Tax Haven Basics and the New U.S. Legislation

Olivia Clifford |

In lieu of the recent G-8 summit and the light that was put on the global profit of major global corporations such as Google, Apple, Amazon and Starbucks; the legislation and momentum to generate fair taxes and increased transparency has become the forefront of international financial politics.  Domestically, Americans have been playing the tax laws of different countries to mitigate tax liability for as long as anyone can remember. Well-regulated tax havens provide many beneficial incentives to investors. On a very basic level they allow investors to take advantage of higher rates of return, lower rates of taxing on returns as well as being less costly and more notably legal. It’s the poorly regulated tax havens that have been brought into the limelight, as they are historically havens for tax evasion, money laundering, or to conceal or protect illegally acquired money. 

Advantages of Tax Havens: 

Tax Reduction: There are major tax reduction incentives to foreign investors, particularly in countries that need to promote investment as well as attract outside wealth. The reduction normally takes place when offshore investors generate a corporation in a foreign country that acts as a shell for all the investor accounts. The reduction comes from often receiving tax-exempt status in the US Market as well as reduced residential taxes as the corporations are not apart of the local operations. 

Confidentiality: Confidentiality being on of the most attract aspects of tax havens worldwide today, is a huge draw for larger corporations who are taxing advantage of the mitigated tax liability.  There is complex secrecy legislation as well as corporate banking confidentiality, with severe consequences to those who breech them. Though this is dropped when there are instances of drug trafficking, money laundering or illegal activities. This is one of the most controversial portions of the tax haven structure. 

Asset Protection:  Tax havens can be used to protect an investor from loosing all assets through a restructure of ownership. Trust funds, foundations, existing corporations can be transferred internationally to other people or legal entities effectively rendering them safe from seizure. Though a trustee of an offshore asset protection fund will be taxes on the trusts income whether its been distributed or not, if they are a US resident they have the ability to make contributions free of income tax. 

Diversification of Investment: They provide opportunities to many different nations particularly those who are developing. They are flexible giving more access to the international markets effectively making any investors portfolio more diverse and therefore stable. 

Disadvantages: 

Tax Laws are Tightening:  There have been many new laws but nationally and internationally that have been implemented in the last ten years to cut down on global tax evasion. Tax agencies such as the IRS have been cutting down of traditional tax avoidance. Most notably were the amendments made to the Internal Revenue Code in 2004, which collect taxes that from American corporations that operate in other countries as well as American citizens or residents who earn money through offshore investments. The most recent change to domestic litigation was the amendment to Obama’s Hiring Incentives to Restore Employment Act in March of 2013.

Cost: To set up and generate a tax haven is not a cheap endeavor. In most cases generating the shell corporations internationally come with the cost of setting up the corporation, hefty legal fees, account registration fees and sometime they are even required to own property. 

The newest legislation that has been implemented within the Unites States comes from an amendment to Obama’s Hiring Incentives to Restore Employment Act; Title five: Offset Provisions. With this new piece of litigation and continual progress that that is taking place, tax havens are becoming less ideal. The offset provisions instate two new mechanisms that give the U.S. Federal Government more power. The first change that was made was a 30% additional tax  on assets placed on financial institutions that have investments in the United States and either refuse or don’t disclose. The second eliminates the strategy that many investors use to avoid taxes on derivatives by targeting foreign holding companies that are hiding accounts. They are in turn assessed based on stock, securities, bond, debt and equity earnings of companies based in the US. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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