Category Archives: Little Red Tax Haven Book

The worldwide trend of attacking the use of corporations as a way to reduce or defer taxation for individuals

Introduction – The war against corporations and the shareholders of those corporations

Corporations as entities that are separate from their shareholder/owners

As every law students knows, a corporation is a legal entity that is separate from its owner. As a legal entity that is separate from its owner, a corporation is capable of holding assets, carrying on a business and investing in a way that results in separation of the shareholder(s) from the business itself. It is a mistake to infer that the corporation’s status as a separate legal entity means that the corporation’s income will not be taxed to its shareholders.

Corporations as legal instruments of tax deferral

When corporate tax rates are lower than individual tax rates, there is incentive for individuals to earn and invest through corporations rather than to earn and invest as individuals. In other words, in certain circumstances, corporations can be used to pay less taxes.

Corporations as instruments of tax evasion

In many jurisdictions is it possible to create a Corporation and NOT disclose the identities of the beneficial owners. Because of this circumstance:

1. Corporations (as was made clear in the “Panama Papers Story”) can be used to hide income and assets for either legitimate or illegitimate reasons; and

2. Corporations can be used to avoid the attribution of income earned by the corporation to the shareholders.

Corporations and the rise of @TaxHavenUSA
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Green card holders: the “tax treaty tiebreaker” rules and taxation of Subpart F and PFIC income

Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post …

The Internal Revenue Code of the United States imposes (1) requirements for taxation (determining how much tax is payable by various individuals) and (2) requirements for information reporting returns. For “U.S. Persons Abroad” the “information reporting requirements” are far more onerous.
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Tax Haven or Tax Heaven 5: How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code is of great interest..

IRC871

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The above subsection of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. It contains rules for how those who are not “U.S. Persons” are taxed under the Internal Revenue Code. As is expected, the Internal Revenue Code imposes U.S. taxation only on those “aliens” who have income sources that are connected to the United States. The previous post explained that S. 871 (in its present form) was enacted in 1966. Internal Revenue Code S. 871 also provides strong incentives for “aliens” to bring their capital to the USA.

Interestingly this subsection of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Significantly, both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809.

The combination of the inclusion of both Internal Revenue Code sections 871 and 877 suggests that the intent of the Foreign Investors Tax Act of 1966, Public Law 89-809, included:

1. The intent to attract “Foreign” capital to the United States by imposing either no or low taxes on that “Foreign” capital lured to the United States, as expressed in S. 871 of the Internal Revenue Code;

2. The intent to give “non-resident aliens” certain tax benefits that were NOT available to U.S. citizens;

3. A recognition that some U.S. citizens might wish to expatriate to avail themselves of the benefits of NOT being a U.S. citizen;

4. A “penalty” expressed in S. 877 of the Internal Revenue Code for those U.S. citizens who expatriated to receive the same tax benefits enjoyed by “non-resident aliens”.

For a pdf of the 1966 Foreign Investors Tax Act (a massive document), see …

Foreign Investors Tax Act 1966 809

My point is a simple one …

It is clear that the U.S.desire to establish itself as a “Tax Haven”, also resulted in the S. 877 Exit Tax, which gradually evolved into the S. 877A Exit Tax that exists today.

To put it another way: the desire to establish the United States as a “Tax Haven”, eventually evolved into the S. 877A Exit Tax rules that:

1. Impose confiscatory taxation on assets that are outside the United States; and

2. Impose confiscatory taxation on assets that were acquired after a “U.S. Person” abandoned residence in the United States.

To illustrate why this is so, please see:

The S. 877A Exit Tax in Action – 5 actual scenarios with 5 completed U.S. tax returns

You will be shocked by what you see!

Like the 1970 FBAR rules, S. 877 of the Internal Revenue Code has gradually evolved into a mechanism to confiscate the assets of Americans abroad. Think I am kidding? See the examples in the link above!

John Richardson