TAX HAVENS
The
term tax haven has come to be associated with unsavory, immoral,
and perhaps even illegal activities in the minds of many people.
Novels like The Firm as well as constant negative media coverage
and government propaganda have all caused the public to associate
tax havens with shady business deals and characters of questionable
nature. As a result, many people wonder why anyone would want to
take their money offshore. The reality of tax havens and those who
use them could not be further from the truth. Since the French Revolution,
the wealthy have moved money offshore to protect their assets and
to avoid paying taxes on gains. There are currently over 200 jurisdictions
that offer these and other special incentives to foreign investors
across the globe. They vary from sun-drenched Caribbean islands
with palm-lined beaches to mountainous, European principalities
filled with castles and picturesque villages.
First, it is important to define what a
tax haven is. A tax haven is a foreign country or dependency
that has a series of unique characteristics, the primary one being
relatively lower tax rates in comparison with other countries. In
fact, many tax havens impose no taxes at all on income earned by
foreign individuals. Bank secrecy and strict privacy laws are other
important characteristics of tax havens. In fact, in some tax havens
there are prison sentences for anyone revealing private financial
information. In the US, the IRS agents' handbook defines tax haven
as "a term that generally connotes any foreign country that
has either a very low tax or no tax at all on certain categories
of income." The IRS itself defines at least 30 jurisdictions
around the world as tax havens, including Austria, the Cayman Islands,
Hong Kong, Liechtenstein, Panama, Singapore and Switzerland and
lesser known places such as Bahrain, Nauru, and Turks & Caicos
Islands.
Governments of most industrialized nations,
and especially their tax collecting agencies, would have everyone
believe that the use of a tax haven is the same thing as tax evasion.
These governments frown on you relocating your money offshore. If
everyone could invest abroad and in secrecy and never pay taxes
these governments would go broke. The Governments do everything
in their power to discourage citizens from moving funds offshore
because when you move your money offshore, the government loses
control. It is in no way illegal to take your money offshore, even
though the government has done its part to try to persuade you to
not do so. To this end, the taxman would have the public believe
that tax havens are used exclusively for tax evasion, but that is
just not the reality of the matter. For example, in the US the IRS
agents' handbook carefully notes that taxpayers use havens to avoid
taxes, not evade them. Tax avoidance is the legal reduction of taxes,
while evasion is any illegal means of reducing or eliminating taxes.
Furthermore, the IRS guide concedes that US taxpayers may also use
tax havens for tax planning reasons. This same guide also admits
that some transactions conducted through tax havens have a beneficial
tax result that is completely within the letter of US tax law. In
fact, the US Supreme Court stated in Gregory vs. Helvering (1935),
293 US 465 that taxpayers can arrange their affairs so that they
can make their taxes as low as possible. Given that admission, it
becomes highly probable that many Americans are overlooking tax
havens, private international banking and offshore investing as
a fully legal means of restructuring their income and reducing their
tax liability.
Given the information above, there are
multiple reasons for using tax havens. One of the most
important tax related reasons is the formation of an offshore corporation
to engage in international business activities. Since the corporation
is based in the haven, the income it generates is not subject to
foreign taxes and through expert planning, US taxes may be minimized
or deferred. The same rule applies to investments made through an
offshore corporation and any resulting profits. The most prominent
of non-tax reasons for using a haven is the privacy and confidentiality
they offer for business transactions. It is very difficult for the
US government to obtain information about business activities that
take place in offshore tax havens or to locate income from investments
made through an offshore corporation. Freedom from overly restrictive
banking regulations is yet another attractive characteristic of
many tax havens. Banks in many offshore jurisdictions may not
have reserve requirements and so they are able to loan funds at
higher rates and pay higher rates on deposits. Many offshore havens
also give banks greater discretion in investing funds on deposit.
Although not a concern for US residents, tax havens can provide
economic and political stability for individuals who live in countries
where such stability is sadly lacking.
An excellent example of a well-known public
figure who is publicly known to utilize tax havens to his advantage
is Rupert Murdoch. In 1985, media magnate Rupert
Murdoch renounced his Australian citizenship and became a US citizen
and so was able to comply with the US law that prohibits foreign
ownership of television stations. This very wise business move helped
Mr. Murdoch build a global entertainment empire that includes among
its many subsidiaries the 20th Century Fox studios. Mr. Murdoch's
company, News Corp., earns most of its revenue from US subsidiaries,
but through the use of international tax havens, Mr. Murdoch has
paid corporate income taxes of one-fifth the rate of his US competitors
during the 1990s. US authorities do in no way suggest that
there is any impropriety in his business strategies. News Corp.
has remained incorporated in Australia in spite of Mr. Murdoch's
taking on US citizenship. News Corp. has mastered the use of
the offshore tax haven in its many international transactions. The
company reduces its annual tax bill by moving profits through multiple
subsidiaries in offshore tax havens like the Cayman Islands. For
example, the overseas profits from movies made by 20th Century Fox,
go into a News Corp. subsidiary in the Caymans, where they are not
taxed, according to one insider familiar with the transactions. Mr.
Murdoch has taken advantage of the differing tax regimes around
the globe and so has been able to make sure his companies keep more
of what they earn. Mr. Murdoch provides an excellent example
of the proper use of tax havens in business strategy for all to
follow.
Since most of high industrialized nations
enforce extremely high rates of income and estate taxes on the worldwide
income and assets on resident citizens, expatriation has become
the ultimate tax-planning tool for their citizens. For
instance, a former American citizen who adopts Bahamian nationality
pays zero estate tax. There are generally significant income tax
savings in renouncing U.S. citizenship. As an example, St. Kitts-Nevis
and the Cayman Island levy no income taxes while some other countries
do not tax the foreign income of retirees. Although some may have
second thoughts about expatriation for patriotic and practical reasons,
the costs of American citizenship may eventually outweigh renunciation.
Ultimately, the loss of American citizenship is not terribly burdensome.
Telecommunications and convenient international airline schedules
facilitate the expat life. Now with the Internet and satellite television,
an expatriate can be as well informed living in San Jose as in Manhattan.
Frederick Krieble, a director and former treasurer of Loctite Corp.,
moved to the Turks and Caicos Islands, where he runs an investment
company. Expatriation is not limited to the super rich. Jane Siebels-Kilnes,
a vice president of Templeton, Galbraith & Hansberger, in Nassau,
followed in the footsteps of Sir John Templeton. Templeton gave
up his U.S. citizenship in 1962 and moved to Nassau. As a result,
Templeton saved over US$100 million on the sale of his investment
management company in October 1992. Obtaining a second nationality
is not quite as expensive as one may think. For example, St. Kitts-Nevis
requires the purchase of US$150,000 worth of local real estate and
paying US$50,000 in fees for instant citizenship. For those with
time on their hands, Costa Rica offers permanent residency with
a US$50,000 investment in reforestation and a passport a few years
later. Many mid level executives and small business people nearing
retirement consider expatriation as a method to ensure a high standard
of living in a comfortable environment. As you can see, there are
a handful of viable options for an American looking for expatriation.
Tax havens offer numerous opportunities
and if you have not yet researched the use of one or more in both
your personal and business tax planning, it is now time to seriously
consider the matter. Every student of American
taxation is required to memorize Judge Learned Hand's declaration,
"Over and over again courts have said that there is nothing
sinister in so arranging one's affairs as to keep taxes as low as
possible. Everybody does so, rich or poor; and all do right,
for nobody owes any public duty to pay more than the law demands:
taxes are enforced exactions, not voluntary contributions. To
demand more in the name of morals is mere cant." It is
foolish to not take advantage of the tax code regulations and provisions
that give one legal right to use tax havens. Only the government
loses because it will be taking less of your money in taxes. Keeping
more of what you earn is not such a bad outcome after all, is it?
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