In view of widespread concerns and demands for tax transparency amid a rapidly globalising economy, the Organisation for Economic Co-operation and Development (OECD) presented a comprehensive action plan to curb tax base erosion and profit shifting (BEPS). Fifteen specific actions were proposed to advise governments on the domestic and international instruments required to prevent corporations from paying little or no taxes.
Similarly, as the official statutory body responsible for the development and administration of Labuan IBFC, the Labuan Financial Services Authority (Labuan FSA) intends to upkeep a strong regulatory and supervisory regime in the jurisdiction and continually enhance its drive for substance and value creation.
For instance, a Labuan Entity needs to prove that it has an office, staff, and a bank account in Labuan IBFC. Over the past two to three years, the Inland Revenue Board of Malaysia has also been stressing on substance in Labuan which is in line with the increased spotlight on corporate tax obligations worldwide.
With the recent years development especially the implementation of FATCA and CRS, one must be very well planned and seek proper tax advise whenever they would like to establish an entity in any jurisdiction. It is not the same like those old days when people are using the “offshore jurisdiction” to “avoid” tax especially those from a high tax jurisdiction. At that era people are more drawing a distinction between tax evasion and tax avoidance. However, in this era especially after year 2010, the tax liability can be legally reduced either by tax planning or tax avoidance.
Tax planning is within four corners of the law generally the legal utilization of the tax regime for one’s own advantage, to attempt to reduce the amount of tax is payable by means that are within the laws or tools that are made available whilst making a full disclosure of the material information to the tax authorities. Examples of tax planning involve using tax deductions, changing business structure through incorporation or establishment of “offshore company” in tax friendly jurisdiction.
However, tax evasion as an effort to evade the payment of taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce the tax liabilities, and include in particular dishonest tax reporting i.e. under declaring incomes, profits or gains or overstating deductions.
‘Tax planning’ is an arrangement of one’s financial affairs in such a way that utmost tax benefits can be availed. This can be done by applying the majority of advantageous provisions which are permissible by law and entitles the assesse to obtain the benefit of the deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the assesse would be minimum.
Tax planning is an art of logically planning one’s financial affairs, in such a manner that benefit of all eligible provisions of the taxation law can be availed effectively so as to reduce or defer tax liability. As tax planning follows an honest approach, by conforming to those provisions which fall within the framework of the taxation law. Tax Avoidance
Tax avoidance implies any arrangement of financial activities, though done within the legal framework, overpowers the basic intention of the law. It involves taking benefit of the shortcomings in the statute, by deliberately parking the financial affairs in a way that it neither violates the tax law nor it attracts more tax.
Tax avoidance includes cases, wherein the assessee seemingly mislead the law, without making an offence. And to do so, the tax payer uses any scheme or arrangement, which reduces, defers and even completely prevents the payment of tax. This may also be done by shifting of tax liability to another person, so as to minimise the incidence of tax.
Criteria in Selecting the Right jurisdiction
In international trade and investment the selection of international business (offshore) jurisdiction requires very careful consideration. It is important to select a jurisdiction that is well suited to specific corporate and personal needs. Most international business (offshore) jurisdictions are free from foreign exchange controls and have introduced company legislation to cater for a diverse range of international business requirements.
1. Intended Business profile
Before considering a particular IBFC jurisdiction, you should first consider it in the light of your intended business.
Whether your prospective customers concern that their new supplier or service provider is registered in a particular IBFC jurisdiction?
Whether your prospective market countries impose any restrictions against transfers of funds to the particular IBFC jurisdiction?
How will your partners, suppliers, customers or investors react when asked to have their business with an IBFC company?
If you can find positive answers to the above issues then, the preliminary part of choosing the right IBFC jurisdiction is already done.
2. Political and economic situation
One of the pre-requisites for establishing business or private interests in international (offshore) jurisdiction centre is to select a jurisdiction that provides both political and economic stability, so that business can be conducted with certainty, confidence and corporate security are certainty, confidence and corporate security.
3. Essential Corporate Characteristics
Most International business (offshore) and “tax planning” jurisdictions have made efforts to ensure that their company law satisfies the following demands:-
Minimal or optional statutory filing obligations
Low capital requirements
Availability of bearer shares
Disclosure of beneficial ownership either not required or limited to special bodies (offshore authorities; central banks)
Broad range of permitted company names and suffixes to denote limited liability
Directors and/or shareholders meetings can be held anywhere in the world
No requirement or optional requirement for accounting records to be audited
4. Legislation Requirements
Another essential criterion is that legislation should be modern, flexible and well proven. Furthermore, the legislation should preferably guarantee confidentiality and complete privacy with regard to a client’s business dealings. Nowadays there are more than 50 jurisdictions world-wide providing offshore company legislation. Some jurisdictions i.e. Labuan, Malaysia have introduced new and modern corporate legislation specifically designed for international business; others have amended existing domestic legislation to cater for offshore requirements.
5. Company Law
There are three main models of Company Law: English Common Law; European Corporate Law; US Corporate Law. Hybrid models of Company Law that are a combination of the above-mentioned models also exist. Let us consider the characteristics of these models.
English Common Law
Company Law based on English Common Law is the most frequent model for classic offshore jurisdictions. Company Law in this case is based on the UK Companies Act 1948. This Act in turn draws on earlier Acts (since 1844) and many other concepts, such as the acceptance of nominee shareholders, based on 19th century Acts. The Joint Stock Companies Act of 1856 introduced the Memorandum and Articles of Association providing incorporation by registration. Examples are the BVI, the Bahamas, Hong Kong, and Belize.
European Corporate Law
European Corporate Law is based on French Law (1864). Usually it is different for a “share” company (with a lower initial capital and a smaller number of subscribers) and a public company (which is allowed to issue publicly negotiable securities).
Incorporation procedures in Civil Law jurisdictions have the following features (compared to English Common Law):-
An amount of paid-up capital must be subscribed before incorporation
A Company’ statutes are essentially a contract between subscribers
Procedures are more onerous and time consuming than in English Common
Incorporation procedures are carried out by a notary
Corporate Law in Civil Law countries demands that the responsibility of a board of directors be shared between an executive and a supervisory board
Directors’ powers may be limited
A legal reserve may be required
Liquidation procedures are time consuming and complex
US Corporate Law
US Corporate Law was formed under the influence of both English and Civil Law. Apart from differences in language, terminology and interpretation, US Company Law differs from English Law in a number of significant ways, including:-
US Corporations have officers in addition to directors
By-laws are often adopted after incorporation
Directors are often empowered to change by-laws
6. Double taxation avoidance treaties
The jurisdictions around the world can be divided into two groups: Treaty jurisdictions, and Non-Treaty jurisdictions.
Clients wishing to benefit from relief from a double tax treaty must establish a company situated in a Treaty jurisdiction. This is essential for minimum withholding tax on dividend payments and royalties from contracting states. Treaty jurisdictions also convey a non-offshore image and thus provide cosmetic appeal.
This type of jurisdiction is mainly used because of the absence of corporate taxes on the company’s profits and usually only requires companies to pay a fixed annual license fee.
It is important to assess the taxation implications for the business and to decide whether a treaty jurisdiction is required. Usually, a treaty jurisdiction is not required for international trade, the movement of goods or most services. However, inward investment into certain countries requires a treaty jurisdiction to minimize the impact of taxation.
7. Legal and accounting infrastructure
Administration of all offshore structures requires both legal and accounting services.
The infrastructure of International Business (Offshore) jurisdiction is important. You would not like to place your corporate nest-egg in a country which takes ages to get through by telephone. Some of the more exotic jurisdictions sport a very laid-back attitude towards timing and work in general – this may not be helpful when something needs to be done fast and accurately. Factors such as quality of telecommunications and internet, physical access to the country, language, work ethics, legal system, confidentiality culture, exchange controls, quickness and variety of administrative and financial services available all can influence the smooth running of your business. Labuan, Malaysia, is second to none, on an infrastructure basis.
9. Cost Involved
A rather obvious factors i.e. what is the registration fees and taxes? What are the costs involved to fulfil the commercial substance?