Billion Dollar Shell Game– Offshore Havens: Avoid Taxes, Hide Transparency, Hoard Wealth… and It’s Legal…

If we could figure out how to tax offshore wealth without killing the proverbial golden goose, or at least entice its owners to reinvest it back home… that would certainly make a significant contribution for tax justice, and help pay for many social problems. ~James Henry

The term offshore is ambiguous; it has no precise legal, tax, or general business meaning. The words offshore business, offshore company…  are typically used in connection with matters, such as; structuring of international business, family wealth management or tax planning, and a wide range of strategies that capitalize on advantages offered outside of a home country.

Offshore is often demonized in the media; they often paint a picture of companies, individuals… illegally stashing their money on some obscure Caribbean island where taxes are next to nothing.

While it’s true that there are instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on the situation, offshore may offer many advantages… In 1997, approximately 60,000 offshore companies were incorporated in various Caribbean centers.

This figure is clouded by the fact that currently over 600,000 international business companies (IBC) are incorporated in the British Virgin Islands (BVI) alone. In a recent survey it was estimated that up to 41% of worlds offshore companies are incorporated in the BVI.

The reality is that in one month alone, in 2010, an astounding 4600 offshore firms are registered in Singapore, which adds to the fact that going offshore is not simply a concept, but rather a trend which is growing exponentially…

In the article $600 Billion of U.S. Cash Balances Held Overseas by Large Companies by WSJ writes: In a review of disclosures, the bank’s analysts found that out of the $974 billion in cash on the balance sheets of 602 U.S. multinationals, at least $588 billion, or 60%, is sitting in foreign accounts. According to a study by JP Morgan, at least 60% of the cash balances of the largest U.S. companies are held overseas.

While offshore comes as little shock to anyone following transgressions of U.S. corporations, the degree of this revelation is striking: J.P. Morgan found that Apple had the highest offshore corporate cash balance, with $74 billion held overseas, representing 67% of its total cash holdings. But as a percentage of total cash, J.P. Morgan said the company had a smaller amount sitting offshore than many of its tech rivals, including; Microsoft, Cisco, and Hewlett-Packard, which had 89% or more of their cash overseas. Microsoft, General Electric, Cisco Systems, Google, and Oracle had the next largest dollar amounts of cash held overseas, according to the study.

The analysts also found that Johnson & Johnson and Hewlett-Packard appear to have almost all of their cash holdings in overseas accounts. Companies don’t disclose their overseas cash balances in a uniform way, so the bank used estimates based on corporate disclosures, in some cases. The Wall Street Journal (WSJ) suggests that heightened pressure is leading to more transparency, though the information remains largely incomplete…

In the article Bailed-Out Firms Have Offshore Tax Havens, GAO Report by Julie Tate writes: Most of America’s largest publicly traded corporations — including several that are receiving billions of dollars from U.S. taxpayers to finance their recovery — have set-up offshore operations that could help them avoid paying U.S. taxes on their profits, a government study found. AIG, Bank of America, Citigroup and Morgan Stanley are among the companies that are getting bailed out by U.S. taxpayers while having subsidiaries in locations where they avoid paying U.S. taxes, according to the Government Accountability Office (GAO).  

Of the 100 largest public companies, 83 do business in tax-haven hotspots like; the Cayman Islands, Bermuda and the British Virgin Islands, where they can move their income into tax-free accounts. The U.S. Treasury estimates that it loses $100 billion a year in tax revenue as a result of companies shipping their income offshore… However, the GAO did not independently review company transactions to see if companies purposely created tax-haven businesses to avoid U.S. taxes.

But it said that historically, offshore subsidiaries are used for reducing tax costs and shielding transactions from public view. Several of the companies are household names, including; Pepsi, Exxon, Dell and Dow Chemical. In the list of 100 companies that GAO studied there were 63 with major federal contracts, including; Caterpillar, Boeing, Merck & Co. and Kraft Foods.  Legislators gave particular attention to the 14 companies on the list that received bailout money… The bailout recipients included; Bank of America, which received $45 billion; Citigroup, $45 billion; American Express, $3.4 billion; and Goldman Sachs, $10 billion.

However, in defense, several companies said they are engaged in legitimate business operations around the world, and rejected the premise that they are avoiding paying their share of U.S. taxes. Representatives from two companies in interviews reported; they couldn’t say whether their foreign operations ultimately reduced their total tax bill, or not. For example, Nick Ashooh, AIG, said: We do business around the globe… and, it’s absurd that we’re being accused of using these as tax havens

According to Jack Blum; this business of letting companies, people… get away with bloody murder by taking their money offshore is inconsistent with trying to fund our government. These practices are going to put terrific pressure on Congress to close down obvious and ridiculous loopholes…

In the article How Offshore Tax Havens Save Companies Billions by John Cogill writes: The top corporate income tax level in the U. S. is 35%. In the UK, it’s 28%. But in Ireland, it’s only 12.5%, and in Bermuda there’s no corporate income tax at all. That means multinational companies that shift their earnings through Ireland or Bermuda can save billions of dollars in taxes each year. According to Jesse Drucker; companies like; Google, Pfizer, Lilly, Oracle, Facebook, and Microsoft have managed to reduce their tax rates by hundreds of millions, in some cases, billions of dollars by taking advantage of offshore tax havens.

Drucker says, Google had saved $3.1 billion in taxes in the past three years by shifting the majority of its foreign profits into accounts in Ireland, the Netherlands and Bermuda using financial techniques called ‘the Dutch Sandwich’ and ‘the Double Irish’ arrangement. Basically, he says, Google credited its Irish office with majority of non-U.S. sales revenue, and then shuttled that money through subsidiaries located in Ireland and other countries to save billions in taxes. For example; You have an Irish company selling ads, and they actually have real employees in Dublin, he explains. They make payments to a Dutch subsidiary with no employees, which in turn makes payments to a Bermuda-headquartered Irish company with no employees.

The result is that it helped to cut about $3 billion in Google’s income taxes, in the last three years. Other companies have also cut thousands off their tax bills by shifting or licensing their earnings overseas. For example, Forest Labs Inc., the manufacturer of the antidepressant ‘Lexapro’, cut its total income tax bill by more than a third last year by allocating income through various subsidiaries. They are a company that does almost 100% of its sales here in U.S., they have almost 100% of their employees in U.S., they’re headquartered in New York City and yet majority of their profits show up overseas, most attributed to mailbox in Bermuda, says Drucker.

Also, an economist at Reed College estimated that the U.S. is losing $60 billion a year in federal tax revenue (from all U.S. companies), but she’s revising that estimate and has arrived at a figure closer to $90 billion. Technically, companies are not avoiding paying U.S. tax when they shift their income abroad, says Drucker. You’re merely deferring it for as long as you keep it outside the U.S., he says. These are indefinitely reinvested earnings in your non-U.S. operations. When you bring (earned income) home you’re supposed to pay U.S. tax minus a credit for the income taxes you’ve already paid overseas. But companies have a number of techniques for bringing back profits without paying tax.

One method, Drucker says, is lobbying the federal government for a tax holiday– a period of time when companies can bring back offshore profits one time at a reduced rate. Advocates of the plan say it would function as a non-government stimulus plan because as much as $1 trillion could flow back into the U.S… Drucker says, that may sounds reasonable, but there’s a fair amount of research on what happened after the last tax holiday, in 2004; then the result was– very little hiring and little investment for the $300 billion (or so) that came back. Most of that money seemed to be used to buy back company stock…

According to Christopher Matthews; a report by the ‘Tax Justice Network’ estimated that somewhere between $21 to $32 trillion in wealth is unreported and shielded from taxation from various governments, globally… The study is one of the most comprehensive to date, using data from World Bank, United Nations, International Monetary Fund and central banks around the world to measure how much wealth is sheltered from tax collectors, globally… However, it’s important to remember; that the movement of assets and opening of bank accounts offshore is legal.

Companies and individuals are free to open an offshore bank account almost anywhere in the world. It’s also completely legal to lodge assets, liabilities, reserves… almost anywhere in the world. But while moving offshore is legal, remember that withholding information about your offshore investments is considered illegal in some countries. Also, some offshore jurisdictions offer benefits beyond tax; for example, confidentiality– meaning they are excellent locations to protect your assets and for holding companies.

Other advantages are unrestricted flow of capital and transfer of assets. However, the dynamics of tax havens and the offshore industry is changing, and there are two key drivers of change. First, financial industry experts agree that Asia’s booming economies, strong banking confidentiality laws and pro-business incentives are driving capital flows eastwards, away from the more traditional banking centers, such as; Switzerland… 

Second, some tax haven jurisdictions, especially in the Caribbean, are reportedly bowing to pressure from the ‘Organization for Economic Co-operation and Development’ (OECD) to exchange confidential information about companies and bank accounts housed there. In contrast, Hong Kong and Singapore, as well as, Belize, continue to refuse to cooperate with the OECD. As a result, these jurisdictions represent probably the most secure, stable offshore companies available anywhere today.

There are also other macro-economic and geopolitical issues which will influence the evolution of the offshore industry. Security of information has become a highly important, as well as, sensitive, issue, boosting the role and importance of genuinely private, secure jurisdictions. Also, populations are growing, and wealth creation is more important than ever. To provide new infrastructure, governments in most developed, developing and even third-world countries will continue to impose high taxes.

Going forward, industry analysts believe the idea of tax competition between nations will continue. In a report, one analyst said: Countries with a small domestic tax base favor tax competition, while countries with a large tax base prefer tax co-operation…