Some international tax experts see a big irony in a U.S. Senate subcommittee recently taking Apple Inc. to task for allegedly using “offshore tax havens” to avoid paying U.S. taxes on foreign income. There may be even more irony in continued U.S. government pressure to compel overseas banks to give up information on Americans with bank accounts in the belief those people may be hiding money from the taxman.
The reason: Much of the world considers the United States to be one of the biggest international tax havens.
In the United States, it is very easy for anybody to set up, say, a Delaware Corporation. You can do it online. You have to give very little information to get it up and running. And Delaware’s not alone. There are other states that offer the same services.
But if you are a U.S. citizen and you go offshore to try to set up a company or a bank account, international banks have to lead an army of due diligence to comply with the PATRIOT Act and, now, the Foreign Account Tax Compliance Act (FATCA). Within our borders, however, the U.S. may actually have the lowest hurdles to creating structures to shield foreign wealth in the world.
There are many foreign countries where people are more concerned about their governments potentially seizing assets or imposing confiscatory taxes. For example, South American countries seem to be particularly susceptible to these type of government maneuvers. The taxpayers in these countries view the United States as more respectful of property rights and therefore look for ways to move investments into the U.S., such as by setting up Delaware corporations and keeping money in U.S. banks.
The United States is one of only three countries in the world that taxes worldwide income. No other industrialized nation does that. Instead, they use territorial tax systems.
In a territorial tax system, tax is paid wherever income is earned. So, for instance, Germany would not try to tax income earned in the United States by German carmaker Volkswagen. That money would be taxed in the United States. However, under the nearly unique worldwide tax system we use here, the U.S. claims power to tax income earned by Ford in Germany. When Ford or other U.S. companies recognize income earned in other countries, where foreign tax was already paid, the U.S. government would tax that money for a second time.
To alleviate this double tax burden, the U.S. allows a foreign tax credit to offset some of the U.S. tax the corporation would otherwise have to pay. For example, The U.S. has a 35% federal corporate income tax. If a corporation in the 35% tax bracket were to recognize $1 million of income earned abroad, it would owe $350,000 in federal tax. But if it had already paid, say, $250,000 in tax to the country where the income was earned, it would only have to pay an additional $100,000 in U.S. tax rather than $350,000.
Additionally, intergovernmental treaties between the U.S. and foreign governments can created carve outs where tax is only paid in one of the two jurisdictions as agreed upon via treaty. Apple Paid $6 Billion in U.S. Tax in 2012
Last month Apple executives including CEO Timothy Cook testified the company is “a powerful engine of job creation in the United States” that “pays an extraordinary amount in U.S. taxes.”
Over the past four years Apple has earned about $44 billion in overseas income. “Apple has substantial foreign income because it sells the majority of its products outside the U.S.,” the company said.
The Foreign Account Tax Compliance Act, which goes into effect January 1 of 2014, incentivizes foreign banks, insurance companies, and other financial institutions to report all U.S. citizens they do business with, or there will be imposed a 30% withholding tax. Many other information reporting requirements come into play when offshore business, investment or savings is involved.
Just because people have foreign trusts, foreign companies, or foreign bank accounts doesn’t mean they’re doing anything wrong. There are many legitimate reasons for Americans to have overseas accounts.
For example, if you send your children abroad as students, they will need a bank account. If you do a lot of business overseas or you are a corporate executive who is sent abroad for work, you’ll simply have to comply with the FBAR and 1040 information reporting requirements at a minimum. Some clients maintain foreign accounts for diversification and protection in the event of a downturn in the U.S. dollar.
From a tax and information reporting and compliance perspective, it pays to be certain about your international tax and information obligations. A tax attorney can advise you on how you should be treating and recognizing your foreign accounts, investments and businesses. If you have money in offshore accounts, or if you own a foreign business, the Tax Law Office of David W. Klasing can help you stay compliant with all of the new regulatory requirements, such as filing FBARs and acting within the bounds of FATCA. We can also help nonresident aliens make investments or open business in the U.S.