Tax Planning

Types of Tax Reduction

Tax Planning

• playing by the rules to achieve lower taxes

Tax Avoidance

• playing by the rules to achieve lower taxes
• but you are not following the spirit of the law

Tax Evasion

• passively hiding information from tax authorities to achieve lower taxes
  • e.g. not declaring income

Tax Fraud

• actively falsifying information to achieve lower taxes
  • e.g. faking/altering documents

BEPS

• BEPS

Debt

• high debt is beneficial for tax planning/tax avoidance
• paying interest reduces profit
• reduced profit → reduced corporate tax
• interest deduction limitation aims to alleviate this
  • only up to gearing of 3 is deductible
  • i.e. up to 3x debt vs equity is deductible

Case Study 1

• ATAD Art. 4
  • EU Directive
  • passed in only 6 months (super quick)
• givens:
  • 5mn EBITDA rental income
  • 4.5mn interest expense
• basically: is interest expense tax deductible?
  • all debt payments are caught
  • only 30% of EBITDA is deductible
  • only applies beyond 3mn of net interest expense
  • not applicable for financial undertakings (bank, insurance)
  • therefore: 3mn + (5mn * 0.3) = 4.5mn tax deductible
    • first 3mn are deductible anyways → 3mn
    • after 30% of EBITDA → 1.5mn
  • conclusion: full amount of interest expense is deductible in this case

Case Study 2 (Panama)

• givens:
  • company A (25% tax, country X)
  • company B (0% tax, country Y)
  • A holds 100% of B
  • B generates 10mn in year 1
  • B distributes 10mn in dividends to A in year 2
• how/when/where is the profit (10mn) taxed?
  • year 1
    • income taxed in parent company (25%)
      • 2.5mn
  • year 2
    • dividend distribution
    • no extra tax

CFC

• CFC

Case Study 3

• givens:
  • sole entrepreneur with start-up
  • sets up company to save tax
    • company income tax rate: 25%
    • personal income tax rate: 50%
• conclusion:
  • not so smart (at least for tax purpose)
    • main reason should be Limited Liability, rather than lower income tax
    • or main reason should be that with a company only profit is taxed, not gross income
  • still extraction from company for personal profit is due to personal income tax → effectively same tax burden

GAAR

• ATAD Art. 6
  • obtaining tax advantage which defeats the purpose of the law
  • non-genuine commercial reasons
• GAARs allow to ignore legal structuring when dealing with taxation
• Questions:
  • Is the object or purpose of the law defeated?
  • What is the object or purpose of the law?

Case Study 4 - Exit Tax

• Givens
  • unrealized capital gains of 400
  • state X (current residence) tax rate: 25%
  • state Y (migration location) tax rate: 0%
• Tax Effect
  • in this case study relevant taxation
    • unrealized capital gains cannot be taxed normally
    • exit tax is an exception to this (fictitious sale)

Exit Tax

• migration from state X to state Y (applicable even within EU)
• At the exit of state X, state X has last chance to tax the company
  • therefore tax liabilities become liable right away, instead of at end of year
  • state X has significant and justified interest in taxation
• even unrealized capital gains are taxed (normally not possible)
  • profit = fictitious sale price - book value
• tax burdens reasons are not yet realized, therefore company may not have funds to pay tax burden immediately
  • state X may offer the company to pay tax burden within 5 years

Case Study 5 - Arms Length

• At Arms Length is technically illegal
• but it very hard to actually prove
  • if patent is unique it is very hard to find a comparable transaction and judge the market price
• possible double taxationl

Quiz 2

Double Personal Taxation

• limited tax liability: only as much as earned in state X
• unlimited tax liability: all income from all countries
• correct answer: unlimited in UK (residency) and limited in AT (only income)

Double Corporate Taxation

• juridical double taxation
  • same income taxed twice for same company
• no double taxation
  • same income only taxed once
• economic double taxation
  • same income taxed twice for 2 companies
• profits generated in Belgium, siphoned off to US
  • same profits are taxed in Belgium and in US
  • correct: economic double taxation
• Tax Treaty

Mandatory OECD MC

• OECD MC is not mandatory
  • template for a Tax Treaty between countries
  • only a model - something to copy and tailor to your needs
• soft law - although very successful
  • most tax treaties follow this model → Tax Treaty

Distributive Rules

• distributive rules allocate taxing rights non-exclusively to one of the two contracting states. Both states have a taxing right, just not the complete tax right.

DTC

• what is the purpose of a Tax Treaty DTC?
  • Reduction/Elimination of double taxation (main purpose)
  • Facilitating administrative cooperation (added benefit)
    • prevention of tax evasion/fraud
  • never increasing tax liability
    • only ever limit the tax liability within a single tax jurisdiction

Case Study 6 - Tax Treaty

• Tax Treaty