An effective tax planning strategy requires in-depth knowledge of different tax scenarios, as well as some of the common tax planning terminology. While Healy Consultants can help clarify tax planning phrases during the course of your engagement, below are a few of the most popular tax planning terms.
Tax Avoidance
Taxpayers who hope to use the varying laws of different countries and loopholes contained within their tax codes to minimise their taxes are engaging in Tax Avoidance. Tax avoidance is one of the key goals in any tax planning, and though a well-planned tax strategy may ensure legal tax avoidance, it is often very difficult for an individual to determine whether a particular transaction is tax avoidance or tax evasion.
Tax Evasion
When taxpayers knowingly use the secrecy available in offshore jurisdictions to disguise parts of their tax and income transactions. This is not a recommended tax planning strategy.
Offshore Tax Havens
An offshore tax haven is a jurisdiction which is either entirely free of tax or imposes low taxes on companies incorporated in that jurisdiction. Not all low tax offshore jurisdictions have a negative reputation.
Double Taxation Treaties
A Double Taxation Treaty helps avoid the same tax being paid in two different jurisdictions. This is an important tax planning consideration, since businesses and individuals resident in one jurisdiction may earn taxable gains in another jurisdiction.
Non-tax motivated transactions
These transactions may have no income tax impact. For example, a US bank may open a tax haven branch to avoid US reserve requirements. Another company may use a tax haven subsidiary to avoid currency controls or other regulations imposed by a country that it does business with. A tax haven may be used to minimise the risks of expropriation that accompany business activities in much of the Third World. A foreign person may use a tax haven bank or a nominee account to shield his assets from his political enemies.
Tax-motivated transactions
These are transactions made for tax purposes but consistent with the letter and spirit of the law. Some examples of these transactions are flag-of-convenience shipping, (which avoids high registration fees), banking through subsidiaries, (which postpones taxes on the profits from loans to foreign entities), transactions between subsidiaries of unrelated companies that are designed to avoid sales tax, and certain transactions that take advantage of minor loopholes in the laws aimed at tax haven use. While some of these may create anomalous situations, they are legal and an integral part of tax planning
Aggressive tax planning
Measures of a coherent and strategic nature that takes advantage of an unintended legal or administrative loophole are considered as aggressive tax planning. Examples include captive insurance companies, investment companies, some service and construction businesses being conducted through tax haven entities, and pricing of transactions. One instance of this might be the establishment of a service business in a tax haven to provide services for another branch of the same business located in a third country. A further example might be the use by a multinational corporation of artificially high transfer pricing to shift income into a tax haven. Often, the parties are aware that if the transaction were thoroughly audited, a significant adjustment would probably be made. They rely on the difficulties involved in overseas information gathering and on the complexity of the transactions to avoid payment of the taxes.
Effective Tax Planning
Effective tax planning offers legitimate ways in which businesses can minimise their international tax exposure. International tax planning opportunities include restructuring your company, taking advantage of the low corporate tax rate and various tax incentives of certain jurisdictions. As offshore tax consultants, Healy Consultants is able to offer valuable advice on tax planning.
Contact Us
For more information on tax planning, email email@healyconsultants.com or telephone us at (+65) 6735 0120.
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