Once a month, our panel of mentors answer your practical business questions. Send us your questions!
Dear BAM Mentor,
What are some guidelines you could pass on from your practical experience of paying taxes? I am in a challenging environment for business, and while I don’t want to evade tax, I do want to minimise company taxes to give my business the best chance of survival.
In short, it is critically important that BAM companies do their tax and legal work in a “world class manner.”
What does this look like? You find and retain good tax people who will keep you within the laws while also minimizing taxes. Plan ahead and stay current.
Be wise as serpents and innocent as doves – Matt 10:16
The mature…have their powers of discernment trained by constant practice to distinguish good from evil – Hebrews 5:14, ESV
Since 1990, our BAM-focused holding company has had partial or full ownership in over 25 companies with another 20+ companies being “management-supported” by us, with total workforce around 5,000. These legal entities have been in eight different countries, with five of those countries among the least reached of the world – China and four Islamic countries. We have holding companies in three other countries primarily for tax purposes: Hong Kong, USA and Mauritius
We have had situations where we were trail-blazing operating a foreign-owned company in a place. We were the very first foreign company registered in a certain Central Asian country when it was still part of the Soviet Union. We were the second foreign company registered in that same country, under the new system, when it when it became independent.
We have never been part of a public company so we have not had to satisfy public investors. As privately held companies, in addition to our tech partners, we have had 20 individuals and 20 companies invest with us. We make most of our money from dividends. Dividends are taxed around the world, so understanding how to minimize that is important.
On a personal level, one of authors, who is chairman of the company, has had one of the “Big 4” prominent accounting and auditing firms in the USA do his personal taxes since 1997. We have had two of the “Big 4” do the taxes for some of our companies, as well a couple of independent tax auditors. Even though we have a full time CFO and accounting staff, tax work is so complex in all these locations that we always have outsiders we hire to help us. That is a best practice.
There are high, medium, and low tax rate countries. The USA is an example of a high tax country. One of the authors has his cumulative (combined personal and corporate) tax rate in the USA approaching 50%. An example of a medium tax country is China. When you add everything together, it is about 30%. In the low tax countries such as Hong Kong, taxes are typically around 8%.
Philosophy and Decision Making
We try to maximize profits in low tax countries and re-invest from those countries, or hold the funds until we want to repatriate the funds to our home country which is the USA. We pay a lot of taxes, however we try to minimize taxes in high tax locales. We keep most of our profits in low tax places until we need to move it to someplace else.
Tax and legal decisions have can have serious consequences if you don’t pay. Looking at Chinese Christians who have been imprisoned since 2008, many of them have been busted on tax issues. Of the Christian foreigners who have been kicked out of the country, the government has sometimes used tax issues as the means.
However, wisdom is required when you do pay taxes. The world is very competitive. And if you want to compete, you can’t afford to pay unnecessary taxes because that is taking out cash you would use to reinvest in the business or pay a return to your investors.
An unethical businessman might pay a bribe to minimize taxes. That is not something that we would do. Bribery no. Negotiation yes.
Many times in the past, I have gone to the local tax people and negotiated taxes. For one company I started in 1998, 23 different entities asked us to pay some sort of tax or fee during the first year. In the end, I only paid one of those 23!
When paying taxes, can you get an official receipt for the “official” tax? We look for overlap between government agencies. That often means they don’t have jurisdiction over an area. Those are the areas in which we tend to fight.
In some countries and contexts, the tax laws and regulations are clear. Rule of law is the norm and enforcement matches the clarity. In other situations, the laws and regulations are not so clear and the discretion of officials is more prominent. There is often an expected lag between enacting of new laws and regulations and the enforcement of them, which works itself out over time. Sometimes you might be the first to pay a tax, sometimes you might be the last.
How do you know what to do in various situations? You have to do a lot of prayerful thinking and get advice from others.
You can’t rely on your heart, it is deceitful and desperately wicked. You need input and accountability. I have a two check processes: one internal and one external. Within my company I discuss each situation with key people and if any of them has any concerns, we go with the most sensitive concern. Then I also ask external tax people. They are outside my direct control as a boss. Because their reputation and legal status is on the line, I can’t tell them what to do. I need to follow their advice.
It is also helpful to consider your peers in the industry; what do they say and do?
Key Bible verses:
“Be wise as serpents and innocent as doves” (Matthew 10:16).
“The mature…have their powers of discernment trained by constant practice to distinguish good from evil” (Hebrews 5:14, ESV).
by Dwight Nordstrom and John Nugent
Another Mentor’s Response on this topic:
Jesus was very clear about giving Caesar what is Caesar’s and God what is God’s. He also once told his disciples to go fishing and to pay the temple tax with the coin they’d find in the fish’s mouth. Jesus lived and worked in a pretty tough context where neither Roman nor Jewish tax officials were known for reasonableness, but he taught us to pay taxes and to respect governmental authority. So the core principles are straight forward. It’s just the practical application that hurts!
Tax evasion is illegal, but in some settings is virtually inevitable. Tax avoidance can be either clever or immoral based on circumstances. Much of the world is angry with large corporations which legally avoid taxes by moving their headquarters to tax havens and while making massive profits pay little to the countries in which they really operate. It’s legal, yes, but it’s not very honourable behaviour. On the other hand, paying unneeded taxes is simply wasteful.
While we want to obey the laws there are countries which literally make it impossible. A Central Asian country at one time had a tax regime which, if followed exactly, required over 100% of profits to be paid in taxes. That just doesn’t work for the company or the economy. I worked in a large multi-national in Asia and we ran across a tax which was clearly required but which as far as we could learn had never been paid by anyone. The Tax Office gave up after a week of research because they couldn’t figure out how to calculate or process the tax! [Read More…]
Dwight Nordstrom has over 25 years experience in doing business as missions in China and Islamic countries. Since 1990, he has been the chairman of Pacific Resources International (PRI), a USA manufacturing-holding company with support functions of consulting and engineering for start-up and/or expansion of manufacturing in China. PRI specializes in planning and implementing small to medium high-technology manufacturing start-ups, mergers or acquisitions – over 30 of these since 1990. PRI currently has equity or management interests in approximately 10 manufacturing or other business operations in China. Dwight has also been General Manager of 9 factories in China with employment ranging from 30 to over 750.
John Nugent has been with PRI since 2001 and is currently a Training Specialist and Special Projects Manager. John and his wife have lived and worked in East Asia for 25 years. They have 3 adult children. John’s interests outside work include leadership, mentoring, language and culture acquisition, and volunteering in his local church.
Dwight and John are serving as Guest Mentors for this month’s ‘Ask a BAM Mentor‘ panel.
Submit a Question to the mentors panel via the Contact page, select ‘Ask a BAM Mentor – submit question’ as the subject.