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How to Approach Company Taxes in Challenging Situations

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.

~ Taxed

Dear Taxed,

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!

In many countries the legal framework is still developing and more elastic than in wealthier countries. This calls for wisdom, reflection and a deeper, perhaps a more nuanced understanding of right and wrong.  For example, there are many places where gifts (or bribes) are legally banned but socially required. A friend told me a discussion with the Finance Minister of a country who explained he didn’t have the budget to pay customs officials a salary; he knew they all lived on the fees the extracted from importers.  “Yes,” the Minister said, “it’s illegal, but what can we do? We can’t get budget to pay them.” He understood the challenge this presented for the well intentioned foreigner, but was he too was stuck. The economic system and the bureaucratic structure were both under construction. The rules couldn’t be fixed and couldn’t be obeyed. The Minister expected everyone to work in this grey mode as best they could.

This demonstrates a common situation in developing economies.  The rules just don’t work and the systems can’t function as written. Outsiders need to understand that the functional regulatory system isn’t the same as what’s written. There really are rules, but you can’t find them on the website or in the legal code. Typically, this is a situation where the regulations have been written quickly, maybe borrowed from another setting but the actual implementation is more relational and will be “reasonable”, at least in the eyes of the locals. Learning to sort out and understand the real, unwritten system is essential.

“Pharisees” have a tough time navigating in these environments. It’s messy. The fact that the written rules don’t really work doesn’t give us license to ignore them. But it does invite us to a more culturally appropriate look at the nature of the system. As foreigners trying to be lights in society we need to keep the bigger goals in focus. We may face a tax that is generally ignored and is hard to pay. That’s very different from a tax that’s universally ignored and impossible to pay. It’s also different from one that is unfair by your home standards and just expensive to pay.

My guidance in these situations is to do the best you can and to set standards for your company that will keep you in the top 5-10% of industry in paying taxes and following the official regulations. Consult with local business people and local Christians to see what they think. But push them to find out what they really think, not what they’ve learned to say to foreigners. A Christian owned business should have a good reputation both in the church community and the general community. Overall it’s better to err on the side of paying something that isn’t usually paid than to join the crowd of those justifying non-payment.

So here are my short guidelines for taxes:

  • If the tax is legally required and paying it is possible then pay it cheerfully and “honour Caesar”.
  • If the tax can be legally avoided but it presents ethical questions because only a few can work the rules to make the avoidance, then pray hard and consider paying it anyway to shine a different light.
  • If there are legal and generally accessible means to avoid the tax then avoid it and rejoice. But do steward the money you saved properly and be generous.
  • If the tax is legally required but paying it will seriously damage your business then you need to consult with local business and church people and prayerfully work out an answer that is appropriate both to the culture and to God’s call for integrity.

At the end of if we need to rely on God’s direction.  Who knows, perhaps Jesus will tell you to go fishing!

by Robert Andrews

 

Another Mentor’s Response on this topic:

From Dwight Nordstrom and John Nugent:

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.

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. [Read More…]

Robert Andrews is a regular Mentor on our panel. Meet the ‘Ask a BAM Mentor’ panel of mentors

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