- Offshore Tax Avoidance
- What is a Tax Shelter?
- Offshore Tax Havens Explained
- Offshore Banking Services
- Types of Offshore Tax Avoidance
- Top Offshore Tax Havens
- Measures to Stop Offshore Tax Avoidance
Offshore Tax AvoidanceAre you part of the increasing number of citizens frustrated with the amount of tax evasion in the United States? You’re not alone. More and more honest, hardworking taxpayers are becoming fed up with the prevalence of offshore tax avoidance schemes and are demanding tax fairness. It seems as though offshore tax evasion and financial secrecy have become standard operating procedures for many of America’s Fortune 500 companies including:
What is a Tax Shelter?If you and your money live in the U.S., your financial assets are subject to American tax laws imposed by the Sixteenth Amendment. To avoid paying this tax liability, taxpayers move their money into tax shelters. A tax shelter is a place money can be stored where it cannot be taxed, such as a retirement account or an IRA. Essentially, tax shelters create legal loopholes to defer taxation on investments. Specific investment strategies are used to reduce tax liabilities by putting off payments. Instead of paying income tax on investment contributions for a given year that dollars are earned, they are included in taxable income for the year in which they’re withdrawn—usually many years later. Many taxpayers fall into a lower bracket after retirement, enabling them to lower their current tax liability and pay a lower rate later on. White hat tax shelters such as 401(k)s and IRAs are frequently used to taxpayers’ advantage, and with good reason. However, going offshore and repatriating your money is considered black hat in the eyes of the IRS.
Offshore Tax Havens ExplainedAlthough tax shelters may be used by taxpayers of every stripe, offshore tax havens seem accessible to only large companies and wealthy individuals. Shrouded in mystery and financial secrecy, leaked documents such as the Panama Papers and the Paradise Papers shed light on how these schemes work.
What is a Tax Haven?An offshore tax haven is simply a place—be it a country, state, or territory—with relaxed tax laws (usually either no income tax at all, or tax at much reduced rates). These places allow foreigners to put money in banks there and charge them little or no income tax on those finances. Tax havens also have a policy of sharing little or no information to foreign tax authorities, such as the United States. Tax havens are utilized in a number of different ways. Multinational companies establish subsidiaries in offshore tax havens to avoid paying the 35% corporate tax in the U.S.
Panama Papers and Paradise PapersIn 2016 and 2017, two different data leaks, known as the Panama Papers and Paradise Papers, respectively, leaked a total of nearly 25 million documents and 4 terabytes of data about offshore banking accounts from two different law firms to German newspaper Süddeutsche Zeitung. The papers showed a wealth of politicians, celebrities, corporations, and other world leaders who store money in offshore tax havens. According to IRS.gov, while simply having money in a tax haven doesn’t prove wrongdoing, it does suggest that there might be foul play. These two leaks revealed the most information ever known about offshore tax havens.
Offshore Banking ServicesTax havens also provide banking services to individuals who want to hold their assets offshore in order to dodge taxes. In addition to easily accessible bank accounts and trusts, it’s also very easy for foreigners to establish offshore corporations. Say, for example, a wealthy individual has a large piece of property in the U.S. but does not want to pay property tax, they can create a “shell company” in an offshore tax haven under a different name and transfer ownership to that property. With offshore tax havens explained, take a look at the various vehicles used to conceal assets and income which should be subjected to U.S. tax.
Types of Offshore Tax AvoidanceThere are many different devices taxpayers utilize to conceal transfers of money or property to foreign entities for offshore tax evasion, including:
- Foreign trusts
- Foreign corporations
- Foreign (offshore) partnerships, LLCs and LLPs
- International Business Companies (IBCs)
- Offshore private annuities
- Private banking (U.S. and offshore)
- Personal investment companies
- Captive insurance companies
- Offshore bank accounts and credit cards
- Related-party loans
Top Offshore Tax HavensThere are many popular places successful businesses and wealthy individuals choose for offshore tax evasion.
- Bermuda and the Cayman Islands: In addition to being a tropical paradise, both offer full protection for corporate profits.
- Switzerland: Allows wealthy individuals to shield both their income from taxes and their identity from prying eyes.
- The British Virgin Islands: Considered an offshore tax haven because they have no sales, corporate, capital gains, inheritance or estate tax.
- Luxembourg: A lesser known offshore tax haven, and the chosen location that Apple, Inc. uses to direct its revenue stream from iTunes sales in exchange for tax breaks.
Measures to Stop Offshore Tax AvoidanceIn order to prevent offshore tax evasion and deferral, Congress has enacted several specific provisions in the IRS. Nonetheless, many U.S. corporations manage to avoid paying as much as $90 billion a year in federal income tax. In order to restore fairness to the tax system and alleviate America’s budget deficit, strong measures must be taken. Policymakers are attempting to reform the tax code in order to:
- End incentives which shift profits and jobs offshore
- Close offshore tax loopholes
- Increase financial transparency
Offshore Tax Avoidance ProposalsIn 2017, Representative Lloyd Doggett and Senator Sheldon Whitehouse introduced a bill that proposed to end offshore tax avoidance by:
- Requiring reporting on foreign investments held by US taxpayers
- Treating foreign corporations managed and controlled in the US as domestic corporations for tax purposes
- Require reporting of US beneficiaries of foreign-owned financial accounts