Things I Need to Remember as an Owner of Foreign Assets

According to statistics, 75% of Americans turn to tax consultants when preparing a income statement, in order not to break the law, on the one hand, and not to pay too much on the other. 

Saving on a qualified tax consultant, can make you lose much more. Here is a simple example. Suppose a bargain is concluded in a country with which there is no agreement on the avoidance of double taxation. After receiving the payment under the contract, it turns out that, according to local laws, the income of foreign companies in this case is taxed at the source. As a result, the entire margin is “eaten up” by taxes, instead of profit.

At first, everything seems to be according to the law, but, at the same time, the transaction is carried out through two offshore companies, and the contract value is underestimated without objective reasons. Such suspicious actions will most likely attract the attention of tax inspectors. 

A competent consultant is able to calculate all the tax consequences in advance and offer the right options. 

Often, a businessman, while entering a risky deal, reassures himself that secret information would not float out. Unfortunately, this is not guaranteed even by the presence of a professional “security guard”. A dismissed employee, a disgruntled counterparty, or even the former spouse of a shareholder can become an insider. Given the widespread penetration of Internet technologies, sensitive information can be given out by chance.

Suppose there are two companies, A and B, with a common beneficiary. “On paper”, they are not connected in any way. Disclosing information about their interdependence can lead to serious problems. The staff, of course, is instructed on how to answer by phone, employees of different companies are sitting in different rooms of the office, etc. 

But the companies have a common Internet channel, and information about the IP address is usually not hidden. Even a superficial study can show that an employee of company A and an employee of company B accessed the same site from the same IP address. This is enough to raise suspicions about the affiliation of these firms, which may initiate a thoughtful investigation. Interestingly, in some countries, there are companies specialized exclusively in the collection and sale of business information of this kind. Such “detective tax agencies” have their own informants and a price list for these secrets.

Often, the jurisdiction for an offshore company is selected based on the simplicity of the tax system. That’s why the need for early planning is imperative. For example, in the Pacific countries, in addition to the usual European taxes, you’ll have to pay all kinds of state duties, stamp duties and fees. When calculating the planned tax burden and the effectiveness of future business, the final amount can become quite imposing.

In conclusion, foreign assets manipulations are not about mutual investments and joint ventures, but about the exchange of data with tax authorities. The profit of a foreign company (both real and “on paper”) may unexpectedly be converted into tax requirements, and the company itself may be subject to tax jurisdiction. And all this is due to just one unsuccessful asset transaction.

That is why every owner of a foreign company should know at least the basic rules of the “tax game” in the state chosen for doing business. In difficult cases, be sure to contact professional consultants and not spare money on protecting your business!