Essentials Of International Tax Planning

International Tax planning is the study of taxes levied on citizens of different countries or gaining knowledge about the international aspects of doing business internationally and then paying taxes according to the international rules and regulations. Governments usually have certain rules and regulations on the income of citizens of their country. These taxes vary according to the territories as well. A person cannot do business dealings internationally without paying taxes. An individual’s income can be twice, by two countries (double taxation) or would not be taxed at all(no taxation). This depends on the rules decided by the government for the same. Income can be levied on local income or on worldwide income. When worldwide income is implied, reduction of tax or foreign credits is added for paying taxes to other judiciaries. Multinational Corporations usually hire international tax professionals who can do International Tax Planning, to decrease their worldwide tax liabilities. There are certain objectives of International Taxation-

  • To promote equality amongst domestic and foreign taxpayers with the same income, regardless of the source of income.
  • To increase domestic competition through fiscal measures and to improve the growth of the economy.
  • To gain a fair share from the revenue generated during cross-border transactions.
  • To create a fair balance between capital export and import neutrality.

Tax equity and tax neutrality within different territories can influence the principles of international taxation. When international tax is levied on some income, the revenue generated from that should be equally shared among the nations involved. It also requires that taxpayers that cross-borders taxation activities are held without discrimination or undue preferences.

Tax systems are equal when they don’t affect the economic choice of taxpayers. A system may be tax neutral either on capital export or on capital import. Developed countries usually prefer capital export or domestic neutrality. This does not affect the taxpayer’s choices between investing at home or abroad. Whereas, developing countries generally tend to favor capital import or competitive neutrality to make sure that investment decisions of domestic and foreign investors in their country are on par. The fairness, efficiency, and equality of tax systems are affected by not only the tax laws of any one country but is also affected by the tax laws of all the countries. Due to less global tax harmony, domestic tax systems often lead to conflicts and problems during cross border transactions and ultimately cause excessive taxation. Countries all over the world have varying social and economic growth with different fiscal needs. Every country has its own set of taxing rules and laws for different transactions that are held nationally or internationally. Lack of agreement on international tax principles leads to economic unbalance and also encourage international tax competition.

International taxation laws were made to resolve these distortions amongst various territories. A country may levy unlimited taxes on its individuals but they cannot enforce them outside their own jurisdiction. This is how international taxation planning came into being. It was needed because the taxes that were to be paid by businesses during international transactions were becoming a liability. Therefore, management of these taxes needed professionals who could help people pay these taxes on time, without breaking the law and order of any country.