Monthly Archives: May 2014

International Business Companies (“IBCs”) are commonly used as Offshore Tax Minimization vehicles for businesses that source product in one country and sell it in another.

Often I’m asked how such a business might be structured.

Essentially there are three different ways such a business could be run:

• As an import/export business ie where instead of your onshore business buying stock from an overseas supplier you have your tax free Offshore Company buy it and on-sell it to your onshore business for a substantial mark-up (thus enabling you to potentially bank the majority of the ultimate sales profit in a nil tax environment). See here for details of how that can work: https://offshoreincorporate.com/how-to-use-an-ibc-for-international-trade-import-and-export/

• As a website based business. In this situation you set up a zero tax Offshore Company to own the domain name/website/server. All orders are placed either via the website or via email and all payments made direct to the nil tax Offshore Company (eg via card through a merchant provider or payment gateway such as paypal). Packages once ordered would be airmailed or couriered direct to the customer by the manufacturer (albeit with your packaging/branding).

• Where the tax free Offshore Company (“IBC”) buys the stock and keeps a warehouse in your home country/city – but pays you (or your local business/company) a modest sales commission /percentage to distribute the stock. If that is your preferred option you’ll need to get legal and or taxation advice (a) firstly to see whether the IBC will require some kid of business license in your home state and (b) to find out whether having a warehouse in your home city/state will make the IBC liable to pay tax there on its sales profit.

Note these are generic structuring models. Local law can impact on viability hence legal/tax advice should be sought prior to commencing such a business.

I’m often asked the question what is the difference between a Panama Foundation and a Seychelles Foundation?

In essence the Seychelles model of Offshore Foundation is basically a copy of Panama’s but with a couple of additional (in my view, very attractive) features including:

• The rights of the Founder of a Seychelles Foundation can be assigned. This enables complete privacy because normally the Founder’s name appears in the Charter (which is publicly filed as part of the registration process). However with a Seychelles Foundation you can use a Nominee Founder (who then immediately following registration assigns his rights to you or whoever you might nominate)
• The Seychelles law specifically states that the Foundation is both legal and beneficial owner of any assets it holds. This is (a) a fantastic tax planning feature potentially because traditionally onshore tax authorities have taxed similar entities on the basis that the beneficiaries are the beneficial owners of the entity. It also means (b) when opening bank accounts or incorporating subsidiaries that you can avoid having to declare to the bank etc the names of the beneficiaries of the Foundation (which are usually you/your immediate family).
• The Seychelles law also states that the beneficiaries are owed no fiduciary duty by the Foundation Council (which bolsters the above proposition ie that it is the Foundation which owns the assets/income for tax purposes)

The Seychelles law also provides additional asset protection provisions eg:

• It specifically says that a transfer of property to a Sey Foundation, shall not be void, voidable, liable to be set aside or otherwise defective in any manner by reference to a foreign rule of forced heirship or any other written law of a foreign jurisdiction
• It also says that a transfer of property to a Sey Foundation, shall not be void the founder’s bankruptcy or the liquidation of the founder’s property; or any action, proceedings or other claims against the founder brought by any creditor of the founder. (Refer See sections 71 to 74 of the Seychelles Foundations Act – these asset protection provisions don’t appear in the Panama law)
• A Seychelles Foundation can be capitalised with as little as $1. A Panama Foundation’s minimum authorised capital is $10,000.

AND The Government Incorp and annual license fee in Seychelles is $100 cheaper than in Panama.

Panama still has the better name but we are seeing more and more people choose Seychelles as the place to register their Private Tax Free Offshore Foundation.

With these competitive features it’s not hard to see why.

Internal Tax Revenue Services worldwide are struggling to apply age old taxation rules to the behemoth that is becoming Ecommerce.

Under the current principles of International Tax Law for an Offshore Company to be taxed onshore the company needs to have a “permanent establishment” ie a tangible physical presence onshore.  Lobby groups notably led by the OECD are pushing for this to be changed so that countries can tax Offshore Incorporated Businesses – even if these businesses have no buildings or people in a country – provided they have a website or gather data there.

Moreover in what is becoming something of a conundrum for taxmen worldwide Revenue Authorities are finding themselves faced not only with the challenge of tax collection but also with having to play a major role in realizing the potential of what is already probably the greatest economic force of the 21^st century!

Of late Business Groups have begun to hit back at moves to pile heavier corporate taxes onto digital companies, arguing that governments risk interfering with “one of the great economic success stories of the past 20 years”.

We’ve seen that the Offshore Tax Planning strategies of Amazon, Google etc as revealed have given rise to waves of media hysteria. Hence it was reassuring to read recently that no less than the OECD’s own Business and Industry and Advisory Committee have warned the OECD that, whilst it’s all well and good to bring the aggressive Offshore Tax Avoidance strategies of digital companies under the microscope,  it’s important to avoid introducing tax burdens that would inhibit the growth of a technology that has played a central role in “improving the lot of people around the world through increased cross border trade and investment”. Bravo!

The taxation of Ecommerce profits ultimately depends on the ability of revenue authorities to check reported income and spending against bank and credit card statements. Presently its estimated that as much of 90% of all financial transactions with respect to consumption take place using cash, checks or credit cards which (via banks/credit card companies) leave an audit trail.

Throughout history the great entrepreneurial pioneers have always found ways to extract the greatest return from their efforts. Hence it’s fascinating to see that just as the push has begun to find a way to tax Offshore Incorporated ECommerce businesses a whole new world of electronic cash is beginning to emerge led most noticeably by the rise of Bit Coins.

It stands to reason that the development of this electronic cash will almost certainly further facilitate both electronic commerce and Offshore Tax Avoidance since payment no longer leaves a paper trail but is rather anonymous and untraceable.

Is this surprising?

Not really… as has been stated many times, Capital always flights to where Capital gets the best deal. Which in many cases is Offshore!

Watch this space for developments….

It has been reported that Kentucky Senator Randal Paul on May 7 confirmed via a letter to United States Senate Majority Leader Harry Reid that he will continue to block the passage of five tax treaties that are presently awaiting a move to the Senate floor.

The passage of tax treaties through Congress has been blocked since 2011, largely through the efforts of Paul, who also introduced a bill last year to repeal swathes of the Foreign Account Tax Compliance Act (FATCA). Paul has cited privacy concerns surrounding the exchange of US taxpayer information within both the tax treaties and under FATCA.

In his letter to Reid, Paul again cites his view that five proposed agreements – with Switzerland, Luxembourg, Hungary, Chile and the Organization for Economic Cooperation and Development – would flout the privacy rights of US individuals and US expats.

Previous treaties, he wrote, “were more focused on information specific to suspicions of tax fraud, while requiring that serious allegations of wrongdoing were grounded in evidence. It appears these treaties may end up being the tool that implements FATCA,” which purports to require foreign financial institutions to “send the Internal Revenue Service (IRS) the private records of overseas American bank account holders – no questions asked, and no reasonable suspicion, due process, or court order required.”

While reiterating that he does not “condone tax cheats,” he continued that he cannot “support a law that punishes every American in pursuit of a few tax cheats, … (and he will) object to any unanimous consent request, motion, or waiver of any rule in relation to these treaties or any related measure.”

Was it JFK who said the greatest sin is committed when an honest man does nothing to fight an obvious injustice?

It’s interesting to see that there is someone within the system with the guts to stand up to America’s attempts to bully the entire banking/finance world. It’s every man’s god given right to try and reduce his tax low bill to the lowest possible amount. Moreover anyone with clarity of vision can see that the US’s attempts to create a system enabling them to discover the holder of Offshore Bank Accounts is designed to intimidate persons thinking of deploying what might otherwise be lawful Offshore Tax Minimisation or Offshore Asset Protection structures in a vain (but ultimately futile – see below)  attempt to keep more tax/currency at home.

The really sad part is had the US paid more attention to the principles of sound fiscal management (and effectual financial market regulation) this wouldn’t be happening. Nevertheless one can feel the winds of liberalisation beginning to blow. If the freedom fighters can hold out a bit longer imminent regime change might just save the day.

Lest the arrogant behemoth forget Capital ALWAYS flights to where Capital gets the best deal….

Maybe rather than trying to squeeze a few extra dollars out of those smart enough to Incorporate Offshore, Invest Offshore (or hold their money Offshore) the US lawmakers should be more focussed on reigning in record levels of government debt and offering investment incentives to shift up a gear the slowly idling US economy.

All such country-centric measures do is rob Peter (ie smaller countries) to pay Paul, or should I say Sam (as in Uncle).

Well known Italian fashion design gurus Dolce & Gabbana were reportedly sentenced to a term of imprisonment this week when their Offshore Tax Minimixation plan was deemed by an Italian Appeals Court to amount to Criminal Tax Evasion.

The pair were found to be the underlying beneficial owners of a low tax Offshore Company incorporated in Luxembourg to which 268 million euro in pre-tax profits had allegedly been diverted undeclared. Under Italy’s Tax law it was held that the pair should have declared and paid tax in Italy on the said income.

Most developed countries (including Italy) have passed Controlled Foreign Corporation (“CFC”) Laws which require locals to declare and pay tax at home on income earned by an Offshore Company where they have the capacity to own or control the said Offshore Company. Moreover in most countries failure to declare such reportable income is a criminal offence punishable by jail time.

The good news is that with careful Offshore Tax Planning the risk of jail can usually be averted.

Howso?

By placing management and control of your IBC Offshore and via the use of layered structuring (ie by setting up a non-CFC applicable entity to hold the shares of your zero tax Offshore Company).

There are 2 multi-layered structures which may assist. The first is a tax free Offshore Discretionary Trust. The 2^nd is a nil tax Private Interest Foundation. What these entities do is shift underlying beneficial ownership of the zero tax Offshore Company to a person or entity other than the person who sets up the Company.

In the case of a nil tax Offshore Discretionary Trust what smart people do is make themselves potential or contingent beneficiaries. This can get you around the obligation to declare and pay tax at home on the Offshore entities earnings (as most countries only require “presently entitled” beneficiaries to declare income earned by an Offshore Tax Haven Trust).

In the case of a Foundation (a separate legal entity) the argument goes that it doesn’t matter who the beneficiaries are because at law the Foundation is both legal and beneficial owner of any assets it holds. As such the beneficiaries don’t become presently entitled beneficiaries unless or until such time as the Foundation Council resolves to pay them a distribution.

The bottom line?

If it is ever revealed that you are the beneficiary of a Trust or Foundation (which owns the shares of a profit making nil tax Offshore Company) at least you can raise a valid legal argument as to why you haven’t declared the Offshore entity’s earnings such as should enable you to avoid criminal liability.

You’ll want to get local tax/legal advice before setting up such a structure but presumably the worst case scenario if you’re found out is that you’ll have to pay some back tax/fines.

That sure beats rotting in jail for a couple of wasted years….