Many of the Fortune 500 companies are currently using international tax planning to save them heaps of money annually. By utilizing the tax benefits provided by foreign jurisdictions, each of those companies is able to legally reduce their tax burden. What’s more, this same method used by the biggest companies in the world is just as useful and practical for entrepreneurs, both big and small.
Why the need for offshore/foreign tax planning?
Paying taxes can be a stress-inducing headache. However, as tax laws are designed to be domestic in nature, investing financial capital in a foreign country can simplify the whole process and reduce your tax burden at the same time. This provides an additional level of security too, as tax authorities are limited to domestic investments. While the OECD works effectively as an international authority, their goal is to increase transparency to combat illegal tax evasion, not to interfere with the finances of persons legally invested abroad.
What about ‘tax havens’?
‘Tax haven’ is a term that is fast becoming obsolete. It originally was used to negatively refer to countries with very low or no corporate tax rates, often with laws in place to protect the privacy of foreign investors. Typical foreign investment laws prevented the offshore finances from being used for business transactions and thus, any money brought in could only be invested in to the country’s development. This meant the ‘tax haven’ jurisdictions could benefit off of foreign investors committing tax evasion.
The term has fallen out of professional use as more and more countries have adapted to meet the OECD standards on financial disclosure, ensuring the majority of offshore investment activity is done legally. The term ‘treaty haven’ is still occasionally used to describe countries with several taxation treaties with low-tax jurisdictions but the term has less of a negative connotation.
How does it work?
The process by which entrepreneurs save using offshore business is actually rather simple. First, the business owner invests their money into a jurisdiction that has a double taxation treaty with the country where they made their money. This means that any funds moved abroad would not be charged a withholding tax. Next, the business owner allows their wealth to accrue in the foreign jurisdiction at the more favorable tax rate. Finally, the business owner can easily repatriate any of the funds they would like, without incurring a tax. The process provides security, stability and liquidity to the finances of any entrepreneur who uses the right jurisdiction.
What are double taxation treaties?
Double taxation treaties were initially developed to prevent expatriates from paying taxes for the same income in two different countries. These same treaties enable prudent investors to save their wealth in tax-free jurisdictions. The treaties are often designed to benefit both parties and thus, the U.S. avoids signing treaties with countries that don’t directly levy tax. However, several jurisdictions with favorable corporate tax rates have treaties with the US, the EU, the UK and other major markets. The OECD and the IRS will continue to work to ensure that existing treaties that benefit tax evaders are renegotiated but neither organization has any plans to interfere with existing treaties with beneficial jurisdictions like Singapore and Hong Kong.
What are multinational investors?
The process of saving money through offshore investments may sound easy and in many ways, it is. However, the assistance of a multinational investor to ensure proper asset management and to help select the perfect jurisdiction can increase potential savings ten-fold. Multinational investors, also called corporate services firms are consultants with expertise in international tax law, capable of managing the entire foreign investment process from start to finish. With the right firm’s assistance, saving through legally minimizing tax obligations is an ideal option for any entrepreneur.
About the Author: Aidan Healy is Managing Director of Healy Consultants a corporate services firm, specialising in helping entrepreneurs/startups get their business incorporated and operating successfully. Aidan is a chartered accountant, based in Singapore. The Healy Consultants website has information about the firm and the blog will show some other recent articles.