The complexity of the laws and rules that determine the tax for foreign companies and the profits generated abroad actually derived from some basic concepts. This concept includes the term:
1. Neutralists tax means the tax has no effect on resource allocation decisions
2. Tax equity, meaning taxpayers who are facing similar situations should pay similar taxes the same but there are disagreements between how to interpret this concept.
Diversity of the National Tax System
Effective management of potential tax require understanding of the national tax system is very different from one country to another.
Various Kinds of taxes
Five kinds of taxes, namely:
1. Corporate income tax
2. Tax levy
3. Value added tax
4. Border tax
5. Transfer tax
As more and more companies are reducing the marginal corporate tax rate, many states are expanding the tax base of the company. In the real world is rarely effective tax rate equal to the nominal tax rate. Thus it is inappropriate to base the comparison between countries on tax rates must be. Besides low tax rate does not necessarily mean a lower tax burden. Internationally, the tax burden must always be determined by observing the effective tax rate.
Tax Administration System
For simplicity there are two systems, namely:
1. Classical system
2. Integrated system
Foreign tax incentives
Many states offer tax incentives to attract foreign investment. Incentives may include tax-free cash grants are used for the cost of fixed assets of new industrial processes or remission of taxes to pay for some period of time.
Tax competencies that are Hazardous
Throughoutworld trends that lead to a reduction in corporate income tax rate is the direct impact of tax competition. The competition is conducted by a tax haven country would benefit if it can make government more efficient. While the harmful effects if the transfer tax revenue for governments that actually requires these revenues to provide services required by businesses.
Taxation Of Income From Foreign Sources and Double Taxation
Most countries apply the principle of the world and impose taxes on profits or income of companies and citizens in it, regardless of the country. The underlying idea is that a foreign subsidiary of a local company is a local company that happens to operate overseas.
Foreign Tax Credit
Foreign tax credit can be counted as a direct credit on income tax paid on earnings branch or subsidiary and any tax withheld at source such as dividends, interest, and royalties are sent back to domestic investors. The tax credit can also estimated if the amount of foreign income tax paid is not too clear.
Tax Credit Restrictions
Foreign tax credit limitation applies separately to U.S. tax on foreign source income tax for each of the following types of income:
1. Passive income
2. Financial services revenue
3. Income levy high taxes
4. Transportation revenue
5. Dividend for each of the foreign company with a share of ownership by 10% to 50%
Tax treaties affect the tax levy on dividends, interest and royalties paid by companies in the country to foreign shareholders. These agreements typically provide a reciprocal reduction of tax levies on dividends and royalties are often exempt from taxes and interest charges.
Consideration of Foreign Currencies
Gains or losses in foreign currencies are generally located between U.S. sources and foreign sources with reference to the domicile of the taxpayer in its accounting books reflect the assets or liabilities in currencies foreign. Source gain or loss is the United States.
Dimensions Tax Planning
Observations on the issue of tax planning starts with two basic things:
1. Tax considerations should never attempt control strategy
2. Constant changes in tax laws limit the tax benefit in the long-term planning
If the overseas operations initially predicted to cause harm may be advantageous if the taxes are organized in a branch at an early stage. If the subsidiary is organized in a tax haven country that does not tax at all, then the tax deferral will increasingly look attractive.
Controlled Foreign Company Profits And Subdivision F
United States to close the hole this weakness with a controlled foreign company and the provision of income Subdivision F. Profit Subdivision F includes several sales and services revenue associated with the special.
Parent Company Abroad
Parent company concerning taxes, among others:
1. Maintaining the benefits of the tax rate levies on dividends, interest, royalties, and other similar payments.
2. Defer U.S. taxes on overseas profits until those profits repatriated to the U.S. parent company (ie to reinvest these earnings outside the country)
3. Defer U.S. taxes on gains from the sale of shares of subsidiaries of foreign operations
Overseas Sales Company
United States created the company’s overseas sales of FSC to encourage exports and improve the U.S. balance of payments position continued to deteriorate. Under the FSC provisions of U.S. export earnings in part by FASC exempted by the U.S. income tax.
As shown by the following diagram of affiliates of foreign funding can also be used to shift profits from high-tax state with the location of the parent company or companies affiliation to the state that low tax jurisdictions where affiliates who provide funding.
Merger Tax Credit
The combined profit of the many possible sources of excess credits generated from countries with high tax rates to reduce the income received from the tax rate for the tax credit can be extended low. advantages for tax related to dividends paid by a company that shared a second-tier foreign and the third in a multinational network.
Allocation of Cost Accounting
Internal cost allocation between the companies was another means to shift profits from high tax countries to low tax countries. The most common is the allocation of corporate overhead expenses to affiliates in countries with high taxes.
Location and Transfer Pricing
Location of production and distribution systems also offer tax advantages. Profit for the company as a whole system can be improved by determining the transfer price is high for the components were shipped from subsidiaries in countries with relatively low tax rate and price low transfer of components were shipped from subsidiaries located in countries with tax rates are relatively high.
Transfer Pricing International: A COMPLEX VARIABLE
Transfer pricing is anything new lately arise. Transfer pricing in the United States evolved along with the decentralization movement that influenced many American businesses during the first half of the 20th century. Once the company expands internationally transfer pricing issues are also expanding rapidly. There are factors such as:
1. Tax factor
2. Factor Tariff
3. Competitiveness Factors
4. Job Evaluation factors
Transfer Pricing Methodology
In a world with a highly competitive market, there will be a big deal when they wanted to transfer pricing resources and services between companies. Transfer pricing can be based on the difference in cost increases or market price. Environmental influences on transfer pricing also raises several questions regarding the pricing methodology.
Price Versus Cost Versus
Cost-based transfer pricing system can overcome this deficiency. After all this is simple to use system, based on data readily available, easy to explain to the tax authorities, it is routinely carried out so as to avoid occurrence of internal friction that often occurs when the system arbiter is used.
Cost-based systems rely too much on historical costs that ignores the relationship of demand and supply on a competitive basis and does not allocate costs to products or services in a satisfactory manner. Problem of determining the costs are felt in the international level because of these cost accounting concepts are from country to country.
Principle of Fair
OECD identifies some broader mode to ensure a fair price is. Method are:
1. Uncontrolled price method is equivalent
2. Uncontrolled transaction method is equivalent
3. Resale price method
4. Cost plus method
5. Comparable profits method
6. Method of income splitting
Source of: Federick DS Choi and Gary K.Meek.2005.Akuntansi internasional.edisi Salemba kelima.jakarta-four.