Going Global – Here's Your International Tax Planning Handbook
Growth is always good. It’s the fuel that motivates any business to keep doing better, bigger things. On the journey to grow, you have to face a lot of challenges too–especially when you’re expanding your business overseas.
You have to worry about attracting a new target audience, finding a perfect location, and building the right team there. While juggling all of these, it is natural to miss out on other nitty-gritty of going multi-national. One of the commonly overlooked challenges by businesses is tax planning. When you move your business out of your native land, a lot of tax implications come into the picture.
You have to take care of taxes not just for a single country, but for multiple of them–that’s where international tax planning comes into the picture. In this article, we’ll cover the fundamentals of International Tax Planning and how it can help you reduce tax liabilities. What’s more–these would work irrespective of the country you expand to.
What is International Tax Planning?
Before we get into the details of International Tax Planning–let’s clear the air about certain words that you would have come across related to international taxes– international tax structures or expanded worldwide planning (EWP). Both of these words mean the same as international tax planning.
As the name suggests, International Tax Planning is the process of taking care of taxes regulated by several authorities from different countries. It comes in handy when you’re dealing with cross-border transactions–and want to find the most tax-effective and lawful route to conduct business actives internationally. Fundamentally, to do that, you need to know about the tax principles of all the involved authorities and how they affect you. International Tax Planning looks at the best possible ways to save tax and also reduces the possibility of you being taxed twice (double taxation).
Before we deep into what these “authorities” stand for and the tax implications they bring forth, let’s quickly address the burning question you may have right now.
Why should you care about International Tax Planning?
We’re sure that when you plan to invest, expand or engage in overseas business–taxation is probably not the first concern that pops in your head. After all, you have to take care of factors like resource availability, viability, accessibility, and of course, market potential.
Apart from that, some of the common questions that you might have on your mind would be:
- Is there political and economic stability in the country?
- Are there any special grants, treaties, incentives that can be leveraged by expanding there?
- Does that offer a feasible infrastructure cost and transit cost?
- Is the workforce there skilled and available at a cheaper cost?
All said and done, tax laws don’t make it into any of these lists.
However, as soon as you’ve done deciding where you want to expand to or invest in, the first glaring concern becomes taxes. After all, before you realize it, you’re paying taxes to multiple countries. That’s why adding taxation or tax planning to your list of priorities isn’t a bad idea. In fact, nowadays, several multinationals consider tax rate as one of the key deciding factors in choosing a country they want to expand their operations to.
That’s where International Tax Planning becomes a savior in disguise. It doesn’t only help you make a cognitive decision about choosing a country with manageable tax rates and good tax administration but also directly affects your business’s long-term financial standing and overall return on investment.
Without International Tax Planning, you’d not only have several surprises (or mostly shockers!) on your overseas journey but also end up paying excess tax and additional tax compliance costs.
Levels of Impact In Internation Tax Planning – Who Will Charge You?
For any cross-border transaction, you can possibly have 3 levels of impact or tax authorities that’d charge you.
Source or Host Country
Your host country–the one where you plan to set up operations in would charge you on the income you generate from the branches you have overseas along with the withholding taxes on the payments that you received from these branches.
While you’d not always have an intermediary country in your overseas operations, it is a recommended tact for tax benefits. It lets you leverage tax treaties to reduce the withholding taxes in the host country. Your intermediary country–the one via which you direct your transactions to the host country will charge you on the income that you generate from the overseas branches that you have as well as the taxes that are due on the recovery of profits at the home country.
Residence or Home Country
This one would be no news to you, right? Your home country–the one where you’re originally based out of will charge you on the entire income or capital gains that you receive at home, whether or not it is from your overseas operations.
The Tax Planning Mantra: How To Save Tax?
Reducing Taxes In Source
In the source country, you’re primarily dealing with their domestic law. So, you need to go over their tax legislation thoroughly to optimize tax deductions, tax losses, incentives, and individual tax concessions that you can find.
Apart from that, there are some pro-tactics that you can use as well:
- Leverage tax exemptions that you get from connecting tax factors with the source or residence country (or both).
- Try to move payments and transactions such that the taxable profits happen outside the source country–get payments directly to your home/intermediary country.
- Read up on the tax treaties and new policies that can help reduce withheld taxes or obtain tax exemption.
Reducing Taxes In Intermediary Country
The key reason that you get an intermediary country involved in your International Tax Planning is to leverage them using tax treaties–thereby reducing the withholding taxes in the host country.
In order to make the best use of an intermediary, you need to:
- Select proper offshore financial organizations that can minimize or entirely avoid withholding taxes
- Use tax arbitrage (using the differences in how transactions are treated by different authorities) by way of nature or character of payments.
- Retain funds offshore for reinvestment abroad or getting some type of tax deferral on settlements made to the home country.
Reducing Taxes In Home Country
Apart from your usual domestic tax planning that you take care of in your home country, once you move to overseas transactions, you also need to take into account global corporate structures that can help you avoid, reduce or defer tax liability.
Some of the most common ways to optimize tax liability are:
- Use foreign tax credits and exemptions to cut down on domestic tax liabilities.
- Check for tax relaxations in the home country–most countries offer relief if you’ve paid foreign taxes paid on income that’s received at home to avoid double taxation.
To Sum Up
All-in-all, International Tax Planning is nothing but an end-to-end analysis of the tax legislations of all the jurisdictions that would affect your international transactions and/or overseas business.
One can summarize the steps of Internation Tax Planning as:
- Analysis of the existing data and information about every tax legislation.
- Design the most effective plan with minimum tax liability and lawful adherence.
- Evaluate the implications and possibilities related to the plan.
- Update the plan as per learnings over time.
As long as you make a conscious effort to consider the tax implications of your overseas transactions and not leave for the eleventh hour, you should be able to avoid double payments and additional tax liabilities effectively.
Did you know that Britishers bricked their windows to avoid taxes? Read similar bizarre facts about taxation here.