The transfer of profits is one of the most popular tax planning methods for commodity trade and less for services. This method involves the use of several companies located in jurisdictions with preferential tax regimes which are used successively in the sales chain. This method may sometimes consist of underselling or overselling sales prices of goods or services, which in some cases may go beyond tax avoidance under corporate financial policy.
In doctrine, they were distinguished three basic types of this method:
- • the distribution of profits after tax in the tax haven,
- • increase the cost of obtaining revenue by including different types of payments to subsidiaries established in tax havens,
- • the sale of goods by a subsidiary intermediate company established in the tax oasis.
As part of the transfer of profits, taxable transactions in the tax haven are also possible according to the rates in force there, which are based on a civil contract concluded between the company, the mother and the company, a daughter established in a territory harmful for tax purposes of the company's home country.
first from the above methods of profit transfer, i.e.
their distribution after tax in the tax haven, consists in the transfer of the profit earned by the company - the mother of its subsidiary established in the legal regime applying harmful tax competition through another company belonging to the same capital group and located in a State party to the double taxation agreement concluded with the State in which the subsidiary which is the target recipient of the company's profit is established.
The most convenient legal form of the profit transfer company is the holding and the form of transfer of the company's income to it – the mother cannot be taxed at source as this would make the economic sense of such an operation.
The most common forms of transfer of foreign capital to a holding company include recapitalisation or donation.
As part of the transfer of profits, taxable transactions in the tax haven are also possible according to the rates in force there, which are based on a civil contract concluded between the company, the mother and the company, a daughter established in a territory harmful for tax purposes of the company's home country.
The profit in this way of transferring capital is twofold – first of all, the fact that the beneficial taxation of income in the tax haven is undoubtedly attractive to the company – the mother and the entire capital group.
Furthermore, the actual value of the services provided by the subsidiary to its company – the mother sometimes differs significantly from the market value of the same service provided between independent entities.
Although the value of the services provided is a weak point of this method, which may be the basis for the sovereign interference of the authorities of the tax office of the company – the mother, but in the case of the use of the company – the daughter in the tax haven, having a full trust structure, the turnover between these units will be considered to be between independent entities under Polish tax law.
third the method of transfer of profits is to sell the goods to their target customer through a subsidiary established in the country (territory), whose legal system is considered to be applying harmful tax competition from the perspective of the company's home country.
This method applies both to income taxes and to tax on goods and services.
In the classic version of ‘sale by intermediary’, the company – the mother sells the goods to its subsidiary, having a full trust structure, with a minimum profit, and then the company resells the goods further to its target recipient, resulting in the profit appearing in the country of establishment of the subsidiary and being taxed on a much more favourable basis than would have been the country of establishment of the parent company.
A key element of this method is therefore the use of trust institutions as a way of legally avoiding the risks arising from transaction price regulation between related parties.
The combinations of the above methods of profit transfer, using more foreign affiliates, are particularly difficult to detect by individuals third.
In the case of the use of more intermediate companies not only during the transfer of capital from the State of residence of the parent undertaking to a subsidiary established in the tax haven, but also during the transfer of profits to the State of residence of the parent company, the fact that intermediate companies are not resident in the State of residence of the parent company makes the authorities of the parent company often without legal basis for any sovereign interference in their activities, which is equivalent to the lack of information on financial flows within the group as a whole.
At the same time, the residences of those companies are not considered by the legislation of the home country of the dominant party to apply harmful competition for tax purposes. The use of a network of intermediaries can lead to the optimisation of taxation both in terms of income taxes and tax on goods and services.
The form of transfer of such profit shall, in the above method, be adapted to the provisions of tax law relating to the financial flows between the State of residence of the parent company and the State of residence of the subsidiary acting as intermediary, and at an earlier stage also to the tax legislation of the State of establishment of the intermediate company and the State of residence of the consignee of the goods concerned.
The need to take account of international tax agreements derives from the principles of taxation of different forms of cross-border distribution of profits. However, the sales by the intermediary itself without the transfer of profits to the company – mothers are tax attractive.
The profit arises in another country and is taxed on favourable terms, whereas the parent company, having a company, has daughters in at least two other countries achieve a minimum profit for a given transaction, which significantly reduces their tax base.
The possibilities of a combination of methods of profit transfer are many, which further makes it difficult to capture their substance. The idea behind this method is to increase the number of entities involved in tax avoidance, leading to a specific tax camouflage.
The finding that the target place for the transfer of capital is a State (territory) applying harmful tax competition is almost impossible under conditions of lack of legal basis to obtain information on the economic operations undertaken by the intermediate company and not directly by the parent company.