Until recently, international taxation and optimization were sought after treasures for big international companies, such as Apple, Google, and Starbucks, and for high net worth individuals. These multinational companies
– regardless of the industry they catered for – would be given the biggest perks of the local markets because they had the capital, the infrastructure, the resources, the brand and the reputation. They would grow territorially faster than smaller businesses and would give access to the global market easily by setting up branches and affiliates. Foreign governments welcomed them, giving them preferential treatment because they attracted business and created employment. High net worth individuals (HNWI) would investing, helping these offshore jurisdictions grow and attracting more businesses to enter that local market.
Today, Tim Cook has been sent in front of the Senate Homeland Security and Governmental Affairs Committee’s Investigations Subcommittee for questioning about Apple’s offshore profit shifting and tax avoidance. Bankers are put on trial and thrown in jail; the Swiss Parliament interferes in a private matter to save a bank and avoid a national economical fall; the Organization for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF) that combat money laundering, tax evasion and terrorism financing are introducing drastic transparency policies to be enforced everywhere.
Countries around the world are beginning to recognize that they need to increase their revenues and address the effectiveness with which they administer, collect and enforce taxation among both corporates and individuals.
Although people will continue to run, today there is nowhere left to hide. As Leonardo Di Caprio got caught by Tom Hanks at the end of the famous movie Catch Me If You Can, so too will the modern-day tax evaders.
The use of international taxation, such as the Double Tax Treaties, is necessary to maintain order and to regulate international transactions and multinational groups. They come, of course, with heavy cumbersome procedures, paperwork and costs. However, when used wisely, such legislation can be a way to grow businesses, rather than to limit them. Most often however, these international treaties will benefit the multinational and large companies, with little impact on small and micro enterprises. Why is this? Most microenterprises operate locally, with their operations being regulated by local rules and laws. Nonetheless, the Double Tax Treaties are used mostly to receive or distribute passive incomes such as dividends, royalties, interests, freight without companies having to pay tax twice over. This gives great advantages to trading or holding assets companies owned by HNWI dealing on an international level. For instance, smaller companies assisted by an asset holding company could have a vendor which provides them with shipping services, or the company could operate under a franchise structure. These options for infrastructure would effectively utilize the Double Tax Treaties and could save small and micro enterprises huge amounts of money in the long term.
Therefore, small and micro enterprises should always consider the kind of income they deal with to be treated as passive incomes in order to be able to use the advantages of the international tax agreements and avoid risks of double taxation. Additional expenditures that have arisen should then be considered to be correctly treated under the international agreement’s provisions.
Many countries support their small and micro businesses by giving them some preferences and allowances. Singapore, for example, offers a tax exemption scheme for new start up companies. This scheme was introduced to support entrepreneurship and help local enterprises grow. Under certain conditions, new start up companies can benefit for the first three consecutive year of a tax exemption up to SGD 200,000.
Small and medium enterprises micro and local businesses, start-ups and entrepreneurs are vital to ensuring economic growth in a sustainable and inclusive manner across developed and emerging economies alike. As such, their utility must be recognized and taken into account. Ensuring that the voices of our local entrepreneurs are heard in our chaotic fast growing world can only reap rewards in growing and diversifying our economies.
22 March 2016 on LinkedIn