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How Large Corporations and the Wealthy Utilize Tax Havens

Thursday, September 20, 2012

Even though tax havens are of paramount importance to some individuals, they are also most beneficial to small companies and especially multinationals. For example, multinationals such as Pepsi take advantage of offshore tax structures to lower their outgoings. Obviously, these large organizations have expendable budgets and can afford the pleasure of tax advisors to discover tax saving opportunities. To put it simply there are two tactics dispensed to minimize businesses tax.

This is called effective tax rate meaning the total tax paid divided by the company’s profits. The two ways to reduce tax are known as ‘corporate migration’ and ‘subsidiaries’.

Corporate Migration

Put simply, this means a company moving abroad and setting up its headquarters in another tax haven. This can be one of two things, either a move of total operations where the entire company move abroad or only a part transfer where the name settles abroad but the company’s operations stay in their original position with only segments of the company operating abroad.

Be wary when trying to execute a part transfer because many countries won’t be fooled and will want you to move the entirety of the operations to their homeland, this could potentially result in even higher tax. In reality companies often just instigate a part-transfer of operations.

An example of this is the lesser parts of the company being vacated abroad such as a call centre or help lines. Here savings are made because the tax haven does not require the company to pay tax. What is a tax haven? this is a place where companies go to pay little or no tax. This, however, does require the cost for a tax advisory as they need to check the company’s residence has actually transferred operations abroad.

Utilizing Tax Haven Subsidiaries


This is where a multinationals tax agent is really worth their salt. Many very large businesses use this tactic; however it is a tricky area and depends on the jurisdiction involved and the type of business you are offering. Here are some of the more popular strategies:

Deferring Tax Payments

This tactic is deployed mainly in the US, it means taxing companies on their earnings worldwide but allows deferral of tax for income made from abroad business, but only if it is reinvested overseas. This enables corporate groups to be based in these countries to use the tax haven subsidiaries but hold trading abroad and minimize the tax charge.

Offshore Finance Companies

Put simply, it is a tax haven subsidiary lending finance to a tax paying business. The excellent factor about this arrangement is that the interest is then counted as a tax deductable for the paying tax company.
This then means any overseas subsidiaries income which sells the offshore tax havens company’s intellectual property is tax deductible.

Offshore property

This means a tax paying company will transfer its intellectual property such as patents and copyrights to a tax haven. Then the tax haven can sell a licensing fee for use of the property.

Transfer Pricing

Transfer pricing use to be a very effective and used on a large scale but now many countries have enforced legislation to restrict this. Transfer pricing simply means the rate charged for services or products between two parties, for example a parent company and its subsidiaries.

The main purpose of this is to arrange a structure that ensures the taxpaying companies are paying the management charges to a tax haven group. Provided they get a tax deductible, the whole structure will benefit. The same would also apply for the purchase of stock and merchandise from overseas companies; the salaries are then deductible for using overseas staff.

Remember for the scheme to be effective the paying company needs to get the tax deduction.

Restructuring

One technique used by the larger companies to achieve tax advantages is by using offshore companies. How to achieve this tax benefit is by forming a company abroad between the UK Company and the stakeholders. This means the share holders then owns the majority of a non resident company, the UK Company then belongs to the overall company.

This is achieved very easily by using share to share exchange; this is regarded as commercial purposes. Bear in mind you need to ensure that the UK resident company is managed by an abroad firm.

Some known advantages for having an offshore holding company:

• Overseas income exempt from UK tax
• It can hold shares in CFC without having to abide to any or all the provisions

This restructuring avoids exit from the UK Company but keeps it UK owned, it’s the shareholders who become tax exempt and benefit.

Utilizing Holding Companies

Holding companies are usually set up in a suitable jurisdiction, where it holds shares in various companies. It allows the profits made to be taxed at a minimum.

How to prevent withholding Tax

A number of the greater developed countries have enforced legislation which creates withholding tax dividends. This is very similar to a PAYE for employee. When you receive a certain amount it is already taxed and this deducted prior by the employer. Countries such as the UK and US already allow less tax for companies paying overseas tax.

This is where double tax treaties are very useful; this can make a company free from withholding tax or at the very least minimizes tax they must pay. This allows dividends to be passed between the company and the subsidiaries without being taxed. This trick creates many tax benefits for companies with offshore accounts.

To conclude, these are various methods implemented by companies to reduce or even eliminate tax for your company. It would be advised to further research each individual jurisdiction before expanding as rules and legislations can vary. Tax professionals would be encouraged, even though expensive they are hugely beneficial. This is a set of ideal solutions to pursue when trying to reduce taxes between your company and its subsidiaries.



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