velututax said:
I am noob here.
Let me understand:
- If I am entitled to pay taxes in my country then why would I also create an offshore company?
- The only benefit I'll get is the offshore company will cover myself? And protect my own bank assets?
- What about going with dark docs and bank acc's and get it by myself without a company?
Click to expand...
Let me see if I can break this down for you from the tax office's point of view:
The tax office in your country is in the business of finding funding for the government's budget, by force.
It does this mostly by taxing transactions. When your country doesn't have to compete with other countries for a transaction, the tax on that transaction is generally high. When there is low competition, the tax is low.
Between the jurisdictions, there is a game being played where if one country can lure easily-movable transactions over to themselves, they win.
Inside high-tax countries, this is especially strained for the tax office, as they require creating isolated spheres of economic activity with low or no taxation to be competitive, while at the same time keep high taxes on other economic activity.
The tax office will always see capital entering the country as beneficial, and thus give that capital lower tax than capital that's already inside the country. They will hide this in various ways, but this is a fundamental truth for offshore. If you're a foreigner, the tax office will treat you better.
Just for purposes of explaining this, assume there are 3 classes of transactions:
Class 1 - High: wages, profits from mining, petroleum exploitation, and property. You can't move property, mining operations or petroleum drilling from one country to another. These are highly taxed. (For property it's a bit complex as on one hand it's immovable, but on the other hand in a democracy most people own a home, so it's often not politically viable to tax the dwelling highly. But the tax office always wants this.)
Class 2 - Low: Then there are transactions that are at the opposite side of the spectrum: shipping companies (deriving revenue from freight services), holding companies (deriving profit from dividends), fund management companies, intellectual property companies etc. For these types of transactions there is a lot of competition, so the tax is low.
Class 3 - Low/Medium: Then there are things in between where the tax office is looking for future revenues: startups, entrepreneus, high net-worth individuals, specialists. These companies and people bring in future revenue for the tax office, so there is tax competition around them.
So I'd say that in general, if you can move your economic activity so that you change a transaction from being highly taxed to competitively taxed, then you will see that offshore gives you benefits.
As an example, let's break down how a normal salaried person might end up moving his economic activity from being highly taxed to less taxed.
Step 1: Say you start off working 9-17 in a normal job. This is wage income with a high tax.
Step 2: Next step you become a consultant working 9-17 for one or a few clients. This is typically lower taxed income, because it's class 3. You can expect maybe 30% lower tax here (and typically higher income).
Step 3: Next step you start identifying intellectual property (IP) rights that you create as part of your job. Without charging more, some of your income is now classified differently. This income can be taxed at 2-5% in your company.
Step 4: Next step you start identifying work that you do outside of your country. Maybe during vacations for instance. This income can be tax free in your company. (Maybe you become a digital nomad and all your income becomes tax free.)
Step 5: Next you start reclassifying your personal income from paying capital gains tax on dividends, to owning your consulting business through a trust, or inside an endowment policy. This is country specific, but you can get down to almost 0% income tax using this method, while staying resident in your home country.
For step 3 and onwards, you need to take special care to do it correctly, as the reduction in taxation is no longer blessed by the tax office.
In every case, the tax office erects barriers to enter the next level of tax avoidance structure. For example for step 2 they might require a consultant to have more than 1 client. For step 3 they might require you to file paperwork to protect your patent or copyrights.
For step 4 they will require proof that your offshore structure is "real" (substance requirement) and that it's not controlled by you (CFC rules, my area). Basically they want proof that the capital really is foreign (because as I said, foreign capital deserves lower taxes!).
For step 5 they might require that you are associated with someone that has a lot of money (regulated banks, insurance companies, regulated trust etc), because people with lots of (foreign) money deserve lower taxes!
So should you start avoiding tax? In a way, it's your moral duty to avoid tax. Not for your own sake, but for the betterment of the world. The fact is, the more people start to use tax avoidance setups, the less beneficial they will be over time, because of the tax base erosion. This is assuming the developed countries do something about it, and they provably do! Rest assured they will continue doing so, and your tax avoidance will help them keep their focus!
The reason there's a global crackdown on tax havens is that enough people started using them that the tax offices started to care. That's a good thing if you're not part of the 0.001% (most on this forum aren't) because it means the tax rates available to the them and you is more equal.
The thing is - the tax office is able to tax whatever they want, they are just stuck in this global system where foreign capital is soo sweet for them that they can't avoid the temptation of giving lower taxes to that foreign capital. However, if everyone starts using tax avoidance strategies, then the tax office will be forced to react, and those beneficial tax regimes will become less beneficial and we will move closer to "fair" taxation.
One step that is often difficult to do alone is the controlled foreign corporation (CFC) step where in the general case you leave control of your offshore company in order to have it become "foreign capital" (that deserves lower tax!)
