Pre-requisites for International Tax Planning

Eltoma Corporate Services international tax planning services aimed at reducing the tax burden for your business.

Pre-requisites for international tax planning

Rapid changes to the market economy have led to the fact that no country can be sustained and needs to find its own way into the international trading market. Maximising profit and minimising the tax burden is one of the most significant issues international businesses face. A resolution would be to find ways of minimising or optimising taxes through consecutive and legitimate tax planning.

A key source of budget funding is tax revenue. In order to reach a reasonable compromise between tax revenue and tax burden governments seek through various means of taxation in order to regulate economic activity inside the country.

Different approaches to corporate tax planning

Approaches to tax planning require accurate definitions.

Tax evasion means minimising taxes using illegal methods.

Tax avoidance is minimising the tax burden over the course of financial activity by various means and methods provided by law.

Choosing between tax evasion and tax avoidance

As mentioned previously, taxation is one of the main source of budget replenishment, therefore governments make efforts to maximise tax fees. On the other hand they do not aim to create obstacles for business. Therefore officials try to find balance between replenishing budgets and creating an attractive business environment.

The choice between tax avoidance and tax evasion is based on business objectives, the size of business and its goodwill.

As a general rule, means of tax avoidance are used by smaller start-up businesses willing to earn money from international trade. During business development processes they raise concerns about reputation, so business owners start thinking of more difficult and less risky approaches to business. In terms of cost reduction it means that tax avoidance is the only legitimate way.

International tax planning in practice

Example 1. Small scale import business.

As a rule a small scale import business is financed by a business owner personally. So the business owner try to lower the costs as much as possible.

The best option for the international company is to incorporate a tax haven company which imports or exports goods (services). Belize, BVI, Panama, etc. are good examples of tax haven jurisdictions. In terms of tax legislation and the disclosure of information, generally speaking, there are no differences between jurisdictions.

Tax havens characteristics:

  1. 0% income tax rate.
  2. No requirement for accountancy and annual audit.
  3. Beneficiary and directors details are stored by the Registered Agent.
  4. Small annual fee to Registrar (required for Good Standing Certificate).
  5. Annual maintenance fee varies from $400 to $1,500.

This option has negative aspects. Firstly, the lack of interconnection between banks and trade partners means that over the course of business expansion and reaching certain steadiness and goodwill companies reject this option.

Example 2. Steady growing import (export) business

Financing steadily growing businesses can be difficult when provided using your own resources. Therefore to minimise the tax burden and to raise the company profile for financial institutions, trade partners and insurance companies, a systematic approach is required. Positive business image for foreign partners, financial institutions and insurance companies allows for obtaining competitive advantages in the form of commodity credits of foreign suppliers, allowing for cheaper trade financing.

Different jurisdictions providing certain tax advantages are used in this case.

In particular, there are various means of corporate tax planning and optimisation, i.e.:

  1. Double tax treaty network between various jurisdictions.
  2. Tax incentives for trade activity.
  3. Tax benefits from investment activity and for holding companies.

Tax relief provided by Cyprus are as follows:

Double tax treaty (DTT) network

Cyprus has wide range of double tax treaties (with 57 states). The DTTs regulate tax deduction on income and capital gains. For example:

  1. Dividend income.
  2. Interest income.
  3. Royalty income.

Cyprus tax system for trading companies

The tax rate of net income in Cyprus is 12.5%. Paid tax is reduced by the amount of taxes paid in other jurisdictions.

Investment activity

Except income tax there are also other taxes. Capital gains tax (tax on cost increase) is one of them. In Cyprus the tax is withheld only from property sale. One of Cyprus tax system advantages is a zero tax rate on sale of securities. So in Cyprus there are wide range of investment funds operating on various places globally. Other taxes may be considered while conducting international trade.

There are set of other taxes which are necessary to be considered while conducting international trade:

  • VAT/GST.
  • Withholding tax.
  • Net worth tax.
  • Capital gains tax.

Another important thing to consider is measures preventing tax evasion:

  1. Regulation of transfer prices (during the trade between dependent or associated companies).
  2. The thin capitalisation rule.
  3. CFC rules.

Tax relief

There are a set of reliefs available to you while conducting international trade activity. Such as the territorial principle of taxation, considering trade in other jurisdictions, e.g. in Singapore or Hong Kong. This principle implies that if there are no trade transactions in Hong Kong and Singapore carried out (and there is no repatriation of money to Singapore), these transactions are taxed at a rate of 0%.

Effective implementation of international tax planning is rather difficult process. Eltoma Corporate Services is ready to assist you with developing international tax avoidance approach and selection of the most suitable solution for your business, contact us to see how.

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