1. STRATEGIC TAX PLANNING FOR GLOBAL COMMERCE & INVESTMENT Planning Presented by : Iván Sotomayor, CPA, MBA

2. Developing a Tax Planning Strategy Cross Border Tax Planning Strategies Benchmarking and Tax Rate Drivers Tax Evasion / Tax Avoidance and Tax Planning Agenda Topic 1 Topic 2 Topic 3 Topic 4 Global Taxation

3. Cross-Border Tax Planning

4. Globalization and its impact on Tax Planning 1.Expansion of Markets Globalization has been defined as the tendency of business to move beyond domestic and national markets to other markets around the globe, thereby, increasing the interconnectedness of different markets Most companies evolve and grow along at least two dimensions: 1.Product/service expansion (enabled by strategic investment) 2.Geographic market expansion beyond national borders Certain trends, such as the movement of capital and labor, the shift of the manufacturing base from high to low cost and, the gradual removal of trade barriers, which along with more subtle ones, such as organizational changes, the globalization of branding and the ever increasing importance of developing, protecting and exploiting intellectual property (IP), are having an impact on the way multinational enterprises (MNEs) are structured and managed

5. Globalization and its impact on Tax Planning 2.Global Effective Tax Rate (ETR) Globalization has caused operational models to evolve, has made tax planning more complex and has created a need to better align tax strategy and planning with corporate strategy and operations. Thus, management responsible for overall corporate strategy must be able to understand relevant tax concepts and draw out the business implications. In todays business environment, management needs to anticipate change and address business issues globally. This include for a global tax strategy that is integral to corporate strategy and tax planning that is better aligned with: 1.Operations and, 2.Aimed at achieving and sustaining a lower worldwide effective tax rate (ETR)

6. Sources of Cross-Border Tax Principles Domestic Tax Rules Source of Income Resident vs. non-resident Worldwide vs. Territorial Double Taxation

7. Domestic Tax Rules The right to tax the income of an enterprise is generally based on a factor that determines its connection to a jurisdiction through: Incorporation or, Effective management This type of tax is commonly referred to as: Residency Jurisdiction and it typically includes the right to tax the worldwide income of the person resident in that jurisdiction In addition the country may base its right to tax on the source of income within its territory Cross-Border Tax Principles

8. Taxation Systems Worldwide Taxation A worldwide system subjects to tax: Its residents on their worldwide income derived from sources within and outside its territory and, Non-residents only on the income derived from its territory Territorial Taxation A territorial system subjects to tax residents and non- residents only on the income derived from sources located in its territory All income derived from sources outside of its jurisdiction is disregarded Cross-Border Tax Planning

9. Jurisdictions-Taxation Systems

10. Resident vs. Non-resident  The concept of residency for tax purposes becomes crucial in a system of worldwide taxation  With regards to companies, countries generally use two sets of criteria to determine residency:  Formal criteria – such as incorporation, legal residency registration in the commercial register, etc. and  Factual criteria – such as place of effective management, administrative residence, principal business location. Etc. Cross-Border Tax Principles

11. US Jurisdictional-Authority to Tax Foreign Income

12. Source of Income In order to function properly, both territorial and worldwide systems contain rules that define when an item of income is sourced within their jurisdiction The connecting factor between income and the territory Generally differs depending on the item of income concerned For example, income from real property is generally deemed to arise in the country where the property is located. Income from interest, on the other hand, may be deemed to arise from: Where the capital is located Where the capital is invested, or Where the payer of interest resides Cross-Border Tax Principles

13. International Double Taxation  The coexistence of different of different tax systems leads to international double taxation  This may be the result of different definitions under different jurisdictions of:  Residency for tax purposes  Different sourcing or attribution of income rules  Taxation based on residence as opposed to taxation based on source of income  International double taxation is generally divided into:  Economic double taxation – it arises where two different taxpayers are taxed in respect to the same income. A classic example arises in the case of transfer pricing adjustment  Juridical double taxation – it arises where the same income is taxed in the hands of the same person by more than one jurisdiction and the total tax burden is higher than if it had been taxed by only one jurisdiction

14.  Since double taxation constitutes an obstacle to the expansion of cross-border commerce, many countries grant relief under their domestic legislation or any relevant double tax treaty so that their resident taxpayers are in a neutral position when conducting commerce abroad.  Generally there are two methods of double tax relief  Exemption Method – Under this method the country of residence of the taxpayer exempts the income derived from foreign sources either under the so-called “tax exemption” or “income exemption” methods.  Foreign Tax Credit Method – A foreign tax credit may generally be applied in two ways: A credit is allowed for the tax paid on foreign income against the domestic tax due on worldwide income (full credit) or, A credit is allowed against the domestic tax due on the worldwide income the taxpayer paid on the foreign income, but only up to the amount of domestic tax corresponding to the foreign income (ordinary credit) Double Tax Relief Methods

15. Tax Treaties  Tax treaties are bilateral agreements that serve to harmonize the tax systems of two countries and it applies not only to companies but also to individuals involved in cross-border investment or trade.  In the absence of a tax treaty, income from cross-border transactions or investment would be subject to potential double taxation. First by the country the income arises and again by the country of the recipient’s residence  The tax systems of most countries impose withholding taxes, frequently at high rates, on payments of dividends, interest, royalties and services to foreigners. Tax treaties are the mechanism by which these taxes are negotiated and lowered on a bilateral basis.  As cross-border trade and investment expands, tax treaties are playing an increasingly important role in preventing the imposition of excessive and inappropriate taxes on global business and in insuring the fairer and more efficient application of the tax laws.

16. Benchmarking and Tax Rate Drivers

17. Tax Planning Strategies

18. Financial Profit Drivers  Financial profit drivers relate to financial risk. Financial profits represent the return on external and internal business risks and capital investment.  They include return on inventory risks, A/R risks, warranty risks and foreign exchange risks.  They also include the return from internal deployment of capital and other income producing assets  Negative tax drivers are intangible profits and capital in high-tax jurisdictions, which are often exacerbated by inefficient transfer pricing policies Functional Profit Drivers  Functional profit drivers relate to the critical business functions of the company and where those functions take place.  Functional profits accrue from the physical functions such as manufacturing, distribution, marketing, sales, services and research and development  The location where such functions are performed and the level of tax risk borne can have a significant impact on where the profits arise and thus, ETR of the company  Establishing and maintaining core functions and the related risk in a high tax jurisdiction is a negative tax driver Benchmarking and Tax Rate Drivers

19. Developing a Tax Planning Strategy

20. Global Structure Treasury Management Profit Management Tax Management Tax Attributes Management

21. Profit Migration Strategies  Profit migration is a critical strategy that must be evaluated in the tax planning of any MNE. It is at the core of global tax planning and addresses the most significant tax rate drivers.  Under this strategy a MNE identifies its “portable” profits currently generated in High-tax jurisdictions and seeks to move them to lower-tax jurisdictions  Profit migration can be achieved through:  Finance management techniques – uses capital deployment and,  Financial risk shifting or sharing to migrate profits Tax Planning Strategies

22. Jurisdictional Strategies  Focuses in the use of domestic or in-country tax laws.  Depending on the country, planning opportunities may include:  The use of local country consolidations  Research and development tax credits  The use of tax loss carry-back or carry-forwards  Tax free asset step-ups and re-evaluations  Use of tax holidays  Special tax zones Tax Planning Strategies

23. Developing a Tax Planning Strategy Developing and implementing a comprehensive and integrated global tax plan is complex and requires an integrated approach and an understanding of many interdependencies and involves the following steps:  Studying the global profit and tax drivers  Setting goals  Identifying strategies and categorizing planning techniques  Weighing and choosing alternatives  Implementing a plan  Periodically reviewing the plan’s performance Planning should include each one of the following impact areas:  Profit Management  Treasury Management  Tax Management  Tax Attributes Management Tax Planning Strategies

24. Tax Evasion vs. Tax Planning

25. Tax Evasion is the general term for efforts by taxpayers to mitigate taxes by illegal means. What can be defined as legal or illegal depends on the national laws and varies from jurisdiction to jurisdiction Tax Avoidance and Tax Planning involves arranging the company’s affairs in order to minimize taxes. This is known as the principle of freedom to contract, which have been upheld by various courts in various jurisdictions Tax Evasion vs. Tax Avoidance (Tax Planning)

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