Introduction Income shifting and deferral are among the most sophisticated tools in international tax planning. Used ethically and within the law, they allow businesses and high-income individuals to reduce their current-year tax burden by moving income to lower-tax jurisdictions or delaying recognition to future periods. In Day 4 of our 15-part series, we explore […]
Income shifting and deferral are among the most sophisticated tools in international tax planning. Used ethically and within the law, they allow businesses and high-income individuals to reduce their current-year tax burden by moving income to lower-tax jurisdictions or delaying recognition to future periods.
In Day 4 of our 15-part series, we explore the mechanics of income shifting and deferral, the legal frameworks that govern them, and how Indian and US tax authorities are increasingly scrutinising these strategies.
Income shifting is the practice of allocating income to a related entity, family member, or jurisdiction that faces a lower tax rate. The goal is to reduce the overall tax burden on a group or family without changing the underlying economic activity.
Examples:
– A US parent company charges a low royalty to its Indian subsidiary, shifting profits to a lower-tax jurisdiction
– A family business pays salary to a lower-income spouse or adult child who is in a lower tax bracket
– A multinational allocates shared services costs to high-tax entities, reducing their taxable income
Income deferral means postponing the recognition of income to a future tax year, often when the taxpayer expects a lower tax rate or needs to manage cash flow.
Examples:
– Using accelerated depreciation to defer taxable profits
– Investing in tax-deferred retirement accounts (401k, IRA, NPS)
– Structuring long-term contracts to spread income over multiple years
– Using installment sales to receive payment over time
1. Transfer Pricing Manipulation (Legal vs. Illegal)
Transfer pricing is the primary mechanism for income shifting in multinationals. Setting intercompany prices at arm’s length (as covered in Day 1) is legal. Artificially pricing transactions to shift profits to low-tax entities is illegal and aggressively pursued by tax authorities.
2. IP Holding Structures
Locating intellectual property (patents, trademarks, software) in a low-tax jurisdiction and charging royalties to operating entities in high-tax countries. The IP must be developed with genuine economic substance in the holding location.
3. Principal Structure
One entity acts as the “principal” owning all significant assets and bearing all significant risks. Other entities act as limited-risk distributors or contract manufacturers, earning a guaranteed limited return. Profits concentrate in the principal entity’s jurisdiction.
4. Cost Sharing Arrangements (CSA)
US multinationals can use CSAs under IRC Section 482 regulations to share the cost of developing intangibles between related entities. This allows non-US entities to own a share of IP at a pre-appreciation cost basis.
1. Retirement Accounts
– India: NPS (National Pension System), PPF, EPF contributions reduce current taxable income
– USA: 401(k) (up to $23,500 in 2026), Traditional IRA, SEP-IRA for self-employed
2. Deferred Compensation Arrangements
High-income employees can defer a portion of their compensation to future years under non-qualified deferred compensation plans (IRC Section 409A in the USA).
3. Instalment Sales
When selling a business or property, structuring payments over multiple years can spread the capital gains tax liability.
4. Qualified Opportunity Zone (QOZ) Investments (USA)
Investing capital gains into Qualified Opportunity Zones defers and potentially reduces capital gains tax.
Both India and the USA have robust anti-avoidance regimes targeting income shifting:
– GAAR (General Anti-Avoidance Rules): Can recharacterise arrangements deemed to lack commercial substance
– Section 94B: Limits interest deductibility for debt-financed cross-border income shifting
– Transfer Pricing Officer (TPO): Actively examines intercompany transactions
– IRC Section 482: IRS authority to reallocate income between controlled entities
– GILTI (Global Intangible Low-Taxed Income): Minimum tax on foreign earnings of US corporations
– BEAT (Base Erosion and Anti-abuse Tax): Tax on deductible payments to foreign affiliates
– Subpart F: Taxes certain passive income earned by Controlled Foreign Corporations (CFCs)
Income shifting and deferral are legitimate, widely-used strategies — when done within the law. The line between legal tax planning and illegal tax evasion is often drawn by the presence of genuine economic substance, arm’s-length pricing, and proper documentation.
In 2026, with BEPS, GILTI, GAAR, and increased information exchange between tax authorities, aggressive income shifting schemes carry significant legal and reputational risk. The best strategy is one that is defensible, documented, and commercially justified.
In Day 5, we examine Permanent Establishment Risk Management — how a single employee working in the wrong jurisdiction can create a taxable presence for your entire business.
Moiz Ezzi is a Certified Public Accountant (CPA) and Chartered Accountant (CA) specialising in cross-border tax advisory for multinationals, NRIs, and non-US founders with India-US and India-global operations. He advises clients across transfer pricing, international holding structures, DTAA planning, and entity structuring.
Connect with Moiz Ezzi on LinkedIn for weekly cross-border tax insights.
