Every once a while it happens that, when starting upon the ‘information gathering process’ with a new client, I get the question “So why not just incorporate an offshore company, because then I pay no tax”. Of course at that point I am talking with an entrepreneur who is not just chatting about investment portfolios, but has a commercial background, trading in goods or delivery of services. “I want to work from my home country and will just invoice my clients from an offshore company” seems to be the sentence that always follows. And each time I’m astonished how much additional time and patience is needed before the client understands that this is “not what works nowadays”.
We have been familiar for several years with the substance over form discussion. However, with the increasing pressure of the over-discussed financial crisis that has definitely left its impact upon the global economy (the topic is getting very old, I realize, but remains trending and seems to have established itself in our general vocabulary) with the result that many governments are focusing on getting their hands on as much revenue from their taxpayers as possible and therefore using all tools within their power. In some countries this causes various, in the eyes of many, unfair effects with the chances of double taxation increasing dramatically. The well-known and feared Limitation on Benefits clauses present in almost all double tax treaties the US concluded, FATCA not to be forgotten, measurements taken and time by time adjusted by the Indian government following the Vodafone case, amendments to the European mother-daughter directive are “good” examples of the increasing interest of (tax) authorities to make sure they get their piece of the cake and even a bit more.
The basic premise that a company is established and effectively resident where it performs its business and that it receives its profit and pays tax in that jurisdiction where it should pay taxes, is without doubt a defendable thought, if not simply logical and just. On the other hand, freedom in organizing ones assets, in choosing optimal routes or forms, resulting in paying an acceptable tax rate (from the perspective of the taxpayer this being anything between 5 and 15%, even though the cash strapped jurisdictions are, without doubt, attempting to collect a tax percentage substantially higher) should remain possible. One of the primary reasons we are in business – ours is the task of finding the jurisdictions most beneficial to our clients! Or as the often quoted Judge Hand wrote: “There is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; all do right. Nobody owes any public duty to pay more than the law demands. Taxes are enforced extractions, not voluntary contributions.” The increasing trend of limiting the autonomy of the individual entrepreneur (and therefore indirectly limiting free competition) is a drastic measurement. In the end, it is all about the right balance and even about personal freedom.
These developments have had their effect on tax planning and structuring and thus on us corporate service providers who, in the end, are responsible for servicing structures which resulted from the genius – and the less genius – fiscal brains of our times. The mere keeping books and records, holding a yearly AGM and taking some resolutions is not enough anymore in an increasing number of cases. More and more corporate service providers form the jumping board to a corporate (re-)structure in order to set up the most beneficial advantages available for a business’ actual operations. This means that we are not only expected to create substance and run a real “shop” but it can even be said that a large part of the burden to initiate a “real” set up of a new business rests on our shoulders. We are moving from being a follower to being an initiator, picking up quite some responsibilities, if not liabilities, on the way. The so called “dummy-directors” have exited or are on their way out.
To give it a romantic touch, we could start thinking of ourselves as parents, nurturing a baby, educating it and growing it into a healthy responsible adult who will take off to stand on his/her own feet. This means a drastic change in our ways of working. We need to understand more of the business our clients are running or want to run; we have to be involved, becoming an actual yet independent part of the new structures we help develop until, at least, the client has reached the point where the proverbial bird is ready to leave the nest.
This brings some new challenges, if not complications. We need to move between being generalist and specialist on various areas. It is essential for us to attend meetings about products which may be new to us, arrange to get the advisors on board in specialist areas outside our scope of knowledge, and assist, where possible in finding financing for the expansion happening under our noses. From passive paperwork provider, we are moving – or have already moved – to being a company kick-off facilitator. We must re-invent ourselves, welcoming challenges and a certain adventure, saying goodbye to certainty of recurring fees on a single client for at least 10 years. Getting actively involved will be rewarding but has its challenges: how do we deal with that potential minefield of sometimes conflicting interests and sentiments?
In the practice our role as corporate services provider gets more leading, providing accounting, managing payroll, acting as tax and legal counsel, be a local co-board member next to ‘real’ directors abroad and form a gateway to the local market when it comes to banking, financing and local trade organizations. I would say that the art of being a service provider, or any kind of entrepreneur perhaps, also entails the ability to keep reinventing yourself and be ahead of trends. What is crucial, though, is that you are passionate about the job. As simple as that may sound, this is often the difference which makes a successful professional. Especially when working with private clients one has to think as if you are ‘part’ of the client, not just the outside professional. We’ve got to be involved in familiarizing ourselves with background, family situation and line of business of the client. Only then can we develop the steps toward becoming an integral part of the new (re-)structuring. Remember though, that we cannot rest upon the laurels of being successful in substance requirements fulfilled. Sooner or later, the governments we work with will develop new problems and will come up with new laws, rules and regulations that inefficient government in financial need tend to develop…..and we’ve got to look, again, at what we can do to rectify the problem!