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International Tax And Offshore Planning Database
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Planning Factors
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In analyzing the tax factors of an international tax plan, it is necessary to examine:
- the domestic internal tax systems of the countries involved in the project; and
- the manner in which the general rules embodied in such systems are affected by the
introduction of the offshore factor.
- - Non-tax factors may also have to be taken into consideration for the purposes
of a proposed offshore tax plan. These can be every bit as important as the tax
factors.
Caveat: The tax tail must never be allowed to wag the business dog.
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The Connecting Factor
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The most effective offshore tax plans derive from the ability to sever the nexus
or connecting factor with a taxing country in favour of an offshore country or to
rearrange the connecting factors in such a way that a lower overall tax burden is
suffered.
Caveat: Even though a taxpayer may stay within the letter of the law, there is usually
a limit to the tax minimization steps that he may take. Most tax systems contain
some general or specific anti avoidance provisions. The substance versus form rule
enables the revenue to disregard appearances and to rewrite transactions so as to
reflect the true situation.
The most effective offshore tax plans derive from the ability to sever the nexus
or connecting factor with a taxing country in favour of an offshore country or to
rearrange the connecting factors in such a way that a lower overall tax burden is
suffered. Liability to tax is dependent upon the existence of a connecting factor
between a taxing jurisdiction on the one hand and a taxpayer or taxable event on
the other.
In the case of an individual taxpayer, the principal connecting factors are residence,
ordinary residence, domicile, and citizenship (nationality). In the case of a company,
they are management and control, beneficial ownership, place of incorporation, and
location of the registered office. In the case of a trust, they are the place of
creation, the applicable law, the place of administration or trusteeship, and the
residence, domicile, or citizenship of the beneficiaries or trustees.
Other important connecting factors may be the centre of economic interests, the
presence of a permanent establishment, and effectively connected income.
The principal connecting factor with regard to a taxable event is the real or deemed
source. For example, in the case of profits deriving from the sale of goods, the
source might be the place of the execution of the contract, the place where a trader
or manufacturer employs his capital or where activities are exercised, while in
the case of a real property tax or a capital gains tax on the sale of real property,
geographic source or situs would normally constitute the connecting factor.
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Tax and Non-Tax Incentives
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Tax incentives may convert otherwise high tax countries into limited purpose tax
havens. Tax incentives are tax concessions that are granted to attract local or
foreign investment capital to particular activities or areas. Nearly all countries
grant tax incentives of some kind as part of their general or regional economic
development programs.
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