INTERNATIONAL TAX PLANNING AND MANAGEMENT
Tax planning is the art of analysing the financial situation of the tax payer and planning the tax in the best possible way by applying various methods and techniques. Every tax payer opts for tax planning techniques in order to minimize their tax liability. International Tax Planning refers to planning of the cross border transaction and gathering the knowledge about international tax laws and its principles for successfully executing the inter border transactions.
Domestic tax planning is primarily restricted to the home country tax laws, its exemptions, deductions and different tax rates applicable on various sources of income however the International tax planning covers more than one tax laws, their impact on international transactions and effect on double taxation.
The primary objective of international tax planning and management is to establish and maintain an effective strategy for the international business. It also have various other objectives such as-
- Availing various tax incentives.
- To grab the opportunities for foreign tax credit.
- Avoid double taxation
- Wealth Maximization.etc
Need for International Tax planning
Though tax is not the primary factor while making the decision to do the business overseas however it becomes a very important consideration once the primary decisions relating to business are taken. The Double taxation Avoidance Agreement Treaties (“DTAA”) between the countries and tax administration are the one of the main factors to be considered while planning international taxation. They influence the long-term Viability of the business and has a great impact on their growth.
Cross border transactions involve tax in more than one jurisdiction and therefore suffer higher tax liability than any domestic transactions. Moreover, Multi-National Corporations have to cope with inconsistent tax laws, additional compliance costs, Government regulations, etc.
Therefore, a proper Tax planning is necessary for the entities doing international Business in order to reduce tax liability and manage the business successfully.
Steps for International Planning:
Various steps that can be adopted for international planning are as follows-
1. Study the Existing data base
- Analyze the Home transactions.
- Review the tax structure and tax treaties
- Compute the tax liability and other costs
2. Design of Alternative tax planning options
- Identify the tax-free countries.
- Select the suitable form of transactions, business operations, Etc.
- Identify all the Non- tax factors
- List all tax planning options.
3. Evaluate the Alternative plans:
- Calculate the tax liability and tax savings if:
- The plan is adopted and fails
- The plan is adopted and succeeds
- The plan is not adopted.
4. On the basis of evaluation select the best tax option.
5. Update the Plan:
- Review regularly the changes in international tax laws, Treaties, etc.
- Update the plan accordingly.
Some of the Principles on which International Tax Planning techniques are based:
- Exemption form the tax
- Reduction in tax rate
- Reduction in tax base
- Deferral of tax payment
- Credit or exemption from foreign taxes paid
- Treaty shopping.
International tax strategy should be dynamic; it should change with change in the international tax laws. Top level managers must be aware about the challenges and global threats and after analyzing all the factors and risks, evaluate and design international tax structures.