Utilizing Tax Havens in Income Tax, Estate and Asset Protection Planning

By Brinker, Thomas M., Jr. | The National Public Accountant, December 2003 | Go to article overview
Save to active project

Utilizing Tax Havens in Income Tax, Estate and Asset Protection Planning


Brinker, Thomas M., Jr., The National Public Accountant


Tax planning with "tax havens" is not unlike other planning scenarios. Objectives or goals are defined, information is gathered, alternatives are researched, and a decision is made based on the information available. In order to implement any tax savings plan, taxpayers need to make a decision on a strategy, comply with the legalities of such a strategy, and properly reflect the strategy in their accounting and tax records.

[ILLUSTRATION OMITTED]

There is nothing within the tax law prohibiting a taxpayer from planning his/her activities to minimize the burden of taxation. The imposition of a tax is an obligation enforced by the government; it is not a voluntary contribution by the taxpayer. The taxpayer who is capable of planning a tax transaction with the least tax consequences should be rewarded with a lower tax bill, as long as the substance of the transaction is within the boundaries of the law, regardless of the transaction's form. The avoidance of tax is therefore the result of using acceptable, viable alternatives.

Setting aside what some believe are ethical considerations, the utilization of tax havens has its place in legitimate tax planning. However, planners need to keep in mind that tax evasion, on the other side of the spectrum, is tainted by the taxpayer's (or his/her practitioner's) willful intent to disregard established tax law and is not a legitimate component of a "tax plan."

Income Tax Planning Considerations

Historically, taxpayers have utilized tax havens or Offshore Financial Centers (OFCs) to minimize their overall tax liability. Although the definition of a "tax haven" may vary from nation to nation, a common factor is that the foreign jurisdiction imposes an income tax that is lower than the tax imposed by the taxpayer's home country. According to Professors Walter and Dorothy Diamond in their treatise Tax Havens of the World, the "absence of income taxes or low taxation was the primary reason for selecting an OFC a decade ago." The Diamonds cite 30 key factors/considerations in deciding the optimal OFC, and emphasize that that "all of the advantages and drawbacks of a specific country must be analyzed with extreme care in order to be certain that the location chosen satisfies the company's particular needs." In the wake of 9/11, many Americans have altered their focus from tax haven to "safe haven" in choosing the optimal country in which to establish their business and investment ties. Although tax considerations are still significant, there are many non-tax benefits that can be achieved from the use of tax-haven related strategies. Critical non-tax factors in choosing a tax haven include:

* guarantees against expropriation or nationalization,

* confidentiality of financial and commercial information,

* investment concessions,

* interest rates and inflation,

* avoidance of currency restrictions, and

* political and economic stability.

Although there are other considerations, taxpayers need to determine if the country's financial structure includes residents skilled in financial transactions (i.e., bankers, lawyers, and accountants) and a modern communications system. In addition, taxpayers need to ascertain if the haven has a treaty network, providing reduced tax rates on income tax by its treaty partners. Tax havens enjoying treaty networks often provide an attractive combination in the formation of a multi-national tax strategy. As a general rule, this combination offers increased flexibility in tax planning with tax havens by reducing tax rates through treaty shopping.

Anti-Avoidance Provisions

The United States taxes its citizens and residents on their worldwide income. Consequently, where the income is earned--domestically or internationally--is irrelevant. The authority to tax is determined by the residency or citizenship of the taxpayer. However, the characterization of whether income is domestic or foreign is significant in determining the timing of when a particular item of income is subject to tax.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Utilizing Tax Havens in Income Tax, Estate and Asset Protection Planning
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?