Rule 1: collect and supply evidence: You are not dealing with sympathetic tax inspectors. Gather evidence on your own that can support your arguments:
- Documents, electronic records
- Witnesses
- Plausibility, on-scene evidence
We recommend that you collect relevant documents from the very beginning, in order to be able to present them in the case of an audit by fiscal authorities .... and that you carefully avoid such evidence that can be misinterpreted by malicious people against your interests.
Rule 2: know that tax authorities require increased participation in international business relations: reversing the burden of proof, most tax authorities require proof of the taxpayer, and this has to be taken into consideration; conversely, there should be no evidence of facts that lead to undesired tax liabilities.
It is about a lot of money: take enough time to get familiar with the basic issues of international tax law. Expertise will not only help in dealing with tax authorities: you will recognize attractive design options which your tax consultant did not find for you; you can organize your processes so that they result in desired fiscal consequences; you can identify fiscally critical functions and implement the proper tools to monitor them precisely.
Rule 3: pay attention to the desired allocation: collect and provide evidence in order to cope with any attempt to classify your company as “transparent” (not real) company based on Art. 5 of the OECD model tax convention, DTAs and national laws:
- assure that the company has an economic function (e.g. marketing, also online)
- appropriate infrastructure (server / webshop, staff, premises)
- control over available sources of income
Rule 4: let the location of the company be the real place of management: make sure you collect evidence that important decisions for the company are made at its seat: accounting, attendance of management of the company (meeting minutes) and much more. Hint: if you do not have time to be there, employ a manager or let one of your employees be manager of the foreign company, but make sure in the management contract that he is really at the site of the company.
Rule 5: Avoid unplanned fiscal establishments: criteria for unplanned permanent establishment can be according to Art. 5 of the OECD model tax convention: a fixed place of business through which the business of an enterprise is wholly or partly carried on; an agent with authority to conclude contracts in the name of the enterprise; permanent services that last longer than 6-12 months, depending on the DTA.
If the manager of a company that is located in a country with reasonable taxation has his residence in another country, no written correspondance should be done or kept in that other country in order to avoid any assumption that the place of effective management could be in the country of residence.
Rule 6: justify transfer prices: according to Art. 9 of the OECD model tax convention transactions between associated companies should conform to comparable transactions between independent third parties, otherwise there is threat of an classification as a covert distribution of profits based on tax assessment (by estimation). There are accepted ways:
- Transfer prices in the range of market prices
- Transfer prices based on sales price minus commission percentage (based on a contractual agreement that has to show adequate return-service)
- Calculation of costs and markups (pro rata allocation overhead is accepted, but is not mandatory, often separation of direct costs and overheads offers interesting options). Dokumentieren Sie freiwillig, wie Sie Geschäfte zwischen verbundenen Unternehmen kalkulieren.
It is strongly recommended to establish from the very beginning a voluntarily documentation of to calculate transactions between related companies.
Remember: transfer pricing regulations are applied for businesses between associated companies, not on transactions between independent companies where a classification is only applied if there is clear evident of abuse.
Rule 7: Avoid covered distribution of profits: if there are transactions between a company and its owners, be sure that there is good documentation and that transfer prices can be compared with prices between independent companies.
Rule 8: Avoid to raise suspicion of taxation abuse: the best way is to demonstrate real business, by plausible transactions and by conscious involvement of witnesses who could testify their current perceptions.
Rule 9: always use after tax money for obvious private expenses: often it is checked whether house, car and visible lifestyle could be proven to be financed with taxable income. It has proved valuable to keep records about such facts.
Rule 10: in tax audits let an expert represent you: let your tax expert deal with tax auditors, because some tax auditors can be dangerous: psychologically excellent educated, they establish a friendly relationship for some days and then ask some tricky question (that is permitted to them most countries).
Rule 11: be discretely in tax matters: tell only those who need the information and present yourself always as honest upright taxpayers, however tricky your real tax planning might be.
Rule 12: Know your personality: if you do not have strong nerves or if you are not able to work precisely in detail, do not try to engage in international activities. For intelligent business and tax planning, these personal qualities are crucial.
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