Tax havens - what are they and what are the risks associated with them?
One of the main goals of entrepreneurs is tax optimization, i.e. taking actions aimed at reducing tax liabilities. One of the most controversial methods of such optimization are tax havens. What exactly are they and which countries can be considered a tax haven? What risk may a Polish entrepreneur bear when using tax havens as a way to optimize tax?
Tax havens - definition
Tax havens do not have a uniform definition, as for each country the tax burden applied in other countries may or may not be favorable depending on local tax laws.
According to the Organization for Economic Co-operation and Development (OECD), which aims to support member states in achieving the highest possible level of economic growth and living standards for citizens, a tax haven is a country that deliberately shapes its law against the standards in force in member states. Several factors that distinguish tax havens were also indicated:
do not impose any or very low taxes,
do not cooperate with other countries in the field of effective exchange of information for tax purposes,
their tax regulations are not very transparent,
they do not require actual activity in their territory in order for income to be taxed there.
Which countries are tax havens?
The list of tax havens includes the Regulation of the Minister of Finance on the determination of countries and territories applying harmful tax competition in the field of PIT and the Regulation of the Minister of Finance on the determination of countries and territories using harmful tax competition in the field of CIT.
Tax havens are not only exotic countries such as Barbados, Maldives, Seychelles and the Bahamas, but also European countries: Andorra, Monaco and Liechtenstein.
Are tax havens always associated with tax fraud?
It is often believed in society that tax havens are always associated with tax fraud - money laundering or deliberate tax evasion. This is not true. Tax havens are essentially one of the ways of tax optimization that aims to avoid paying tax. The purpose of the activity of persons managing economic entities is to avoid taxation, which should be distinguished from tax evasion.
Tax evasion is against tax law and is considered a criminal offense. It is misleading the tax authorities, deliberately acting to the detriment of the State Treasury and, as a result, illegal elimination or reduction of the tax burden.
Tax avoidance is tax optimization, i.e. legal action, and sometimes a series of consecutive activities aimed at minimizing the tax burden. Each attempt at tax optimization is made using legal and legally permitted means.
How do tax havens work?
The strategy of using tax havens mainly consists in creating offshore companies that have a legal form with limited liability and constitute a legal means of tax optimization. Enterprises accumulate profits from doing business in tax havens. As an added bonus, no physical presence of investors, management or personnel is required in the jurisdiction in which the company is incorporated.
A popular example of the use of tax havens is an advisory company in a tax haven that provides services to the parent company or other subsidiaries of an international entity, for which it usually charges excessive fees. Consequently, the parent company incurs higher tax costs, which contributes to tax savings.
Another possibility of using an offshore company is trade brokerage. It consists in shifting the sources of income before tax. A daughter company operating in a country with high tax rates sells the goods to the mother company, which is located in a tax haven. The profit on the transaction is small (selling at the transfer price). The parent company resells the goods to the beneficiary country, applying the maximum profit margin. Thanks to such an operation, the basic income is created in a tax haven.
Transfer prices are prices set by the selling site, division or subsidiary of a multinational enterprise for a product or service supplied to a site, division or subsidiary of the same enterprise.
Transfer pricing is often given a negative meaning, which refers to shifting income between group members in order to avoid taxation or minimize the tax burden, as well as to manipulate information contained in the financial statements of affiliated entities.
Tax havens - a risk for Polish entrepreneurs
Tax optimization using the so-called tax havens may not always be beneficial for Polish taxpayers. In Poland, the PIT Act distinguishes between unlimited and limited tax liability.
Unlimited tax liability means that all income is subject to income tax in Poland, regardless of the source from which it comes. Unlimited tax obligation under Art. 3 sec. 1 of the PIT Act covers every natural person residing in the territory of Poland.
Having a place of residence in the territory of the country means that a given person:
This means that an entity that has a place of residence in Poland is obliged to tax all its income in Poland, regardless of the source of its origin.
Mr. Jan, who resides in Poland, shows his income in one of the tax havens, transferring the entire amount to a bank account at a local branch of a local bank, mainly in order not to pay tax in Poland. According to the local regulations of this country, it does not pay income tax there and this practice is not questioned by the local administration. In accordance with the belief that he is not obliged to pay income tax, he then transfers funds to Poland, buying, for example, real estate.
In accordance with Polish regulations, the taxpayer also obtains income from activities performed outside the territory of the Republic of Poland or from sources of income outside the territory of the Republic of Poland, and the agreement on the avoidance of double taxation does not constitute the application of the method specified in paragraph 8, or with the country in which the income is achieved, the Republic of Poland has not concluded an agreement on the avoidance of double taxation - this income is combined with income from sources of income located in the territory of the Republic of Poland.
This means that, despite everything, Mr. Jan will be obliged to tax the income shown in the tax haven in Poland.
Another risk is double taxation, i.e. double taxation of the same subject of taxation in two different countries. To avoid this, states sign agreements to avoid double taxation with each other.
To avoid double taxation of the same income, Poland uses two methods of avoiding double taxation depending on the country in which the income was obtained:
In order to equalize the amount of tax, there is a so-called abolition allowance introduced by the Act of 25 July 2008 on special solutions for taxpayers obtaining certain revenues outside the territory of the Republic of Poland. The tax relief is available to taxpayers who obtained income abroad, for which they cannot benefit from tax exemption in Poland on the basis of exemption with progression.
The issue of unlimited tax obligation and at the same time avoiding double taxation was raised, inter alia, in by the Director of the Tax Chamber in Katowice in the individual ruling of 27 August 2014 (IBPBII / 1 / 415-448 / 14 / MCZ), in which he indicated that if the taxpayer did not achieve income from sources located in Poland in a given year, and only on account of remuneration in Qatar, then it is not subject to taxation in Poland (it may take advantage of the abolition allowance). However, the applicant is required to submit an annual tax return.
Limited tax obligation is connected with the taxation of income earned only in the territory of the country. Entities that do not have a place of residence in the territory of Poland and taxpayers who do not have their registered office or management board in the territory of the Republic of Poland, are subject to tax liability on the income they obtain on the territory of the Republic of Poland.
Therefore, according to Polish tax regulations, some services, although provided by a foreign entity, may be taxed in Poland. Importantly, the Polish taxpayer acts as the tax payer. This is called withholding tax.
A consulting company registered in a tax haven acts as an intermediary between a seller from Poland and his contractor in order to artificially inflate costs, and thus reduce the tax base.In accordance with the limited tax obligation, non-residents are required to tax income earned in Poland in Poland.
In this case, the Polish taxpayer acts as a payer of income tax, and therefore is responsible for collecting the withholding tax in the amount of 20%. revenues.
A very important issue from the point of view of Polish taxpayers is the government draft amendment to the Tax Ordinance introducing a clause against tax avoidance, which is aimed at eliminating the possibility of taxpayers taking legal actions if they are aimed solely at avoiding paying the tax. This project already in March this year. went to the Sejm. The amended provisions will not apply, among others:
if the tax benefit or the sum of benefits obtained by the entity from the activity does not exceed PLN 100,000 in the reporting period or
when the entity receives the so-called securing opinion of the Minister of Finance.
Risk on tax grounds is not everything. For entrepreneurs, tax havens may also pose a reputational risk. Why? The society often mistakenly assumes that the company's headquarters in one of the tax havens is associated with the intention of tax fraud or that it is simply tax evasion and income siphoned off the state. As a result, such a company may be falsely accused by third parties of fraud, which may result in, for example, a reduction in sales.
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Not reaching far, an example in Poland can be the LPP SA company (a clothing company with brands such as Mohito, Reserved, House, etc.), which a few years ago, when moving its headquarters to Cyprus, met with great indignation from the Polish society. Internationally, one of the loudest recent scandals concerning tax havens was the so-called The Panama Papers scandal, which disclosed millions of confidential documents from a Panama tax and law firm. The names include not only leading politicians and businessmen, but also world-famous sportsmen, filmmakers and celebrities. Although experts point out that tax havens are not always associated with tax fraud, the disclosure of such data has plunged many people who were on the published lists.
Tax havens have always aroused controversy, but it should be emphasized that they are not always related to tax fraud. It is often a fully legal way to optimize tax. In any case, companies that decide to avoid taxation in this way should consult it with specialists, because in some cases it may turn out to be unprofitable and involve a high risk - both from a legal and tax point of view, as well as the risk of losing a good reputation. .
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