By Bill Cara –
All the economic powers of the world are high rate income tax jurisdictions. Without lots of your money they wouldn’t have as much power.
The United States is the only major country in the world that taxes its citizens globally, wherever they reside, in or out of the USA.
Unlike citizens or resident aliens of most other nations, a U.S. person can’t escape by moving offshore. U.S. persons must pay annual income tax (IRS Form 1040) on all income earned from any source anywhere in the world.
In spite of all the media attention given to tax rebating and tax lessening policies of the 2001-2004 government administration, the U.S. is a high-tax jurisdiction of the first order.
Unlike the U.S., other major countries of the world (U.K., Germany, Japan, Canada, France, Italy) offer tax relief to the non-resident citizen. But they too are high-tax jurisdictions.
Some countries of the world – typically very small ones — are called tax havens because they have a low-tax system. Countries like Hong Kong, Malta or Barbados are tax jurisdictions that appeal to non-resident investors.
Other small countries like The Bahamas, Bermuda and Cayman Islands have zero tax on income, capital gains, death taxes, and so forth, not only for non-residents but also for residents.
But does that mean a “zero-tax haven” has no taxes?
No. No. No. These small countries all have taxes. Make no mistake about that.
Bahamas is not going hat-in-hand to the United Nations or the World Bank. Instead, they rely on a different type of fiscal system to raise the cash needed to meet their government’s expenses.
In fact all these tax haven jurisdictions have just made a decision to legislate a fiscal system that tries to balance their budget in a different way to high-tax jurisdictions. They do that by way of customs duties, property taxes, sales taxes, and so forth.
The appeal to a tax haven then is that it is a haven to the highest taxed persons and corporations of the high tax jurisdictions who can arrange their affairs to take advantage of what these small countries offer.
The problem of course with high tax jurisdictions is that wherever high income taxes exist there will be income tax avoidance measures being taken by certain taxpayers. Some of these are in fact legal. Many are not.
When avoidance, which is legal, crosses the line, it is called evasion.
In the past ten years, U.S. tax authorities (4Q03) estimate the loss of US$33 billion to tax evaders who have taken their money to other jurisdictions and not reported it to Uncle Sam. That’s a lot of dough not to be taxed, and Sam clearly wants it back.
Tax is a very complex subject. Having considerable experience in this field, the best advice I can give a high tax bracket investor is to seek professional counsel before trying to avoid taxes via offshore tax havens.
Unlike many other nations, a U.S. person can’t escape by moving offshore but there are ways that a U.S. person can reduce or defer taxes legally.
Bob Bauman, Editor, sent the following note to his A-Letter readers, under the heading How to Avoid Taxes – Legally:
* Estate Taxes: Although it’s complex and requires expert tax and legal help to create, an offshore asset protection trust can produce significant estate tax savings for your heirs. And with the uncertainty surrounding U.S. estate taxes, that can be a major savings.
* Life Insurance and Annuities: Although the IRS doesn’t like the fact, it’s still possible to achieve major deferral of current taxes using offshore life insurance and annuities as an investment vehicle. But this too is a technical area that demands expert help.
* Expatriation: The Ultimate Estate Plan. The most daring tax avoidance plan of all; acquire a second citizenship, move to a no-tax nation, re-order your assets and relinquish your U.S. citizenship. If you’re not a U.S. citizen, you don’t owe any U.S. taxes. It’s more complicated than that, but it is possible.
Of course there are other domestic tax saving moves you can make: incorporation to save business expenses; a family limited partnership to divide tax liabilities; and, domestic trusts to avoid probate. But the bulk of current tax savings and deferrals, plus strong asset protection can be achieved offshore.
As Bob Bauman signs off his A-Letter, “That’s the way it look from here.” I agree but don’t play games with yourself. If you live in the United States, before you start taking tax avoidance measures, seek advice from a registered tax professional that practises in the United States.
How can a Bahamas accountant or lawyer possibly give you any kind of personal tax advice when Bahamas, as we stated, does not even have an income system? The answer ought to be obvious.
In your case, ignorance of your own tax law is not an acceptable defence.
The problem with the system of income tax in all the high tax jurisdictions, other than the fact everybody hates paying it, is the tax legislation has become so convoluted by special interest groups pressuring legislators over the years that it is now indecipherable to the average person.
There needs to be a stripping out of loopholes and a simplified flat tax implemented, like exists in Hong Kong. However, don’t count on it; too many lawyers would be put out of work and you know the legislative body is already full of lawyers so there is a fat chance in Hades that will occur.
In my opinion, taxes ought to have zero to do with investment decisions.
If you like the fiscal systems operating in Cayman Islands, Bahamas or Bermuda, then I suggest you move there.
If you are American, you’ll still be taxed on personal income but at least you can set up your business affairs within tax advantaged corporations and trusts to defer personal income taxes to a great extent, without even moving there.
And, if you are German, Italian, British or Canadian, you’ll do even better than that. You can move there and never pay income tax again. And, as they say, enjoy the sun, the sand and the sea.
The bottom line is that most people are not moving from their home country and they ought not to be thinking about the tax situation (or omission thereof) in other jurisdictions. Reading the offshore promotional literature is to them a little like the typical boater at a yacht club: they don’t take their boat from the dock, so the information is irrelevant.
So, if going offshore interests you, my advice is to find good tax counsel in your own country and leave it at that.
Before you do, however, make sure you do know how to invest for success so that you’ll have a significant tax situation to deal with.
Source: Trader Wizard
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