Donetsk National Technical University
Zuykov Roman
Dissertation thesis: "THE USE OF INSTRUMENTS OF INTERNATIONAL TAX PLANNING TO INCREASE BUSINESS EFFECTIVENESS"
International Economics
category: Master Graduate Thesis
supervisor: ass. prof. Ivanov Olexandr Georgiyovych
E-mail:
zuykov@dru.dn.ua1. GENERAL STATEMENTS
1.1 Actuality and goal of reserch
During the past few years Ukrainian economy showed some positive changes on macroeconomic level. Production as well as business activity becomes more active and shows an increase compared to former years. More enterprises step from mere trade to manufacturing. Production and financial companies become stronger and able for competition with foreign companies, they establish subsidiaries and representatives offices abroad. The main thing now is to help these companies to maintain or increase levels of their development and development of national economy. One of the ways of improving company’s efficiency, fastening its development and strengthening its financial conditions is tax optimization both in internal and external transactions. This paper deals with a latter part and tries to answer the question: how juridical entity may optimize its tax obligations in “a global village” by using legal instruments. This question touches simultaneously interests of both state and company. And if one party calls these transactions optimization than other party – state officials – perceives them as tax evasion. In this situation it is needed a clear understanding of the fact that financial means legally saved from taxation (avoided from taxation) will work with multiplied effect for this company, for state in the form of investments and for society in the form of new job places and low social tension.
1.2 Object of reserch
Ukrainian export-import companies which have an international activity in all possible ways whether contracting through international foreign establishment or through mediator.
2. CONTENTS OF DISSERTATION
To get acquainted with instruments that are widely used in international business operations and their basic mechanisms one should get acquainted with main principles and terms of international taxation, namely these matters are discussed in the first chapter of this paper. The second chapter deals with examples of tax optimization instruments, which are most widely used in the world. The meaning of every instrument is assessed and compared to different attitudes to them by different countries, there are illustrations of basic schemes and picturesque examples are given. The third chapter deals with some aspects of national legislation of tax treaties on relief from double taxation and regulation of operations with residents of tax havens territories. Some weak points and loopholes of Ukrainian legislation are discussed in that part.
Taxation
schemes are usually created for three basic purposes: 1) to raise revenue for
governments; 2) to encourage, regulate, or restrict local or foreign
investment; 3) to protect consumers or local producers [5]. They are stated
directly or indirectly in national tax legislation of every country and are
the bases for constructing national tax system. Law
of Ukraine of 13.03.1992 ¹ 2199-XII “About tax system of Ukraine”
[7] also contains these statements.
Every
national tax system deals with common terms and principles. The key elements
of national tax systems are nationality person or company taxpayer, the place
it resides or residence, source of taxpayer’s income or a combination of
these elements. Each elements needs to be described more thoroughly.
Nationality
Principle
Countries
that use the nationality principle tax their citizens or nationals on their
worldwide income no matter where they may reside. A citizen is an individual
who is a member of a state or nation, who owes allegiance to it, and fealty to
a sovereign. Domestic companies are sometimes treated as citizens or nationals
of their home country.
Residency
Principle
According
to residence principle, a country taxes the worldwide income of persons
legally resident within its territorial jurisdiction.
Generally,
the residence of natural persons is determined by one of three tests. One test
is objective: the length of time a person resides within the borders of a
particular state; a second is subjective: the intent of the individual to
make a place his or her permanent domicile or household; and the third is
declarative: the individual obtains admission to a country as a resident.
India,
Indonesia, Japan, Panama, Singapore, Taiwan, and Venezuela have all adopted a
simple objective test, for example, a stay within the country for an arbitrary
period of time, most commonly a stay of at least 6 months. Belgium uses a
subjective test: it looks for a person's domicile or a principal home. Brazil
uses a declarative test: individuals with permanent visas are residents,
individuals with temporary visas are nonresidents (unless they stay in the
country for more than 1 year). Many countries, however, use two or more of
these tests in combination. Luxembourg, for example, treats an individual as a
resident if he has a permanent home in the country or has been living in the
country continuously for 6 months. Poland uses the same test. Mexico regards
an individual who has established a home in Mexico as a resident unless the
person has been outside the country for at least 183 days and can demonstrate
residency in another country. According to Ukrainian legislation citizen of
Ukraine is, in particular, a taxpayer of income tax if she or he resides on
territory of Ukraine not less than 163 days.
The
residence of companies is determined by two tests: (1) where the company was
organized or (2) where the company is managed and controlled. In the United
States, only the first is used. In the United Kingdom, its colonies, and
former colonies, residence is determined solely by the place where the "central
management and control" of the trade or business is exercised – the
second test. In Germany, France, and most other civil law countries, both
tests are applied. That is, a company is a resident if either its statutory
seat or its center of management is within the country. Companies in civil law
countries may, as a consequence, have dual residency.
Countries
applying the source principle tax all income from sources within their
territorial jurisdiction and generally exempt from taxation income accruing
abroad.
Domestic
and resident taxpayers, all additionally impose taxes on the domestic income
of nonresident taxpayers. Worldwide income, of course, is income derived
from any source, from any part of the world. Domestic income is income
originating within a particular country.
Domestic
income is often described as income "accruing" or "deemed to be
accruing" or, alternatively, "derived" or "deemed to be
derived" from "sources" within a country.
Sometimes
these terms are interpreted in the tax laws: other times administrative agencies
are given discretion to interpret them. Commonly, income that is accrued or
derived from sources within a country will include three kinds: 1) income
derived from property located within the country (including interest,
dividends, fees, royalties, etc.), 2) income derived from any trade or
profession carried on through any agency or branch within the country (with
agriculture, mining, and manufacturing often being mentioned as examples),
and 3) income derived from employment carried on within the country.
To
determine if particular income is "derived" from a trade or
profession carried on within a country, the following factors are also
commonly considered: 1) whether the gain was derived from assets used in the
conduct of the trade or profession and 2) whether the activities of the trade
or profession were a material factor in realizing the gain.
The only foreign persons commonly able to escape taxes are
foreign governments, diplomats, and international organizations (this clearly
states in Law of Ukraine “About Income Taxation of Enterprises of Ukraine”
[7]). Governments can claim sovereign immunity. Transactions of a commercial
nature – such as the purchase or sale of goods or services, loans,
guarantees and employment contracts – are all potentially subject to
taxation. Nevertheless, many countries choose not to tax foreign governments
or to exempt them from certain types of taxation. For example, the US.
Internal Revenue Code exempts "foreign governments," including
"the integral parts [and] controlled entities of a foreign sovereign,"
from taxation on interest income, dividend income, and gains on sales of
securities, and from branch profits taxes and withholding.
Foreign
diplomats are exempt from tax liability by the provisions of the Vienna Convention
on Diplomatic Relations
The
immunity of an international organization and its personnel from taxation does
not exist as a matter of course in international law. Exemptions depend on 1)
the instrument creating the organization, 2) agreements between the
organization and the particular state, 3) the applicability of multilateral
tax conventions, 4) local tax law and 5) the applicability of general
principles of international private law [4].
Taxpayers
who earn income in two ore more countries face the problem of dual taxation.
That is, income earned in one country may be (and often is) taxed a second
time in another country.
It
is now the practice in virtually all countries to provide relief from double
taxation either unilaterally or through a bilateral or multilateral treaty.
Relief may take the form of an exemption, a credit, or a deduction.
The
exemption system provides for income that is subject to taxation in two or
more states to be taxed in only one and exempted from tax in others. Income
may be exempted in either the host state (the state that is the source of
income) or in the home state (the state where the taxpayer resides). Commonly,
an exemption system exempts income that has been taxed in a host country from
further taxation in the home state.
The
credit system allows the tax paid on one state to be used as a credit against
a taxpayer’s liability in another state. The credit will be the form of a
credit for an overseas branch or in the form of an indirect credit for a
foreign subsidiary.
The
deduction system allows a taxpayer to deduct the tax paid to one state from
the profits liable to taxation in another state.
2.2
Instruments of International Tax Optimization
The
problems presented by double taxation – as well as other problems that arise
from tax incentives, tax avoidance, and tax evasion – can deal with
unilaterally (that is, exclusively by one state) or through the use of
reciprocal tax treaties. Although a few commentators have suggested that these
problems can best be dealt with unilaterally, most authorities hold that they
can be dealt in treaties.
Among
the earliest advocates for the adoption of bilateral tax treaties was the
League of Nations, which sponsored a group of experts who drafted several
model tax treaties in the 1920s. These draft treaties were later used by the
Organization for Economic Cooperation and Development (OECD) in drafting its
influential model treaty. The OECD’s Model Convention for the Avoidance of
Double Taxation with Respect to Taxes on Income and Capital (OECD Model Tax
Treaty [3]) was issued first in 1963; it was revised and reissued most
recently in 1988. Possibly because the OECD model is aimed primarily at
resolving tax disputes between developed countries, the United Nations focused
its efforts on formulation guidelines for treaties between developed and
developing countries. Committees set up by the UN in 1968 and 1974 both
advocated the drafting of a model bilateral convention that would contain as
many standardized clauses as possible. In 1980, the UN Secretariat acted on
these recommendations, issuing a Model Double Taxation Convention between
Developed and Developing Countries (UN Model Tax Treaty).
Most
tax treaties are bilateral agreements. Indeed the UN ad hoc Group of Experts
on Tax Treaties between Developed and Developing Countries doubted in 1968
that any effort should be expended on developing multilateral agreements.
Nevertheless, several multilateral agreements have concluded, including the
Double Taxation Agreement of 1966, entered into by the member states of the
African and Mangalasy Common Organization; the 1966 Convention for Avoidance
of Double taxation, adopted by the member states of the Andean Common Market;
and the 1972 Nordic Convention Regarding Mutual Assistance in Matters Relating
to Tax, signed by Denmark, Finland, Iceland, Norway, and Sweden.
Most
tax treaties mirror the coverage provisions of the OECD and UN model treaties
(which themselves contain identical provisions). The taxes covered are income
taxes, capital gains taxes and taxes on the wealth. The persons covered are
both natural persons and companies.
Both
the OECD and the UN model tax treaties base taxation on the residency of
persons within the contracting states. This was not always so. Today, with one
notable exception, states do not insist upon taxing their nonresident citizens.
The exception is the United States. In every tax treaty to which the United
States is a party, without exception, the United States has refused to yield
its right to tax the income of its citizens.
Due
to Ukrainian legislation the permanent establishment of nonresident in
Ukraine is its regular activity place through which economic activity on
territory of Ukraine totally or partially is fulfilled. To permanent
establishments in Ukraine belong, in particular: subsidiary, representative
office, factories, workshops, mines, oil and gas wells, quarries, and other
places for extracting natural resources (order of State Tax Administration of
Ukriane on 16.01.98 N 23).
The
OECD and the UN model treaties differ in their approach to determining the
income that may be attributed to a permanent establishment. The UN model
allows profits to be attributed from a wider range of sources than does the
OECD model by following what is known as the
force-of-attraction rule. This rule says that if a company in Country A
has a permanent establishment in Country B, then Country Â
may tax not only the profits generated by the company through the permanent
establishment but also any profits that come to the company from trade or
business that is carried on in Country B independent of the permanent
establishment.
The
taxation of company dividends varies among tax treaties. Older treaties
allowed only the contracting state where the capital was invested (i.e., the
"source" stale) to tax the resulting dividends. The OECD Model Tax
Treaty takes a different approach. If a parent company in Country A owns
more than a 25 percent share of a subsidiary in Country B. Country B may
impose no greater than a 15 percent withholding tax on dividends remitted to
the parent; and Country A may tax the dividends received by the parent. The
UN Model Tax Treaty approaches dividends in a fashion similar to the OECD
treaty, except that it leaves open for negotiation between the contracting
states the percentage ownership of the subsidiary and the percentage of
withholding tax that a source country may impose.
The
UN Model Tax Treaty treats (be taxation of interest the same way that it
treats dividends. The OECD treaty takes a different (and more traditional)
approach. It allows the state where the recipient of the interest is a
resident to impose taxes. Additionally, the source state may tax the same
interest by imposing a withholding tax, but that tax is limited to a rate of
10 percent. However, if the recipient carries on a business or trade in the
source state through a permanent establishment or a fixed base, then these
interest rules do not apply. Instead, the interest is treated as ordinary
income attributable to a company or to a person providing independent or
professional services.
Consider
two associated business establishments that are residents of different states.
They may be loosely linked affiliates or close-knit elements of a multinational
enterprise. In either case, they are under common ownership, and in both cases
they transfer goods or merchandise back and forth between themselves. The price
they set on the transfer of goods and services from one establishment to another
is arbitrary. If the same taxing authority were taxing both establishments, the
price would also be irrelevant, because the profit made by the overall
enterprise would always be the same, and so would the taxes. However, if one
enterprise is located in a low-tax country and the other in a high-tax country,
this would not be the case. By charging the enterprise in the high-tax state a
high price on transfers from the enterprise in the low-tax state, the first
enterprise will have a lower profit and therefore less taxable income that is
subject to taxation at high rates, whereas the second enterprise will have a
higher profit and more taxable income to be taxed at low rates. The effect for
the overall enterprise, of course, is a substantial tax saving [3].
Tax
authorities commonly approach this problem by assessing the profits earned by
affiliated enterprises from international transactions between themselves on the
basis of the arm's length principle. This principle has been widely
accepted in domestic legislation, in model treaties (including the OECD and UN
model treaties), and in most bilateral treaties for the avoidance of double
taxation. The arm's length principle attributes to an affiliated establishment
those profits that it would earn if it were a completely independent entity dealing
with another affiliate as if the latter were a distinct and separate enterprise
and both were operating under conditions and selling at prices prevailing in the
regular market.
The
arm's length principle lets tax authorities in the countries where affiliates
are located determine the earnings of each affiliate as if it were an
independent enterprise dealing with its associates at arm's length. This is true
whether the affiliate is a branch, a subsidiary, or the head office.
Three
methods for calculating an arm's length price are in common use. 1) The "comparable
uncontrolled market price" method uses prices charged in comparable
transactions between independent enterprises or between the concerned
multinational enterprise and unrelated parties. This is often difficult to
ascertain, either because comparable uncontrolled market prices are unavailable
or because adjustments have to be made for a variety of factors, such as
shipping costs or differences in quantity or quality. 2) The cost plus method
begins with the actual cost of goods, services, and the like, and then adds
appropriate cost and profit markups. 3) The resale minus method starts with the
final selling price and then deducts the appropriate markups for cost and profit.
Of course, the complexities of business in the real world make it difficult to
apply any of these three methods in its pure form. In practice, as a consequence,
taxing authorities use a mixture of these and other methods.
Another
approach to countering transfer pricing is used in California (the taxing entity
that originated the approach) and some 10 other states of the United States. It
is known as the unitary business rule,
and it taxes multinational enterprises on a percentage of their worldwide
income, regardless of where it is earned or by whom.
Instead
of beginning with the local affiliated enterprise and adjusting its income so
that it is treated as an independent arm's length entity, the
unitary business rule begins with the worldwide enterprise and determines the
share of income that it has earned locally. Because transfer pricing can distort
the amount of profits earned locally, the unitary business rule does not compare
local profits to worldwide profits. Instead, it uses three other factors to
determine the share of income earned locally: property, payroll, and sales.
The ratio between the local and worldwide figures for each of these is then used
to adjust the total consolidated income of all the affiliates of the worldwide
enterprise.
Treaty
shopping means that a taxpayer “shops” for countries with beneficial tax
treaty provisions, then sets up subsidiary enterprises in those countries to
take advantage of their treaties.
The
expression “treaty shopping” was first used in congressional hearings on
Offshore Tax Havens held in the United States in April 1971. The tax problem it
describes, however, has been around for quite some time. A 1945 tax treaty
between the United States and the United Kingdom, for example, contains an
“abuse” clause. The OECD has been studying the problem since 1961; and it is
discussed in the commentary to Article 1 of the OECD's 1977 Model Treaty. À 1983 OECD Working Paper entitled "The Improper Use of Tax Conventions
through Conduit Companies by Persons Not Entitled to Their Benefits"
examines treaty shopping in depth, as does a 1987 United Nations report by the ad
hoc Group of Experts on International Cooperation in Tax Matters.
Treaty
shopping involves two basic situations: the use of "direct conduit
companies" and the use of "stepping-stone conduit companies."
Both involve taxpayers who take advantage of tax treaties that were not meant to
apply to them.
Company
A in State A has a subsidiary. Company B, in State B. When Company Â
remits dividends, interest, or royalties to Company A, State Â
withholds substantial taxes. To avoid these taxes. Company A shops around for a
country. State C, that has a beneficial tax treaty with State A (i.e., a treaty
that reduces or eliminates withholding taxes charged by State Ñ
when dividends, interest, or royalties are remitted to a company in State A) and State B (i.e., a treaty that reduces or eliminates
withholding taxes charged by State B when dividends, interest, or royalties are
remitted to a company in State A).
Having
"shopped" and found State C, Company A will set up a subsidiary.
Company C, in State C, and make it the parent of Company B. Company B will then
remit its dividends, interest, or royalties to Company C (Company C serving as a direct conduit company).
The
major tax consequence of this arrangement is the elimination or reduction of the
tax collected by State B. Indeed, neither State A nor State C have to be tax
havens for Company A to have a tax advantage. The principal savings for Company
A will be the difference between the tax imposed by State B on remittances to
State A and the lower tax (or absence of tax) imposed on remittance to State C.
A
stepping-stone conduit companies arrangement is similar to the direct conduit
situation, except that a second intermediary country (State D) and company (Company
D) has to be used to move profits from the source company (Company B) back to
the parent (Company A). In this situation there is no tax treaty between State A
and State C, and State Ñ
does impose taxes on profits earned by Company C. To remedy this, Company A
shops for a second country, State D, to serve as a tax sink. To qualify as a tax
sink, State D must impose no income taxes. In addition, State C must (because of
a tax treaty or local legislation) allow its companies to deduct from their
earnings any expenses paid to companies in State D.
Again,
having "shopped" and found a tax sink in State D, Company A will set
up a second subsidiary. Company D, in State D. Company D will be made an
affiliate of Company C. Company D will grant Company C the technology licenses,
the franchises, the loans, and so forth it needs to carry on its business.
Company C will then pay Company D high fees, commissions, interest, and so
forth, all of which Company C may deduct in State C from its income. Company C
will, as a consequence, pay little or no
income lax to Stale C. The income, having been transferred to Company D in State
D, will then be remitted to Company A. free from the taxes of both State Â
and State C.
Countries
or territories that provide a refuge from taxes for a) taxpayers themselves, b)
the taxpayers' income, or c) the taxpayers' capital and other assets are known
as tax havens. Commonly,
tax havens not only impose few if any taxes, they also have secrecy laws that
forbid foreign governments from obtaining information about the ownership of
particular assets, as well as rules that allow for the full and complete
transfer and exchange of currencies.
In
the past several decades the scale on which individuals and companies have moved
their operating bases to tax havens to obtain relief or refuge from political
interference with their assets has grown dramatically. At the same time, this
growth has been paralleled by an increase in the number of attempts to define
and to curtail tax havens.
The
term "tax haven," although in widespread use, has no internationally
accepted definition. In part, this is because the concept is a relative one. One
country with substantially lower tax rates on some (or all) taxable income may
be considered a tax haven by a second country with substantially higher rates.
It is also because the term has often been used negatively, so that countries
with lower tax rates are unwilling to accept the "tax haven" label.
Several
approaches to defining tax havens are used in national legislation. One is to
make a list of countries that are regarded as tax havens. Germany, Australia,
and Japan, for example, have compiled such lists. In Ukraine Cabinet of
Ministers annually proclaims a list of countries treated as offshore territories
and due to Law of Ukraine “About
Income Taxation of Enterprises of Ukraine” [7] ad hoc tax regime is stipulated
with these territories. A
second approach is to define tax havens quantitatively. Article 238A of the
French General Tax Code, for example, describes a tax haven as a foreign state
or territory that imposes "taxes on profits or income that are
substantially lower than in France." What is meant by "substantially
lower" is stated although indirectly.
The
United Kingdom has taken a similar approach, defining a tax haven as one that
imposes taxes on a company controlled by U.K. residents that are less than
one-half of what the company would pay in the United Kingdom.
Other
approaches involve neither making a list of nor defining tax havens. Canada, for
example, has adopted a "functional" approach. Instead of enacting
legislation directed particularly or exclusively at tax havens, it has adopted
general legislation that effectively limits the usefulness of tax havens to
Canadian taxpayers. The United States has taken a "transactional"
approach, imposing restrictions on certain types of income (generally income
from foreign holding companies controlled by Americans) and certain types of
transactions (typically transactions with related persons) that commonly
involve the use of tax havens.
Because
individuals and companies do business in tax havens does not necessarily mean
that they do so to escape high taxes. Some of the nontax reasons why individuals
and firms may do business in a tax haven are the following: 1) to cater to the
needs of the tax haven country itself: 2) to remain anonymous for reasons other
than avoiding taxes (such as concealing one's identity for personal safety, or
to avoid possible boycotts of one's products, or to conceal one's activities
from competitors); 3) to protect a company or corporate group from
nationalization, political unrest, revolution, or war; and 4) to avoid rules and
regulations in a home country (such as national banking laws that dictate
interest rate ceilings and set reserve requirements, company laws that prescribe
particular management structures, or regulations that restrict foreign exchange).
Of
course, many operations carried out in tax havens are tax motivated, or at least
partly tax motivated. Many of these are legitimate forms of tax avoidance (as
compared to tax evasion), conforming both to the laws in the tax haven country
and the investor's home state. In such instances, of course, the possibility of
minimizing one's taxes will depend not only on the tax relief offered by the tax
haven country but also on the anti-tax haven laws in force in the home country.
Some of the legitimate tax-motivated uses of tax havens are the following: 1)
overall reduction of a person's tax burden; 2) delay of tax payments on income
from foreign sources until after it is repatriated to the home country so that
profits can be accumulated without being depleted by tax payments; 3)
minimizing taxes on certain types of income (such as investment income, income
from shipping, etc.) that are covered by exceptions to the home country's
anti-tax haven legislation; and 4) centralizing income in a tax haven country
and repatriating it to the home country in a nontaxable form.
2.3.1
Relief from double taxation using tax treaties
Due to
Letter of the State Tax Agency of Ukraine of 11.01.2000 ¹ 290/7/12-0107
“About implementation of tax treaties for a relief from double taxation”
there are a number of countries Ukraine signed a tax treaty (later Convention)
with: Great Britain (22.11.93), Poland (24.03.94), Belarus (30.01.95), Hungary
(24.06.96), Moldova (27.05.96), Sweden (04.06.96), Canada (22.08.96), Germany
(04.10.96), Slovakia (22.11.96), Latvia (21.11.96), Denmark (21.08.96), Norway
(18.09.96), Estonia (24.12.96), Armenia (19.11.96), Kazakhstan (14.04.97), the
Netherlands (02.11.96), Bulgaria (03.10.97), Rumania (17.11.97), Latvia
(25.12.97), Uzbekistan (25.07.95), Finland (14.02.98), China (18.10.96), Turkey
(29.04.98), Macedonia (23.11.98), Indonesia (09.11.98), Belgium (25.02.99),
Croatia (01.06.99), Kyrgyz (01.05.99), Czech (20.04.99), Georgia (01.04.99),
Austria (20.05.99), Turkmenistan (21.10.99), Russia (03.08.99), France
(01.11.99). Besides, according to article 7 of Law “About law succession of
Ukraine” [7] those conventions on relief from double taxation signed by USSR
still have power, unless new Convention with this or that country is signed. By
12.31.2000 USSR Conventions take part in relations of Ukraine with following
countries: India, Spain, Italy, Cyprus, Malaysia, Mongolia, USA, Switzerland and
Japan. Nowadays there are 43 conventions between Ukraine and countries of the
world on the relief from double taxation.
All
Conventions deal with income taxation (and some of them with property) received
by: a) residents of Ukraine abroad, b) nonresidents in Ukraine.
Description
of terms resident and nonresident is given in Law of Ukraine of 28.12.94 ¹ 334/94
“About Income Taxation of Enterprises
of Ukraine” [7] (later Law about Income). So, according to this law
under the term residents should be meant legal entities and subjects of economic
activity, which were founded and operate in accordance with laws of Ukraine and
reside on its territory (physical persons do not fit in the framework of this
term). So, under the article 19 of Law about Income tax sums on income received
from abroad, which were paid by these companies abroad, are taken into account
when paying an income tax in Ukraine. Sum, which is taken into account,
is computed under the rules set by this Law. It cannot be more than the sum,
which is to be paid in Ukraine by this taxpayer during the certain tax term. In
case the sum of paid taxes abroad exceeds that one which is to be paid in
Ukraine, there is no opportunity to reimburse the difference. Besides,
there is another limitation about the relief from double taxation, which depends
on the tax type paid abroad, and to be paid in Ukraine. So, the following taxes
are not the subject for lessening the tax obligations in Ukraine: (a) capital
gains tax, (b) stamp duties, (c) turnover tax, (d) other indirect taxes,
(e) tax sums paid from passive income (dividends, interests, royalty, others).
And, finally, in order to get an advantage of Conventions on relief from
double taxation resident company has to prove the fact of paying certain taxes
abroad with written confirmation of tax body in a certain country. But it is
necessary to note that rules named above may not be implemented in case other
rules are defined by Convention. It may be true for a body competent for drawing
written confirmation of paying certain taxes.
Nevertheless
the procedure of using this or that advantage of certain Conventions has become
recently more or less clear only for a second category of income – “income
of nonresidents with the source from Ukraine ”. And speaking about income
received from abroad by residents of Ukraine, one may say that there is a big
“procedural gap”, which may cause a number of difficulties in their
practical implementation [9].
According
to article 1 of Law about Income under the term nonresidents should be meant
legal entities and subjects of economic activity, without status of legal
entities (branches, representative offices, others) residing outside Ukraine,
which were founded and operate in accordance with the regulation of other states.
Diplomatic representative offices, consular bodies and other official
representatives of foreign states, international organizations and their
representatives, which have diplomatic privileges and immunity, and other
representatives of foreign organizations, which do not perform economic activity
according to legislation of Ukraine, are also defined as nonresidents.
Under
the term income of nonresidents with the source from Ukraine should be meant any
income of residents or nonresidents received from any business activity on the
territory of Ukraine, including interests, dividends, royalty and any other
passive incomes paid by residents of Ukraine.
Besides,
Law about Income outlines two categories of nonresidents-taxpayers, which: (a)
perform economic activity on the territory of Ukraine through a regular
representative office; (b) do not have such office.
In the
first case, according to article 11 of Law about Income, representative office
like that equates with income tax payer (instead of nonresident itself), which
fulfils its activity independently from this nonresident and is levied with the
tax in a common order.
In the
second case for the sake of taxation some residents are equated with
representative offices, in particular those ones, which transfer the income to
nonresidents. The order of taxation of such residents is absolutely identical to
the order of taxation of regular representative offices, with only one
difference, concerning additional registration at tax bodies as an income tax
payer – there is no need in this procedure for them.
Conventions
foresee three ways of implementing this or that norm relatively to incomes with
its source from Ukraine: a) exemption from taxation, b) tax credit, and c) tax
deduction (all these ways are described in detail in chapter 1.4).
Whatever
way was chosen the main document one will not be able to manage without is inquiry,
testifying that nonresident is a resident of state-participant of Convention. If
this inquiry is not presented, than taxation will be held due to Ukrainian
legislation.
Due to
Resolution ¹ 825 of 18.05.2000 “About affirmation of Order of tax exemption
(deduction) of income with the source from Ukraine due to international treaties
of Ukraine about relief from double taxation” this inquiry has a special form,
example of which is given in appendix B. Although company may grant inquiry of
another form, than it should legalize in a competent bodies. In order to do this,
company has to turn to consular body of Ukraine. Besides, free form inquiry
should contain all the obligatory properties identical to a given form in
appendix B.
Period
of validity of the inquiry is bounded by a calendar year in which it was given.
2.3.2
Optimization through offshore companies
As
a rule, in Ukraine offshore companies (offshore companies – companies of
international law, operating in low tax territories, “tax havens” [1]) are
used to minimize legally tax obligations in exports operations. In this case
offshore company is used as a intermediate between Ukrainian firm-exporter and a
buyer abroad. Overpricing in import operations leads to higher custom payments,
VAT and income tax correspondingly. Measures taken in recent years aimed at
abolishing privileges, against tax evasion, capital leaks, and limitation of
deals with offshore companies (this, in particular, will be considered in
details later) decrease the variety of possible instruments and makes schemes to
be more sophisticated, but still leaves means to tax optimization. One of them
is discussed earlier – treaty on relief from double taxation, which is prior
over national legislation. Traditionally they are used in payment of already
paid taxes and decreasing revolving taxes and also for dealing with contracting
country without registering a regular representative office and levying itself
with taxes.
According to Conventions offshore territories of Cyprus, Great Britain, the Netherlands present a special interest for Ukrainian enterprises. One of the most popular and widely used is offshore territory of Cyprus. It allows exporting Ukrainian capital abroad with minimal tax obligations and reinvesting it in Ukrainian economy in the form of foreign direct investment. Between Ukraine and Cyprus there is a Convention on relief from double taxation, signed by USSR and Cyprus in 1982. To take an advantage of this Convention is possible only by dealing in Ukraine through independent agent. According to Convention Cyprus companies may perform some business activities without paying local taxes.
The
following scheme that takes into account advantages of the named convention
significantly spreads opportunities of using offshore companies for legal
minimization of tax payments by transferring a part of purchasing and production
activity at a commission basis. With the help of commission contract between
Cyprus company and Ukrainian enterprise (governed by one Ukrainian resident)
certain steps, which you are going to fulfill or have already fulfilled, are
made. They charge insignificant commission reward levied by tax.
The
core of this method is in splitting of trade deals and production operations
into two independent contracts: one with expense character, other with income
character. It means that foreign company entrusts independent agent to operate
for a commission on behalf of its name, but it means for committent certain
juridical and factual transactions. Due to scheme enterprise is a commissioner
and performs on committent behalf juridical and factual transactions with goods
and finances. So this enterprise receives, accounts, and taxes only commissions
[2].
A
given example allows to minimize taxes in national deals as well as in
international one. In case of import changes only an agent agreement. In latter
case Cyprus firm will order its partner to buy goods and import it in Ukraine
paying custom duties and levies. Reasons for minimization of taxes are in
Convention between Ukraine and Cyprus: Cyprus company operating in Ukraine via
Agent with independent status (commissioner’s) has a legal right not to
register permanent establishment in Ukraine and is not the subject of taxation
in Ukraine and Ukrainian company agent taxes only its commissioners. More over
according to the Convention purchasing, storage, supply, goods demonstration and
some other activities also are not taxed in Ukraine. But there are some
contradictory moments in Ukrainian legislation towards operations with offshore
companies.
First
of all Law about Income in article 18 proclaims: “In case of signing contracts
which foresee payments for goods, services in favor of nonresidents, situated in
offshore territories or executing payments through such nonresidents or their
bank accounts… taxpayer’s expenses for payments of such goods, services are
included in structure of aggregate expenses in sum equivalent of 85 per cent.
The list of offshore areas is annually proclaimed by the Cabinet of Ministers”.
From the point of view of the state this article should nip in the bud the leak
of financial means and raise additional revenue for budget. Time has shown that
neither one of these aims were reached. And the reason lies in rude violation of
this article of international and national norms of law. Namely: a) in
international internal taxation practice of imports goods another principle is
applied (it is fixed in Law of Ukraine “About International Business Activity”
[7]) – principle of country’s birth of goods; b) this norm has a
discriminative character and violets international Agreement “About
Partnership and Cooperation” signed by Ukraine and European Community in 1994,
and it is known that one country alone has no right to change the terms of
international treaty, unless every country participant of this treaty brings in
certain changes, c) national principle and principle of the most favorability is
broken. Instead of positive effects this norm rained down a wave of malevolent
saying to Ukraine’s address, deteriorating the weak reputation of Ukraine at
international political and economic arena [8]. It made Ukrainian companies face
again with the dilemma of either to pay or not. Any decision should be confirmed
in the court. Such practice, naturally, cannot motivate companies deal with
offshore areas, but once more put them in vice of dubious lagislation.
3. MAIN RESULTS OF RESERCH
After
examining main points of instruments on international tax optimization the
following conclusions could be made:
1)
The key elements of national tax systems are nationality of company taxpayer,
the place it resides or residence, source of taxpayer’s income or a
combination of these elements
2)
Taxpayers who earn income in two ore more countries face the problem of dual
taxation. It is now the practice to provide relief from double taxation. Relief
may take the form of an exemption, a credit, or a deduction
3)
Tax avoidance involves efforts by
individuals and companies to take advantage of loopholes in the tax laws or,
where some doubt exists as to the interpretation of a tax law, to benefit from
that doubt; tax evasion is considered to be deliberate and illegal nonpayment of
taxes. The former is legal, if sometimes only "technically" legal; the
latter is illegal. The dividing line between the two, however, is seldom clear.
Tax avoidance can easily become tax evasion, or vice versa
4)
Usually company may lessen its payments through transactions between parent and
subsidiaries using transfer pricing. Tax authorities commonly approach problem
of transfer pricing by assessing the profits earned by affiliated enterprises
from international transactions between themselves on the basis of the arm's
length principle. Another approach to countering transfer pricing is used in
California (the taxing entity that originated the approach) and some 10 other
states of the United States. It is known as the unitary
business rule, and it taxes multinational enterprises on a percentage of
their worldwide income, regardless of where it is earned or by whom.
5)
Treaty shopping – a taxpayer “shops” for countries with beneficial tax
treaty provisions, then sets up subsidiary enterprises in those countries to
take advantage of their treaties. Treaty shopping involves two basic situations:
the use of "direct conduit companies" and the use of "stepping-stone
conduit companies." Both involve taxpayers who take advantage of tax
treaties that were not meant to apply to them
6)
Countries or territories that provide a refuge from taxes for a) taxpayers
themselves, b) the taxpayers' income, or c) the taxpayers' capital and other
assets are known as tax havens.
Commonly, tax havens not only impose few if any taxes, they also have secrecy
laws that forbid foreign governments from obtaining information about the
ownership of particular assets, as well as rules that allow for the full and
complete transfer and exchange of currencies.
7)
The problems presented by double taxation – as well as other problems that
arise from tax incentives, tax avoidance, and tax evasion – can deal with
unilaterally or through the use of reciprocal tax treaties . The OECD and the UN
model treaties differ in their approach to determining the income that may be
attributed to a permanent establishment. The UN model allows profits to be
attributed from a wider range of sources than does the OECD model by following
what is known as the force-of-attraction rule. Nowadays there are 43 conventions between
Ukraine and countries of the world on the relief from double taxation. Procedure
of using this or that advantage of certain Convention has become recently more
or less clear only for income of nonresidents with the source from Ukraine . And
speaking about income received from abroad by residents of Ukraine, one may say
that there is a big “procedural gap”, which may cause a number of
difficulties in their practical implementation.
4. REFERENCES
1.
http://ageyev.bizhosting.com/
3. www.oecd.org
4.
International Business Law / J.Cameron, Washington, 2000, 915 p.
5.
Underlying principles of tax policy/ R. Vedder, L
Gallaway, Washington, 1998, 16 p.
6.
Çåëåíñüêèé
Â.Ñ., Ôàéºð Ä.À. Åêîíîì³êî-ïðàâîâà
õàðàêòåðèñòèêà ïðîöåñ³â òîí³çàö³¿ ³ êðèì³íàë³çàö³¿
êðåäèòíî-ô³íàíñîâî¿ ³ áàíê³âñüêî¿ ñèñòåìè
Óêðà¿íè// Âåñû Ôåìèäû,
¹3, 2000
7.
˳ãà
Ïðàêòèê-êåð³âíèê/ Ýëåêòðîííàÿ áàçà
äàííûõ çàêîíîäàòåëüñòâà Óêðàèíû, 2000
8. Âîäÿííèêîâ À., Ïåðåñòþê Í. Îôôøîðíûå êîëëèçèè â óêðàèíñêîì çàêîíîäàòåëüñâå// Ãàçåòà Áóõãàëòåðèÿ, ¹10, 2001
9. Âîäÿííèêîâ À., Ïåðåñòþê Í. Óñòðàíåíèå äâîéíîãî íàëîãîáëîæåíèÿ// Ãàçåòà Áóõãàëòåðèÿ, ¹25/2, 2001
10. Ñóùåñòâåííîå î íàëîãîâîé ðåçèäåíöèè ÑØÀ// Ãàçåòà Áóõãàëòåðèÿ, ¹25, 2001
11. Óìàíöèâ Ã. Ñîçäàíèå çàðóáåæíûõ äî÷åðíèõ ôèðì// Ãàçåòà Áóõãàëòåðèÿ, ¹12, 2001