Wednesday, 24 May, 2017
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History of tax planning
  • Relations between the government and the taxpayer have been a topical issue for over many centuries. Historically, entrepreneurs have always been not only the main source of revenue of the state budget, but also the most rational thinking and mobile part of society.
  • Traditionally, in ancient times the only option of legitimate tax planning was a change of home country of the entrepreneur. Whilst entrepreneurs thought about moving jurisdiction if repression of business was added to high taxes or if the government ceased to provide anything in return for replenishment of the treasury, in most cases, high taxes alone would not cause the search for another home country.
  • As an example, in the mid-XV century, the Portuguese Prince Henry raised the tax rate for seafaring merchants to 25% if the merchants used their own ships, and 50% if state vessels were used. However, Portuguese merchants were happy with these rates because the government provided protection and monopoly of trade with other countries in return, and profit from a single voyage could be over 100%. The situation changed when, after several generations of kings, the state not only continued to raise taxes, but started spending the money on royal receptions and entertainment instead of protecting the seafarers. Many businesses moved to the Netherlands as a result, where the tax rate was more reasonable, and the state support was more tangible.
  • A further example is the United Kingdom, where in 1799 the head of the government at that time William Pitt the Younger introduced a progressive income tax. The rate of income tax for up to GBP 80 per year in revenue was approximately 1%, whereas a revenue in excess of more than GBP 200 per year resulted in tax at an incredible tax rate for those times of 10%. Wealthy British people at that time were outraged, but chose not leave the country, because at that time Britain was still the main world business centre, and such jurisdictions as Hong Kong or Singapore were not as attractive then as they are today.
  • The emergence of low-tax territories has brought many new things into the world economy. The United States of America may be considered as a pioneer because at the end of the XIX century in the state of New Jersey, Governor Leon Abbett introduced a lower corporate tax which resulted in many large companies from other states moving to New Jersey.
  • However, the main event was the decision by the British court, which recognised in 1929 that a company which is only incorporated in the United Kingdom but not conducting any activity in that country was not obliged to pay taxes to the British treasury. This laid down the principle of territorial taxation for legal entities which is followed now by many jurisdictions globally.
  • The benefits offered by tax-free and low-tax jurisdictions are used now by many different groups of society ranging from entrepreneurs to artists. As an example, the famous Rolling Stones music group, who earn most of their income outside their home country, have registered a holding company in the Netherlands Antilles and transferred to it their entitlement to royalties. Simultaneously, the musicians themselves, having eased their tax burden, have remained as British nationals, thus continuing to replenish the treasury of their native country.
  • The situation is different where it is impossible to regulate the tax burden by means of corporate instruments. The taxpayer, whether an entrepreneur or just a high net worth individual, may start thinking about changing their citizenship. As an example, the famous investor John Templeton changed his United States nationality to Costa-Rican. A similar decision was arrived at by one of the founders of Facebook, Eduardo Saverin, who chose the citizenship of Singapore instead of the United States of America. Other examples include the singer Tina Turner who renounced her United States nationality in favour of Switzerland, and the French actor Gerard Depardieu who changed his nationality to Russian.
  • Since the middle ages the basic principles have not changed in that the entrepreneur will be loyal to his country if the objective rate of taxation is combined with some support from the state for the replenishment of the treasury.
  • Accordingly, the offshore sector makes it possible for the entrepreneur to regulate taxation of his foreign operations by legal means, and serves as a kind of buffer that helps the entrepreneur to retain his seat in his home country and thus to continue generating revenue for the treasury. The attempts by any country to shut down completely all access to work with low-tax jurisdictions is likely to create rather an opposite effect, where the only route open for the entrepreneur will be a change of his residence.
  • Accordingly, it is predictable that the principle of the existence of low-tax territories and international tax planning, set over one hundred years ago by the United Kingdom and the United States of America, will continue to be a favourable factor not only for entrepreneurs, but also for their home states.
  • The corporate world is constantly changing. New types of enterprises appear. Old types of enterprises disappear. Tax rates are adjusted. New double taxation treaties are entered into. International Overseas Services has witnessed many events over the last twenty years in practice such as:
  • cessation of offshore regimes in Ireland (1999) and Cyprus (2003),
  • closure of the program of offshore banks in Nauru and Palau (2001),
  • termination of the possibility of incorporation of conventional companies with names indicating banking or insurance activities (2004),
  • termination of the practical use of bearer shares in most jurisdictions (since 2006).
  • Simultaneously, new offshore jurisdictions have emerged in the world. Many countries that were formerly known as states with a strict taxation system offer an increasing amount of benefits to both taxpayers and certain types of corporate instruments, which increase the attractiveness of those countries to international business.
  • ‘Everything changes and nothing remains still’. This phrase accurately describes the world of corporate services which is one of the most exciting, interesting and significant parts of international business.
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