What Is An Offshore Tax Shelter?

Offshore tax shelters can save millions for those with money, but they have come under fierce criticism.

How does an offshore tax shelter work? A company can incorporate in a number of countries where regulations allow the income from their business to be kept a secret from the governments of the countries where they are actually headquartered. Open a small office in Belize, for example, and your multi-billion dollar business that does no work at all in Belize can protect its income from taxing agencies. As a matter of fact, Belize doesn't allow these companies to do any profit-making business at all in their country.

To incorporate in Belize you need only one director and one shareholder. There are no public filing requirements or filings of annual returns and no requirement for audited accounts. This makes it quite easy to be as secretive as you wish. And Belize is not alone in trying to help the rich and famous - at last count there were almost 65 tax havens around the world including Cyprus and Malta, Singapore and Mauritius, as well as a number of countries in the Caribbean.

The promoters of these tax shelters cite several advantages. They provide secrecy for the investors' banking services since the countries in which the money is kept have few, if any, reporting regulations that need to be adhered to. This secrecy allows the offshore wealth to be kept safe from lawsuits and creditors - even the IRS. These shelters can also be used to avoid estate taxes. Some promoters even suggest that offshore havens can help the often poor countries in which they're set up. Estimates are that billions of dollars have been placed in these accounts.

Individuals, as well as companies, can use the banking systems of these countries for their savings and they will have the same privacy and tax advantages, as do those entities incorporating in them. This is also one of the areas that has led to abuse since money from illegal activities - from drug smuggling to the draining of state bank accounts by dictators - can be more easily hidden in these accounts.

The amount of money that can be saved through these tax shelters is staggering. Some experts say that up to 10 billion dollars in lost tax revenues has been taken just from the U.S. economy.

This kind of lost tax revenue has not gone unnoticed by both governments and watchdog organizations. Many non-profits have brought to the world's attention that the loss of such revenue has contributed to the underdevelopment of not only poorer countries but also to economic problems within the countries from which this money is hidden. Education and health care goes wanting while money is hidden in these tax shelters illegally.

The misuse of offshore tax shelters has led to attempts to reform the system that has allowed multinationals and wealthy individuals to beat the taxman. Bermuda and the Cayman Islands have recently reformed their oversight procedures for these accounts, and most of the states in the U.S. have joined with the IRS in attempting to identify which companies and individuals are using these offshore tax shelters to break U.S. laws. The topic of offshore tax shelters often becomes a subject for political debate as governments look for revenue.

Some promoters of offshore tax shelters say that these tax havens are not only for the rich and powerful. But they exist for big money and the amounts involved are truly huge. The debate on their legality and their morality continues.

© High Speed Ventures 2011