[FoRK] Busting the "offshore tax havens" myth
jbone at place.org
Mon May 5 17:54:28 PDT 2008
On May 5, 2008, at 7:04 PM, Jeff Bone wrote:
>> Another area of interest to the committee is the ability of hedge
>> fund managers and private equity managers to defer large portions
>> of their income offshore, where it can increase tax free (they pay
>> taxes when they bring it back into the United States).
> This isn't a super-secret thing they teach you when you enter the
> "hedge fund and private equities managers tax-dodging club." ANYONE
> can do this. Go ahead, try it --- I dare you!
Let's dig into this one in a little detail, as it's a common myth.
Before I delve into this let me say --- there used to be numerous
loopholes related to offshore financial activity. I happen to own a
book called "Offshore Tax Havens" from the early 90s, bought it years
ago just out of curiosity, had absolutely no call for such a thing at
the time. Most of the things that are talked about there are not
Russell, lets take (a semi-fictionalized version of) you as an
example. For the purposes of this discussion, "Russell" owns a couple
of oil wells and makes most of his income as a contract programmer.
First, let's try see what happens when we expatriate the oil wells.
Let's set up a Cayman holding company and capitalize it with the oil
wells, accepting in return illiquid stock in said holding company.
Lets hold onto those wells for several years until oil's going for
$500 a barrel; let's assume the wells are gushers but we've held back
on productivity waiting for oil prices to get sufficiently high. The
HC then sells the oil that the wells produce and pays a dividend on
that revenue; that's income to Russell. Tax on that's paid just like
any other dividend from any other source, so the offshoring didn't buy
us any tax savings, just hassle.
Okay, so let's instead sell the wells. Okay, so the proceeds
presumably get distributed pro rata to the shareholders. Once that
distribution is repatriated, it's taxed just like it would have been
here. No additional benefit to the offshoring, same long-term capital
gains treatment, as it should be as this was a multi-year (i.e., long-
term) investment. What if the HC is a partnership? Same thing.
Okay, let's not repatriate the money; instead, let's do a
distribution to an individual account that Russell holds somewhere
else offshore. That's taxable in the US, no benefit to offshoring,
plus likely to get you a nice audit even if it's all above board.
Let's have the HC buy Russell a house in Provence instead; ticket to
Club Fed for Russell, I believe the operative theory is called
"beneficial control" and they *will* bust you for that kind of shit if
they catch on.
Let's try to expatriate Russell's domestic income stream; instead of
hiring out to his clients directly, they hire the offshore entity, who
Russell both controls and ostensibly works for. As soon as Russell's
effectively received or got control of the income stream, he's going
to get taxed --- just like you would. If he fails to pay the taxes,
he's going to jail --- just like you would, offshore or no.
Let's make it more complicated for the IRS. Set up a web of holding
companies, and keep all the money and all the acquired assets
offshore. Big trouble now, long vacation in Club Fed. The IRS makes
the *presumption* that most attempts to put capital or wealth offshore
are dodgy, and you've made your case for them --- if you get caught.
You might not, but then, you're just a garden-variety tax dodger; and
we're disputing the existence of *legal* offshore tax strategies that
actually have any substantial benefit for the person who doesn't feel
like totally getting the hell out of Dodge.
You can make money offshore. You can keep money offshore. You can
even move money offshore. None of that's in question. You just
aren't going to get anywhere but jail by trying to make (and spend)
money here w/o paying the Tax Man.
IANAL and IANAA, $0.02. But if you've got any real specific
information to the contrary of any of this, I'd love to hear it.
Short version: pay your taxes. And while you're at it, stop
believing in Santa Claus and the Tooth Fairy.
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