Offshore Tax Evasion Is Not The Same As Offshore Tax avoidance

The concept of offshore tax evasion and offshore tax avoidance can be fairly confusing. The line between the two may seem thin, but in reality both concepts are different, with offshore tax avoidance occurring as a result of legally and systematically organizing one’s affairs in a way so that taxes would not apply, while offshore tax evasion would simply refer to not paying taxes where applicable.

Offshore tax avoidance is legal based on the fact it involves the use of legal and acceptable means of reducing one’s tax burden. A common way in which this is achieved is by setting up an offshore trust in which cash or property is placed for future use. So, say that an offshore trust is established for a period of 15 years until retirement, the cash and or property held in that trust remains untaxed for those 15 years. However, if upon retirement the offshore trust is dissolved and the cash is used as a source of income whether monthly, fortnightly or otherwise, such income becomes taxable, but taxes would have been legally avoided for the 15 years that the cash remained in the offshore trust through what is known as tax deferral. On the other hand, if the offshore trust matures after the 15 year period and the taxes due on the income received regularly are not paid, offshore tax evasion occurs.

Similarly, if real estate property is placed in a trust, offshore tax avoidance can be achieved on transfer and succession taxes. This is done by rather than dissolving or terminating the trust when passing on the property to its beneficiaries, the names of the legal owners of the offshore trust can be changed into those of the beneficiaries. Since no active transfer took place and was made effective through a name change which gives ownership to the property, transfer taxes are not applicable and are avoided. The same goes for turning an offshore company over to new owners, so that shares are transferred to new owners. The new owners of an offshore company, however, would be liable to duties, income and corporate taxes in the jurisdictions where they function and thus are required to meet those tax obligations. Not doing so constitutes offshore tax evasion if the company earns income from sales, interest and dividends received internationally and tax evasion locally if the regular domestic taxes are not paid.
Accounting systems are often chosen based on their ability to help companies to lower their tax liability in any given financial year. For example, under GAAP (Generally Accepted Accounting Principles), funds can be classified as income when earned, meaning that if a certain amount of money is owed to a company but is not yet received, such amounts may not be considered income. Likewise, for applying income tax, money is normally recognised as revenue when obtained. By using an accounting system which calculates a company’s earnings in this manner, taxes can be deferred for the coming or next fiscal year, thereby reducing the tax liability for the current period. This is form of tax avoidance is obtained through cash basis accounting which differs from accounting on an accrual basis through which revenue is recorded whenever services are provided and goods delivered. Offshore entities, like Belize companies, operating in a single or more than one location are capable of offshore tax avoidance in this way as well.

Most countries grant their citizens and residents the permission to deposit funds offshore. Some countries impose tax on international income or earned in other jurisdictions such as a state or an overseas territory, for example, while other countries do not impose international tax. In the US, companies and individuals are allowed a maximum of USD 10,000 offshore which is treated non taxable income. If keeping that sum of money in the US in an entity or an account on which taxes would apply, individuals are thus legally capable of sending those funds offshore where they will not be taxed. Within the law, this is permissible and does not constitute offshore tax evasion. Funds held offshore are however, required to be declared and if in excess of USD 10,000 are liable to tax, which would be offshore tax evasion.

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