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International tax planning can get fearsomely complex.

You have at least two (usually more) countries interested in extracting some tax revenue from you, and their laws are usually only barely consistent. It’s a bit like three dimensional chess, except that the rules change from time to time. (And no one in our law firm is anything like Spock in any way whatsoever. Just for the record.)

It’s also a bit of fun. For some people, anyway. There’s a little bit of the “Ooooh, shiny” when we talk about setting up holding companies in small palm-fronded island nations.

I am a tax lawyer. My job in life is to deflect the discussion away from tax. My job is to push companies to think about the business, THEN think about tax. Cart. Horse. Etc.

For privately held companies doing business worldwide (we help these people), talk to the shareholders–the people who started the company. Sooner or later they will dispose of their shares. There’s an exit strategy that every company owner has in his/her head.

• They get bought out by a third party.
• They give/sell the company to their kids.
• They get divorced and the ex gets a piece of the company.
• They die.

Yeah, the other exit strategy is to go public. But that’s a transformer strategy (transforming stock in a private company into stock in a public company). When it’s all done, the shareholder still has an exit strategy for the shares he/she owns. Going public isn’t a disposition strategy.

The disposition strategy that no one is willing to talk about is death. I talk to entrepeneurs who tell me they plan to run their companies foreverrrrrr. FAIL.

Here’s the simplistic way of approaching things for corporate income tax planning:

• First, think about the business and how it can maximize its profits from running the business. Where do you need people? Where do you need to control inventory, run quality control, provide customer service, build your widgets?
• Then, remember that profit is profit. Worldwide. Do your tax engineering for the lowest average income tax cost on company profits. Worldwide. Numerator = taxes paid everywhere, denominator = net profit before taxes. Your metric is to drive that number down slowly, year after year, if you can.

After that, work on the estate tax side of the equation. Why after? Because the company is worth some multiple of its profits. If you focus on the business planning, then the income tax planning, you should be increasing your worldwide pre-tax and after-tax corporate income, thereby increasing the value of the company. You build wealth by building wealth, not by shaving taxes.

One thing at a time. Business planning first because it creates higher pre-tax profit. Income tax planning second because it creates higher after-tax profit. Then and only then, estate and gift tax planning to make sure Mr. Congress doesn’t share too much of your wealth.

This post was triggered because I never really thought about why I do what I do until I saw a recent post, completely unrelated to tax law.

Dave McClure, in talking about web businesses, says in “not safe for virgin ears” language that the problem isn’t exotic “issue du jour” stuff.  The major problem people face is “I forgot my password.”

Same thing with tax planning.  That’s not the most important thing for a business.  The most important thing is “I need to make a profit.”  That’s boring and repetitive and in front of you every day.  It’s much more fun to talk about the Cayman Islands.

Nope.  Let’s deal with the “Duh!” stuff first.

I’ve been thinking about what I do and the age I am and the fact that what I used to really suck at I am really good at now, and the stuff I used to be really good at then, well, I’m still good at it but I can barely stand to do it sometimes.

I came out of law school in 1982 in the teeth of a recession. Like a normal person who has been an “A” student I knew how to study and get answers. So that’s what I did. Swarming over stuff through sheer hard work, determination, and rocket fuel (aka coffee) to get “the answer.” Whatever that was.

Funny thing. “The answer” isn’t really what was called for. Someone coming in and plopping themselves down on the couch in my office (I have a really comfortable couch) isn’t looking for an answer hidden deep inside the Internal Revenue Code. They think they want an answer. But they don’t. Really.

What do they want? Better questions. I think. Lawyers live in a world where they dole out answers for money. Lots of money, sometimes. But for me, answers are a dime a dozen. Any technician can come up with answers. Software already prepares tax returns way, way better than an unaided human could do it. I’m sure that software will be able to spit out international tax answers sooner rather than later.

Mr. Turing is going to visit tax law sooner or later. There is a certain logic to tax law. (Tax rules build over time in the same way that sediment accumulates at the bottom of a lake–one idea layered over a prior idea, with no overseer making sure it all makes sense. But at least there is SOME logic, however bad). The logic can be automated. It will be.

It’s an interesting perspective in that link. I think Kevin Kelly is right. The impact in law will be profound. The law business is ossified. Getting Turing’d will not only change the business, it will change the participants’ perception of who they are and what they do. For the better. The prevailing lawyer as pointy-headed professor/priest/Protector of the Sacred Chalice of Freedom attitude will go overboard. Thank God.

Getting Turing’d is dangerous for the people that I help, though. Going from a machete to a Tim Allen-sized chainsaw and you’re going to see more than a few inadvertent amputations. Garbage in, garbage out. So you can spit out answers — amazingly sophisticated answers — with trivial effort. So what? Are you answering the right question? Getting to the right question is a feat immune to being Turing’d, I’ll wager.

So that’s what’s happened to me. I’m better at the questions now, at 52. Clever answers aren’t what is needed. Finding the right questions? THAT is what’s needed.

Kevin Kelly has another essay in which he talks about cheap answers. The questions are vastly harder to get than the answers. Go to Google now and try to research some idea vaguely formed in your head. Hard, isn’t it? When Google is spitting back 4 million answers at you, there is only one thing you can do — ask a better question.

Questions are hard. Finding to the right questions usually seems to have little to do with technical stuff, and everything to do with stuff going on inside the humans involved. If you can talk about the stuff rattling around inside the brains of the humans — out loud, like a grown-up, principles before personalities — you’ve got it made.

The appropriate (and they are “appropriate”, not correct) answers (and there are usually a few answers rather than “the” answer) are usually self-evident and require rather less engineering than a technician fascinated with his own craft would like. The answer selected suits the people involved, and they know it.

Yes, this is purely anecdotal.  Draw your own conclusions, bang your own political drums, whatever.

Because we do international tax work we get lots of inquiries from people who  have U.S. citizenship but want to give it up.  Or they have a permanent residency visa (the mis-named “green card”) and want to get rid of it.

Until recently, this has mostly been an area where people would kick the tires, think about it, and back off.  In short, they kept their U.S. citizenship or permanent residence visas. Usually this was driven by a fear that they wouldn’t be able to re-enter the United States at some point in the future.  With either family or investments (or both) here, they didn’t want to run the risk of being denied entry to the United States.

Now we have a steady flow of this work.  We are taking folks through the process of renouncing citizenship and permanent resident status.  It involves mountains of bureaucratic paperwork for two different arms of the U.S. government (one agency handles citizenship/visa status, the other agency handles the U.S. tax implications of switching from citizen to non-citizen/resident to nonresident).

Here’s an article from Der Spiegel about a convicted criminal in Germany. He’s hoping to buy down his sentence by offering up incriminating private bank information about 2,700 unsuspecting souls. His plan isn’t working quite as well as he had hoped, but what do you bet that the German tax authorities will get their hands on the data anyway?

Look. I set up trusts and companies all over the world. Lots of money gets parked there. It’s my job. I’m the kind of person that www.taxresearch.org.uk loves to hate. :-)

But for God’s sake if you park your money there, tell the truth and pay the taxes. Life’s too short. If you think you’re such a genius to be able to get away with tax evasion, well (how do I put this politely) all I can suggest is that you look for unchallenged assumptions in your thinking.

An example: “My identity will be completely hidden forever because it is illegal under the laws of ____ to disclose my identity” ORLY?

Bank Julius Baer did the only sensible thing it could have done. It dismissed the California litigation against Wikileaks.

Brief synopsis, as far as I know it.

Employee of Bank Julius Baer steals internal documents — private, secret stuff exposing (by name) customers of the Bank. Employee becomes ex-employee of Bank Julius Baer.

Employee and Bank play Angryland for a few years. Skill sets of players unknown, but apparently bush league, given that the game goes on for a long timee. Employee kicks up a snit. Employee posts private documents stuff on the internet on wikileaks.org.

Bank’s lawyers, with an Everest-like obliviousness, file a lawsuit in California. (The combatants are nowhere near California, by the way. Not even the same continent). Bank’s lawyers successfully achieve Employee’s desired results for him — everyone, all over the world, now knows about this. What was of minor interest to a few hundred people has now put a permanent divot in the Bank’s reputation.

Bank executives swallow their sanity pills, dismiss lawsuit. Nothing to see here, please move along. Back to business.

Bank can now do what it should have done originally — pursue the employee for stealing internal documents and publicizing them.

Lessons learned

1. Bankers? Judgment trumps blind aggression. You can’t blame your lawyers. You hired them. Sorry.

2. People relying on bank secrecy for tax benefits? It’s a doomed strategy. Murphy works where you have your money parked.

So there you have it.

- Make sure you are not forced into a choice by a foreign law.

- Decide based on business practicalities that you will have a foreign entity.

- Assume “invisible” is better.

- Try to disprove this in favor of “deferral” by financial projections. Figure out if the deferral strategy generates tax savings.

Those tax savings–if used correctly–act like a tax-free working capital loan from Uncle Sam. What is your return on investment for working capital plowed into your business? That’s the upside of the deferral strategy. Compare it against the cost of setting up and running the structure. Cost/benefit balance? How does it look.

You’re done. Good luck