$5 trillion in assets worldwide is held "offshore" in tax havens the IRS writes on their website: “It is difficult to quantify the amount of assets being held offshore or the rate at which the industry is growing. But it has been estimated that some $5 trillion in assets worldwide is held "offshore" in tax havens. Presumably, transfers from the U.S. represent a large share of this wealth. One authority has estimated the annual revenue loss to the U.S. at a minimum of $70 billion.”
http://www.irs.gov/businesses/small/article/0,,id=106568,00.html
DEAR Bloggers:
Below is a financial (estate, income, and gift tax) plan for "high income" US and international industrial nation taxpayers that was outlined in the February 2008 newsletter - The Tax Haven Reporter - in publication since 1985. Email me if you want a copy of this in MSWord.
I am a US tax specialist - having been reading and writing about CFCs and PFICs since 1983.
My partners are (Scottish/head of firm) barristers - living in the Caribbean for over 200 years. They are not concerned much with our U.S. Tax code, but talented in their fields and honest. An acre of waterfront property in the Caribbean goes for over $10,000,000 today. Home is extra.
I am well acquainted with IRS/Treasury Circular 230, and there is an appropriate disclaimer below.
The bond issue mentioned in the newsletter is not on the IRS "listed transaction" or their "dirty dozen" list - and it is very unlikely that it will (ever) appear there.
A legitimate transaction (as defined by the IRS below) cannot also be an abusive transaction (you agree?) - thus a "bond issue" is not on any of their "hit" lists - and my venture ("Love and Marriage") is easy for a client to meet IRS compliance requirements, and live a life without fear of incarceration.
See IRS’s Filing requirements for "legitimate foreign transaction" – these links.
http://www.irs.gov/businesses/small/article/0,,id=106560,00.html http://www.irs.gov/businesses/small/article/0,,id=106494,00.html
Call me if you have questions; or if you have a client that is interested in "offshore tax havens" and sound, (relatively) safe financial planning. There's now over $5 trillion dollars offshore according to the IRS!
I've been audited by the IRS in 1997 and can handle a Section 6700 probe (for those promoting domestic and foreign abusive tax shelters and other abusive transactions) successfully. How many firms can say that? Probably not many. I can give you some pointers!
A 70 man law firm in Texas paid a $70 million dollar fine to the IRS a few years ago for selling "faulty" domestic tax shelters. The firm was also shortly thereafter disbanded - as part of the IRS agreement.
KPMG paid a $400+ million dollar fine for abusive transaction tax advice recently too.
RE: KPMG fined over $450 million for their tax planning mistakes (i.e., their Bermuda/Tyco fiasco and others tax advice)
http://www.irs.gov/newsroom/article/0,,id=146999,00.html
My outline below is not for the "faint at heart", but it is "the best possible solution" to high tax appropriations. It is also now wholly a tax avoidance plan, but an efficient financial plan.
IRS legislation in the "tax books" in 21st century (i.e., Gregory v. Helvering, 293 U.S. 465 (1935)) contain this Supreme Court decision for the taxpayer and their own agents. Order the February issue of the Tax Haven Reporter and view this tax code legislation for yourself.
Gregory v. Helvering, 293 U.S. 465 (1935)
2. By means which the law permits, a taxpayer has the right to decrease the amount of what otherwise would be his taxes, or altogether to avoid them. P. 469. – US Supreme Court/1935
Kind regards - enjoy,
Integrating offshore holding companies into a financial plan for safety, tax avoidance and asset protection. Can it be done?
We all know how tuff marriage can be. When kids grow up and get married, the marriage is not guaranteed to last forever, despite best efforts.
A husband could be unfaithful, or a wife could want a divorce, and the lawyers fighting between one another are costly - in the end. Lots of things can go wrong.
Divorce can leave a person and couple devastated financially, as well as emotionally.
Meet the Bumps
What follows is a general outline of a "financial plan” for fictitious US taxpayers (Donald and Linda Bump (ages 48) – the parents of Marsha (age 26), Debra (age 23), Joanne (age 18) and Tom Bump (age 17). Any taxpayer from an industrial nation might use a similar plan, as most industrial nations have CFC and Passive Foreign Investment Company provisions - including the UK, Australia, Canada and Japan.
Please be advised, the plan outlined below is for demonstration purposes only, and is not complete in all its design and parts. See also the “disclaimer/circular 230” that follows this outline. Disclaimers are now required on written or verbal advise under IRS regulations.
Example: An Anguilla IBC called Rocky Mountain Holdings, Ltd. is formed. Marsha Bump is a director, but not a shareholder of this foreign company. Linda Pickett (a Canadian is the other director). Donald and Linda Bump could be directors of these companies too (good insurance if Marsha should die prematurely), but we'll leave them both out for purposes of this example.
A second Anguilla IBC called Forward Holdings, Ltd. is formed to purchase all the shares in Rocky Mountain Holdings, Ltd. for $1,000. All the shares of Forward Holdings, Ltd. are purchased by Rocky Mountain Holdings, Ltd. for $1,000. Marsha has sole signature authority over the offshore company bank accounts. Marsha owns no shares in either of the Anguilla companies.
Rocky Mountain Holdings, Ltd. issues $50,000,000 in bonds (debentures) and Donald Bump purchases all of them. The bonds pay 2-1/2%% interest. Donald Bump must put this income on his US tax return (1040) or he could get charged with income tax evasion in an audit.
Donald Bump also has to file a Form 926, but that's all the “filing” that is required of him. See the following links.
http://www.irs.gov/formspubs/lists/0,,id=97817,00.html
http://www.irs.gov/pub/irs-pdf/f926.pdf
Note the box at the bottom of the two page form 926 - line #8 - where Donald Bump checks non-controlled foreign corporation.If Donald Bump does not file form 926 the IRS can fine him 10% of the $50,000,000 transferred to purchase the bonds of Rocky Mountain Holdings, Ltd. The bottom line here is… he files this form.
http://www.irs.gov/pub/irs-pdf/f926.pdf
Because there are no “US Shareholders” that own more than 50% of the stock in Forward Holdings, Ltd. or Rocky Mountain Holdings, Ltd., neither of these foreign corporations meet the Tax Code requirements for Controlled Foreign Corporations (CFC). See this IRS link for the definition of Controlled Foreign Corporations.
http://www.fourmilab.ch/ustax/www/t26-A-1-N-III-F-957.html
See this link for the definition of “US Shareholder”:
http://www.fourmilab.ch/ustax/www/t26-A-1-N-III-F-951.html
b) United States shareholder defined For purposes of this subpart, the term "United States shareholder" means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.
The bonds of Rocky Mountain Holdings, Ltd. pay Donald Bump 2-1/2% interest annually which he has to put on his tax return. The Principal in this bond issue is to be repaid after 20 years.Marsha Bump (with advice from investment specialist) decides to reinvest the $50,000,000 under management worldwide and obtains a 7% annual return.
Rocky Mountain Holdings “net” on the “interest rate spread” is 4-1/2% or $2,250,000 annually (which is not taxed by the UK overseas territory of Anguilla). Banks around the world work on “interest rate spreads” to make a profit. Why can’t Rocky Mountain Holdings (Anguilla)?
In 2001 our bankers (formerly named Bank of America Bank and Trust (Anguilla), Limited) paid us 5-3/4% interest on a 2 year CD, and there are many safe investments that pay upwards of 7% as I write - including some US Government backed "mortgage" obligations. Tax free to an offshore holding company domiciled in a country that has no tax system, like Cayman and Bermuda and Anguilla.
But, Marsha and her husband Jason are currently getting along fine and find a house they want to purchase in Virginia for $3,000,000.Jason has some money and a good job, and they need $300,000 for the bank mortgage.
A Virginia holding company is incorporated with Marsha and husband Jason as directors. This company could also be a Delaware company.
Forward Holdings, (Anguilla) Ltd. buys 22% of the shares in Virginia Holdings for $300,000. Note, If Forward Holdings, (Anguilla) Ltd. buys more than 25% of Virginia Holdings, it must file a Form 5472 with the IRS, but Virginia Holdings does not have to file a form 5472 in this transaction because it does not “breach” the 25% threshold for filing Form 5472 .Virginia Holdings than assists Marsha and Jason buy their first dream home, and Marsha and Jason take out a mortgage for the remaining $2,700,000 with Wachovia USA.
How and who owns the outstanding shares of stock in Virginia Holdings is another consideration, but we will not disclose a most sensible solution in this example.
Asset Protection plan threatened
After 5 years, the marriage fails, and Marsha wants to divorce her husband Jason (we'll say for being unfaithful). Jason decides to sue Megan - asking for 1/2 of "their joint estate".
But, Forward Holdings, Ltd. is not anything Marsha owns, so the $50,000,000 plus offshore in Anguilla holding companies is safe from creditors, etc., and even the IRS.
Jason and his lawyers can not get at any of this. After the divorce is finalized, Marsha is still in good shape financially, and not wrecked by lawyers or her "cheating X". Typically, an offshore company might get 1% of the $50,000,000 bond issue (i.e., a $500.000 broker’s commission - paid to an offshore company and not taxed), and Donald Bump gets to take a $500,000 deduction for his tax return for this finders/brokers fee on the bond issue.
Advantages of the above financial plan vs. a similar domestic irrevocable trust:
Federal taxes: A US based irrevocable trust is often used to hold assets for children/beneficiaries, but during the lifetime of the trust income taxes are payable on an annual basis either by the trustee of the trust or upon distribution to the beneficiaries (i.e., oldest child/Marsha). Rate of tax is 35% for US trusts. The offshore companies in our example would have no Federal income tax liability on an annual basis so long as they “do not carry on a business within the US or have offices inside the US”. They would not have to file tax returns.
One trust specialist writes: Since an Irrevocable trust is taxed as a separate entity on accumulated income, it is sometimes desirable to create as many irrevocable trusts as possible for purposes of accumulating income at the lower tax brackets. However, two or more Irrevocable trusts will be treated as one trust if the Irrevocable trusts have substantially the same grantor and primary beneficiaries, and federal tax avoidance is the principal purpose of the trusts. Code §643(f).
Costs: Costs for managing a domestic trust would be similar to the annual maintenance fees to form and run Forward Holdings, (Anguilla) Ltd. and Rocky Mountain Holdings, Ltd.
Asset protection: All the assets of the two offshore companies are virtually untouchable by the IRS and by creditors (of Marsha or any of the Bumps). One domestic trust specialist writes: “An irrevocable trust can be beneficial in protecting assets from creditors, or potential creditors, of the individual establishing the trust or the creditors of the beneficiaries of the trust. Depending on applicable state law, creditors of a beneficiary of a trust will probably be unable to reach the assets of a trust where the beneficiary has little or no control over the assets.”
The Federal Gift Tax: On a transfer of $50,000,000 into an irrevocable trust the gift tax (payable by the giver of the gift) could exceed $15,000,000. No gift taxes would be applicable on a purchase of foreign bonds from Rocky Mountain Holdings.Estate Taxes: The beneficial interest of an irrevocable trust is subject to federal estate (death tax) at a rate up to 45%.
No federal estate tax is payable by the offshore companies, but the bonds held by Donald Bump are includable in his US estate. If Donald Bump predeceases his wife Linda, the entire $50,000,000 (FMV) in bonds can be passed onto Linda Bump 100% free of US Federal Estate taxes via the estate tax marital deduction.
http://www.prudential.com/view/page/public/12021
Control: The beneficiary of an irrevocable trust usually gives up most of the control over the assets held by the trust. Control of assets held by offshore companies is the responsibility of the directors of the company, and shared equally. See “Controlled Foreign Corporations” and Passive Foreign Investment Companies at these links:
http://www.fourmilab.ch/ustax/www/t26-A-1-N-III-F-951.html
http://www.fourmilab.ch/ustax/www/t26-A-1-P-VI-D-1297.html
An offshore company also has to be a CFC for the “US Shareholders” to have a tax liability.
Definition of a CFC: In general, a foreign corporation is a CFC if at least 50% of either the total voting power or total value of the stock of the foreign corporation is owned by U.S. persons, each of whom owns at least 10% of voting power of the corporation (each such U.S. person a "10% Shareholder").
Note that the type of income or assets of the corporation does not affect whether a foreign corporation qualifies as a CFC, but those attributes will affect how much income is taxable to the 10% Shareholders under the CFC rules. Consequences to U.S. Shareholders of a CFC The 10% Shareholders of a CFC are taxed on their share of the corporation's "Subpart F Income" whether or not this income was distributed. But note, the offshore company must be a CFC by definition too.
Subpart F Income generally includes interest, dividends, rents, royalties, and business income derived from transactions with related parties unless the business in conducted entirely within the country in which the CFC is organized. The 10% Shareholders of a CFC must also include their share of certain amounts of previously untaxed income which is invested in U.S. property and certain amounts of previously untaxed income which is invested in so-called "excess passive assets".
As with the other anti-deferral regimes, the CFC rules can cause a cash-flow problem for Ten Percent Shareholders who are taxed on income which is not distributed to them by the corporation.Compliance: The domestic trust (trustee) must file income tax returns annually and the trust is subject to IRS audits. Beneficiaries must put trust distributions on their tax returns.
The offshore companies are not subject to US taxes or IRS audits provided they are not actively engaged in a trade or business within the United States. The holder of the $50,000,000 bond issue must file a one time Form 926, but no other filings with the IRS are mandatory.
Risks: The irrevocable domestic trust is low risk. The purchase of the bonds of an offshore company is a “legitimate foreign transaction”. “legitimate foreign transaction” - says IRS?
See IRS’s Filing requirements for "legitimate foreign transaction" – these links.
http://www.irs.gov/businesses/small/article/0,,id=106560,00.html
http://www.irs.gov/businesses/small/article/0,,id=106494,00.html
Special note; It is difficult to calculate the risk involved for the entire offshore plan/scheme, but the “plan” above is not at this writing on the IRS’s list of dirty dozens, and is not “abusive” according to information extracted from the IRS websites and the United State Tax Code and Treasury Regulations..
Thomas Azzara
New Providence Estate Planners, Ltd.
Overseas Agent - Anguilla Registrar(Consultants)
54 Sandyport Drive
P.O. Box CB 11552
Nassau, Bahamas
Fax/phone: (242) 327-7359
E-mail: taxman@batelnet.bs
http://www.bahamasbahamas.com/
http://havensconsult.blogspot.com/
http://tom-havensconsult.blogspot.com/
Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice in this communication, including any attachments or enclosures, was not intended or written to be used, and it cannot be used, by any person or entity for the purpose of avoiding penalties imposed under the Internal Revenue Code.
Disclaimer: The use of tax havens by US citizens is discouraged by the IRS/Treasury department in the tax code. There are only a few avenues for sensible, successful tax planning using tax havens for Americans. Non-resident aliens (foreign investors) are afforded better tax privileges and less compliance and reporting under the same U.S. "tax code". It is required under new IRS regulation that we tell you this.
About the Author: The author has been domiciled in a tax haven (Nassau, Bahamas) since 1990. He is the author of a 375 page book - Tax Havens of the World (available at Amazon.com/8th edition); and the Tax Haven Reporter (a monthly newsletter published since 1985).
The offshore financial services firm he works for has formed over 1,300 Bahamian and Anguilla companies and Anguillian and Bahamian (foreign) trusts since 1990. Tom is currently an overseas agent for the Anguilla registrar (since 2001) - a UK overseas territory in the eastern Caribbean like the Cayman Islands, Bermuda and the B.V.I.
The offshore bank we recommend was once called Bank of America Bank and Trust (Anguilla), Ltd., (back in 1984 ), and is a publicly traded bank whose stock is traded on the Eastern Caribbean Stock Exchange. The Government of Anguilla uses this bank for their own registrar services. PriceWaterhouse was the underwriter that brought this bank public back in 2001.
Sunday, February 24, 2008
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