International taxation and transfer pricing
Opening representation abroad, the foreign companies quite often face that taxes on the same activities should be paid twice: and in the homeland, and in the country where a representation is. To solve this problem, many states sign international agreements about avoidance of double taxation which allow lowering a tax burden. However it is worth to remember that quite clear aspiration to reduce tax payments involves a certain risk. In particular, in order not to fall under suspicion of tax avoidance, it is necessary to consider a number of features of international agreements on avoidance of double taxation.
Each state when designing system of the taxation has two opportunities: either to tax all world income of the residents (the principle of a residency), or to levy taxes in the place of implementation of economic transactions (the principle of territoriality). If all countries of the world agreed and began to use one of these two principles, based on the same criteria, problems wouldn't arise. But as the tax rates and level of economic development in all countries different, in practice both the principle of a residency and the principle of territoriality are applied at the same time. As a result, the situation of double taxation arises, i.e. collection of comparable taxes in two states on the same taxpayer concerning the same object for the same period.
The company can be registered in the territory of a certain country, but at the same time cannot use benefits from the signed international agreements on avoidance of double taxation. For example, LLP (Limited Liability Partnership) in Great Britain, LLC (Limited Liability Company) aren't assessed with the corporate taxes at the rates of a country of incorporation (the income is at once distributed between owners and is assessed with a tax in the country where they live). Such companies cannot receive confirmation of the residency and, respectively, has no right to use advantages of international agreements on avoidance of double taxation.
International treaties extend only to the so-called direct taxes. It is the income tax (capital gain) of the organizations, a tax on the income of legal entities, as well as the property tax.
Often determinations of the local tax legislation do not coincide with determinations of the international treaty. In the Russian Federation, for example, determination of dividends is narrower, than in world practice in general. In this case the international treaty is considered as priority. The need for international treaties arises by international transactions of two types: active commercial activity or passive incomes, for example, obtaining for provision in use of own resources (leasing, loans, dividends, a payment for intellectual property, etc.).
The income from commercial activity of the non-resident in the territory of the state is subject to the taxation only in the presence of permanent government and in the part carried to activities of this representation.
Though there is a problem of "double" taxes, there will always be people interested to use tax benefits, having only the formal rights to them. So far tax services of many countries more and more develop various techniques which allow differentiating rather accurately legal use of tax international treaties and tax avoidance. So, the following scheme is widely applied: the taxable basis is transferred to the country with the smaller tax liabilities, providing the companies considerable tax economy.
Control of transfer pricing implies a possibility of verification of transactions between affiliated persons regarding their compliance of reality. Tax authorities understand: the interconnected companies can underestimate or overstate the prices of goods in group that the profit on the transaction remained in more preferential tax jurisdiction. Therefore in those countries where rules of control of transfer pricing are legislatively established, tax authorities concentrate the attention on transactions between affiliated persons, and also on barter transactions and transactions of export or commodity import or services. To reduce tax risks, in a number of the states it is foreseen such tool as provisional agreements between taxpayers and tax authorities on the pricing mechanism is provided.
Respectively, agreements allow taxpayers to avoid risk of additional accrual of the amounts when conducting tax audits (if conditions of agreements are complied).
Thus, in spite of the fact that international treaties also allow the companies to lower a tax burden, in case of application of these agreements in practice it is necessary to be very careful and to accurately separate from legal methods of reduction of tax payments in the budget and tax avoidance.
We will help You in the problem resolution with the international taxation and transfer pricing.