Offshore Taxation

Unless where funds earned from offshore sources are exempt from offshore taxation, they are required to be reported when filing income tax returns. In the U.S, this is demanded by the IRS (Internal Revenue Service), which has for the past time been coming down real hard on offshore funds with a series of strategies to tighten offshore taxation.

The United States is known for its multicultural and diverse ethnic background, numerous opportunities for success and freedom of expression. This makes the United States a dominating center of economic activity both in terms of trade, production and investment, making it an important part of the global economy which has the potential to highly affect international market trends, standards and progress.

A significant portion of U.S government revenue is earned through both domestic and offshore taxation, which are applied to wages and tips, royalties, interest, rents, dividends, pensions and capital gains earned worldwide. Taxation on offshore income is a major income generator and a number of strict fiscal measures are being implemented to ensure that offshore taxation is efficient because of its important contribution to the U.S economy, especially in these difficult economic times.

With the relocation of U.S and European firms to countries with favorable and lower taxes, offshore taxation provisions by the U.S Federal increasingly targets offshore income. Similar offshore economic activity in Europe also led EU countries to implement laws and information exchange agreements and treaties with EU and other regional countries in an attempt to find more effective and vigorous means of offshore taxation. But several offshore taxation laws are being revised because most countries have recognized the need to reduce their own taxes on domestic and offshore income in order to retain local investors while attracting foreign capital. One of the efforts made by the EU to impose offshore taxation was the implementation of the EU Savings Tax Directive which levied a withholding tax on offshore bank accounts held in other EU countries and their Dependencies.

In discussing the issues involving equitable and economic ways of levying both local and offshore taxes in the U.S, many people believe that U.S offshore taxation is inequitable in that it reduces the U.S tax burden of offshore income generated by U.S firms rather than on domestically earned income by locally based companies. It is also argued that offshore taxation in the U.S tends to subsidize the offshore investments made by U.S multinational corporations at the expense of employment, production and investment within the United States. In spite of this, offshore tax experts suggest that providing a more equitable means of offshore taxation nor augmenting it does not offer a sound solution, while the decrease and elimination of offshore tax rates as suggested by basic proposals for tax reform in offshore taxation will not necessarily provide a more equitable way of taxing taxpayers or achieve increased efficiency for the U.S economy. Arguments also state that these offshore taxation schemes may only result in a distortion of the distribution of capital resources and negatively impact how efficiently and productively the U.S economy functions.

U.S policy on offshore taxation subjects both citizens and permanent residents living in or outside the US. Offshore tax havens that offer offshore financial services such as offshore firm production, similar to Seychelles company formation, do not impose offshore taxes on these companies which are only expected to pay a maintenance fee every year. The IRS is aware that many US citizens and residents are holders and recipients of funds from offshore sources and for offshore taxation purposes, both U.S. Citizens and firms are required to report all offshore income when filling out their tax return forms. Offshore business tax must be paid except if exemptions are given by the IRS through the possibilities provided for making claims for offshore tax deductions and exclusions. Applicants seeking exemptions from offshore taxes are capable of receiving exemptions of significant sums as long as they meet the necessary requirements. What most Americans seem to fear is being audited by the IRS. But IRS tax auditing can be avoided if your tax return forms do not present high risk tax audit areas such as huge sums of itemized deductions that surpass what is targeted by the IRS, making claims of enormous cash donations that way exceed your income to charity organizations and presenting complex business or investment expenses.

If you are considering setting up an offshore tax free company, to effectively avoid and save on taxes, it is worth finding out the domestic and offshore tax benefits that are made available by the IRS as well as whether tax treaties exist between your country of residence and where you decide to incorporate your offshore tax free structure. In Canada for example, the “exempt surplus rule” creates opportunities for taking advantage of exemption and exclusion from certain domestic and offshore taxation. British citizens and firms can view Canada as an attractive location for offshore taxation reasons they are involved in holdings. Under the “exempt surplus rule”, dividends paid by an offshore affiliate to its Canadian parent are exempt from offshore taxation. A series of “tax sheltering” provisions also exist to attract new residents.

Back to top