Throughout the world many businesses and businessmen undertake Offshore/Foreign tax planning to save money on the tax they would pay their governments. The main principle behind international tax planning is to, legitimately, minimize the tax obligations in your country of residence by using the benefits added within foreign jurisdictions.
The requirement for Offshore/Foreign tax planning
Laws of revenue and taxation are a major cause of anxiety for most people. These laws are domestic in nature, thus making it the ideal option to invest financial capital in another country. Tax and government authorities have no jurisdiction outside their domestic territory, although the efforts of the Organisation for Economic Cooperation and Development (OECD) are aimed at providing a framework for government bodies to disclose financial details of those involved in legal proceedings related to tax evasion.
A tax haven is a country in which there are minimal taxes or no taxes levied on the income of individuals and companies alike. The tax haven benefits from the fact that, the company is not allowed to carry out business transactions within the country, but to only spend or invest in the country’s development or infrastructure.
Some countries also have tax treaties with high tax countries; such a country is known as a treaty haven. If the country doesn’t have a treaty in place with the US, there is a 30% withholding tax which is levied.
What many business owners do is amass wealth from various sources in various jurisdictions in such a way that their tax liability is minimized as much as possible. A business which operates in the US invests its money in another jurisdiction by making use of the tax treaty that jurisdiction has with the US. The company is charged little or no withholding tax as per the terms of the treaty. The operator of the company thus transfers the assets to another entity, and can now accumulate funds in the offshore location.
Tax treaties were brought in place to avoid making an individual pay tax to two countries. Though this was not the intended usage, using the system to their benefit many investors make large tax free savings. The US generally doesn’t sign treaties with countries that do not levy taxes directly. In the past there were treaties in place with many of the Caribbean islands that didn’t tax various forms of foreign activities. However, as mentioned above, in recent times the IRS has made great efforts to crack down on tax evasion activities with the assistance of the OECD’s international guidelines related to disclosure of financial information. As a result of this, new treaties are being negotiated to as to benefit both parties.
Multinational Investors, and corporate services firms, are professional tax experts who can advise an individual, or company, on how and where they should manage their assets. Offshore/Foreign tax planning is a complex process but is a legitimate and effective way for minimizing tax obligations.