International tax standard

International tax standard
Criteria for Choosing Tax Havens
In the realm of financial planning, one of the more prominent areas that really grabs people’s interest - as well as raises many eyebrows - is in the aspect of taxes. The controversy arises from the fact that tax planning necessarily involves finding ways of how to reduce a taxpayer’s tax liabilities.
There are various strategies used in tax planning to put into effect a significant tax reduction for an individual or business. Some of these tax reduction methods are considered more acceptable than others. However, enumerating such strategies will be reserved for another discussion.
About Tax Havens
Amongst the tax reduction methodologies that carry with it a certain degree of notoriety is availing of financial services at various offshore jurisdictions. These offshore financial centres are more commonly known as tax havens.
Whether or not the term “Tax Haven” is appropriate is subject to debate. Nevertheless, there are those who are not quite keen on tax reduction measures by way of offshore facilities as these actions are often generalised as tax avoidance.
However, the impulse to move away from restrictive taxation by governments has its roots in the very history of taxation itself. Taxes will always strike a sensitive chord amongst populations since it is necessary for the proper functioning of governments. But the undeniable reality is that people are not really enthusiastic to part ways with the fruits of their hard labour by default.
The evolution of tax havens as we know them today comes as the product of the growth of global trading and the fact that different countries promulgate different tax laws. It so happens that people find tax laws in certain jurisdictions as less restrictive, and are thus more attractive, than taxation in their own countries. In other words, the existence of tax havens promotes an atmosphere of tax competitiveness within the scope of economic globalisation.
Using Tax Havens
For those who do choose to avail of tax mitigation strategies at offshore financial centres, there are several pathways that can be taken.
First, individuals can become residents of the tax haven. In most cases, countries count residency as the foremost criterion for taxation. Whilst non-residents may enjoy little to no taxes, residents on the other hand are afforded certain protection compared to non-residents. A person may thereby benefit from relatively lower income tax and little to no capital gains tax compared to the person’s high-tax country of origin and still gain the benefits of being a resident of the offshore jurisdiction.
Another common method is to place assets in an offshore trust or company. In effect, ownership of the asset is held in trust by the offshore company with the real owner as the beneficial shareholder. Company shareholders in offshore tax havens are, in practice, kept in the strictest confidence and effectively remain anonymous because reporting requirements regarding these matters within these jurisdictions are usually non-existent.
As an alternative, entire businesses may be setup offshore simply to avail of lower taxation. Whilst this strategy is the least “tax-free” option the minimised exposure to taxes is enough to allow businesses to operate with more funds at their disposal compared to operating their business in a high-tax regime.
Regarding Onshore Tax Havens
There are other ways of leveraging the benefits of tax havens. Those mentioned here are just the more popular forms of tax mitigation using offshore havens. Note however that there are certain localities within ones country that may be considered tax havens as well. At any time that a particular region or province provides a competitive taxation scheme to attract individuals or business to reside, invest or trade then that would essentially be a tax haven.
Selecting Tax Havens
There are quite a number of places that may be considered as tax havens, whether onshore or offshore. Whereas there were only a handful of countries considered modern tax havens during the middle part of the 1990’s, which were usually located in the Caribbean and thereabouts, the number of jurisdictions have multiplied dramatically in the past 2 decades.
According to the Organisation for Economic Co-operation and Development (OECD) there were more than 40 countries identified as tax havens by the turn of the millennium. Now the OECD has refined its list to two general categories - cooperative and uncooperative tax havens. The latter refers to tax havens that have not committed or are yet to fully implement the international tax standard being pushed by the OECD.
With OECD reporting that all countries included in their survey of well known offshore tax havens have agreed to enact compliance with the tax standard, OECD status should be the least of the criteria for choosing a tax haven.
The main determinant for most people, which truly defines what a tax haven is all about in the first place, is the enforced tax rate in the jurisdiction. The applicability of a particular tax haven will all depend on the situation of the person or business - particularly which forms of taxes need mitigation.
There are countries that do not impose personal income tax on foreigners. There are those with minimal or no capital gains tax and inheritance taxes. There are also jurisdictions that impose zero to very minimal personal or corporate taxes.
Apart from the different tax rates, other factors used to select a viable tax haven for minimising exposure include the country’s political and economic stability, availability of local professional services (i.e. accounting and legal firms), telecommunication infrastructures, and existing international taxation treaties.
At any rate when choosing a tax beneficial jurisdiction, the help of a tax planning professional is essential to making a proper selection. Not only are there financial considerations involved, but there are also numerous legal aspects that need careful attention before one can undertake offshore tax reduction strategies.
Tax Planning
For individuals and corporations, one aspect of overall financial planning is tax planning. Inasmuch as majority of people may want to wish away their tax liabilities, it is an integral component of modern living. To ignore the significance of tax systems to persons or businesses is to lose sight of the fact that in many countries, taxes eat up as much as a third of the population’s generated income.
Nations in general depend on taxes for the survival of their respective economies. More than half of the countries in the world have Gross Domestic Products that are fueled by taxation - at least a quarter up to 50% (and in some cases even more) of their GDP consists of revenue from their various taxes. This clearly illustrates the crucial role of taxes in public finance, which has direct implications to personal and corporate finance as well.
In light of this, tax planning makes a lot of sense. Taxes impact not only individual finances but entire economies as well. Paying attention to existing tax laws and looking out for opportunities to improve ones financial situation through various acceptable tax mitigation schemes is a vital part of keeping ones finances viable.
Defined Tax Planning
One way to define tax planning is to highlight its expected results - that is, tax planning is the adoption of legal measures that would reduce the total payable tax due. Although eliminating tax altogether may be the desire of most taxpayers, it would remain an elusive dream.
Tax reduction is the key concept here. Lowering ones exposure to tax is at the very core of tax planning. This used to be a simple matter. There was a time when tax planning merely involved determining what to spend on, when to make the spend and whether such expenditures are tax deductible.
These days however, new forms of tax relief have evolved as well as more sophisticated strategies for tax reduction that professional expertise may be needed for most cases in order to achieve an optimal and legal tax plan. Such experts may include accountants, tax lawyers, registered financial advisers and professional tax planners. Sometimes specialised computer programs are thrown in the mix so that maximised tax savings can be realised.
Aspects of Tax Planning
One irrefutable principle in tax planning is that the more you earn on paper, the more exposure you have to tax liabilities, and therefore the more taxes you pay. Chances are, the reverse is also true - the less you earn, the lesser your tax liabilities.
The challenge therefore in tax planning is to reduce ones exposure by lowering the documented taxable income as well as availing of various tax reliefs to further reduce the total tax owed. It may sound simple enough but there is no shotgun approach that can be applied to the process. Everything must be done on a case-to-case basis.
The foundational requirement to tax planning is a thorough knowledge of applicable tax laws. If your accountant has minimal exposure to the intricacies of taxation in your particular locality, then that puts you in a less than ideal position to take advantage of tax planning. Get the suitable services a real tax expert and endeavor to know the tax laws applicable to you as well.
For individuals, there are not too many lawful options on how to reduce income on paper. This is further confounded by the particular tax laws existing in the relevant domicile of the taxpayer. In some cases, individual taxpayers may avail of various deductions to the taxable gross income which may include contributions to a retirement fund or other tax deductible annuity investments.
Business owners on the other hand have more expenses which may go to reducing their gross taxable income. In many countries, small businesses and self-employed persons are allowed greater latitude of adjustments to their gross revenue.
Another aspect of tax planning is the accounting method used particular to businesses. The cash method of accounting allows businesses to delay billing of customers so as not to increase taxable income. In contrast, the accrual method of accounting may allow the posting of larger deductions for billed expenditures.
Big corporations usually have no choice as most jurisdictions require accrual accounting for large business entities. The option here is to time deductible expenses towards the year’s end. Smaller businesses on the other hand may opt for cash accounting and then defer the collection of receivable income for the following year. In both cases, tax savings will be realised.
Lastly, tax planning also involves utilisation of various tax relief provided by laws of the particular jurisdiction of the taxpayer. Such tax relief may include various tax exemptions, additional tax deductions as well as tax credits. Advanced tax planning will include the use of a wide array of financial and legal structures both onshore and offshore that would effectively minimise the taxpayer’s exposure to tax.

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