by Vern Jacobs
There seems to be a huge amount of non-sense and some outright deception about the impact of tax havens and the alleged abuse of tax havens. The following comments are offered as an attempt to provide some balance to the arguments of those who rail against U.S. persons with foreign income, particularly in a so-called tax haven. This article is not copyrighted and I encourage readers to forward it to anyone who might be interested in shedding the light of truth on this subject. However, please don’t alter or edit the article because it could easily change the intended meaning.
The U.S. imposes an income tax on the world wide income of our citizens and permanent residents, regardless of where the income is earned. If it is earned in a country that also imposes income taxes, the U.S. provides for a tax credit to avoid double taxation. But if the income is earned in a country that has no income tax (or a low rate of tax), the U.S. collects a tax on that income as if it were earned in the U.S. We do allow for a limited exemption from U.S. tax for earned income in foreign countries — but most of the U.S. citizens who work outside the U.S. pay substantial taxes to foreign countries. The tax credit is not allowed on foreign excluded income, so that apparent tax break doesn’t really cost the U.S. any significant loss of tax dollars.
U.S. corporations that operate in multiple countries are permitted to defer tax on income earned in a low tax country so long as the income is re-invested in the business and not used as passive investments. This is done to partially compensate for the disadvantages imposed on U.S. companies in competing with companies based in other countries.
Many decades ago, it was legal and possible to move assets offshore and to invest them on a tax-free basis until the money was returned to the U.S. But various laws have removed those tax breaks. If a U.S. investor opens a foreign bank account and buys various offshore investments, the U.S. investor is obligated by law to pay taxes on the income earned by those investments. Many times, the U.S. investor is encouraged to put his assets into a foreign corporation or an international business company (IBC) and to make the investments through the corporation or IBC. But the U.S. tax law already requires the U.S. shareholder of a foreign corporation to pay taxes on the income of a foreign investment holding company or a foreign corporation controlled by U.S. persons.
Some people seem to believe that the use of a foreign trust is some kind of tax shelter, but it’s not a legal way to avoid taxes. The U.S. person who puts assets into a foreign trust that has any current or future U.S. beneficiary is obligated by law to report the income earned by the foreign trust and to pay taxes on that income.
Virtually every other country in the world imposes income taxes on a territorial basis. Income earned in their country is taxable. Income earned outside their country is not taxable. But the U.S. insists on taxing the income of its citizens, permanent residents, corporations, partnerships, trusts and estates no matter where the income is earned.
Those politicians who rail against alleged losses of tax revenue because of tax havens are either not aware of the scope of the U.S. tax laws, or are intentionally dispensing non-sense to pander to the public’s lack of awareness of the current system. The only people who are evading taxes offshore are outright crooks and those who are not concerned about complying with the U.S. tax laws. More laws will have no impact on those who choose to ignore the existing laws. Claims that closing up tax haven loopholes will somehow generate revenue to be used for domestic spending is political propaganda that is totally contrary to the facts.
We don’t need more laws to prevent tax evasion offshore. We have more than enough laws already.
Editor & Publisher
The Jacobs Report on International Financial Planning
Vern Jacobs is an independent CPA, tax author and publisher with a focus on international tax law.