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What Is An Offshore Tax Shelter?

What Is An Offshore Tax Shelter?

A number of news reports have recently covered the use of offshore tax shelters by multinational corporations to prevent paying billions of dollars in additional taxes. Tax shelters, often used in tax avoidance schemes, are for more than just big organizations, wealthy individuals also use them to minimize the hit from estate taxes and payments to the IRS on earned income. Offshore tax shelters are used by relatively few a society but many have criticized their existence. The belief is that there is a moral and ethical obligation for all citizens to pay an appropriate level of taxes in order to function in a civilized society to our mutual benefit.

The stereotypical view of an offshore tax shelter is of a fat cat CEO with millions of dollars in compensation setting up a shell company in a tropical island paradise to prevent having to pay millions of dollars in taxes. While this does exist, it's become less common because these types of tax avoidance schemes are illegal and often successfully prosecuted. There are literally dozens of nations who provide anonymous incorporation with a requirement of as little as one shareholder and one director to establish a company. With such little oversight and minimal requirements, it's no wonder wealthy individuals look to protect their money in these tax shelters.

There are many benefits to having an offshore tax shelter in a financially friendly nation. In addition to avoiding a significant tax burden, many individuals will use the shelters to hide assets that could be targeted in a messy divorce or lawsuit. Local laws and requirements for incorporation may also prevent the disclosure of individual names associated with the organization providing additional protection and anonymity. A handful of wealthy individuals however is not what concerns most governments and nonprofit watchdog organizations the most. Billion dollar multinational companies also use perfectly legal offshore tax shelters and complicated rules to prevent having to pay billions of dollars in taxes.

Multiple news stories have appeared recently about companies like Google and Apple establishing subsidiary headquarters overseas. By opening offices in countries like Ireland and the Netherlands they can avoid having to send billions of dollars back to the U.S. Using a technique called the Double Irish, billions of dollars in revenue every quarter appears to be domestically collected in Ireland which has an incredibly low tax rate. If these same billions of dollars were to be repatriated and moved into U.S. bank accounts, the corporations would have billions of dollars in additional taxes owed. The same companies often receive additional tax breaks and incentives from the U.S. government which results in an effective tax rate of essentially zero in some cases.

As a result of the actions of these multinational corporations, tax reform discussions have been a hot topic of late. These same corporations however disingenuously state that the reason billions of dollars in revenue are not repatriated is due to excessive domestic tax rates. While it is true that the standard tax rate for a U.S. Corporation is 35%, as already stated very few if any corporations actually pay this during any given tax year. The average tax rate for most large corporations is roughly 15% which is in contrast to the 2% some of these same corporations pay by consolidating revenue in Irish bank accounts.

As you can see, offshore tax shelters serve exactly one purpose. They exist to make already rich individuals and corporations even wealthier while avoiding their moral and ethical obligations to pay their fair share in taxes. Fortunately, every legal loophole can be closed by governments creating new laws and regulations. Now that the discussion has been started, it's only a matter of time and public uproar before wealthy companies and individuals are forced to pay the same taxes every other small business and individual pays.

Image by: churl