site map

Barron's International Tax Service

« The TaxBarron » Serving the American Expatriate Community

US Economy Hit By Tax Evasion Havens

A Senate panel said recently that offshore tax havens enable wealthy Americans to avoid paying up to $70b in taxes annually.  In one example, according to a report from the Associated Press, $2b in capital gains were sheltered from taxation when the promoters of the tax shelter fabricated securities transactions designed to generate capital losses.

Relying on an armada of tax professionals, wealthy Americans look to the creation of trusts or corporations to create the impression that money sent offshore is no longer in their control.  Promoters fill out essential paperwork, pay appropriate fees and conduct business on behalf of their American clients.  The trusts and corporations created offshore then become the new owners of a client's money and assets.  In return for this service, promoters hold the paperwork that allows clients to continue controlling their assets.  They of course charge a management fee to clients for their services.

Investigating offshore jurisdictions considered attractive sheltering havens, the Senate investigative panel focused on Belize, the British Virgin Islands, the Cayman Islands, the Isle of Man, Nevis and Panama.  Their report stated that hiding assets offshore would not be possible without lawyers guiding clients and financial institutions.

In an interview on this subject, a top member of the investigative subcommittee, Senator Carl Levin, said:  'We've got to end the tax haven abuses.  We've got to take some major legislative steps.'  Senator Norm Coleman, the subcommittee chairman, added:  'Using offshore jurisdictions to shelter income is unfair, and I intend to fix this problem.'

The Internal Revenue Service has already published a list of identified schemes on their website at www.irs.gov.  These schemes include:

* Limited Liability Companies (LLCs) - Abuse of anonymous corporations in the US by foreigners mirroring the abuse of tax havens by US persons for funneling illicit funds.

* Offshore Deferred Compensation Arrangements - Highly compensated individuals and business owners in the US who receive but then defer a large portion of their salaries.

* Fictitious or Overstated Invoicing - Unrelated offshore entity fictitiously invoices US person's business.

* Factoring of Accounts Receivable - US person's business discounts receivables to an unrelated foreign business entity.

* Abusive Insurance Arrangements - US taxpayer deducts premiums for insurance provided by an offshore insurance company but actually represents self-insurance.

* Shifting Income Using Offshore Private Annuities - US taxpayers avoid or defer tax on income streams by exchanging property for unsecured private annuity offshore.

* Offshore Internet Business - US business routes transactions through offshore servers with income collected via foreign bank accounts.

* Offshore Wagering - Virtual casinos operate from offshore locations from where operators suggest US persons are not subject to taxation on their winnings.

* Repatriation of Offshore Funds Using Credit Cards - Credit cards issued by tax haven domiciled banks that enable US taxpayers to covertly repatriate offshore funds.

Because of investigations into abusive offshore tax shelters by the US Senate and the attention being given to various schemes by the Internal Revenue Service, the days of offshore tax avoidance appear numbered.  Still perhaps Congress could do better considering a flat tax rather than losing so much time investigating tax havens and so much revenue chasing tax avoiders.