How Tax Neutrality Creates Tax Certainty for Investors and their Clients

May 9, 2022

How Tax Neutrality Creates Tax Certainty for Investors and their Clients

Double taxation is a complex topic. With international double taxation, investors and corporations are taxed twice – by their home countries and again by the territories where their investments are made. Yet, for too many, the risk of double taxation creates a degree of unnecessary uncertainty surrounding international finance.

Although many jurisdictions use double tax treaties (DTTs) to help reduce or eliminate double taxation, the practice can create more complexity as different provisions can impact different investments in different ways. This means that organizations are not always certain how much tax they will pay – creating risk and jeopardizing their investment strategy. After all, investors can’t go back to their clients and say they miscalculated the percentage of tax owed on their investments. That’s just bad business. At the same time, many investors engage in “treaty shopping” to orchestrate investments specifically for tax benefits, which can provide a lack of certainty for jurisdictions’ tax authorities.

That’s why tax certainty is so important in international finance and is a major reason investors and corporations turn to Tax Neutral jurisdictions.

Tax Neutrality and tax certainty go hand in hand

Tax Neutral jurisdictions take a neutral approach to taxation – meaning they don’t impose additional taxes on collective investment vehicles or corporations whose capital is domiciled in those jurisdictions. Investors must still pay taxes in their home countries but are not subject to double taxation.

In this way, Tax Neutrality brings certainty to international finance. By investing in Tax Neutral jurisdictions, corporations and institutional investors can develop investment strategies with the assurance that no additional tax will be levied on transactions beyond what they pay in their home jurisdictions and the jurisdictions in which their capital is invested. Tax Neutral jurisdictions also impose the same stated and applied tax rates, providing fairness and certainty to investors.

Certainty beyond taxation

Furthermore, Tax Neutral jurisdictions are home to a wealth of expertise to help guide investors and alleviate unnecessary or unanticipated tax risk. These world-class, in-country fund service providers, law firms, accountants, and fund administrators – all of whom are regulated by independent government bodies – bring decades of experience and reassurance to investors who seek to utilize the jurisdiction and protect their rights. Those are just a few of the reasons investors like the World Bank’s International Finance Corporation (IFC) have established collective investment vehicles such as a fund in the Cayman Islands to help recapitalize the Haitian private sector following the January 2010 earthquake.

For the World Bank’s IFC and other renowned organizations, Tax Neutral jurisdictions provide the certainty that comes from access to respected international fund managers who blend investment with advice. This is done within the framework of a strong and transparent judicial, regulatory, and political system – for maximum benefit.

Indeed, Tax Neutral jurisdictions are renowned for their rigorous legal codes enforced by judicial officials and attorneys with years of experience in tax law. These jurisdictions are also complemented by regulatory structures designed to uphold and protect the investors’ rights. And, unlike tax havens, that are known for secrecy and obfuscation, Tax Neutral jurisdictions offer stable, democratic, and transparent political systems that put the rights of investors at the forefront – significantly reducing investment risk. Tax Neutral jurisdictions also work hard to ensure these standards are consistent with and recognized by international supervisory bodies.

Being assured of tax certainty

To ensure a strong level of return, institutional investors and endowment managers must leave no stone unturned when assessing how funds are invested and that they pay the right tax, at the right time, to the right jurisdictions – but no more than necessary. That’s why Tax Neutral jurisdictions are invaluable to their investment strategies. These territories are fully transparent about their Tax Neutral stance and investors can be confident they are not taking unnecessary risks with their transactions. For decades, institutional investors and corporations have trusted Tax Neutral jurisdictions for the clarity and certainty they bring to the tax planning process and their exemplary standards of transparency, empowerment, security, simplicity, and fairness. All these efforts make them preeminent jurisdictions with an established culture for doing good and fair business – without levying unfair taxes – while reducing investment risk.

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