Thursday, May 21, 2009

Offshore Tax Avoidance

Most people who take the time, spend the energy and swallow the fees associated with securing a functioning offshore credit card, do so with the intent of legally avoiding taxation, known as "tax avoidance", or illegally avoiding taxes, known as tax evasion.

As far as the U.S.'s taxation authority, the IRS, is concerned, offshore credit cards are legal and a right of US citizens to own, maintain, and use them -- much like offshore bank accounts. However, they go further in an opinion letter to state that they believe the "average" citizen has no purpose for owning (much less using) an offshore credit card, and chances are the use of one will put you under the microscope.

So how would this supposed offshore tax avoidance take place and how is it aided by the use of an offshore credit card.

Well, it depends on the individual's situation, but I'll attempt to outline a couple of cases to give you a clearer idea and hope you can extrapolate from there :)

Primarily it comes down to the moment of taxation. Broadly speaking, corporations are taxed periodically (often monthly, quarterly, or annually) based on net earnings. In addition, they can be taxed in the case of a liquidity event a sale or a time when the asset in question (perhaps the entire company in this case) legally changes hands.

We wil deal with the first case, first.

In the case where the company has ongoing operations and is booking revenue and expenses, most modern corporations are taxed as a percentage of net income. In this common case, it becomes a game to lower TAXABLE revenue or raise allowable expenses to the point where the organization pays little or no taxes.

So, how is this accomplished?

Three or four standard techniques are employed (among others) which I will mention here, and cover in more detail in later posts.

1.) offshore factoring

2.) captive insurance programs

3.) back to back loans

4.) rebilling

Offshore credit cards play a role primarily in cases where periodic or occasional payments are moving back and forth between an "offshore" location and one onshore -- or in cases where money needs to be accessed easily and cost effectively.

Factoring and back to back loans are the most obvious techniques where accessing money over time is a major factor in dealing with the admistrative hurdles to implementing such a tax avoidance strategy.

For those unfamiliar with the costs and benefits of offshore factoring and back to back loans, as I said earlier, I will attempt to cover those and rebilling and captive insurance in a separate post.

No comments:

Post a Comment