:
- Monitoring and analysis of the current tax legislation for the proper use of special preferential taxation schemes;
- Optimal choice of legal status and form of legal entity;
- Carrying out the revaluation of the major assets of the company or enterprise;
- Optimal choice of the market for entrepreneurial activity and jurisdiction for company incorporation.
It is important to understand that the proper tax planning is the optimization of the tax base in accordance with the applicable law, and the submitting of the appropriate tax reporting to the fiscal authorities.
As to the international tax planning, it can be noted that, in addition to the abovementioned points, there is an opportunity to choose a jurisdiction with a loyal tax climate and availability of preferential taxation schemes.
Advantages and opportunities of international tax planning
It is necessary to single out the following opportunities among the main advantages of tax planning at the international level:
- Choosing a jurisdiction which is relatively stable in the economic and political terms;
- Possibilities to optimize the taxable base in some industries and sectors;
- Simplified regulations of company registration and subsequent financial reporting;
- Preferential access to the international financial market.
At the same time, for the efficient, and what is most important – economically feasible tax planning, it is important to consider a number of the objective factors, among which there are:
- Structural components of the company – the number of shareholders, the presence of resident status for the owners, the confidentiality of information, etc.;
- Limitations related to the absence of the resident status – the amount of the authorized capital, licensed types of activity, types of securities, etc.;
- Current tax law – ability to use zero or preferential tax treatment;
- Opportunities for international planning –presence of bilateral state agreements aimed at avoiding double taxation;
- Conditions for business relocation or transfer the financial assets – availability of the infrastructure which is required for transferring business and restrictions on the withdrawal of assets.
Tax optimization and reducing of the existing tax level can be achieved via:
- Reduction of the taxable base;
- Using preferential tax rates;
- Obtaining the status of a tax resident for using the investment incentives;
- Registration of business in the specialized trade zones (tax and customs privileges).
The modern practice is prepared to offer business a wide range of tools which allow optimizing the taxable base at the international level. The following methods of optimization are the most popular among them:
- Carrying out entrepreneurial and economic activities in the jurisdictions, which provide preferential terms of taxation (tax havens and trade zones);
- Investment activity on the territory of the countries, which provide preferential or zero taxation, including taxation of the source of payments, interests, royalties, dividends , etc.;
- Usage of the jurisdictions, which provide advantages for different operations (insurance and financial transactions, shipping and construction, tourism and small business);
- Obtaining a residential status for participation in international agreements aimed at avoiding double taxation;
- Distribution of the gained income and applying the optimized pricing in the territory of countries with a comfortable tax climate.
It should be noted that the United Arab Emirates, according to all the specified parameters, are the ideal jurisdiction for effective international tax planning. In this country all these methods and tools, which make the business profitable and competitive on both local and international market, are perfectly combined.
Specialized free trade zones as the reliable solution
Registration of the company or enterprise in the specialized free trade zones are the most typical solution for the optimization of the taxable base. A special economic status, which suggests a special system of calculation and payment of the provided tax payments, operates on the territory of such free zones.
In fact, a special economic free zone is special area within the country, where there is a preferential tax regime for companies and enterprises which are involved in local and foreign investment projects. Such free zones, in addition to attracting direct investment into the national economy, provide a set of other functions for business development. In particular, these are: improvement and development of the export potential and the introduction of the advanced developments and technologies, as well as management and business experience.
In the current international practice, there are more than fifty countries, which provide a preferential tax treatment for the foreign investors. Such countries offer both possibilities - minimal tax rates or complete absence of the taxation as such. A zero tax rate, in the most cases, is envisaged for the offshore formations, trusts and international companies. Such entities operate outside the jurisdiction, and accordingly are not taxed.
The jurisdiction of the United Arab Emirates, where the tax incentives are provided not only for the offshore, but also for the onshore companies, can be singled out as the exception. The most various International and local companies can count on the customs privileges and fiscal incentives in the jurisdiction of the United Arab Emirates.
Choosing the legal jurisdiction – how not to make mistake
Even the most experienced experts cannot give a definite answer to this question. The fact is that everything depends directly on each particularly case. The goals which are set by the entrepreneur, while creating a company, largely affect the choice of the appropriate jurisdiction. You should understand the main differences and possibilities of the various legal jurisdictions for taking a correct decision for tax planning. It is accepted to distinguish several basic types of legal jurisdictions, depending on the methods of optimization and protection of the investment assets, in particular they are:
- Classic offshore jurisdictions – offshore companies, in the territory of such countries, are exempted from taxation, as they do not conduct any economic activities within the country. Typically, traditional offshore areas provide simplified form of registration and financial reporting, and annual fixed fee is paid instead of taxes. Small island countries prevail among the traditional offshores. Among them there are the British Virgin Islands, Seychelles, Bahamas, Belize, Panama, Mauritius, Nevis and the Marshall Islands;
- Jurisdiction with a preferential tax regime – a preferential tax regime is often provided for certain types and forms of companies. It can be international companies with no tax resident status, but which are obliged to maintain tax and financial records. The United Arab Emirates, Liechtenstein, Hong Kong, Sweden and Luxembourg can serve as an example of such jurisdictions for tax planning;
- Jurisdictions with the status of the respectable territories with certain benefits – the tax incentives are provided for the companies that meet high requirements and do not come under the status of the offshore formations. Such jurisdictions are mostly used for providing business with a high status and for developing the markets of the developed countries. The Great Britain, the Netherlands and Switzerland can serve as an example of such jurisdictions.
Proceeding from the requirements to the financial and tax reporting, taxation schemes and the terms of its further administration, one can say that there is a great variety of jurisdictions, both offshore and onshore. That’s why the area of business, its characteristic features and specifics are of a key importance when choosing a legal jurisdiction for a company registration. The optimal solution for tax planning can be used both for optimization of the overall business activities of the company and for the optimization of tax payments for a single transaction.
Among the traditional factors which influence the choice of the appropriate legal jurisdiction, there are the following conditions:
- Cost of registration of the company and its subsequent administration;
- Registration procedure (conditions and time costs);
- Image of the country in political and economic terms;
- Availability of the well-developed banking and financial infrastructure.
In this respect, the legal jurisdiction of the United Arab Emirates remains the most optimal for the most various types of entrepreneurial activities. International tax optimization is the ability to increase the profitability of the company or enterprise in UAE via reducing tax payments and applying other business benefits available.