Fiscal planning is an actual necessity in every Enterprise since it allows efficient resources generation with direct benefits to stockholders, employees, and consumers.
There are diverse levels of planning depending on the needs and size of each operation although, in this article, we’ll deal with the subject of international fiscal planning from the enterprises operations’ point of view which can obtain important financial benefits if they apply convenient strategies. Unfortunately, we must recognize that this important tool is not used by many Mexican enterprises whether by ignorance or by the wrong belief that its cost is too high. Here, we will try to point out the most important factors that must be considered when evaluating the feasibility of its implementation.
The positive result of its implementation is based on the establishment of a well defined objective and the creation of a work group that understands the possibilities and limitations of the operation in the legal domestic and international framework. Therefore, in order to obtain the wanted result, it is of great importance that all areas of the company are involved in the planning process but above all, there must be an absolute understanding between the financial and the legal areas which unfortunately in most cases show some kind of disagreement in the decision making process.
The creation of an operational structure organized with independent activities (based on cost centers for example) but linked at the same time by a controlling unit, has been one of the most applied solutions by large and medium sized enterprises but does not exclude the small company or even the particular individual with the objective of reducing costs and also fiscal foundations.
Now, it is clear that if these strategies are not implemented correctly, the damages would be more important than the result of not applying any strategy at all. Nevertheless, a professional planning should yield good results.
First we must understand which are the main objectives pursued by the international fiscal planning, and generally, they are the following:
Avoid dual taxation that may arise from operations’ expansion
Postpone taxes payment
Reduce tax on dividends, consolidate losses or locate the business in jurisdictions that facilitate financial operations
An efficient structure of the enterprise
If your business has any of these needs, then you should think about the possibility of exploring the use of this tool. The accomplishment of these objectives can be reached as long as the way in which the plan is carried out fulfills three basic principles: A) that the plan conforms to the domestic and international legal frameworks, B) that it is profitable in the short and long run and, C) that it brings confidence to the group as well as to the tax systems of the countries where operations are located.
To achieve the above, it is mandatory to analyze the legal and fiscal effects of the election of territory where the operations will be established, to choose the best alternative for doing business and selecting the right entity, and the way in which it will be financed.
To that end, the team that carries out the planning task should be without a doubt multidisciplinary since in the process, at least 4 fundamental aspects must be considered; the financial, the legal, the fiscal, and the accounting aspects.
Once such a team is created, the aspects of domestic legislation must be analyzed for it contains two groups of norms, the ones known as anti-abuse norms and the ones that look to avoid dual taxation on behalf of the national investor who profits from foreign sources and in which benefits are pursued through its right application.
In the first group we have measures that have been applied practically all over the world, mainly by member countries of the OECD (Mexico is no exception) that following its guidelines have considered at least (these measures are not mandatory or binding for their members but are such an important reference that they are considered a kind of “soft law”):
Fiscal transparency: It is present when an investor obtains fiscal benefits from operations abroad, but these appear as obtained by another or other diverse entities situated in advantageous fiscal territories. Through the use of this system, tax authorities may find the ownership and control power of a certain investor over these entities, direct or indirect, as a simulation so the corporate link between them disappears taxing the partner who obtains the benefits directly and not the mentioned entities.
Transference prices: Corporate groups carry out numerous related operations (known as “intra-group”) which can affect the corresponding tax authority by eroding the obtained tax base through fiscal benefits and extending expenses or reducing income of opposite results with independent operations. Tax authorities can measure these operations and determine the costs and benefits of such independent operations enabling them to request the taxes not paid derived from these strategies.
Sub capitalization: In intra-group operations, one company financing another is a common practice but it is done through a loan instead of capital which is beneficial to both parts (obtaining interests and not dividends which are fiscally cheaper, also deducting these interests as expenses something that does not happen with dividends). These operations are not necessarily illegal or harmful, but states usually put a limit to loans using this tool so that the interest amounts that exceed such limits can be qualified as dividends by the authorities.
Tax haven: In a corporate group, there are entities that can be located in territories of low or null taxation or in territories with higher corporate fiscal benefits when compared to the rest and in these territories, intra-group professional or financial services are established (with not much willingness to share information with tax authorities of other countries). In consequence, the OECD has created rules to identify such territories and recommended its members to include them as part of their internal fiscal framework. Many countries now apply high taxes to operations celebrated with those territories or in them and to repatriated income with the intention of discouraging these practices.
Nevertheless, all these measures have exceptions that when correctly observed, they allow planned operations to be carried out without important risks.
The other group of internal norms looks to avoid the harmful payment of international dual taxation by the national investor who profits abroad creating the possibility, according to each country, of considering the taxes paid overseas as expenses and deduct them from the tax base in its country of origin or even directly credit the amount paid in its own country.
Once the internal aspects have been analyzed, the planning team must review if agreements exist (agreements between countries of origin and destination that exempt investors from dual taxation) in order to obtain the most convenient benefits according to current regulations in the destination territory.
The above mentioned should not represent an obstacle if this well informed group of experts helps to develop a financial goal that is certain and conforms within the legal framework.
One important aspect is that the plan, once it is established, must be flexible because all around the world the fiscal environment is absolutely dynamic so it must adjust to new changes and necessities that fulfill the objectives.
It is commonly said that “fiscal is financial” and this is correct. Any company, profitable as it may seem, should never neglect the fiscal cost of its operation since results may fall down. International fiscal planning is today an important tool that can yield high financial returns.
If your company (even if it’s not a holding) is established in a fiscal territory as narrow as the Mexican territory, and you have not considered this tool as an option, maybe it is time to do so. If you have implemented it and the results were not the expected, before going back it is recommended that a new team is allowed to analyze the situation and perform the necessary changes.
It should not be considered a priori that a planning of this nature will be high in cost and therefore refuse the opportunity of implementing it since the initial investment in time and resources, when correctly done, should yield very satisfactory results with relatively low maintenance costs of operation.
In case you are interested in implementing a scheme of this nature or revising the one you already have, we invite you to get in touch with us. We have the multidisciplinary team of professionals and the necessary international network for the task.
