Worldwide: So What Exactly Is International Tax Planning? Is This Practice Illegal?

Last Updated: 22 October 2014
Article by George Schizas

Well, as most matters on human universe have two sides 'the good and the bad', tax planning has its own good 'the tax avoidance scheme' which is perfectly legal, and the bad 'tax evasion scheme' which is illegal in terms of law.

From the beginning of 20th century many court cases took place in many industrial countries (USA, Germany, UK) and as summary the main outcome was that 'every person or a legal entity in this planet has the right and duty to take reasonable steps to protect their assets using legitimate ways'.

That said, for an investor, the key to exploit this right and avoid unnecessary cost (taxes), is to pro-actively plan and assess exposure to tax authorities. This is a recurrent process performed every time when conditions change.

The rise of internet and electronic communication push tax authorities to their limits, since more people are taking advantage of this right. Anyone may established a company in every jurisdiction around the world and exploit the tax systems in place.

There are two possible ways to own or control an assets. This can be done either directly or indirectly. For a small amount value of assets such as car is more beneficial to own the asset directly but for larger value items such as the shares in a company it would be better off if the control is exercised indirectly. The reason for this is simple, why paying 30% on capital gains on the disposal of those shares when you have the option to invest or spend that 30% somewhere else.

For example, considered that you own a house of US$1.000.000 and you want to sell it. You have to go to the land registry taxes and in addiction declare those gain to your annual tax return. On the other hand you can established a company as an intermediate and let that company being taxed on those gains or the best way is to establish two or even three entities in suitable jurisdiction and sell the shares of those companies to prospective buyers. The most important part is that you will not go again to the land registry and you have transfer the house to the new owner.

Tax regimes around the world

Every jurisdiction must made a choice on how the tax system will be function. As always a system may function either on one way or another. The one way would be a person or a legal entity would be taxed at the jurisdiction which is a tax resident on its worldwide income. Worldwide income means the net profit for example of a shop based in Netherlands of a UK company. The profits earned in Netherlands will also be taxed in UK.

The other way around is that a company would be taxed on its income if that income derived from economic activities at the place which is a tax resident. For example if a Luxembourg based company has a factory in France it will not be taxed in Luxembourg if no sales are made there.

Now, having established the first layer of tax system, the following step is to assess on what income each jurisdiction is effectively levy with tax.

There are numerous ways on how tax authorities can set-up their system to work.

As with previous example the one way is to effectively tax a specific source of income at a rate above 0%

Tax treaties

Double tax treaties are used to minimise taxes around the world and restrict the twice taxation of profits in one country and to another. The most common elements included in tax treaties are the dividends, royalties and interest income. In some cases it will beneficial to use finance a subsidiary or a group of assets using a loan agreement whereas in other cases it would be better to subscribe for share capital.

In regards to royalties, special consideration needs to be given since the importance of them are now realised even more. Most obvious example was the consideration given by the USA and an innovate policy applied to include intangible assets as part of GDP from the end of 2013.

The 21st century will position intangibles assets as a must priority for corporation. In a world where everything are going to be green, most of the information will be held in electronic form. This especially important for big corporation and that is the principle on why big companies step up the competition to acquire and protect these assets.

Bill Gates the founder of Microsoft once said that the biggest asset of a corporation are not shown in the Statement of Financial Position. This is especially true for intangibles mainly because of the complex legal framework and the difficulty to for the innovator to show back to the remaining public that he/she actually has create something.

Google is a notable example as its business model is mainly in electronic forms.

Another issue on royalties is the fair value of these patents. When a valuation is performed for intangible, the person takes into account the net amount future cash flows. This calculation also includes tax expense. Imaging trying to sell a patent and a considerable percentage of its value to be wasted due to tax, which can be minimise by an effective tax structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
George Schizas
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.