tax engineering
sophisticated tax planning
Tax
engineering is a carefully planned
strategy, which aims to prevent, delay or minimize the
payment of taxes of an individual or a company. With due
respect to current legislation, this procedure takes
advantage of loopholes, inaccuracies in the laws and of
differences in the tax regulations of different
countries, in order to get a tax reduction.
This has been made possible thanks to globalization and
to the changes in economic and financial policies in
recent decades. Most governments and world financial
bodies, including the World Trade Organization (WTO) and
International Monetary Fund (IMF) have promoted a series
of policies aimed at eliminating trade barriers between
countries and promoting free movement of capital.
Nowadays, without any major difficulties one can open an offshore bank account or invest overseas, only with the limitations imposed by their country of residence.
On the other hand, companies have significantly increased their international transactions and multinational companies have proliferated. As a result, it is increasingly difficult for the governments of the different countries to exercise an efficient tax control over their citizens and businesses. Most of the operations affect more than one country and the capital flows at breakneck speed from bank to bank, from one end of the world to the other.
The laws are often outdated or suffer significant shortcomings with the proliferation of situations for which they were not intended and new forms of business that simply did not exist before. The lack of uniformity among the laws of the countries can lead to the paradox that the same action may be illegal in one country and yet totally legal in another.
In this new scenario the so-called international tax planning becomes increasingly important. This, unlike traditional tax advice, is not restricted to the area of a country, but addresses tax and legal issues from a global perspective. When international tax planning takes on its maximal development, we are talking about tax engineering.
Why engineering?
It is so named because, like a piece of engineering, it plans and carries out projects of great complexity. “Tax engineers” do not only study and have detailed knowledge of the tax laws of various states and territories, but they benefit from their advantages, ambiguities and loopholes in regulations to develop tax strategies that benefit their clients. In this way and using tax havens, bilateral agreements and double taxation treaties among other things, they manage to avoid, or at least to greatly reduce the amount of tax payable by individuals or companies that contract their services.
As you can imagine, the governments of different countries are trying by every possible means to curb these practices. This creates a kind of cat and mouse game in which the law, usually slower and clumsier, runs after some of the sharpest minds on the planet. While on the one hand legislators try to plug “loopholes”, on the other tax engineering experts seek every day more sophisticated ways to avoid tax burdens.
Any change in the law of a country can make something legal become illegal and consequently ruin all the efforts of tax planning. Keeping up to date on all tax matters is therefore essential. No wonder this work is carried out by multidisciplinary teams consisting of tax consultants, lawyers and experts in business administration from different countries.
Who resorts to tax engineering?
Large multinationals and, to a lesser extent, wealthy people have traditionally have used it and it remains largely so because of its relatively high cost. It is worth mentioning however, that simpler solutions for international tax planning are available and are of interest to almost anyone with minimum resources that could be allocated to savings or investment.
The complexity and thus the operational costs will depend on the particular circumstances of the contractor, especially their place of residence and citizenship. In recent years the explosive growth of the internet has helped bring these services to ordinary citizens, often through offshore service companies.
Is tax engineering legal?
The answer is yes, but we must clarify this. In principle there is nothing illegal about organizing your finances so that the tax burden is as low as possible. This is what is popularly known as tax avoidance. This term should not be confused with tax evasion which, on the contrary is a crime, since paying taxes is avoided by hiding profits.
This difference which seems quite clear in its definition is sometimes not so much so in practice. One has to keep in mind that tax engineering takes advantage of ambiguities in tax laws for its actions. On the other hand, justice can sometimes take into consideration not only the legality or illegality of an act, but the real intentions that lie behind it.
Usually, if they notice artificial transactions that have no economic motivation or operations through non-transparent tax havens, they might take measures if they consider that a crime of tax evasion is actually being committed. That is to say, it is not enough that the economic movements taking place are legal, they must have some justifiable end. Otherwise the tax administration understands that they are being made for the sole purpose of avoiding tax.
It is precisely here, where tax engineering often enters a quagmire, it is not uncommon for them to be forced to “simulate” the need for certain transactions that in fact only seek to reduce the tax burden. In any case, it is often quite complicated for the authorities to prove something, since the operations are performed in different countries, some of which are not usually very helpful when providing information. This is the case of tax havens, where there are strict privacy laws.
As we can see the dividing line between legitimate tax planning and tax evasion is very thin and often depends on nuances or interpretations.
As for the general feeling against tax engineering activities, there are all sorts of opinions. Its defenders maintain that everybody has the legitimate right to organize their finances in the most favorable way, provided that they comply with the law. Its detractors dub it as a tool of capitalism and accuse it of increasing the lack of solidarity and economic inequalities in the world.
For or against, it cannot be denied that tax engineering is used by most large corporations, including financial institutions and the most prestigious insurance companies, and provides a backbone for the progress of our economy, at least in its current model.
