The current crisis has been affecting the world in many unexpected ways. Some people feel that one of its surprising effects may be the return of offshore money back to its respective countries.
The Reasoning – With a Canadian Example
The logic behind the prediction that the crisis may lead to companies returning their offshore money to their respective countries comes down to the local tax agencies. For example, the Canadian Revenue Agency typically considers a corporation a resident of the country that hosts the meeting of the board of directors.
Before COVID-19, it was easy for high net worth individuals and companies to travel to the jurisdiction where their funds are held, letting it maintain that location as its tax residency. With COVID-19, however, travel restrictions have significantly dampened this ability. This essentially forces companies to hold their board meetings in the country in which they operate. It would make them potentially liable to pay taxes in that country.
An Explanatory Example That Shows Even More Potential Avoidance
In a piece for the Financial Post, Allan Lanthier outlines an example of this process in action, as well as the company working to avoid paying Canadian taxes. He referred to the company as Canco, which is a Canadian research company. The company thought it discovered an important drug and began clinical trials after applying for a patent. Upon the suggestion of a tax lawyer, Canco created a wholly-owned subsidiary called Havenco within a tax haven offshore, transferring the patent rights to Havenco.
When the drug received approval, Havenco licensed rights for marketing and manufacturing to an unrelated third party. In return, it receives around $100 million in royalties annually, some of which go to Canco in the form of dividends. The particular set up of Havenco and Canco result in no tax owed to the tax haven or Canada. During the creation of Havenco, the team ensured that the business operations are discussed in the tax haven by the board of directors, two of whom reside in Canada, and one of whom lives in the tax haven.
The example company would face a problem with COVID-19 travel restrictions since the two Canadian directors cannot go to the tax haven. Without action on the part of Havenco, this would mean that the majority of directors are in Canada, making the company subject to Canadian taxes.
Tax advisors come up with a new plan, which involves replacing the Canadian directors with ones who are local to the tax haven. Havenco can continue to avoid paying Canadian taxes since the directors continue making decisions independently, despite influence or instructions from the parent company.
HMRC Guidelines in the UK – The Opposite Stance
The HMRC, the United Kingdom’s tax authority, also recently issued guidance for corporate tax residency in the wake of COVID-19. The HMRC mentioned that the current pandemic interrupted international business operations and travel. The organization stated that this disruption included the location of individuals, such as employees and directors. In the statement, the HMRC indicated that it is “sympathetic” to the disruption.
The tax authority did not make any formal administrative concessions. However, it did indicate that it does not necessarily consider foreign companies to become U.K. tax residents due to where some board meetings are held, or a handful of decisions are made.
It May or May Not Return Money
Looking at the distinct positions that Canada and the UK have taken, as well as the additional loops that international companies can go through to avoid paying taxes, it remains unclear whether COVID-19 will encourage companies to bring their offshore funds back to their countries. It would undoubtedly be a more straightforward solution, especially in jurisdictions that do not make concessions like the UK did. However, most companies that use offshore tax havens are dedicated to their tax avoidance. They would take extra steps to avoid paying taxes.
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