Basics Of Offshore Banking And International Tax Planning

By Author: Peter Robertson
Total Articles: 12
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All law abiding citizens of the world are aware of the fact that evading or not paying tax is illegal in every country. But the flourishing of offshore financial operations has made it easier to avoid paying high taxes in one’s own country by moving one’s money into offshore accounts located in “tax haven” countries. As the name suggests offshore banking refers to banks that are located outside the depositor’s native country presumably in a low tax jurisdiction nation. The term offshore banking originated from the Channel Islands which is one such tax haven nation. Since, Channel Islands were offshore from the U.K mainland the name offshore bank came into use. It is indeed a curious fact that most offshore banks are located in island nations around the globe like the Cayman Islands, British Virgin Islands, Barbuda, and Bahamas. However the term offshore is used to refer to any such banks, even those located in completely landlocked nations, like Luxembourg, Andorra, and Switzerland.

International tax planning happens to be the most important element of offshore banking since the main motivation behind transferring ...
... one’s money from a bank located in one’s own country into an offshore account is to pay less in tax. What is international tax planning? Tax laws in most countries happen to be limited to domestic economies and thus total tax can be minimized by changing one’s residence, location of the source of income, or the form of tax planning. International tax planning involves accumulation of different types of income from different sources like multiple companies and trusts located in multiple tax jurisdictions to reduce the total tax paid. There are many ways to do so, let us try to understand the intricacies of international finance and tax planning with help from an example.

The first step involves income being generated in one nation but it belongs to a company located physically in another country with which, the first nation has a tax treaty; so, the income passes on to the company without much tax withholding. If the same income had been paid out to an employee of the company residing in a country that has said tax treaty with the country where the income originated, he or she would have to withhold a substantial percentage of the money as tax. In the next phase, the money, which is being accumulated with the company located in a tax haven country, is now transferred to a tax haven country where it is allowed to grow in peace. A treaty haven jurisdiction country is one that has a legal agreement in place with high tax jurisdiction countries. A tax haven country on the other hand is one, which does not tax the income of corporations and other entities, provided they do not participate in any local business except to spend money.

Before you jump onto the offshore banking bandwagon though, remember to seek legal advice and know all about the dangers and limitations of offshore banking to safeguard your earnings.