Tax Heaven

Tax Heaven

Tax heaven concept is to route the taxes of different country through a country to reduce the tax liability. Tax heaven is used to take full tax credit available, because the income is now treated from a single country.

Country   Profit     Tax Rate

A               80        25%

B               80        20%

Calculate the total tax liability in case of direct income transfer, and using tax heaven, provided that tax rate is 30%.

Solution

Foreign Tax Liability

Country   Profit     Tax Rate    Tax liability    Remittance

A               80            25%              20                   60

B               80            20%              16                   64

Tax liability in Domestic

Country    Remittances          Rate        Tax          Tax credit         Tax Liability

A              60                         30            18             20=18                   nil

B              64                        30            19.2            16                       3.2

Total Tax Liability

20+16+ 3.2= 39.2

Liability under Tax Heaven

Tax liability (60+64) @ 30%                           37.2

Foreign Tax credit (20+16)                              36

Tax Liability                                                    1.2                           

Total tax liability = 36+ 1.2 = 37.2

It is important to note that total tax liability is reduced from 39.2 to 37.2 by using tax heaven.