Tax On Offshore Income

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Offshore income encompasses funds and income that are not received or earned domestically or from within your established country of residence. Offshore income does not necessarily refer to money earned from an offshore company but comes from foreign sources, such as remittances, dividends earned from a foreign country or employment abroad.

Whether a country has the right to tax offshore income remains a major debate as no international laws exist on how individual countries should design their tax systems. Each country dictates its tax laws as it sees fit and applies tax rates and rules as necessary.

Tax on offshore income contributes to a large part of the revenue earned by governments in countries where offshore income taxes are applied. Funds remitted to large numbers of visitors, foreign students and even immigrants who would over time become permanent residents are a significant source of income for these countries. Offshore income increase spending power and by applying offshore income tax on remittances, governments are able to bank a fair share of these funds in the treasury. Taxation of offshore income by the residence country (where the person receiving the money lives) is done on the basis that a contribution should be made towards public services by people and firms regardless of where the money is sourced or comes from.

Like most developed countries, the United States is a major player in the globalization process as American multinational corporations, banks and organizations lay their foundations by establishing offices in almost every country. Offshore income taxes accumulated by the directors, American overseas based employees, from dividends, profits and offshore bank account interests of multinational corporations also represent a huge portion of the IRS’s tax collections. And given the current state of the economy, it sounds almost unrealistic to expect tax on offshore income to be withdrawn any time soon or in the future as the weight of the economic crisis falls on the backs of millions of tax payers.

However, it is on the basis of tax on offshore income that the offshore industry has been able strive since governments have tried to find ways to protect people and businesses from paying two or multiple sets of taxes to different countries simply because they work, receive or earn money abroad. To avoid double taxation tax treaties are signed, on the principle that in addition to the argument for residence taxation on offshore income, source countries are also capable of imposing taxes for providing the opportunity to generate income. With a tax treaty, the source country agrees to offer exemptions on both local and applicable offshore taxes such as withholding and capital gains tax. Where tax treaties do not exist, countries also have the option of limiting taxes on offshore income by simply exempting offshore income from residence taxes. But this as happens with offshore tax havens tends to be regarded as harmful tax competition and is often blamed for influencing international investment and capital flows in favor of offshore tax havens. But again, as mentioned earlier, each country dictates its tax laws as it sees fit and applies tax rates and rules as necessary, and no tax regime can claim to be completely fair in the way its citizens and corporations are taxed, except in the case where absolutely no taxes on offshore income or domestic earnings exist.

If you are involved in offshore activity, whether in setting up offshore trusts, foundations or bank accounts for offshore tax planning purposes or for simply to decreasing taxes, you should always investigate the tax arrangements that exist between your country of residence and the source jurisdiction. In Canada, offshore business income tax returns should be dealt with in the same way as residence income. So if you do some online consultant work with a U.S firm which pays you a check in U.S dollars, the amount paid should be converted into Canadian dollars and then deposited and recorded as part of your regular business income generated in Canada, so that when filing out your T1 form, it is automatically treated as part of your total corporate earnings. On the other hand, if you are employed abroad, in the U.S or United Kingdom for example, you will be required by those countries to pay the local income taxes and you should also file your Canadian tax return. Under the tax treaties signed between Canada and these two countries income tax in Canada does not apply. In some cases, credit may be provided for foreign taxes paid.

If you are a citizen or resident of the United States tax on offshore income applies. There are however, mechanisms put in place that help relieve and avoid offshore income tax burdens whereby claims can be placed for exclusion and deduction on offshore income and housing once the necessary requirements are satisfied. This facility enables families and firms to make savings on tax on offshore income to up to about $87, 600, while deductions are still made on some foreign housing amounts. To qualify for exemptions on offshore income taxes:

  • You must first be earning income from abroad
  • You must be based in a country that is considered your tax home
  • You must be a citizen of the United States and a full time resident of a given country for an uninterrupted time for an entire fiscal year; or
  • You must be a citizen of the United States or resident alien and resided in one or more foreign countries for a minimum of 330 days of 12 months consecutively; or
  • You must have lived uninterruptedly in a foreign country for at least one entire year and be a permanent resident of the United States and citizen or national of a country that has a tax treaty with the U.S

Except for the renewal fees that offshore companies, like Belize companies, are required to pay yearly to the countries where they are registered, offshore companies are 100% exempt on both local and offshore income tax. Taxes on offshore income are mainly applied by the countries where the beneficial owners, shareholders, employees and directors of an offshore company are physically located and generate revenue and profits.

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