Offshore Tax Planning

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Offshore tax planning involves systematically putting to use a combination of business and personal financial practices that result in minimizing tax liabilities over a given tax period. Contrary to what most people may think, offshore tax planning is not simply about hermetically stashing money in a foreign bank in order to lower taxes because while each one of us exercises the right to save on and minimize our taxes, doing so through means that are considered illegal by local tax authorities should be avoided at all times.

Besides their regular savings most people attempt to plan taxes offshore to reassure themselves of secured savings in an offshore jurisdiction with economic, political and social stability. This is done by either making a lump sum investment in an offshore tax exempt entity such as foundation or trust or by depositing cash in an offshore tax exempt account. Offshore tax planning by making these investments is a way that many people and corporations use for securing their assets and future as well as that of their family as offshore funds can be advantageously used as insurance for retirement, investing, accident or education. In countries where governments assume the right to claim personal and corporate savings, offshore tax planning also gives people and firms the sense of privacy and confidentiality that they need when dealing with their financial matters. The current economic crisis also gives us sufficient reason to find ways and means of shielding our assets and setting aside funds for wet days.

Offshore tax exempt trusts, foundations and international business companies are useful for offshore tax planning due to the way in which they are legally structured to serve as tax deferment tools and should be used by businesses to defer taxes when possible in order to legally economize through offshore tax savings on funds which remain free of taxes offshore and may in certain instances accrue interests. But, simply incorporating an offshore company in an offshore tax haven is not enough, as like any normal business, proper financial and accounting systems need to be used to strengthen not only the amount of savings made through offshore tax planning but through opportunities for tax deductions made available by local tax laws.

In other words, in addition to an offshore company enjoying offshore tax exempt status in the country where it is registered, U.S. tax laws including offshore taxes on capital gains and income earned worldwide can be used to the company’s advantage through its financial set up and accounting system. For example, effective offshore tax planning can be achieved by using the cash accounting method by which the receipt of income and payment of expenses are recorded at the actual time of receipt and payment, thus making income be considered as having been earned only at the time when it is received. By doing this, offshore tax planning occurs through an internally built-in tax deferment strategy which complements the business’ offshore tax savings. Therefore, as a form of maximizing liquidity, earning, investment and spending capacity, offshore tax planning requires careful thinking, setting practical financial goals and having sound knowledge of local offshore tax laws.

In the U.S, because many people are the recipients and senders of remittances or owners of offshore tax exempt companies and or bank accounts, knowing the existing offshore taxes and laws of those countries where our monies are kept and earned is vital for proper domestic and offshore tax planning. Before establishing an offshore company or opening a bank account for offshore tax planning, you should make it a priority to be informed about the tax treaties that may exist between the United States and your choice offshore tax haven because tax treaties and information exchange agreements will affect how effectively you make savings through offshore tax planning and whether your privacy is maintained as you expect.

Offshore entities, similar to Panama companies, receive the offshore tax exemption that they benefit from on the grounds that income is not earned within the incorporating offshore tax haven. However, people may become liable to offshore taxes such as EU withholding tax if they hold an offshore bank account in a country which is part of the EU. Offshore tax planning in this case may not produce the offshore tax benefits that are achieved as in the case where offshore tax exempt accounts are held in a country that is not a member of the EU; except if the relevant tax laws of that offshore tax haven do not give exemptions on the interests on personal offshore bank accounts. Offshore tax havens such as Dominica, Belize and Anguilla allow for effective offshore tax planning because they do not impose taxes on offshore accounts and grant exemption to both domestic and offshore taxes to offshore companies for a period ranging from 15 to 20 years.

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