Offshore tax havens facilitate aggressive tax planning, evasion, avoidance. Call it what you like. And so are a tricky, highly charged topic. It has become relatively easy to set up shop in a tax haven.
People use offshore tax havens for different purposes, but often to avoid tax. Which affects us if any of our clients have gone down this road. Hence the need to better understand how tax havens work. How to set up shop in an offshore tax haven.
Offshore Tax Havens
The word ‘tax haven’ is confusing since people and entities use offshore tax havens for various purposes.
The first one is the ‘legal’ use of tax havens by corporations or individuals. Large corporations register their headquarters in a low-tax jurisdiction and shift profits accordingly. In 2016 Google, Facebook and other US technology companies held an estimated US$1.84 trillion of assets in offshore tax havens.
Globe-trotting individuals also use offshore tax havens by actually becoming a tax resident there and hence reducing their tax bill.
All this does not result in the actual breaking of any laws, but is a political issue. So doesn’t affect our tax practices directly.
What does affect our tax practices is the use of tax havens by individuals to hide assets and hence evade tax. An estimated US$7.6 trillion or 8 per cent of global wealth is held offshore and a large proportion of that is probably to evade taxes. If any of these assets belong to our clients and they don’t tell us and hence evade tax, then this affects us very much.
What are Offshore Tax Havens
There is no single accepted definition of an offshore tax haven but any general definition would include the following elements:
Foreign jurisdiction involved
Grant of incorporation under local law without any requirement to not hold assets within the jurisdiction or have a locally resident director
No publicly available register of shareholders or directors and the right to secrecy of ultimate ownership.
Tax free status for any business
No requirement to file a tax return.
Agents and Intermediaries
The greatest challenge is finding a reputable registered agent or intermediary. Most people search online and are more likely to come across an intermediary than a registered agent.
A registered agent is an international business company required to have an address within the jurisdiction through a certified professional agent (usually a lawyer or accountant).
An international business company is an offshore company formed under the laws of a jurisdiction where the company’s activities are limited to international business. Also known as international business corporation. International business companies usually have no residency and no asset in the actual tax haven.
The registered tax agent holds the register of shareholders and directors. Upon incorporation of the international business company, the registered agents attend to KYC (Know your Client) on behalf of the offshore haven’s regulators.
Australia has no id requirements for company directors. Anybody can set up a company and doesn’t need to provide id. In tax havens the registered tax agent has to check id.
Intermediaries are lawyers, accountants and ‘fixers’ who set up offshore corporate structures. The intermediaries are usually not the registered agents in the offshore haven.
How to set up an offshore tax haven company
The offshore corporate structure usually includes layering, nominee directorships and bearer shares to ensure secrecy while keeping clients in control of the assets held.
When layering, the ultimate ownership becomes opaque by adding multiple layers of corporate ownership and corporate directorships.
Nominee director acts on behalf of another person following their instructions.
In Australia you can’t delegate director duties but in offshore tax havens you can. The nominee director gives power of attorney to the ultimate owner.
Whoever holds the physical certificate of a bearer share owns the company. So actual ownership is impossible to trace.
What does the actual layering look like?
Let’s say Peter has cash on a Swiss bank account and wants to hide his identity. So he engages Fernando, an intermediary. Fernando sets up company A in Belize with bearer shares and makes his aunt Maria the nominee director. Fernando then gives the bearer shares to Peter.
He then sets up company B on the Cayman Islands and makes company A the director. Again, he gives the bearer shares to Peter.
And then Fernando sets up company C on the British Virgin Islands, makes company B the director and gives the bearer shares to Peter.
He gets Company C to set up a bank account somewhere in an offshore tax haven. The cash is then transferred to this bank account.
So company C holds the actual assets, in this case cash, but it could also be shares or property or any other asset. Company C gives a power of attorney to Peter to control the cash.
This layered structure is very hard for lawyers to pierce through. Maria is the only natural person in this three level structure. And she sits at the very bottom, removed by two layers from the assets.
Are there legitimate uses of tax havens?
Historically, mutual investment funds, which attract investors from around the world, have registered themselves offshore to avoid the risk of double taxation of their surpluses.
This isn’t necessarily a problem so long as the beneficiaries of the fund do pay income tax on the money they receive from the fund in their home country.
When it comes to off-shore trusts, some argue that they are necessary to safeguard the privacy of beneficiaries. There are some circumstances where one can imagine this is a legitimate argument.
Yet the problem is that it is easy to abuse the protection of privacy to facilitate tax evasion, money-laundering and other illegal endeavours.
The British Virgin Islands are a popular offshore tax haven, since it is a British overseas territory and its highest Court is the Judicial Committee of the Privy Council in London. Of course, there are others. But let’s use the BVI as an example. What can you get in the British Virgin Islands that you can’t get in Australia?
Identity of shareholders and directors not publicly available unless volunteered or subject to Court order
Bearer shares permitted
No requirement to lodge tax returns.
No law of ultra vires so there is no limit on usage of the company.
It has become relatively easy to set up shop in an offshore tax haven. The Common Reporting Standard CRS (and FATCA for the US) are trying to change this. But how far they will succeed in piercing through the layering remains to be seen.
The next big frontier of offshore tax havens will be crypto currencies since these operate outside of the traditional banking system. And hence are outside of CRS and FATCA’s reach.
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 23 Feb 2018