[FoRK] Busting the "offshore tax havens" myth

[Jeff Bone]

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  
allowed anymore.

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.


jb