Blacklisted Offshore: Private Consultant's Opinion
20 August, 2008
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.
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