Today’s world is constantly changing and evolving. The impacts of globalization and advances in technology have resulted in economic activity becoming increasingly international. The mobility and expansion of economic markets around the world has contributed to both opportunity and problem for the players of the world economy.
In order to compete and survive in today’s globalised markets, a business must keep up-to-date with the accelerated pace of tax, legislative, and regulatory developments around the world. Challenges such as new business models, liquidity concerns, and ever-changing information technologies make efficient business management on a global scale extremely difficult.
Thus, it is evident that many precautionary actions are taken to stay afloat in the current economic climate of our ever-developing world. Various businesses and working individuals currently utilize an international tax planning strategy in order to legally minimize international tax liabilities.
Cross border transactions
All cross border transactions have tax implications. The fundamental principle underlying international tax planning is to legitimately minimize such tax obligations in the country of one’s residence by using the benefits added within foreign jurisdictions. This can range from simple advice like ensuring tax reliefs are claimed through to more complex solutions like restructuring a business.
Some of these can be relatively straightforward requiring minimal specialist consideration, however, once an individual is established in a, or multiple, foreign jurisdictions, matters may become far more complex. Consequently, one is often faced with unforeseen tax liabilities or missed opportunity for legitimate tax minimization.
Tax laws
Tax laws are domestic, meaning that they vary from nation-to-nation. Tax and government authorities have no jurisdiction outside their territory. Thus, when investing financial capital in another country you need to consider the laws of both the country you live in and the jurisdiction being investing in.
Tax havens
Countries with minimal or no taxes levied on the income of individuals and companies are often referred to as ‘tax havens’. The tax haven jurisdiction also benefits from the investments in the nation’s development or infrastructure. The term ‘tax haven’ is being used less and less as more jurisdictions adapt to the internationally recognized Organization for Economic Cooperation and Development (OECD) standards for disclosure of financial-related information.
Tax treaties
Countries that have tax treaties with high tax countries are known as ‘treaty havens’. If a country does not have a treaty in place with the US, there is a 30% retention tax.
Many business owners accumulate wealth by taking advantage of various sources in numerous jurisdictions to legitimately minimize tax liability. For example, a business operated in the US invests its money in a foreign jurisdiction benefiting from the terms of a tax treaty and is hence charged little or no withholding tax. The company operator may thus transfer assets to another entity and can accumulate funds in the offshore jurisdiction.
Tax treaties were introduced to mitigate effects of various double taxation policies and to encourage cross-border trade efficiency, yet very few tax treaties are alike. Although this was not the intended use, investors may benefit from treaties to make legitimate tax-free savings. However, it is becoming increasingly difficult for individuals to identify legitimate tax-free solutions as the IRS, with assistance from the OCED’s guidelines, are making great efforts to abolish tax evasion activity. As a result, new treaties are in the process of negotiation as to benefit both parties.
Multinational investors and corporate service firms are professional tax experts who can give personalized advice on how an individual or company can manage their assets. International tax planning is an increasingly complex process, but remains a legitimate, and important, aspect to consider with international business operations.
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