International tax planning

Jan, 15 2024


International tax planning helps to avoid tax payments to the state budget or to reduce their amount within the scope of law. These actions consist in the rational organization and conduct of business, so that there is no need to pay additional fees and taxes. Budget payments should be planned already at the stage of creating a commercial company or when it reaches the international level.

International tax planning uses legitimate tools and schemes to help businesses reduce their tax burden. It relies on institutions provided not only by Russian laws, but also by international agreements. This aspect of entrepreneurship requires competent legal support, since errors in taxation issues are fraught with large fines and even criminal liability.

The presumption of good faith applies to all taxpayers. It assumes that all actions of economy’s participants are justified, including obtaining benefits through tax cuts. Also, the principle of presumption of good faith assumes that all information contained in declarations and statements is reliable. What does this mean in practice? Until the opposite is proved, documentation is considered reliable, and actions to reduce the budget burden are justified.

Payment Optimization

Optimization refers to legal actions aimed at exemption from taxes or to reduce their amount. It is essential that all measures that a company or entrepreneur use to achieve this goal remain within the law. Otherwise, optimization turns into tax evasion. There is no reason to break the law, because you can legally exempt from part of the taxes or reduce their amount.

The tax benefit may be: to reduce payments by reducing the base, receiving a deduction, benefit or applying a low rate. You can also claim to refund total or part of the budgetary payments.

Optimization can occur at the state, corporation or company level. In addition, international tax planning can be mixed – affecting several levels of management at once. However, it always takes into account the specifics of a particular enterprise or company, and the specialist’s task is to find the best ways to reduce payments. They may include:

• full exemption from taxes and fees;

• reducing the amount of taxes, commissions and duties;

• deferred payments, as well as in restructuring debts on taxes, fees and penalties.

International Tax Planning: Procedure

This responsible work takes place in several stages, the first of which is the analysis of legal information, which affects all financial and economic procedures of the company. Having carefully studied the activities and operations of the company, the specialist can proceed to the next stage: assessment of the obligations that are imposed on the company when concluding transactions.

The third stage of the work is the optimization of all operations which is based on information collected in the two previous stages. Next step is to prepare documents and justifications for operations. The final stage is the settlement and payment taking into account the updated system.

Entering the international market is associated with certain difficulties. States differ not only in territory, resources, traditions, but also in legislation. Tax rates, their structure and payment procedure may vary. If you plan to start a business or open a branch in another state, it is important to study the specifics of taxation, as well as get the support of lawyers.

There are also legislative acts regulating legal relations in various jurisdictions, which must be taken into account when planning commercial activities. These jurisdictions include:

• Offshore zones. These countries provide offshore companies registered with them with full tax exemption. But there are two key conditions: not to conduct activities in the territory of such a country and pay a fixed annual fee in time. It is not necessary to maintain and file financial statements.

• Low tax zones. These countries have low tax rates for certain types of companies. Generally, such states require companies to maintain financial statements, sometimes minimum tax payments.

• Jurisdictions of high respectability. They provide different tax benefits, but subject to pretty stringent conditions. Countries with such jurisdictions can be chosen in order to improve the image of a company and add it weight on the global stage.

Payout Optimization Methods

There is a wide range of ways to reduce payments to the budget. One of the most popular among large entrepreneurs is the registration of a company in offshore zone or state with low tax rates. However, this is not the only tool to reduce the burden on the enterprise. You can choose another strategy: for example, determining the tax rate depending on the country’s system. This technique implies that you choose the state that provides the most favorable conditions for you to host the enterprise. Other popular ways to optimize expenses and mandatory payments:

• Right choice of scope and form of ownership. The size of taxes also depends on the selected types of activities, so at the time of company incorporation it is important to calculate the future burden of payments to the budget. But a competent approach to registration allows you to optimize costs from the very beginning.

• Redistribution of income. Since incomes in different countries are subject to various taxes, you can achieve significant benefits by organizing profit-making in another state.

• Placement of income in a country where a double taxation avoidance agreement is in force. This agreement allows you not to pay double tax on the same income. Russia has entered into a similar economic profitable agreement with 81 countries, including the United States and Germany, so entrepreneurs have plenty to choose from.

Please notice that tax optimization methods are being improved. Therefore, from time to time it is useful to deal with optimization issues by contacting specialists directly.

Optimization mistakes

Going to specialists allows you to avoid many mistakes fraught with financial losses. Such errors include, for example, the conclusion of a transaction with an unverified partner. Make sure that the counterparty pays taxes in accordance with the law, otherwise its violations will affect your company. Also, entrepreneurs are often mistaken in allowing illegal schemes for the import of goods and the application of special taxation regimes without sufficient justification.

The following common mistakes should be avoided when optimizing payouts:

• inaccuracies in the execution of financial and other economic operations, especially if the actions affect non-residents who are part of the enterprise structure;

• distortion of the results of the company;

• Incorrect settlement schemes with business partners and suppliers;

• incorrect calculation of the consequences of economic actions, for example, transfer of property or write-off of debts;

• errors in the maintenance of documentation that records financial and economic activities;

• illegal schemes of cooperation with personnel, including registration of full-time employees as individual entrepreneurs;

• violations in the field of technical and information security and other actions contrary to laws.

VALEN lawyers conduct competent international tax planning. We provide support to legal entities and individual entrepreneurs. You can leave inquiry on our website or consult with specialists via phone +7 (495) 7-888-096! We are also waiting for you at our office in Moscow.

Author of the article
International tax planning
Valentina Khlavich
Managing Partner
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