In general, prudent International Tax Planning provides for the adoption of a series of techniques aimed at managing the production and allocation of a company's profits. To achieve this, three specific management tools are used:.


The aim of profit creation is to choose the best allocation for the taxable amount, locating countries with minor taxation and/or that provide favourable tax treatment.

The goal of profit reduction is to increase as much as possible the costs that can be subtracted from taxable earnings. This action is suitable in jurisdictions that apply high taxes. At the same time, the taxable amount should be transferred to countries that offer favourable tax treatment.

Finally, with profit diversion, incomes are moved from high-taxation countries to those with lower taxes.

Each of these three actions can be applied alone or in combination.

With profit creation, the most suitable and convenient fiscal means of doing business in a certain jurisdiction should be chosen. To do this, you will typically select one or more corporate designations suitable for your local business, which will thus form part of your International Tax Planning strategy.

Profit reduction techniques, which involve erosion of the taxable amount, often use multinational corporate designations. The process may differ depending on the situation. But put simply, within the same corporate group, profit reduction can be used to transfer profits from companies located in high-taxation countries to those in low-taxation jurisdictions. Obviously, the larger the difference between the rates, the greater the need to transfer profits. The aim of this International Tax Planning technique is to optimize tax deductions and exemptions.

A typical example of profit diversion can be found in a commercial business. Let's assume that a company manufactures clothes in country X and sells them in country Y. This transaction is completed through an intermediate company located in a low-taxation country. Thanks to this form of International Tax Planning, this intermediate company will receive a share of the income from the sale of the produced clothes. Thus, profit diversion alone is applied: A portion of the profits are shifted from a high-taxation to a low-taxation jurisdiction.