DP Tool Club 24/CD_ASCQ_24_0995.iso/vrac/liberty.zip/30.TXT

Text File | 1995-07-02 | 13KB | 221 lines

                        THE USES OF TAX HAVENS


               Tax havens are one of the most important subjects
          for an international entrepreneur or investor, yet few
          understand and use them properly.  One group discount
          them as hiding holes for dirty money, which is not a
          legitimate use for tax havens.  Others think they are
          only for banking money after you have made it.  Not
          true either.
               Money grows much faster if a tax haven is part of
          your business planning, and almost any international
          business has an opportunity to use tax havens.  It is
          the purely domestic business, confined to one country,
          that cannot benefit from the international fiscal
          loopholes.  Switzerland is a major financial center,
          but not generally a tax haven.
               Called a paradis fiscal by the French, a rifugio
          fiscal by the Italians, and a Steureroase by the
          Germans, it obviously means a place where the fiscal
          grass is greener than in your own particular backyard.
          But an effective tax haven is not determined simply by
          geography; it all depends on what particular asset or
          transaction you are trying to defend from the tax
          collector.
               Simply stated, a tax haven is any country whose
          laws, regulations, traditions, and, in some cases,
          treaty arrangements make it possible for one to reduce
          his overall tax burden.  This general definition,
          however, covers many types of tax havens, and it is
          important that you understand their differences.
               No-Tax Havens.  These are countries that have no
          income, capital gains, or wealth (capital) taxes, and
          in which you can incorporate and/or form a trust.  The
          governments of these countries do earn some revenue
          from corporations; "no-tax" means that what you pay is
          independent of income derived through a company.  These
          states may impose small fees on documents of
          incorporation, a small charge on the value of corporate
          shares, annual registration fees, etc.  Primary
          examples are Bermuda, Bahamas, and the Cayman Islands.
               No-Tax-on-Foreign-Income Havens.  These countries
          do impose income taxes, both on individuals and
          corporations, but only on locally derived income.  They
          exempt from tax any income earned from foreign  sources
          that involve no local business activities apart from
          simple "housekeeping" matters.  For example, in such a
          haven there is often no tax on income derived from
          export of local manufactured goods.
               The no-tax-on-foreign-income havens break down
          into two groups.  There are those that allow a
          corporation to do business both internally and
          externally, taxing only the income coming from internal
          sources, and those that require a company to decide at
          the time of incorporation whether it will be one
          allowed to do local business, with the consequent tax
          liabilities, or one permitted to do only foreign
          business and thus be exempt from taxation.  Primary
          examples in these two sub-categories are Panama,
          Liberia, Jersey, Guernsey, Isle of Man and Gibraltar.
               Low-Tax Havens.  These are countries that impose
          some taxes on all corporate income, wherever earned.
          However, most have double-taxation agreements many the
          high-tax countries that may reduce the withholding tax
          imposed on income derived from the high-tax countries
          by local corporations.  Cyprus is a primary example.
          The British Virgin Islands is another, but no longer
          has a tax treaty with the U.S.
               Special Tax Havens.  These are countries that
          impose all or most of the usual taxes, but either allow
          special concessions to special types of companies (such
          as a total exemption from tax on  shipping companies,
          or movie production companies) or allow very special
          types of corporate organization, such as the very
          flexible corporate arrangements offered by
          Liechtenstein.  The Netherlands and Austria are
          particularly good examples of this.
               To understand the precise role of tax havens, it
          is important for you to distinguish two basic sorts of
          income:  (1) return on labor and (2) return on capital.
               The first kind of return is what you get from your
          work:  salary, wages, fees for professional services,
          and the like.  The second kind of return relates,
          basically, to the return from your investments:
          dividends on shares of stock; interest on bank
          deposits, loans and bonds; rental income; royalties on
          patents.  It is the second kind of income, income from
          an investment portfolio, that tax havens are useful
          for.  Forming a corporation or trust in a tax haven can
          make the second form of income totally tax free, or
          taxed so low that you will hardly notice.  Certain
          types of businesses can be effectively based in a tax
          haven.  If you publish a newsletter, for example, you
          might be able to set up the entire operation in a
          totally tax free country such as the Bahamas or the
          Cayman Islands.  If your income comes from copyright
          royalties, perhaps on the computer program you
          invented, the Netherlands is famed as a base for
          sheltering royalty income.
               Tax havens are a very complex subject, but the
          hours you spend studying their use will probably pay
          you more per hour than the hours you spend directly
          earning an income -- an unfortunate commentary on the
          confiscatory taxation policies of most governments.
               For the best detailed information on tax havens,
          order The Tax Haven Report, from Scope International
          Ltd., Box AS125, Forestside House, Forestside, Rowlands
          Castle, Hants., PO9 6EE, United Kingdom.  The price is
          $125, including airmail postage worldwide, ($100 if you
          want it by slower surface mail) and they accept Visa or
          MasterCard.  They will send a free catalog on request.
               Another source of information is Eden Press, which
          publishes a series of special reports on different
          havens and techniques by which Americans can use them.
          You can obtain their catalog free by writing to them at
          P. O. Box 8410, Fountain Valley CA 92728.
               Yet another is Using Offshore Havens For Privacy &
          Profit, available for $19 from Paladin Press, Box 1307,
          Boulder CO 80307.  (Credit card orders may call 1-800-
          392-2400).
               If you want to gain a good understanding of how
          the government views tax havens, University Microfilms
          International, through its Books On Demand program, is
          now making available Tax Havens and Their Uses by
          United States Taxpayers by Richard Gordon.  Frequently
          referred to as "The Gordon Report," this was a 1981
          U.S. Treasury Department study prepared at the request
          of Congress.  It gives considerable detail and examples
          of the uses of tax havens.  It is available from
          University Microfilms for $67.30 softbound, or $73.30
          hardbound.  Out of print for over a decade, anyone
          interested in tax havens who has not studied the work
          will find much still useful information in it.  Copies
          can be ordered through booksellers, or directly from
          University Microfilms International, 300 North Zeeb
          Road, Ann Arbor, Michigan 48106-1346; telephone 800-
          521-0600 or 313-761-4700.  The UMI catalog number of
          the book is AU00435, and UMI accepts Visa or
          MasterCard.
               The most popular investments for U.S. investors in
          recent years have been mutual funds and insurance
          products.  For the internationally minded investor,
          there are offshore versions of these products
          available.  In many cases, they offer even more
          benefits to U.S. investors than do their domestic
          counterparts.  The IRS and other elements of the U.S.
          government apparently do not believe in offering
          international opportunities to U.S. citizens, however,
          so in some cases these investments are less attractive
          to U.S. investors than to residents of other countries.
               The main obstacle standing in the way of many
          foreign opportunities is the U.S. securities laws.  Any
          "investment contract" sold in the United States must be
          registered with the Securities and Exchange Commission
          and with its counterpart in each of the states.  This
          is a very expensive process.  U.S. securities laws
          require far more disclosure than do those of most
          foreign countries and also require different accounting
          practices.  Therefore, many offshore mutual fund
          companies decide that whatever income they might
          eventually earn would be inadequate compensation for
          the time and expense involved in attempting to comply
          with U.S. securities laws.  In fact, several of the
          mutual funds and hedge funds with the top performance
          records are run from the United States by U.S.
          residents but do not accept investments from U.S.
          residents.  To reduce registration costs and avoid
          other restrictions, the funds are made available only
          to foreigners.
               That doesn't mean that there is something dirty or
          illegal about it -- it merely means that the fund is
          not registered for sale in the U.S.
               Successful foreign funds don't need the American
          market and see little reason to pay the outrageous fees
          of our litigious society.  (Some of the best foreign
          cars cannot be purchased in the U.S. for a similar
          reason -- the makers of $100,000 custom cars are not
          about to give the federal government ten free cars per
          year for destruction testing.)  Some of the funds
          cannot meet U.S. legal requirements because they charge
          investors a performance fee rather than a management
          fee based on a percentage of assets.  But many
          investors would actually prefer a fund manager whose
          only compensation is a share of the profits instead of
          a fee based on the total investments in the fund.  The
          manager's goals are different.
               Fortunately, U.S. citizens can get around the
          obstacles through bank accounts or trusts.  Basically,
          you can travel overseas to buy the shares in person,
          you open a foreign bank account and invest through the
          account, or you can establish a foreign trust.  Only
          then will these opportunities be open to you.
               It is not illegal for Americans to buy offshore
          mutual funds (called unit trusts in some countries) or
          any other security that is not registered for sale in
          the United States.
               Creating a foreign irrevocable trust which in turn
          owns a foreign corporation has proven a viable solution
          in some circumstances.  Recently revised Securities &
          Exchange Commission regulations also make it legal for
          such a corporation to purchase foreign shares and funds
          which could not be purchased by an American directly.
          Regulation S now defines circumstances in which such
          purchases may be made by a corporation indirectly
          controlled by an American shareholder (such as control
          through an asset protection trust).  In many cases such
          a trust and corporation structure can be created in a
          way that provides both asset protection and fully-legal
          income-tax exemption for the trust or corporation.
               Just stop and think for a moment how much faster
          your money can grow if you are not paying out an
          average of 40% to a taxing government somewhere.