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The
term tax haven has come to be associated with unsavoury, 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, 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.
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.
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.
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?
What next? Read on about
Tax Havens
History or return to our
Offshore Banking Centre page.
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Whilst every effort has been made to ensure that the details contained
herein are correct and up-to-date, it does not constitute legal or other
professional advice. We do not accept any responsibility, legal or otherwise,
for any errors or omissions.
Please go to our
Uses of offshore Companies Page where you
will find interesting information on the benefits of using offshore companies
and trusts for business and personal use, links to information on other
locations and details of our products and services.
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