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

Article excerpt

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.


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. …