A tax shelter is an investment with tax deductions and tax advantages of greater value than the investment itself. The specifics of what constitutes a tax shelter depend on local tax authorities and vary from country to country. Rental real estate, prospecting for natural resources, film production, and alternative energy sources are examples of common tax shelters.
Tax havens can be used for natural or legal persons. At the corporate level, taking advantage of tax havens requires an in-depth understanding of tax laws. However, even professional accounting firms are not always right. Following the 2000-2002 U.S. bear market, regulators found widespread abuse of tax havens. Arthur Anderson, a major accounting firm at the time, was disbanded for helping companies such as Enron and Worldcom evade taxes. The executives of these companies found themselves sentenced to heavy sentences in criminal court.
While Tax Shelter has a reputation for circumventing the law, governments often intentionally create a tax shelter to encourage investment in specific sectors of the economy. During the energy crisis of the 1970s, for example, many governments created tax shelters to encourage investment in alternative energy sources such as wind farms, solar power and ethanol-fueled vehicles. Tax shelter incentives can be so powerful that entire industries can be created seemingly recklessly. In Brazil, the tax code of the 1980s encouraged investment in ethanol vehicles so much that at one point,
What are Offshore Tax Shelters?
An offshore Tax Lien is a single or serial business transaction that helps an individual avoid paying some or all of their income tax. Offshore tax shelters are located in countries that do not require income reporting or tax reported income. These countries are called tax-havens. Depending on the country of residence, offshore tax shelters may be illegal, but in most cases, they are considered at least questionable. There are several business transactions that can be considered tax havens in a tax haven.
A foreign trustee is one of the most common foreign tax houses. Each person sets up a trust fund, which is in accordance with the laws of the foreign country in which the order is made. Assets, usually cash, given to the trustee or beneficiary of the account, can spend the money in accordance with local laws.
Setting up a business is another common type of offshore tax shelter. Foreign companies can be corporations, partnerships, or International Business Companies (IBC) governed by the country where they are incorporated. Companies located in tax havens offer asset protection and financial privacy to investors seeking tax shelter. The Bahamas, Samoa, Belize, Panama, Nevis, and Dominica are some of the most common places to set up businesses for tax avoidance purposes.
Private annuities, private banks, and credit cards are additional offshore tax havens for individuals trying to avoid paying taxes on their income. Private annuities operate similar to foreign trusts, while private banks and credit cards allow individuals to conduct
business and act as income-circulating entities. Again, these shelters are governed by the rules of the country in which they are located.
Offshore captive insurance companies also provide offshore tax shelters for those wishing to avoid taxes. A business owner creates an insurance subsidiary to finance his risk in an offshore tax haven. The payment of these premiums is tax-deductible in some countries and the insurance company finances the risk of the parent company.
Another frequently used offshore tax shelter is a related party loan. A national company or an individual from a country lends money to a company or an individual in a tax haven. The money flows through the loan, so the person or business in the other country can benefit from a tax-free loan. Even if the income is declared, it will not be taxable in most countries.