Builders and Contractors Exchange
Weekly Bulletin: 08 Dec 2005
Offshore Companies: Good Tax Strategy or Perilous Scam?
By: Geoffrey Hemphill
So you are at a Christmas party and after you refill your eggnog an acquaintance starts to brag about his new offshore company which is saving him gazillions in taxes this year. He urges you to set one up by the end of the year to get on board before it’s too late. What is a prudent business owner to do?
The first rule in taxes is, if it sounds too good to be true, it ain’t. Companies and individuals have been using, or trying to use, offshore companies in exotic places like Bermuda, the Caymans, Isle of Man, etc. since the birth of the income tax in the early 20th century. In the 1960s, the US government started to implement aggressive laws to fight such perceived abuses. This fight has continued to present with loopholes being closed soon after a creative tax lawyer in New York City saves his clients boatloads of money.
Today it is very difficult to hide money offshore unless some very specific facts are in place. Two basic rules operate to prevent most offshore strategies: (1) the Controlled Foreign Corporation/Subchapter F rules (“CFC”); and (2) the Passive Foreign Investment Company rules (“PFIC”).
These are complex rules that generally prevent the accumulation of passive income in controlled foreign companies. The money will either be taxed currently to the US parent or a tax penalty will be imposed on the eventual distribution to the US parent which will negate any benefits of tax deferral.
An offshore company can still be quite useful in limited instances, such as when it is carrying on an active business in other foreign countries, or there is an equal foreign shareholder. But the vast majority of offshore schemes peddled on the internet and at cocktail parties today don’t work and would result in severe tax liability if audited. Beware of unethical lawyers or consultants peddling complex foreign trust arrangements. Ask them if you can send their promotional materials to the IRS, or to request a ruling from the IRS prior to engaging in the transaction. If they refuse, it is best end the relationship right there.
The rules of international taxation are far too complex to discuss completely in this article. Consult a reputable tax attorney before you engage in any scheme that promises the world. Remember, the IRS isn’t Santa Claus, and they will give you a lot worse than coal in your company stocking if you are naughty with offshore scams.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.