International tax planning means development of the most fair tax regime for the taxpayer. Globalization brought new opportunities for both resident and non-resident individuals and legal entities. Based on our practical experience the following are useful tips for those who want to save on taxes.
How to Lower Your Taxes
First of all there are a number of standard tax planning principles you should never neglect. All of them are quite applicable to national and international levels of tax planning. The advices include:
- Reduce your income to reduce tax amounts. One of the best-recommended ways is saving for retirement.
- Be aware of the exempted categories of income, like life insurance, gifts-bequests and inheritance, health insurance, employer reimbursements, scholarship grants etc. However, remember it is the recipient who gets them income tax free.
- Make the most of deductions. Those biggest ones are normally mortgage interest, state taxes, and gifts to charity.
- Take advantage of tax credits – they don’t reduce your taxable income, but reduce your actual tax liability.
- Try to get a lower tax rate where possible.
- Consider deferring paying taxes – this can be reasonable in many cases.
- Shift income to other taxpayers, for example gift highly valued assets to children.
Aspects Determining Your Tax Liability
Apart from the above listed general rules, analyze each and every of the below aspects that may finally require notable changes of your business structure.
Object of Taxation. Every tax relates to its own independent object of taxation. It can be real estate, goods, services, works and/or their realization as well as income, dividends, interests. Changing the taxable object may lead to a better tax regime. For example, sale of equipment is being often replaced by giving it into leasing.
Subject of Taxation or Taxpayer. It’s an individual or legal entity liable to pay taxes with its own funds. By changing its legal form the business may get a more favorable tax regime. A classic example is a business originally set up in the form of a U.S. corporation transformed into a limited liability company (LLC) having a tax-flow regime and thus eliminating the federal level of corporate taxation.
Tax jurisdiction. You are free to choose your tax jurisdiction. Use benefits of offshore low tax centers same as beneficial features of tax regimes in countries with high taxes. A number of jurisdictions welcome non-resident investments in exchange for total exemption of taxes and reporting. Some countries favor particular types of activities attracting investments into specific industries.
Choosing between low tax centers, looking for an offshore jurisdiction favorable for trading and professional services check Dominica or Seychelles first, for financial holding companies and insurance business consider BVI, Cyprus, Panama, for ship management and maritime operations – Cyprus, Dominica, Nevis or Panama, for licensing and franchising – Cyprus, Gibraltar, Panama, and so on. It’s very probable that you’ll find a suitable option among the existing offers. But have in mind that some businesses are not really mobile in terms of changing jurisdictions.
Location of the company and of its management and administration. They also call it “mind & management” test. This may be the key factor to determine tax residency of the company. It totally depends on taxation policies of the countries involved, but the company may be obliged to pay taxes in the country where its “mind and management” is located.
Potential double taxation happens when one country pretends to the right to tax the income on the basis of residence (or citizenship) of the taxpayer, and the other country – on the basis of that income source. In certain occasions it happens because both countries claim the taxpayer to be their resident or the income to be from their sources.
Avoid double taxation by means of possible tax credit, tax deduction and tax exemption options. Most of the existing double tax treaties between countries normally follow the OECD model tax convention and cover taxes on income and capital in any form. The choice of jurisdiction, as per paragraph “Tax jurisdiction” above, may often depend on availability of the appropriate tax agreement between two countries.
Besides tax treaties, a number of developed countries have in place special tax regulations allowing for credit of the foreign tax paid even without the according tax treaty in force between the involved countries.
Double taxation may also have place within the distribution processes of the company’s revenue. It may be first taxed as profits of the company and later as dividends to the shareholders subject to withholding at distribution. Check the related local legislation to find a possible remedy for this case.
- It’s more beneficial to avoid tax resident status in the country of the biggest profits trying to limit it to withholding tax.
- It’s better to defer withdrawal of funds from business and repatriation of profits. In certain occasions deferral equals tax exemption.
- Transfer of assets is more preferable as movement of capital rather than movement of revenue or profits.
- Comparing tax regimes of different jurisdictions, pay attention to the process of formation of taxable income, besides the tax rates figures.
Tax expedient distribution of assets and profits, as well as some other matters that you are to settle at the conclusive stage of tax planning, do not directly relate to tax calculation and settlement. However, development of priorities in distribution of profits, capital repatriation and investment policy provides for additional tax benefits and some return of paid taxes.