The understanding of International Law of Taxation

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Introduction

Tax system is system that was put up in order to collect taxes from companies and individuals. Paying taxes is not optional but compulsory where people are taxed according to their income. It is important to note that the amount to tax due differs because different people work for different enterprise and earn varying amounts of income. Systems of taxation differ from one country to another depending on the level of development of the country (Fahmi & Saputra, 2011). Through the taxes collected most governments have been able to meet their needs, which has benefited expenditure in dealing with calamities, payment of international debts and paying government employees. Taxes collected have also helped to improve infrastructure and other developments, which have reduced poverty in many regions (Vincent, 2011).

International tax obligation means determination of tax a person or business is subjected by laws of tax of different countries both locally and internationally (George, 2013). It is important to note that Taxation varies from one enterprise/individual to another because of the uniqueness in every source of income. Government tax individual or enterprises according to the nature of income one is enrolled in because different enterprises have different sources of income where some earn a lot and other earn very little. Therefore, the government cannot charge all enterprises the same tax amount (Posner, 2013).

Source of income is the activity that one does in order to meet his daily expenses. It is important in that it helps attain ones goal through different services that one performs. Source of income determination is very important in territorial system unlike in residential because it determines whether the income is to be taxed or not. It also allows credit, which is often, limited to the local tax of all income from other enterprises (Sharma, 2013).
Taxation system generally depends on the rules in a given country. There are countries, which use territorial system where sources of income in the country are charged or residential system where resident are taxed locally and internationally. This varies widely and offers great help for many individual/enterprises because it ranges people accordingly. Shareholders out of profit pay most individuals regularly, though not all countries consider this. However, the few countries, which have adopted the method, have enabled people to achieve greatly in life through good relation between people and the governments (Heimert, 2010). There are countries that the taxation is so high more than the enterprises/individual’s incomes, and this has become a great challenge to many people. Therefore, there is a way the governments have been able to reduce the taxes by taxing income according to expenses the enterprise/individual gets. Further, there is a method where enterprises have been able to move from one level of income to another, which will be able to suite all their needs as well as government revenue (Needles & Powers, 2010). Many people have enrolled themselves to this method and most of them have seen it working. However, it is not advisable because when one moves to different types of enterprises he or she needs to start from step one and this may take a lot of time before one catches up with the business (Rajasekaran, 2011). In addition, change of position or position of work may also help in paying of taxes where dislocation of work may results to a place that is more convenient and assessable.

In international taxation, there are different types of taxations. The first concept is taxation from one country to another, second is taxation of more than one person and thirdly is that regarding taxation of one person. Involvement of two-tax system from different countries may cause double taxation where an individual is charged twice from his or her income (Howard, 2011). There is essay double taxation where the tax is based on income and the profit the enterprise gets. This ensures that the tax charged by both countries is equal to one another even if they differ in one way or another mostly in the income each individual gets.  Limited double taxation is mostly for people who use air transport and those who are in shipping departments (Lang, Pistone & Schuch, 2010). 

Case one - residence of companies

In determination of the taxes that each of the company is supposed to pay the government, it is paramount to establish residency of a company. A company is resident in the country where it is incorporated and is non-resident in a country where it operates but it is not incorporated in that country. The table below is used to determine which company is a resident or non-resident in a given country (Jeffers & Askew, 2010).

From the narration given, there are three main companies. Bigco is the parent company, which fully owns two subsidiaries. Bigco is registered in UK and therefore is a resident company in UK. Its fully owned subsidiaries are Subco and Tax fix that are resident companies in Juno and Mina respectively

                        UK                  Juno                Thea              Dat                 Mina

Bigco               R                                             NR                  NR

Subco                                      R

Taxfix              NR                  NR                  NR                  NR                  R

The codes R and NR are used in the above table to represent Resident Company and non-resident company status respectively.

Taxation of a resident company differs from taxation of non-resident company from one country to another. The table below shows the applicable corporate tax and income tax for resident companies and non-resident companies for all the companies respectively (Richard & Lawrence, 2010).

From the above table, it is clear that the corporate tax and income tax that is levied on both resident companies and nonresident companies in the countries involved are uniform (Freeman, & Phillips, 2010). Thus, tax reduction measures shall be based on other tax liabilities that are levied by the countries involved. From the above table, also, it is notable that Dat charges the highest corporate tax and highest income tax. The addition of the corporate tax levied and income tax levied is 70 percent. This shows that the owner of the company will only enjoy 30 percent of his labor by operating in Dat (David, Harris, Oliver, & Oliver, 2010).

In addition, operating in Mina is the opportunity that allows the shareholders to enjoy maximum fruits of their labor since both corporate tax and income tax are zero. Thus, it is advisable for the owners of these companies to consider opening branches or operating in the countries with the lowest corporate and income tax (Sornarajah, 2010). The stakeholders should thus carry out a SWOT analysis for Mina economy with a view of basing its operations there.

Case two- differentiation of income tax and corporate tax

In accountancy, there is a big difference between income tax and corporate tax. Income tax is the tax that is charged on the benefits that are accrued by natural persons (Butterworth, 2010). Income tax is based on the returns that the natural persons get from involvement in business and other income related activities. On the other hand, corporate tax is the tax that is charged on companies for their operations. It is charged on the gross income before payment of dividends and other non- operating dues (Mogens, 2011).

In consideration of the income tax and corporate tax, the companies should consider the amount that are remitted to the shareholders in form of dividends and amounts that  are paid above income generating activities. To reduce the tax liability, the income tax for David, Joe, Peter, and Jennifer should be shifted to countries that levy the lowest income tax. Further, the operations of companies should be shifted to countries that levy the lowest corporate tax.

As indicated, the persons involved in the ownership of the company are only willing to make minimum changes in their lifestyles to accommodate tax liability reduction. The changes indicated here are closely related to the lifestyles that the persons already have.

Case three- the European Union

The sixth directive of the European Community treaty gives the European Council the power to harmonize the VAT and other taxes charged by member countries to its residents, other member countries and other non-member countries (Heimert, 2010). Apart from UK, all other countries that are in this case are outside the European Union operations. Thus, the taxation applied for the flow of capital, profession, assets, human labour, and profits to and from UK are charged equally across all the other countries involved in the case study (Taxation Law).

There are certain exemptions and provisions that are enjoyed by the countries that are presumed to have low competitive advantage. The companies that are registered in other countries and the branches that are opened by Bigco in other countries should maximize the usage of the provisions in order to reduce the tax liability. Some of the exemptions and provisions include the following.

• Provisions for companies with low shareholding threshold
• Provision for countries with low competitive advantage
• Provision for tax exempt for some commodities such as books
• Provisions for low tax for developing countries (Lawrence & Weber, 2013)

The provisions that are being used must be quoted when filing the tax returns both by persons and by the relevant companies. The ability to use the provisions is based on the relationship between the host country and UK. There are no issues that have been raised in the case study regarding any sanctions issued by the UK or any other member of European Union on the other countries in the case study. The determination of whether the countries trading with European Union are developing or developed is determined by the GDP rating of the said countries.

Case four - The AGM

The Annual General Meeting for Bigco Company is held annually in the UK. This is a business meeting, which attracts fees from the taxman. This shows that by holding the AGM in the UK, the company is still attracting more fees to the parent company (Nolan, 2012). As noted in the narration, the Major shareholder, David, occasionally visits Thea and during that time, the family tries to be together. When comparing the tax liability for Thea and the tax liability for the UK, the tax liability for Thea is lower. With Assumption that the tax liability is directly proportional to other charges, it is prudent for the company to hold the AGM when the family comes together in Thea. This will ensure that the company incurs less liability. While the meeting in the UK is still existent, the company should ensure that the decisions that are made are enforced in the AGM in Thea (Finney, 2004).

Case five - the residence of the individual person

Income tax is charged at the resident company. Thus, the amount charged as income tax for the residents of each country is as per the table provided earlier in the paper. As noted, the income tax liability for the various countries involved is as follows.

Juno                 50%,

Thea                30%,

 Dat                 35%

 Mina               0%,

UK                  45%

The residence of the person is determined by the place where the person has a permanent home and/ or utilises most of his time during the year. Thus, the residences of the various shareholders of Bigco are as follows.

David                          UK

 Jennifer                      Thea

Joe                               Thea

Peter                            Juno

Peter occasionally moves to Dat where his girlfriend lives. From the rates that have been given earlier in the paper, Dat charges zero percent corporate tax and zero percent income tax. This means that if peter can adjust his lifestyle and make Dat his resident country, he wil reduce his income tax to zero. In addition, there is a high possibility that David will move back to Thea after a while. It is advisable that David moves to Thea as early as possible since by doing so he will reduce his tax liability by 10%. The tax liability in the UK is 45% while the tax liability in Thea is 35%. Being the majority shareholder, his residence in the UK leaves most of the profit that is made by the company at high taxation disposal (Becker, 2013).

Case six - tax havens

A tax haven is a country, which charges low taxes or no taxes for companies that are registered there by nationals from other countries. The operation of such companies is made possible through money transfer to the bank accounts in such countries (Helminen, 2010). As noted in the taxation table given earlier in the paper, Dat is a tax haven. Both corporate tax and income tax are zero. As noted, the persons who Own Bigco are only interested in making least changes to lifestyle to reduce the tax liability. Registering of the company in Dat will not affect physical change of resident of the owners to Dat (Renton & Renton, 2009).

The importance of tax havens is that the company will retain most of its income by reducing the tax liability. Thus, it is advisable for the AGM to pass deregistration of BIGCO ltd from UK to Dat. In addition, the AGM may pass a decision of creating a branch of Bigco Ltd at UK. This will ensure that the company remains in operation in UK while at the same time it evades payment of heavy corporate tax to the country.

Since Peter will be a resident of Dat, it will be possible for the shareholder to maintain survey of the company and the bank accounts through one of its own.

Case seven - payment of interest and loan by a subsidiary to a parent company

As indicated in the narration, Sabco has acquired a loan from its parent company Bigco. This means that the corporate tax includes interest that is generated from the loan being paid by the subsidiary. The tax liability that is paid by the group of companies can however be reducing if the company is able to give the money to its subsidiary using a means that cannot attract tax. This can be either grants given by parent company to subsidiary or selling assets at low costs (Graetz, 2003).

Grants to a subsidiary by a parent company are treated as fund transfers and thus they do not attract extra taxation either to the parent company or to Mother Company. On the other hand, sale of assets at a lower price ensures that there is low taxation to both the parent company and the subsidiary. The tax that such a transaction attracts is Value Added Tax (VAT). The charge of VAT is further explained in succeeding sections of this paper (Helminen, 2010).

Case eight - property movement

Taxes are compared in different manner for instance the price the seller sells his product.  There are sellers who increase prices as per location or season where in such situation the government also raises the amount of tax.  To create a good tax system a country or an individual needs to make sure that he or she is able to distribute tax according to how much the business is earning, How much is for taxation, and who is in charge of paying the tax. Through this, it reflects what kind of community is to be formed. Most developed companies get tax from buyers, suppliers, and from goods and services transacted.  Taxation is always important because the tax that is collected from people overall is greater/more than government expenses (Thomas, 2010). There are countries, which request employees to pay the same amount. In this method every employee/employer, is equally levelled. This is computed from the earning each gets though the tax system that suggests the tax to be paid only in wage.

On the other hand, there is property tax either movable or immovable where the owner is charged tax according to the property that he/she owns. This may include land, individual property or even building, this taxation is done either monthly or yearly but the common and most used is annual (Lepard, 2010). In addition, there is expatriation tax. This is a tax  that an individual pays when he or she want to leave his country and re-locate to another this mostly happens when one feels that he or she is earning a lot and maybe 30%- 50% of his income goes in tax, which means the tax rate is more high. In addition, there is transfer tax where there is transfer of document or even property to the willing buyer and all rights towards that property is transferred to the buyer and the tax payment is transferred to that person (buyer).  This way one will be able to move or start another business without any disturbances (Jack, 2012).

There is also value added tax (V.A.T), which is tax paid in goods and services given. In this tax, the manufacturer sells his or her items on high rate to make sure that the VAT is also well covered. Therefore, in every business there is extra money besides the purchasing value that is addend (Jerold, 2012). VAT also varies from one commodity to another or even the company that is manufacturing and type of commodity, quantity as well as quality. The VAT chain is as follows:

Manufacturer          wholesaler                     retailer                    customer

In this channel, each of individual is contributing towards the VAT, which at first place was paid by the manufacturer then all others. It follows the chain until the process of consumption takes place. It ensures that everyone who is involved in it benefits in one way or another. However, the invention of tax favours the buyer because the seller receives less than the buyer does and due to this only a few businesses are put up unlike when the tax was not introduced (Kobetsky, 2011).

The other form of tax is regarded as toll tax, which is tax paid when using bridge or private route or private vehicle. This taxation helps in good  maintenance of those bridges and roads or even expansion and invention of other things that can be helpful to many persons. It can also be an area set aside for any event or leisure like parks (Balachandrabn & Thothandri, 2010).

The VAT charged is done of the property movement from the parent company to the subsidiaries and vice-versa. The production of computers by Bigco at UK attracts high VAT tax. However, the same company has a branch in Dat, which is producing computers. The management should carry out a variation of the opportunity cost for the production, and transportation of the computer and their components at Dat and sale in the UK against the manufacture of the same products at UK. If the production costs are lower, the company should consider producing the products at Dat (Vanderbeck, 2012).

Tax evasion is an act that the company may be engaged in to ensure that it does not pay a tax liability. There are both legal and illegal means of tax evasion that companies practise. The section above explains how the company can engage itself in a legal tax evasion. It is good to note that the laws on VAT keep changing; this means that the concentration of the manufacturing excise should always be based on the country where there is low VAT (Angharad & ‎Lynne, 2012). Where the production of a component of a product is cheaper in one country and another component cheaper in yet another country, the company should consider distributing the production of the entire computer systems in various countries (Laura, 2010). The decision on such distribution should be done after a cost-benefit analysis for the production is done. The items that must be put into consideration in carrying out such analysis include the following.

• The cost of raw material, their availability and cost of transportation for such raw materials
• The cost of production of the computers in each country
• The VAT charged on all the productions done in the country
• Taxation on capital expenditure and the exemptions on capital expenditure
• Cost of exportation of products from one country to the others
• The international relationship between the countries that are involved (USA, 2008).

Case nine- payment of loyalties

Just like payment of interest, loyalties are charged tax by being included in schedule for corporate tax liability. Payment of loyalties by a subsidiary to a parent company is treated as any other investment income. As noted, the parent company already has a lot of activities on Dat. Registering itself in Dat, the company will ensure that all the loyalties that are paid to it by Sabco are paid directly to Dat. This will ensure that the taxation of such loyalties are done at Dat. Transfer of loyalties to Dat will only attract the fees that are charged on fund transfer. Such funds are paid through the receiving bank (Royal, 2010).          

Case ten- shareholding of the members

Bigco is a family owned company and the decision-making is not done by the majority of shares but by consensus. It is also notable that Jennifer makes most of the management decisions (Knut, 2012). Thus, should all the other suggestions made to the group be implemented, the group should also consider changing the structure of company ownership if only for financial reporting purposes. The importance of this shall be to evade tax liability in countries that charge high income tax. As noted previously, this paper suggests a change of residence Dat by Peter. Dat has the lowest income tax liability of Zero (Valelie, 2003). Thus, changing of ownership structure to have peter as the main shareholder will allow the company to evade tax from UK and Thea that would rather be charged if David continues to hold majority shareholding.

To ensure that David still gets the majority shareholding, David and Peter can open a joint account where Peter is not authorised to withdraw and where the funds from the company will be sent. This will leave David not exposed to cheating from Peter. As indicated in the narration though, the family already enjoys trustworthy relationship across the board and this is expected to continue.

Recommendations

From the above analysis and discussions, the following recommendations are made

• That David considers changing his residence from Uk to Thea
• That Peter considers changing his residence to Dat
• That Bigco considers incorporation in Dat (Luc, 2007)
• That Bigco considers moving most of its manufacturing activities to Dat
• That Joe opens a bank account in Dat where the rent receivable for the Holliday home which he lets out can be deposited
• That the group presents single records for taxation purposes instead of presenting individual financial reports. This will make taxation easier and less costly.
• That the loyalties paid by Sabco to Bigco be done through bank accounts at Dat
• That the loan given by Bigco to Subco be given inform of grant or sale of commodity at lower price (Robert, 2009).
• That the group utilises the provisions and exemptions that are available to countries that are considered to have low competitive advantage by the European union

Conclusion  

The understanding of international law of taxation is important in preparation of the financial statements of companies that operate from different countries. The issue of tax evasion however should be undertaken in at-most care to ensure that only legal evasion is considered (Lederman, 2010). Illegal tax evasion such a non-disclosure of some sources of funds may lead to deregistration of the company in some countries, which will be a hindrance to profit maximization that is the aim of the tax advice offered in this paper.

The European Union is an example of the international economic formations that regulate the financial operations of the member countries. The case is not exceptional to European Union as international trade agreements of different forms have salient features that bind the member states together. Movement of persons is also another key element in taxation as determination of residence of a person may lead to increment or reduction of the tax liability.

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