There seems to be a huge amount of non-sense and some outright
deception about the impact of tax havens and the alleged abuse of tax
havens. The following comments are offered as an attempt to provide
some balance to the arguments of those who rail against U.S. persons
with foreign income, particularly in a so-called tax haven. This
article is not copyrighted and I encourage readers to forward it to
anyone who might be interested in shedding the light of truth on this
subject. However, please don't alter or edit the article because it
could easily change the intended meaning.

The U.S. imposes an income tax on the world wide income of our
citizens and permanent residents, regardless of where the income is
earned. If it is earned in a country that also imposes income taxes,
the U.S. provides for a tax credit to avoid double taxation. But if
the income is earned in a country that has no income tax (or a low
rate of tax), the U.S. collects a tax on that income as if it were
earned in the U.S. We do allow for a limited exemption from U.S. tax
for earned income in foreign countries -- but most of the U.S.
citizens who work outside the U.S. pay substantial taxes to foreign
countries. The tax credit is not allowed on foreign excluded income,
so that apparent tax break doesn't really cost the U.S. any
significant loss of tax dollars.

U.S. corporations that operate in multiple countries are permitted to
defer tax on income earned in a low tax country so long as the income
is re-invested in the business and not used as passive investments.
This is done to partially compensate for the disadvantages imposed on
U.S. companies in competing with companies based in other countries.

Many decades ago, it was legal and possible to move assets offshore
and to invest them on a tax-free basis until the money was returned to
the U.S. But various laws have removed those tax breaks. If a U.S.
investor opens a foreign bank account and buys various offshore
investments, the U.S. investor is obligated by law to pay taxes on
the income earned by those investments. Many times, the U.S. investor
is encouraged to put his assets into a foreign corporation or an
international business company (IBC) and to make the investments
through the corporation or IBC. But the U.S. tax law already requires
the U.S. shareholder of a foreign corporation to pay taxes on the
income of a foreign investment holding company or a foreign
corporation controlled by U.S. persons.

Some people seem to believe that the use of a foreign trust is some
kind of tax shelter, but it's not a legal way to avoid taxes. The U.S.
person who puts assets into a foreign trust that has any current or
future U.S. beneficiary is obligated by law to report the income
earned by the foreign trust and to pay taxes on that income.

Virtually every other country in the world imposes income taxes on a
territorial basis. Income earned in their country is taxable. Income
earned outside their country is not taxable. But the U.S. insists on
taxing the income of its citizens, permanent residents, corporations,
partnerships, trusts and estates no matter where the income is earned.

Those politicians who rail against alleged losses of tax revenue
because of tax havens are either not aware of the scope of the U.S.
tax laws, or are intentionally dispensing non-sense to pander to the
public's lack of awareness of the current system. The only people who
are evading taxes offshore are outright crooks and those who are not
concerned about complying with the U.S. tax laws. More laws will have
no impact on those who choose to ignore the existing laws. Claims that
closing up tax haven loopholes will somehow generate revenue to be
used for domestic spending is political propoganda that is totally
contrary to the facts.

We don't need more laws to prevent tax evasion offshore. We have more
than enough laws already.

Vern Jacobs
Editor & Publisher
The Jacobs Report on International Financial Planning
http://finance.groups.yahoo.com/group/JacobsReport/
http://www.offshorepress.com
http://www.vernonjacobs.com

Vern Jacobs is an independent CPA, tax author and publisher with a
focus on international tax law.