Corporations pay the top tax rate on foreign profits, but not until those profits are brought back to the US from abroad. This exception is known as corporate offshore income deferral. But are US individuals able to achieve this kind of “income deferral”?
US citizens and resident aliens all are taxed by the US on their worldwide income. That applies to all foreign corporations, partnerships LLCs and TIC deals you “control” in tax free havens. It seems like this is pretty straight forward. End of story? Hardly.
To begin with, it would be good for us to know exactly where these foreign off shore tax havens are. According to a January 2013 Congressional Research Study here is a list of some of the more popular tax havens:
Caribbean West Indies Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, British Virgin Islands, Cayman Islands, Dominica, Grenada, Montserrat, a Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, Turks and Caicos
Central America Belize, Costa Rica, Panama
Coast of East Asia Hong Kong, Macau, Singapore
Europe/Mediterranean Andorra, Channel Islands, Cyprus, Gibraltar, Isle of Man, Ireland, Liechtenstein, Luxembourg Malta Monaco San Marino Switzerland
Indian Ocean Maldives, Mauritius, Seychelles
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North Atlantic Bermuda
South Pacific Cook Islands, Marshall Islands Samoa, Nauru, Niue, Tonga, Vanuatu
Perhaps I have perked your curiosity. Interested you say in a tax free haven? After you decide on the country you want to set up in, you then usually workout a tax free plan for investment off shore with an advisor who specializes in this area. These advisors may be investment advisors, bankers or other financial types who are selling their off shore tax free strategy. How do you find out more about these deals? I just googled “tax free off shore investments” and got this ad: Setup an offshore company in Cayman and enjoy zero taxes and more!
Still interested? Here is how it works: Funds whether previously taxed or never taxed are wired by the US taxpayer off shore. Any major bank with offices around the world like UBS (United Bank Switzerland) for example can move funds from a US based account to a tax free haven account with a computer journal entry in a matter of seconds. The tax free haven bank usually keeps the account a secret and does not issue any documentation to the IRS.
While some banks in Switzerland are now working with the IRS to identify American account holders, many banks still provide secret accounts. The accounts are further protected because the account is “owned” by a paid foreign national retained by the off shore advisors you hired. The foreign national signs all the paper work but isn’t really the “real” owner. The true owner, the American taxpayer is never disclosed to the IRS. However, the American taxpayer usually receives Debit and Credit cards connected to the account giving the taxpayer the “control” over the funds to purchase goods and services anywhere in the world. The CPA preparing the subsequent annual Federal income tax return for the taxpayer is never told about any of this. Best practice requires CPAs to ask their clients if they have control over foreign bank accounts but as a practical matter this is rarely done in a face to face meeting with the client. As a result, no disclosure is made on Schedule B and no foreign source income such as dividends or interest is reported on the tax return by the CPA. If you haven’t guessed by now, this whole scheme is illegal and subject to criminal prosecution.
Why do Americans get involved in this clearly illegal tax evasion scheme? Perhaps there are many who believe “tax free” haven means that any income earned overseas in a tax free country is tax free in the US as well? Or maybe Americans feel we are all paying too much tax anyway, so what is wrong filing our personal tax returns with our own tax shelters, just like the wealthy have done. Yes, there are a few off shore complex legal tax strategies that would work well for wealthy taxpayers. The sad fact is that the cost to construct this legal bullet proof structure is generally prohibitive for all but the wealthiest of taxpayers.
Have you decided yet? Perhaps we will meet someday as we visit some these tax free havens in the Caribbean as tourists. My hope is that you will not view these islands as a place to avoid paying income tax to the IRS. But if anyone is still not convinced, there is a good saying worthy of remembering when these deals are presented to you: “If it’s too good to be true it probably isn’t.”
See you next month Kindest regards from Chris Moss CPA
