| 20 August 2008
What comes first into your mind when thinking about how much the countries with
high taxes are not happy with existence of low tax jurisdictions? What exactly
is on their agenda and how it touches you – ordinary user, investor, businessman,
individual.
An offshore company, as a standard instrument of international tax planning,
is normally a company incorporated in a low tax or tax-exempt jurisdiction.
Using such company is quite legal when it is used for legal purposes. However,
from the moment of introduction of first tax haven regimes governments of countries
with high taxes campaign against offshore jurisdictions and their clients. Their
concerns and efforts become even more intensive with the march of globalization.
Decades ago so-called anti-offshore measures were a home policy matter. Today
many international organizations are involved, such as OECD, FATF, United Nations,
EU and others.
Their concern number one is "harmful tax competition". In fact low
tax jurisdictions attract too much of mobile capital from other countries. Disadvantaged
countries claim it to be nothing but tax dumping that destroys their tax basis,
encourages tax avoidance and shifts tax burden to less mobile tax basis, i.e.
labor, real estate, consumption etc. The opponents argue that free tax competition
same as in any business is of more good for the world's economy and that there's
no reason for tax regimes to be similar all over the world.
Whatever the motives are and regardless how much hypocrisy you can observe
at both ends the fact is that low tax centers are subject to discrimination
mostly of economic character. International organizations create constantly
changing black lists, make reports and give recommendations.
The real measures, however, are being taken on the level of national legislation
of each country. Most often there exist "controlled foreign corporations"
or similar regulations. In some countries it takes a simple form of a decree
providing for a substantial withholding tax being levied from each payment in
favor of a business partner located in one of the blacklisted countries, no
matter what you pay for and/or whether you control the beneficiary company.
In other cases the burden of economic responsibility is shifted to the banks,
which get obliged to create reserves for each transaction if the counterpart
is from a blacklisted country. Not to mention requirements to each and every
involved professional to report suspicious or fraudulent activities. The aim
is to eliminate economic benefits from using tax haven regimes.
The only advice that naturally suggests itself in this case is to get familiar
with the "anti-offshore" legislation of the countries involved in
your business before you buy in an offshore scheme. Black lists can be numerous
and quite comprehensive but there are always exceptions. A number of decent
locations is still available for different businesses. Offshore service providers
located in a particular offshore jurisdiction are rarely able to consult you
on this matter. The work is for you and your local lawyer, auditor or business
consultant.
Concern number two is facilitation of criminal activities, in particular money
laundering. It results from the lack of satisfactory legislation preventing
the mentioned activities in certain jurisdictions.
You can hardly find a professional who will give you a service without asking
for a number of personal documents within the "know-your-client" policy.
However, despite recently many jurisdictions updated their legislative basis
to meet the international standards there are still loopholes. You will be offered
a number of opportunities claiming to be the legal way to protect your assets
or to avoid tax payment. Be careful. Some offshore service providers still promote
secrecy, anonymous corporations and bank accounts as the right course of business.
They build a sophisticated "form over substance" scheme involving
several legal entities and, yes, they claim it to be for the purpose of privacy
and asset protection for law-abiding citizens, but what they actually do is
teaching you to lie that you are not the beneficiary to the scheme. They want
to sell their service and forget to remind you that you are the responsible
one and that at least you have to report those funds at home revenue authorities.
The above two problems are so closely related that actually sometimes very
difficult to distinguish. We don't speak, however, about voluntary criminals
here.
Whether you wanted your offshore company to save on taxes or hide money trail
for security reasons apparently secrecy is not a merit any longer. A range of
circumstances when it comes right in place is narrowing every day. Those few
currently remaining secretive offshore centers like Panama or Singapore are
the "next in line". Evaders can reduce but hardly eliminate the risk
of being caught by transferring money from one tax haven jurisdiction to another.
If one gets caught the consequences can be grave. Tax
fraud is a criminal offense in most countries and is punished by fines and
imprisonment.
Governments want your taxes in their budgets. You want a justified tax burden.
Everyone is in his own right. Probably it's the right time for you to reconsider
the role of tax-free offshore instruments in your business structure. You can
shift it a bit to get a perfectly legal low tax scheme instead of a half-legal
secrecy-based though tax free one.
You have been reading an entry on the following blog:
Offshore Advisor
Mary is a consultant and blogger at Offshore Advisor - free online consultancy on offshore services covering asset protection, offshore banking, second citizenship and more. Contact Mary via mary@isla-offshore.com.
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