8th Transfer Pricing Asia Summit 2021

In this webinar, we understand tax planning and study various strategies via transfer pricing.

How can corporates save taxes?

“The line of demarcation between tax planning, tax avoidance, tax evasion has always been very thin and fluctuating.”

Maulik Doshi, Deputy Managing Director- Transfer Pricing and International Tax, Nexdigm

Here’s how these three methods can be defined and distinguished:

• Tax Planning: using legal laws and methods that are designed to provide incentives to businesses for saving in taxes. Example - exemptions, tax credits, IP regime, etc.
• Tax Avoidance: It is legally correct but morally incorrect to follow this method since it involves taking advantage of the loopholes in The Tax Act of the host nation or other nations. One doesn’t end up breaking the law, yet can save on taxes.
• Tax Evasion: This includes illegal ways to save on taxes by hiding income, trading on black money, inflating expenses, etc

Tax Planning Strategies

Some of the tax planning strategies that can be followed include:

• Income shifting: conduct transfer pricing of goods and intangibles by transferring profits from high-tax nations to low-tax nations.
• Offshoring tax: transferring functions or business operations to enjoy tax incentives in the lower tax jurisdiction.
• Use tax havens: complete relocation to countries offering tax advantages.
• Tax deferral: Paying taxes in the future than at present.
• Regulatory arbitrage: uses the regulatory gaps between two countries to save taxes. For example: difference in the definition of dividends in two countries in case of hybrid entities.
• International holding company: establishing a foreign holding company in the low-tax jurisdiction to save exit taxation and investment income.
• Corporate inversion: conduct transfer of corporate identities.
• Income conversion: uses funding arbitrage like interest v/s dividend.

OECD report on CBCR statistics

Implementation of these tax planning strategies and tax evasion activities are affecting the incomes of the home countries.

Numbers could vary as to how in an investment hub country, only 4% of the value -generating business activities are carried out in that country, but 25% of the profit share is managed.

Compared to a high-jurisdiction nation, the country might house 32% of the business activities, but only 28% of the profit share.

This leads to more revenues per employee in an investment hub country, creating a misalignment and loss of taxes for the high jurisdiction country.

Notes from case studies

Mr Maulik Doshi presented case studies in tax planning and avoidance for a better understanding of how these strategies are executed. Here are some key learnings from them:

• Using an inter-pose structure, one can conduct sales and invoices of goods in a low jurisdiction country or a country that offers necessary tax rebates.
• One can misalign profit and value creation activities. For example - an R&D center can be opened in a nation that offers tax incentives to benefit research, manufacturing is done in another nation that offers necessary tax incentives, etc.
• One can also deploy critical functions of investment advisory services in a low jurisdiction country. But the main decision made, that houses the actual value is driven by the parent company in high jurisdiction country.
• One can use contract manufacturing instead of license manufacturing structure and use another entity for distribution of the goods in a low jurisdiction country.

Before taking any inspiration from the case studies, one needs to consider the work done under OECD’s BEPS project, General Anti-Avoidance Regulations (GAAR), etc. who are working towards addressing these tax avoidance strategies. With increased cooperation between tax authorities of various jurisdictions where information and knowledge are being shared to optimize their mitigation strategies, one should adopt tax planning primarily to optimize business operation costs and maintain the company’s reputation.