International tax planning revolves around the different tax systems in the world. The scope of taxation and tax rules differ widely. These differences create both opportunities and threats for international tax planning, and planners.
i. They often have differing tax rates on different sources of income (“taxable object”) and different tax treatment for various taxable persons (“taxable subject”).
ii. The tax treatment of foreign earnings and expenses may vary under domestic laws and treaties. For example, what expenses are allowable for tax purposes and what are not may not be the same in each country.
iii. The distinction between capital and revenue income and expenses, and their tax classification may differ. Some jurisdictions tax the substance of the transaction while others insist on taxing the form.
iv. Although most treaties now follow a Model Convention, no two treaties are alike. Each treaty is based on bilateral negotiations that take into account the fiscal, and often non-fiscal, needs of each Contracting State.
The primary role of the international tax planner is not to evade tax or even to avoid tax. Probably, his most important role is to ensure that a client does not fall into any “traps” or anomalies that would result in a higher tax liability than what he should legitimately pay.
It is to make certain, as a minimum, that his decision to enter into a cross-border transaction does not lawfully result in paying more taxes than if he was engaged in a purely domestic transaction. This is often referred to as “defensive tax planning”.
International tax planners spend much more time on defensive tax planning than domestic tax planners. Taxpayers engaged in international transactions frequently face serious risks of having to pay excessive levels of tax.
These risks typically arise when two or more countries claim the right to impose tax on the same item of income. They are largely avoided or relieved through the effective use of tax treaties and the domestic tax provisions governing such transactions.
The “offensive tax planning” activities of most international tax planners deal with complex tax schemes to avoid global taxes. Opportunities for international tax avoidance are widely available to both individual investors and multinational enterprises in many countries.
Although they generally occupy only a modest part of their professional time, they often face complex legislation that counter unacceptable tax avoidance.
Tax planning today has become more difficult with the traditional bright line between acceptable avoidance (using legal means to reduce tax burden through planning) and unacceptable tax avoidance and evasion (illegal acts) becoming increasingly blurred. Most tax administrations regard their primary function to protect their own national tax base at all costs.
Some commentators also argue that even if tax planning is perfectly legal, it can raise serious questions in relation to equality in taxation matters that frustrate the efforts of the tax authorities in their tax collection. A taxpayer is free to arrange his affairs as he wishes to save taxes and can use legal forms that differ from their substance. This choice is not available to tax administrations.
As each country is concerned in preserving its own fiscal sovereignty and its share of the global tax revenues, there is a risk that the tax planning may not be acceptable to the authorities in one or more jurisdictions.
Many countries today regard as unacceptable any planning that reduces or defers the tax liabilities in a way that their parliament (or legislative body) plainly did not intend, or could not possibly have intended had the matter been put to it. Thus, it is often difficult to distinguish acceptable tax planning from unacceptable tax avoidance. The definition usually depends on the domestic policies of each country.
There is no ideal or risk-free solution. The tax plan must meet the business objectives at minimal tax and administrative costs and also at an acceptable level of risk. To be effective, the tax planner should check the validity of the legal entities in the jurisdictions and the applicability of tax treaties.
Moreover, he must ensure that the proposed tax structure is acceptable to the various jurisdictions, and that its benefits are not short-lived as a result of anti-avoidance measures or future legislative changes.
International tax planning must always be done lawfully. It should be based on the legally acceptable use of the tax laws and tax treaties of each country where the business is transacted.
It does not imply or encourage either tax evasion or unacceptable tax avoidance. It should not depend on tax loopholes that can be stopped by prospective (sometimes retrospective) changes in tax laws and practices. The tax planner must accept that tax payments under the law are a legitimate cost of doing business in any country.