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Introduction to Corporate Tax Planning

The assistant provides a summary of the key aspects of tax planning for a Singapore company, Technoworld Inc., that is considering expanding its business operations to Bangladesh either through a liaison office or by incorporating a local company. Option 1 involves selling services from Singapore and would generate a higher total net income of BDT 2,296.8 million over three years compared to BDT 1,848 million if the company incorporates in Bangladesh under Option 2. Though the corporate tax rate is lower in Bangladesh, the withholding taxes on remittances and dividends reduce the overall profits compared to operating directly from Singapore. The assistant recommends Option 1 of operating through Singapore as it results in greater financial benefits due to lower withholding taxes under

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Md Manajer Roshid
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33 views5 pages

Introduction to Corporate Tax Planning

The assistant provides a summary of the key aspects of tax planning for a Singapore company, Technoworld Inc., that is considering expanding its business operations to Bangladesh either through a liaison office or by incorporating a local company. Option 1 involves selling services from Singapore and would generate a higher total net income of BDT 2,296.8 million over three years compared to BDT 1,848 million if the company incorporates in Bangladesh under Option 2. Though the corporate tax rate is lower in Bangladesh, the withholding taxes on remittances and dividends reduce the overall profits compared to operating directly from Singapore. The assistant recommends Option 1 of operating through Singapore as it results in greater financial benefits due to lower withholding taxes under

Uploaded by

Md Manajer Roshid
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Chapter 1: Introduction to Corporate Tax Planning

Q1. What is corporate tax planning?


Corporate tax planning refers to a set of techniques that are applied to minimize the tax liability
of a company within the scope of tax law. Such activities are always forward-looking and
emphasize on the compliance of all relevant rules and provisions. They are basically involved
with the planning of investment in tax-favored assets to avoid or defer tax payment in the future.

Q2. Differentiate between tax evasion and tax avoidance. Which one should be emphasized
to minimize tax liability?
Tax evasion is a mechanism to minimize tax liability through the violation of tax laws,
concealment of income and assets, overstatement of expenditures, and fabrication of documents.
Such activities always focus on the past event and transactions and are subject to substantial fine
and penalty if discovered by the tax authority.
In contrast, tax avoidance is the techniques of minimizing tax liability without the violation of
tax laws, concealment of income and assets, overstatement of expenditures, and fabrication of
documents. Such activities always focus on the future investment and expenditure with due
consideration paid to the compliance of relevant laws. Hence, a company should emphasize on
tax avoidance to trim down its tax liability.

Q3. What measures a company should take to avail benefits of tax planning?
A company should take the following measures:
 Proper documentation of transactions;
 Compliance with all relevant laws;
 Identification of tax-favored investment;
 Avail the opportunity of roll over relief (informing in writing the Deputy Commissioner
of tax (DCT) about the company’s intention to reinvest capital gain in the new productive
assets) where applicable;
 Corporate social responsibility (CSR) activities in the National Board Revenue prescribed
organizations; and
 Take the full advantages of loopholes, exemptions and rebate offered by the tax authority.
SL Types of company Tax rate Remarks
1 Publicly traded company/ listed 22.5% If a non-listed company transfers
company (the name of these 20% of its share through IPO (Initial
companies are available on the Public Offering), it will enjoy 10% tax
website of Dhaka Stock Exchange rebate on the tax liability of the year
under the head ‘sector wise of issue.
company list).
2. Private and non-listed company 30%
3. Listed/ publicly traded Bank, 37.5%
insurance and financial institutions
Non-listed/ publicly traded Bank, 40%
insurance and financial institutions
4. Cigarette and other tobacco related 45%
goods
5. Listed mobile phone operator 40% Transfer at least 10%of its share
through IPO. However, if it transfers
20% of its share through IPO (Initial
Public Offering), it will enjoy 10% tax
rebate on the tax liability of the year
of issue.
Non-listed mobile phone operator 45%
Rate of tax on dividend received 20%, Tax rate of capital gain on sale of fixed assets such as
land, building, plant, equipment 15%, Tax rate of capital gain arising from sale of share 10%
50-2-5-1=42
Q4. Mr. Chen, CFO of BPO Inc., a Singapore based IT Company has appointed you as tax
consultant and sought your opinion on the areas of tax planning so as to prepare an effective
business plan. The company wants to expand its business in Bangladesh by providing IT based
solutions in many industries along with BPO services. It wants to set up a liaison office. But it
has been advised by the BOI to incorporate a company in Bangladesh and enlisted with DSE to
run the business.
In the first year it has a plan of selling BDT 1,000 millions of BPO services with 10% increment
in each of the following two years. If the service charges remitted from Bangladesh, the
purchaser will deduct 20% of withholding tax of it and 15% VAT will be borne by the service
recipient. BPO achieves 28% income before tax on net proceeds and has 30% corporate tax rate
in Singapore. If it incorporates a company in Bangladesh, the services it will deliver will fall
under ITES and in accordance of business plan it will achieve 34% income before tax. Under
double taxation avoidance agreement, dividend from Bangladesh to Singapore is subject to
maximum 16% tax withholding.

Requirement:
Give your opinion to BPO elaborating the aspects of the above mentioned options with
demonstrating financial impact.

Solution:
Option 1: Net income after tax if BPO sells services from Singapore
Particulars Year-1 (BDT Year-2 (BDT Year-3 (BDT
in Millions) in Millions) in Millions)
1. Revenue 1,000 1,100 1,210
2. Less: Withheld tax @20% 200 220 242
3. Net remittance 800 880 968
4. Income before tax @28% of net remittance 224 246.4 271.04
5. Corporate tax to be paid in Singapore @30% 67.2 73.92 81.312
6. Less: Tax credit under double taxation 200 220 242
avoidance agreement
7. Net tax to be paid in Singapore [5-6] 0 0 0
8. Net income after tax [4-7] 224 246.4 271.04
Total income after tax in three years 224+246.4+271.04= 741.44

Option 2: Net income after tax if BPO sells services from Bangladesh (by establishing a
company in Bangladesh)
Particulars Year-1 (BDT Year-2 (BDT Year-3 (BDT
in Millions) in Millions) in Millions)
Revenue 1,000 1,100 1,210
Income before tax @34% of net remittance 340 374 411.4
Less: Corporate tax to be paid in Bangladesh 110.5 121.55 133.71
@32.5%
Net income after tax in Bangladesh 229.5 252.45 277.69
Less: Withheld tax @16% 36.72 40.39 44.43
Net remittance to Singapore 192.78 212.06 233.26
Corporate tax to be paid in Singapore @30% 57.83 63.62 69.98
Tax credit under double taxation avoidance 36.72 40.39 44.43
agreement
Net tax to be paid in Singapore 21.11 23.23 25.55
Net income after tax in Singapore 171.67 188.83 207.71
Total income after tax in three years 171.67+188.83+207.71=568.21

Decision: BPO Inc. should sell services from Singapore as it will generate net income after tax
741.44 million BDT as compared to 568.21 million BDT if it establishes a company in
Bangladesh.

Problem1: Mr. Chen, CFO of Technoworld Inc., a Singapore based IT Company has appointed
you as tax consultant and sought your opinion on the areas of tax planning so as to prepare an
effective business plan. The company wants to expand its business in Bangladesh by providing
IT based solutions in many industries along with BPO services. It wants to set up a liaison office.
But it has been advised by the BOI to incorporate a company in Bangladesh with 100% equity
ownership to run the business.
In the first year it has a plan of selling BDT 2,000 millions of BPO services with 10% increment
in each of the following two years. If the service charges remitted from Bangladesh, the
purchaser will deduct 10% of withholding tax of it and 15% VAT will be borne by the service
recipient. Technoworld achieves 22% income before tax on net proceeds and has 24% corporate
tax rate in Singapore. If it incorporates a company in Bangladesh, the services it will deliver will
fall under ITES and in accordance of business plan it will achieve 30% income before tax. Under
double taxation avoidance agreement, dividend from Bangladesh to Singapore is subject to
maximum 14% tax withholding.

Requirement:
Give your opinion to Technoworld elaborating the aspects of the above mentioned options with
demonstrating financial impact.

Common questions

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Operating solely within Bangladesh could expose BPO Inc. to local corporate tax rates and withholding taxes, affecting net income after taxes, as seen with lower net income compared to operating from Singapore due to local tax rates . Fragmented operations allow for jurisdictional tax arbitrage, taking advantage of Singapore's agreements to minimize global tax burdens. A double taxation avoidance agreement can mitigate some tax liabilities when income is repatriated to Singapore, influencing whether the operation should remain in Bangladesh or adopt a hybrid model for tax optimization .

BPO Inc. should compare the after-tax income from providing services from Singapore versus from Bangladesh. Selling services from Singapore results in a total net income after three years of 741.44 million BDT, while providing services from a Bangladesh-based company results in only 568.21 million BDT . Though operating in Bangladesh could offer operational advantages, financially, remaining in Singapore offers a higher net income after taxes. Therefore, the company should prefer operating from Singapore to maximize profits .

Advantages of establishing a company in Bangladesh include potential tax rebates, such as IPO-related incentives for public trading, along with leveraging lower capital gains tax rates for certain assets . However, challenges include high local corporate tax rates and withholding taxes on remittances, impacting net profits. The necessity to navigate these taxes while adhering to local laws requires detailed planning, often necessitating reliance on double taxation avoidance agreements to optimize post-tax return when remitting profits to jurisdictions like Singapore .

Compliance with tax laws is crucial in corporate tax planning as it ensures legal minimization of tax liabilities while avoiding penalties associated with tax evasion. Adhering to such laws also affects business strategies by aligning operations with available tax incentives, accessibility to double taxation treaties, and maintaining reputational standards crucial for global operations and partnerships, as evidenced by the strategic ways of operating in different tax jurisdictions like Singapore and Bangladesh .

Reinvesting capital gains in new productive assets allows for the deferment of tax payments through rollover relief, which can significantly reduce immediate tax liabilities. This tactic aligns with the goal of utilizing tax-favored investments to effectively manage and minimize future taxes . Under proper compliance and planning, businesses can leverage this to maintain liquidity and invest in growth opportunities while minimizing tax burdens.

Setting up a liaison office generally involves fewer tax implications than full incorporation, as the latter may require the payment of local taxes on income. Incorporating a company in Bangladesh could lead to the application of the local corporate tax rates and potential withholding taxes on remittances to the parent company . Under full incorporation, the company must consider double taxation agreements to mitigate these, but it may still be subject to significant tax costs compared to operating as a liaison office. Thus, full incorporation demands thorough strategic planning to optimize tax outcomes.

A company can optimize its corporate tax planning by ensuring proper documentation of transactions, complying with all relevant laws, identifying tax-favored investments, availing advantages of exemptions and rebates, and considering corporate social responsibility activities in prescribed organizations . These strategies align with legal constraints and offer opportunities for tax liability reduction without engaging in tax evasion practices.

International double taxation avoidance agreements reduce tax liabilities on income like dividends by limiting withholding taxes, allowing companies to claim tax credits in their home countries for taxes paid abroad. This can lead to significant savings on global tax expenses, guiding multinational corporations to structure operations and investments across jurisdictions to leverage these agreements for optimal tax efficiencies, as seen in BPO Inc.'s considerations for operating from Bangladesh versus Singapore .

Tax evasion involves illegal practices such as concealing income and assets, overstating expenditures, and using fabricated documents to reduce tax liability, which can lead to fines and penalties if discovered . On the other hand, tax avoidance involves legal strategies to minimize taxes by making future-oriented financial decisions that comply with tax laws . It is crucial for companies to emphasize tax avoidance over evasion because it allows them to legally minimize their tax liabilities without the risk of legal penalties.

Dividends received are taxed at 20%, capital gains from fixed assets at 15%, and capital gains from share sales at 10% . These varying tax rates necessitate strategic financial planning. Companies might prioritize selling shares over other assets due to the lower tax rate, thus impacting investment and divestment decisions. Additionally, they may strategize to maximize profits through optimizing dividend distribution against retained earnings given the relatively higher tax rate on dividends.

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