Preview

Introduction to Tax Shelters and Tax Havens

Powerful Essays
Open Document
Open Document
1439 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Introduction to Tax Shelters and Tax Havens
Tax Shelter
I. Definition
Any method of decreasing taxable income in a payments to tax collecting entities, including state and federal government. The most common type of tax shelter is an employer-sponsored 401(k)plan.

a. Types of tax shelters
Some tax shelters are questionable or even illegal:
Offshore companies. A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre. Due to differing tax rates and legislations in each country, tax benefits can be exploited. Example: If Import Co. buys $1 of goods from India and sells for $3, Import Co. will pay tax on $2 of taxable income. However, tax benefits can be exploited if Import Co. is to set up an offshore subsidiary in the British Virgin Islands to buy the same goods for $1, sell the goods to Import Co. for $3 and sell it again in the domestic market for $3. This allows Import Co. to report taxable income of $0 (because it was purchased for $3 and sold for $3), thus paying no tax. While the subsidiary will have to pay tax on $2, the tax is payable to the tax authority of British Virgin Islands. Since the British Virgin Islands has a corporate tax rate of 0%, no taxes are payable.
Financing arrangements. By paying unreasonably high interest rates to a related party, one may severely reduce the income of an investment (or even create a loss), but create a massive capital gain when one withdraws the investment. The tax benefit derives from the fact that capital gains are taxed at a lower rate than the normal investment income such as interest or dividend.
The flaws of these questionable tax shelters are usually that transactions were not reported at fair market value or the interest rate was too high or too low. In general, if the purpose of a transaction is to lower tax liabilities but otherwise have no economic value, and especially when arranged between related parties, such transactions are often viewed as

You May Also Find These Documents Helpful

  • Good Essays

    The IRS stated that the transmission of Michael’s individual proprietorship’s assets to MBA was a capital involvement rather than a sale engendering capital gain. The IRS further claimed that the payments made to the Bells were in fact dividends and that the assets transmitted to MBA could not be repaid or declined.…

    • 601 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Many national tax laws often introduce rules that place a limit on the amount of the deduction of interest from a company’s profit for tax purposes. Such rules aim to defeat cross-border shifting of profit through excessive debt, and this way to protect a country’s tax base. Thin capitalization rules typically operate by determining either a maximum amount of debt on which deductible interest can be applied or a maximum amount of interest that may be…

    • 835 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    (2) The fact that the taxpayer would, by withdrawing the earnings during the taxable year, receive earnings that are not…

    • 1006 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    ECO 204 Week 4 Quiz

    • 388 Words
    • 3 Pages

    occurs when taxed agents can alter their behavior and do something to avoid paying a tax…

    • 388 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    References: Jones, Sally, and Shelley Rhoades-Catanach (2014). Principles of taxation for business and investment planning, 2015 edition, 18th edition. [VitalSource Bookshelf version]. Retrieved from http://devry.vitalsource.com/books/1259544486/epubcfi/6/24…

    • 768 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Topic Revenue neutrality Controlling the economy Encouraging industries Research and development expenditures Social considerations Earned income credit Charitable contributions Fines and penalties Home ownership Higher education incentives Tax credit versus deduction Alleviating the effect of multiple taxation Double taxation and effect of a credit versus a deduction Wherewithal to pay concept: transfer to controlled corporation Avoiding the corporate income tax Wherewithal to pay: example Recognized gain versus realized gain: amount Like-kind exchange versus involuntary conversion: losses Settlement time period Installment method Keogh Plan: grace period Bracket creep: indexation Community property states Community property states Deterrence provisions $13,000 annual gift tax exclusion: audit…

    • 6008 Words
    • 25 Pages
    Powerful Essays
  • Good Essays

    Tax and Gearing

    • 709 Words
    • 3 Pages

    A) In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest tax shield.…

    • 709 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Assignment 1

    • 3095 Words
    • 8 Pages

    Multinational companies can be defined as “as a business organisation whose activities are located in more than two countries” (Smelser and Baltes 2001, pg 10197-10204)…

    • 3095 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    Mikemayo

    • 844 Words
    • 4 Pages

    Mike Mayo, an influential analyst with a history of being controversial believes that Citigroup (Citi) is too aggressive in its accounting for deferred tax assets, and should take a write down against them because the firm has operated unprofitably for three consecutive years. A Deferred Tax Asset (DTA) is an asset on the balance sheet that may be used to reduce income tax in a future period. DTAs result from net operating losses and timing differences, but can only be recorded if it is determined that there is more than a 50 percent probability that the company will have future income sufficient to realize the value (Srinivasan and Kaser 2012). The write down, or valuation allowance, would be a signal of poor expected future performance and would wreak havoc on Citi’s stock. Mike Mayo is incorrect in his assessment of Citigroup’s accounting for deferred tax assets because Citi has high likelihood of future profitability, within the time constraints for realization, and substantial capital to meet the regulatory capital requirements.…

    • 844 Words
    • 4 Pages
    Good Essays
  • Good Essays

    The Tax reform act of 1986(TRA) made significant changes to tax provisions which had influence on corporations. One of the most important changes was the deletion of the General Utilities doctrine; under a plan of complete liquidation it had given a tax relief for appreciated assets distribution. This essay illustrates tax law changes about corporate liquidations and suggests some tax planning strategies to mitigate the influence of TRA.…

    • 694 Words
    • 3 Pages
    Good Essays
  • Good Essays

    The article that I was read is called, The wild schemes people will use to commit tax fraud, written by Matt Pearce. The article talks about schemes that people use to get out of paying their taxes and crimes commit with tax fraud. The main purpose of this article is to show that tax fraud is a massive problem in the United States and there are consequence to face for committing the crimes.The article starts off by introducing Michael D. Brandner, an Alaskan plastic surgeon with a wife, who filed a divorce. Brandner does not want his wife getting her share of both their money, so he goes to hide it. In 2007, he drove to Central America to cache 4.7 million dollars in a Panama shell corporation. He also went to Costa Rica to store 350,000 dollars in bank accounts.…

    • 541 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Weekly Reflection

    • 461 Words
    • 2 Pages

    Week three was highlighted by the discussion of fixed assets and the use of accounting for depreciation of those assets. Businesses utilize depreciation of their fixed assets to take advantage of the tax breaks that they receive. The cost of depreciation of assets lowers the taxable income of a company and in turn allows either a higher refund or less owed in taxes. Another option that is available is the use of accelerated depreciation. This option allows for companies to accelerate the depreciation of assets to a current year's return to gain a higher tax break. The use of this tool is usually implemented in times of economic turmoil to stimulate the economy.…

    • 461 Words
    • 2 Pages
    Satisfactory Essays
  • Best Essays

    Tax Law Solutions

    • 4343 Words
    • 18 Pages

    pp. 2-5 to 2-9, 2-26 to 2-27, and Exhibit 2.1 12. a. A Temporary Regulation, with 1 referring to the type of Regulation (i.e., income tax), 444 is the related Code section number, 2 is the subsection number, and T refers to temporary. Revenue Procedure number 23, appearing on page 609 of Volume 1 of the Cumulative Bulletin issued in 1994. Letter Ruling 48, issued in the 3rd week of 2001.…

    • 4343 Words
    • 18 Pages
    Best Essays
  • Good Essays

    In 1954, the provision permitting accelerated methods of depreciation was the first significant tax incentive offered to tax payers. Although this allows corporate tax payers to recover capital investments sooner, the deduction is limited to the depreciable cost of the asset, which thereby affects only the timing rather than the overall amount of depreciation. This tax code was passed by the United States government in an effort to encourage businesses to generate capital for investment, stimulate economic growth and increase national rates of output and employment (Stockfisch 1957). The financial benefit, therefore, to the corporate tax payer is the time value of the money that results from postponing the tax payments on each applicable asset. This arrangement presents the unique opportunity to shift income, and is often thought of as government loaning, since the company is able to hold onto the capital for a limited period, while potentially raising their total tax income over years (Carmichael et al 30-33).…

    • 689 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Outsourcing Ilan Oshri

    • 997 Words
    • 4 Pages

    “ Offshoring refers to the relocation of organizational activities (information technology, finance and accounting, back office, human resources) to a wholly owned subsidiary or an independent…

    • 997 Words
    • 4 Pages
    Good Essays

Related Topics