Common Tax Strategies

Goods which are imported into the U.S. are often routed or invoiced through a company established in one of the tax havens. Products exported from the U.S. may be “sold” first to a tax haven company to drop most of the profit in the no tax jurisdiction. This technique is known as offsite pricing, and the goal is to move profits from a high tax country to a low or no tax country.

Let’s say that you are in the business of importing cheese from Holland. Each year you buy $100,000 worth of cheese which you sell for $200,000 to local supermarkets. That’s a gross profit of $100,000 before other expenses, and that income is subject to tax in the U.S. at the normal rates.

What if you could work it differently? Instead of buying from Holland directly, you set up a company in the Bahamas to buy the cheese. That company then sells the cheese to you in America for $150,000. Now, when you sell to grocery stores, your gross profit is only $50,000 not $100,000. The other $50,000 in profit was earned by the Bahamas company where there is no income tax.

Companies that export goods often use the same basic strategy. A U.S. company sells T-shirts to France for $3 per shirt. It sells 100,000 shirts per year for a gross of $300,000. Instead of shipping directly, the orders come from a company in Hong Kong at a price of $1.50 per shirt. The Hong Kong company now sells the shirts to France for the full $3. As a result of this arrangement, the U.S. company now has gross income of only $150,000. The balance was earned in Hong Kong, where there is no tax on this income.

Despite provisions in the tax law and regulations which prohibit or restrict the use of these strategies, the demand from citizens of high tax countries for these techniques is powerful. Those who receive royalty income from patents or copyrights such as book authors, software developers, and inventors often transfer these rights to offshore companies and have the funds collected in a tax haven jurisdiction. Owners of appreciating stock, which includes almost every man, woman, and child in the Silicon Valley, seek to move and sell the asset in a country that does not tax this income. Founders and employees of successful companies may receive stock options representing a substantial portion of their wealth. Avoiding the tax on the gain is always an important consideration. Individuals with large investment portfolios or those who want to avoid a large tax bite on their investment earnings are eager to shift to non-tax jurisdictions. Most of these strategies for U.S. citizens and residents cannot be accomplished legally. But the demand is powerful and unscrupulous operators, “consultants” and even lawyers promote a variety of tax evasion plans to unwitting or highly motivated individuals.