Real Implementation – important rules to assure
the recognition by tax authorities:
Rule 1: Collect and provide evidence: You are not dealing with sympathetic tax inspectors. Gather evidence on your own that can support your arguments:
- Documents, electronic records
- Plausibility, on-scene evidence
We recommend that you collect relevant documents from the very beginning, in order to be able to present them in the case of an audit by fiscal authorities …. and that you carefully avoid such evidence that can be misinterpreted by malicious people against your interests.
Rule 2: Know that tax authorities require increased cooperation from taxpayers in international business relations: outside the EU, authorities are reversing the burden of proof on the taxpayer, and this has to be taken into consideration; conversely, there should be no evidence of facts that lead to undesired tax liabilities.
A lot of money is at stake: take enough time to get familiar with the basic issues of international tax law. Expertise will not only help in dealing with tax authorities: you will recognize attractive design options which your tax consultant did not find for you; you can organize your processes so that they result in desired fiscal consequences; you can identify fiscally critical functions and implement the proper tools to monitor them precisely.
Rule 3: Pay attention to get the desired qualificaton of facts: collect and provide evidence in order to cope with any attempt to qualify your company as “transparent” (not real) company based on Art. 5 of the OECD model tax convention, double tax treaties and national laws:
- assure that the company has an economic function (e.g. marketing, also online)
- appropriate substance and infrastructure (server/ web shop, staff, premises)
- control over available sources of income
Rule 4: Let the location of the company be the real place of management (“management & control”): make sure you collect evidence that important decisions for the company are made at its seat: strategy, signature of important contracts, attendance of management of the company (meeting minutes) and much more. Hint: if you do not have time to be there, employ a manager or let one of your employees be manager of the foreign company, but make sure in the management contract that he is really at the site of the company.
Rule 5: Avoid unplanned fiscal establishments: criteria for unplanned permanent establishment can be according to Art. 5 of the OECD model tax convention: a fixed place of business through which the business of an enterprise is wholly or partly carried on; an agent with authority to conclude contracts in the name of the enterprise; permanent services that last longer than 6-12 months, depending on the double tax treaty.
If the manager of a company that is located in a country with reasonable taxation has his residence in another country, no written correspondence should be done or kept in that other country in order to avoid any assumption that the place of effective management could be in the country of residence.
Rule 6: Justify transfer prices: according to Art. 9 of the OECD model tax convention transactions between associated companies should conform to comparable transactions between independent third parties, otherwise there is threat of an classification as a hidden dividend based on tax assessment (by estimation). There are accepted ways:
- Transfer prices in the range of market prices
- Transfer prices based on sales price minus commission percentage (based on a contractual agreement that has to show adequate return-service)
- Calculation of costs and markups (pro rata allocation of overhead is accepted, but is not mandatory, often the separation of direct costs and overhead offers interesting options).
It is strongly recommended to establish from the very beginning a voluntary documentation how you calculate transactions between associated companies.
Remember: transfer pricing regulations are applied for transactions between associated enterprises, not on transactions between independent companies where a re-classification is only applied if there is clear evident of misuse.
Rule 7: Avoid qualification as a hidden dividend: if there are transactions between a company and connected companies or shareholders, be sure that there is good documentation and that transfer prices can be compared with prices between independent companies. In addition, document loans carefully and do not forget to pay the defined interest.
Rule 8: Use taxed money for visible private expenses and avoid to raise suspicion of tax evasion: often it is checked whether house, car and visible lifestyle could be proven to be financed with taxed income. Keep records about such facts. Demonstrate that there is real business, by plausible transactions and by conscious involvement of witnesses who could testify their current perceptions.
Rule 9: There are increasing requirements to prove substance (rent, personnel), think not only about taxes, but also about structure costs. If you transfer processes to a country with low wages and low taxes, you save both costs and taxes.
Rule 10: In tax audits let an expert represent you: let your tax expert deal with tax inspectors, because some tax inspectors can be dangerous: psychologically excellent educated, they establish a friendly relationship for some days and then ask some tricky questions (that procedure is permitted to them in most countries).
Rule 11: Be concealed in tax matters: tell only those who need the information and present yourself always as honest upright taxpayer, however tricky your real tax planning might be.
Rule 12: Know your personality: if you do not have strong nerves or if you are not able to work precisely in detail, do not try to engage in international activities. For intelligent business and tax planning, these personal qualities are crucial.