Tag Archives: tax havens

The Busiest Tax Havens

In a recovering economy revenues might be on the rise, but profits are still the key to success.  Global structuring continues to hold its place as a one method of increasing profits.  U.S. tech companies implement the most aggressive global structuring position.  Tech companies, in particular, can easily operate across borders, locating the head office in low tax jurisdictions.  According to the Organization for Economic Cooperation and Development (OECD), 37 of the top 50 U.S. tech companies use a global structure that effectively realizes greater profits in countries with lower than average corporate tax rates.

Both low tax jurisdictions and no-tax jurisdictions can be considered tax havens.  Surprisingly, low tax jurisdictions often result in a lower combined corporate tax rate than, no-tax or zero tax jurisdictions.  The busiest tax havens currently are Ireland, Switzerland and the Netherlands.  I predict this will change, perhaps before the end of 2014, but more likely significant changes are at least five years out.  One reason for the change will be plans by the OECD to redefine the “permanent establishment” concept.  It is expected that any revision of the attribution of profits rules including permanent establishment will impact other areas of global structuring, including transfer pricing.

So will no-tax jurisdictions, the true “offshore” countries create competition for low tax jurisdictions?  The answer is “yes.”  Tax free jurisdictions will gain in popularity as low tax jurisdictions are forced to adopt the changes the OECD has in mind.  International companies will once again tweak their structures to reduce overall tax burdens.  Tax free jurisdictions tend to have a lower population and lower tax base.  These jurisdictions need to attract business to create jobs and boost their economy, which can be accomplished without imposing income tax liability.

Need assistance with your global structuring?  Contact me at wkcantab@cantab.net


Top Five Considerations When Structuring Your International Business.

Moving into foreign markets can be costly, but expansion can be very profitable and necessary. With astute planning your business can avoid pitfalls that will undermine the overall economy brought by the structure.  Be prepared to examine all possibilities.  Think long term, how will the business grow over time, what markets will be the most profitable, then make informed and considered decisions. 

1.  Tax Havens vs. High-Tax Jurisdictions
While it might seem logical that inclusion of corporate entities, in your overall structure, in countries that impose no income tax can achieve the greatest tax economy, it is not necessarily true.  Using high tax jurisdictions with a network of treaties can often achieve better results.  The use of tax-effective structures in, for example, European countries and effective use of tax optimization principles, including correct transfer-pricing, group taxation regimes and hybrid structures, all of which are not deemed as tax avoidance or abuse of treaty rules in their host countries can provide for an overall more efficient structure.  This is true even considering the costs of creating such a structure.

2.  Anti-Avoidance Rules
Avoidance and/or minimization of taxation is of growing importance to many jurisdictions.  To address this concern many countries have enacted anti-avoidance rules, designed to prevent taxpayers from creating business structures with no purpose other than obtaining tax benefits.  Anti-avoidance rules generally deny tax benefits, including expensed deductions, tax credits, exemptions, and lower tax rates, if the transfers are made through a network of companies with no connection to the business activity of the taxpayer.  The underlying transaction being deemed artificial with no commercial goal or purpose.  Carefully consider implementation of a business structure from the standpoint of its connection with the business activity of the taxpayer and the existence of a commercial purpose.

3. Transfer Pricing
The transfer price is the price at which related companies transact business with each other, including the supply of services, supplies, product or labor.  Transfer pricing is a valuable tool for cross-border tax planning. Tax authorities worldwide carefully scrutinize transfer prices between related companies more than any other pricing arrangements.  Many countries allow related companies to set prices for transactions between them in any manner, but to the extent those prices are not equivalent to an amount an unrelated third party would charge for the same or similar services, the tax authorities adjust the transfer price and may impose penalties.

4. VAT
Value-Added Tax (VAT) and any other sales and/or use tax is complex and challenging and can result in significant, and often, unrecoverable costs.  In planning a business structure in addition to the general scope of VAT aspects, take into account VAT treatment of supply of goods and services in both the supplier and customer’s country.  Avoid structures which result in VAT payable both in supplier’s and customer’s country of residence, and whether there is any VAT credit.  The VAT liability for online transactions is still in flux, changes in legislation regarding whether the delivery of services or intangible property delivered over the Internet is VAT-able in countries where the vendor has no Permanent Establishment much be watched closely.

5. Permanent Establishment
Once a business has created a physical presence (“Permanent Establishment”) in a particular jurisdiction it is subject to income tax in that jurisdiction.  A Permanent Establishment will be found where there is a fixed place of business.  A number of countries have determined that a single server owned by a company and located that jurisdiction creates that taxable presence.  Thus, if having a server in that country is desirable, consider leasing a server or using a local service provider.  The risks of recognition of PE have significantly increased since the introduction of new rules regarding agency and service PEs.   Such rules have not yet been tested and create uncertainty.