Naturally, companies want to do business in as many locations as possible, but sometimes that is cost prohibitive. For example, suppose a company in country A earns $100 from doing business in country B; however, it is forced to pay a 30% income tax in both countries. So, that $100 profit becomes $70 due to country B’s tax, and, by then having to pay country A’s tax as well, the final profit becomes $49. Essentially, this company is paying 51% in taxes for trying to do business in country B, which is unfavourable to foreign trade and overall economic development.
Seeking to deal with the issue of double taxation, the beginnings of a solution emerged in the late 19th and early 20th century with the advent of bilateral tax treaties. Following World War I, an expanded interest in international trade and relations met in the League of Nations, providing the first truly global solutions to international tax issues and drawing the very first Model Bilateral Trade Convention in 1928. While the foundations had been laid, it was not until after World War II that organisations were founded to actually form and implement guidelines and offer solutions, most notably the 1980 United Nations Model Double Taxation Convention between Developed and Developing Countries, based on the 1977 Organisation for Economic Co-operation and Development Model Tax Convention. Since 1992 updates to the Model Convention has been made and its impact extended beyond the OECD members, recent globalisation and communications revolution seriously boosted the volume of international trade and the need of new policy options to tackle the problem of tax administration. Many countries have signed the Multilateral Convention on Mutual Assistance in Tax Matters and the OECD, backed up by the G20 governments, has executed a multi-step Action Plan on Base Erosion and Profit Shifting (BEPS) for countries to implement.
From a country’s perspective, the objective is finding the correct balance between trade encouragement and economic growth while still collecting a sufficient tax. Some countries, such as the United States, rely on market size and ease of doing business; however, as demonstrated by the Burger King/Tim Hortons inversion merger, which will relocate the fast food giant out of the United States and save it an estimated $400 million and $1.2 billion in taxes during the first 3 years, sometimes, you can’t argue with a lower tax burden and more favourable double taxation laws. Conversely, looking at widely regarded tax havens, such as Luxembourg, the Cayman Islands, or Mauritius, having a low tax burden – double taxation agreements can definitely attract a substantial business presence, yet this often comes at the expense of lost tax revenue for other countries, which, as we are currently seeing, can lead to greater levels of scrutiny and the threat of an embargo, with the notable recent example being Credit Suisse.
While there is no “silver bullet” for dealing with double taxation, the most important asset for any business seeking to expand internationally is information. Knowing double taxation agreements and their potential to provide a competitive advantage and maximize profits. Given the complexity of tax law in any jurisdiction, the complexity of taxation agreements themselves, as well as the possibility of short and long-term changes to tax legislation, having a thorough understanding of your options, especially in a foreign language, would be next to impossible given most companies’ limited time and resources.
As a translation company with an international presence and more than 20 years of experience, you can expect EVS Translations to provide consistent and cost-effective solutions for tax related document translations of every size and in any language.