Transcript Document

STRATEGIC TAX PLANNING FOR
GLOBAL COMMERCE & INVESTMENT
Presented by : Iván Sotomayor, CPA, MBA
Planning
Agenda
Topic 1
Cross Border Tax Planning Strategies
Topic 2
Benchmarking and Tax Rate Drivers
Topic 3
Developing a Tax Planning Strategy
Topic 4
Tax Evasion / Tax Avoidance and Tax Planning
Global Taxation
Cross-Border Tax Planning
Globalization and its impact on Tax Planning
1. Expansion of Markets
Globalization has been defined as the
tendency of business to move beyond
domestic and national markets to
other markets around the globe,
thereby, increasing the
interconnectedness of different
markets
Most companies evolve and grow
along at least two dimensions:
1. Product/service expansion
(enabled by strategic investment)
2. Geographic market expansion
beyond national borders
Certain trends, such as the
movement of capital and labor, the
shift of the manufacturing base
from high to low cost and, the
gradual removal of trade barriers,
which along with more subtle
ones, such as organizational
changes, the globalization of
branding and the ever increasing
importance of developing,
protecting and exploiting
intellectual property (IP), are
having an impact on the way
multinational enterprises (MNEs)
are structured and managed
Globalization and its impact on Tax Planning
2. Global Effective Tax Rate (ETR)
Globalization has caused operational
models to evolve, has made tax
planning more complex and has
created a need to better align tax
strategy and planning with corporate
strategy and operations.
Thus, management responsible for
overall corporate strategy must be
able to understand relevant tax
concepts and draw out the business
implications.
In todays business environment,
management needs to anticipate
change and address business
issues globally.
This include for a global tax
strategy that is integral to
corporate strategy and tax
planning that is better aligned
with:
1. Operations and,
2. Aimed at achieving and
sustaining a lower worldwide
effective tax rate (ETR)
Domestic Tax Rules
Source of Income
Double Taxation
Worldwide vs.
Territorial
Resident vs.
non-resident
Sources of Cross-Border Tax Principles
Domestic Tax Rules
The right to tax the income of an enterprise is generally based on a factor
that determines its connection to a jurisdiction through:
• Incorporation or,
• Effective management
This type of tax is commonly referred to as:
• Residency Jurisdiction and it typically includes the right to tax the
worldwide income of the person resident in that jurisdiction
• In addition the country may base its right to tax on the source of
income within its territory
Cross-Border Tax
Principles
Taxation Systems
Worldwide Taxation
A worldwide system subjects to
tax:
• Its residents on their worldwide
income derived from sources
within and outside its territory
and,
• Non-residents only on the income
derived from its territory
Territorial Taxation
•
A territorial system subjects
to tax residents and nonresidents only on the income
derived from sources located
in its territory
•
All income derived from
sources outside of its
jurisdiction is disregarded
Cross-Border Tax
Planning
Jurisdictions-Taxation Systems
Taxation System
Applicable to
Examples
Territorial
Taxation only of in-country income
Hong Kong, Panama,
Dominican Republic, Denmark,
France
Residency
Taxation of all income of residents. Residents on
worldwide income and non-residents on incountry income
USA, UK, Canada, Switzerland,
Belgium, Germany, Italy
Exclusion
Specific exclusion of certain amounts, classes, or
items of income in/from the tax base of taxation
Cyprus, Netherlands, Spain
Hybrid
Some countries have chosen, for all certain
classes of taxpayers, to adopt systems that are a
combination of territorial, residency, or
exclusionary
•
•
USA allows $80,000
personal exclusion for
expatriates
UK imposes a tax to
“resident but not ordinary
resident” in the UK based
on income earned or
Resident vs. Non-resident
 The concept of residency for tax purposes becomes crucial in a
system of worldwide taxation
 With regards to companies, countries generally use
two sets of criteria to determine residency:
 Formal criteria – such as incorporation, legal residency
registration in the commercial register, etc. and
 Factual criteria – such as place of effective management,
administrative residence, principal business location. Etc.
Cross-Border Tax
Principles
US Jurisdictional-Authority to Tax Foreign Income
Entity or Event
Applicable to
General Tax Significance
Citizenship and place of
formation
US Citizens; domestic corporations or entity
Federal taxes on worldwide
income
Residency
Resident aliens
Federal taxes on worldwide
income
Source of Income
Non-resident aliens; foreign entities
Federal taxes only on income
derived within the USA
Income effectively
connected with US trade
or business
Non-resident aliens; foreign entities
Federal taxes on income
derived within the US and
certain income derived outside
the US
Source of Income
In order to function properly, both territorial and worldwide systems contain rules
that define when an item of income is sourced within their jurisdiction
The connecting factor between income and the territory
Generally differs depending on the item of income concerned
For example, income from real property is generally deemed to arise in the country
where the property is located. Income from interest, on the other hand, may be
deemed to arise from:
• Where the capital is located
• Where the capital is invested, or
• Where the payer of interest resides
Cross-Border Tax Principles
International Double Taxation
 The coexistence of different of different tax systems leads to international double
taxation
 This may be the result of different definitions under different jurisdictions of:
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Residency for tax purposes
Different sourcing or attribution of income rules
Taxation based on residence as opposed to taxation based on source of income
 International double taxation is generally divided into:
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Economic double taxation – it arises where two different taxpayers are taxed in
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Juridical double taxation – it arises where the same income is taxed in the hands of
respect to the same income. A classic example arises in the case of transfer pricing
adjustment
the same person by more than one jurisdiction and the total tax burden is higher
than if it had been taxed by only one jurisdiction
 Since double taxation constitutes an obstacle to the expansion of cross-border commerce, many
countries grant relief under their domestic legislation or any relevant double tax treaty so that their
resident taxpayers are in a neutral position when conducting commerce abroad.
 Generally there are two methods of double tax relief
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Exemption Method – Under this method the country of residence of the taxpayer exempts the
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Foreign Tax Credit Method – A foreign tax credit may generally be applied in two ways:
income derived from foreign sources either under the so-called “tax exemption” or “income
exemption” methods.
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A credit is allowed for the tax paid on foreign income against the domestic tax due on worldwide
income (full credit) or,
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A credit is allowed against the domestic tax due on the worldwide income the taxpayer paid on
the foreign income, but only up to the amount of domestic tax corresponding to the foreign
income (ordinary credit)
Double Tax Relief Methods
Tax Treaties
 Tax treaties are bilateral agreements that serve to harmonize the tax systems of two
countries and it applies not only to companies but also to individuals involved in
cross-border investment or trade.
 In the absence of a tax treaty, income from cross-border transactions or investment
would be subject to potential double taxation. First by the country the income arises
and again by the country of the recipient’s residence
 The tax systems of most countries impose withholding taxes, frequently at high rates,
on payments of dividends, interest, royalties and services to foreigners. Tax treaties
are the mechanism by which these taxes are negotiated and lowered on a bilateral
basis.
 As cross-border trade and investment expands, tax treaties are playing an
increasingly important role in preventing the imposition of excessive and
inappropriate taxes on global business and in insuring the fairer and more efficient
application of the tax laws.
Benchmarking and Tax Rate Drivers
Tax Planning Strategies
Financial Profit Drivers
 Financial profit drivers relate to financial risk.
Financial profits represent the return on
external and internal business risks and capital
investment.
 They include return on inventory risks, A/R
risks, warranty risks and foreign exchange
risks.
 They also include the return from internal
deployment of capital and other income
producing assets
 Negative tax drivers are intangible profits and
capital in high-tax jurisdictions, which are often
exacerbated by inefficient transfer pricing
policies
Functional Profit Drivers
 Functional profit drivers relate to the critical
business functions of the company and where
those functions take place.
 Functional profits accrue from the physical
functions such as manufacturing, distribution,
marketing , sales, services and research and
development
 The location where such functions are
performed and the level of tax risk borne can
have a significant impact on where the profits
arise and thus, ETR of the company
 Establishing and maintaining core functions
and the related risk in a high tax jurisdiction is
a negative tax driver
Benchmarking and
Tax Rate Drivers
Developing a Tax Planning Strategy
Treasury Management
Profit Management
Tax Management
Global Structure
Tax Attributes Management
Profit Migration Strategies
Profit migration is a critical strategy that must be evaluated in the
tax planning of any MNE. It is at the core of global tax planning and
addresses the most significant tax rate drivers.
Under this strategy a MNE identifies its “portable” profits currently
generated in High-tax jurisdictions and seeks to move them to
lower-tax jurisdictions
Profit migration can be achieved through:
 Finance management techniques – uses capital deployment
and,
 Financial risk shifting or sharing to migrate profits
Tax Planning Strategies
Jurisdictional Strategies
Focuses in the use of domestic or in-country tax laws.
Depending on the country, planning opportunities may include:
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The use of local country consolidations
Research and development tax credits
The use of tax loss carry-back or carry-forwards
Tax free asset step-ups and re-evaluations
Use of tax holidays
Special tax zones
Tax Planning Strategies
Developing a Tax Planning Strategy
Developing and implementing a comprehensive and integrated global tax plan
is complex and requires an integrated approach and an understanding of many
interdependencies and involves the following steps:
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Studying the global profit and tax drivers
Setting goals
Identifying strategies and categorizing planning techniques
Weighing and choosing alternatives
Implementing a plan
Periodically reviewing the plan’s performance
Planning should include each one of the following impact areas:
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Profit Management
Treasury Management
Tax Management
Tax Attributes Management
Tax Planning Strategies
Tax Evasion vs. Tax Planning
Tax Evasion vs. Tax Avoidance (Tax Planning)
Tax Evasion is the general term for
Tax Avoidance and Tax Planning
efforts by taxpayers to mitigate taxes
involves arranging the company’s
by illegal means.
affairs in order to minimize taxes. This
What can be defined as legal or illegal
is known as the principle of freedom to
depends on the national laws and
contract, which have been upheld by
varies from jurisdiction to jurisdiction
various courts in various jurisdictions
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