The ‘Panama Papers’ rekindled the public interest in the subject of ‘what legitimate goal could anyone have in setting up a company in a fiscal paradise?’.
Actually it’s quite simple.
Let’s pretend you are an alien from the outer space who has a business idea backed up by enough capital and you want to put it in practice somewhere on Earth. Aren’t you going to shop around for the best environment you might find? So that your business would have optimal conditions to grow? And when the business ripens wouldn’t you want to be able to cash on it – and end up with as much money as possible?
Rather conflicting demands, isn’t it?
First you want an ‘operational base’ with relatively low costs but secure and full of whatever amenities your business might need in order to thrive. Next you’ll need fast access to a market where to sell your wares. Last but not least it would be important for you to incorporate your business in such a way/place that you’ll end up pay the least amount of tax, both while operating the business and after the cash out moment.
While all these are legitimate demands there are a right and a wrong way to meet them.
I’ll refrain myself to discussing exclusively about the tax part, the rest being relatively easy to balance.
In this respect you can choose to incorporate the business in the same place you have selected for your operational base and pay whatever taxes are due in that place, under the rationale that those taxes cover the cost of doing business there and are nothing but a compensation for benefiting from the conditions present there at the time. After all, when you have chosen a particular place as the home of your business you have entered into an informal arrangement with that place. It lets you make good use of whatever is there to be used – exactly the things that convinced you to select that particular place, and expects you to fulfill your side of the bargain. Provide enough compensation so that that place can continue to be a good place to conduct business and, if possible, improve itself. Pay the local taxes.
Or, equally legitimate, use two different places for each thing. Organize your operational base where it would work best and incorporate your business in a place where you’ll be able to pay as little tax as possible.
And here’s the catch. No matter where you incorporate your business you’ll still have to pay some taxes in the place you have chosen as your operational base.
Then why bother?!? you might legitimately ask.
Since this is not an accounting dissertation I’ll just tell you that there might be serious financial advantages in making this choice, not the least of them having to do with the cash out moment.
And this is the very point where some people get greedy. They try to avoid altogether the taxes tied to the ‘operational base’ – by employing various semi, or even completely i-legal stratagems, and by doing so completely transform the very nature of the entire operation.
From one of fiscal optimization to one of money laundering.
There are a lot of rationalizations for this course of action. From ‘the state is a thief that uses force in order to part me from the fruit of my efforts!’ to ‘why give it to the state since the money will be squandered by the inefficient government?’.
Now let’s please remember where we started from.
OK, you are not an ‘alien from the outer space’ but what’s stopping you from conducting your business where ever you want on the face of this Earth? (My bad, this question is not valid for exactly everybody, there still are countries that don’t allow for people, or capital, to exit freely, but I’m sure you get my drift)
Oh, you like it where you are but you hate paying taxes and/or you’re disgusted by the way the government handles its finances!
Then let me remind you of two things.
First, you probably live in a democracy. Speak up. Make your concerns known. Loudly. Make sure you are listened to. Vote wisely.
Secondly, you are probably fed up not only by the fact that in your country taxes are really high but also by how little you get back in return.
Well… that’s because there are so many people who do not pay their fair share and that your government has to take more from those who do pay in order to make the ends meet.