For Those With Offshore Bank Accounts, Today Is Just One More Tax Holiday
It may be tax day for most Americans, but it’s still a tax holiday for those who use offshore accounts to avoid paying levies on as much as $109 billion annually back to Uncle Sam, according to Quartz.
Many of the monied types keep their dollars in offshore accounts specifically to dodge taxes, and then invest it back into the United States — a practice called “round tripping.” They use shell companies to hide the money, and when they reinvest back into the United States, they often receive special treatment designed to attract foreign investment.
With “round tripping,” investors effectively become foreign sources of capital and thus do not have to pay U.S. capital gains taxes.
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Caribbean islands such as Grand Cayman are the haven of choice for U.S. dollars to be ultimately repatriated.
A new study published in the Journal of Finance estimated U.S. tax authorities missed out on round-tripping funds equal to $34 billion to $109 billion in 2008, resulting in tax revenue loss of $8 billion to $27 billion.
“We estimate that a 1 percent increase in the top U.S ordinary tax rate results in an approximate 2.1 percent to 2.8 percent increase in inbound equity foreign portfolio investment from tax havens relative to nonhavens, depending on the specification. Thus, the effect of round-tripping tax evasion . . . is economically meaningful,” the study stated.
“The higher the tax rate, the more securities appear to be purchased from tax haven jurisdictions,” Michelle Hanlon, a professor of accounting at MIT and one of the authors of the study, told Red Orbit. “This seems to indicate that U.S. individuals are pretending to be foreigners who then invest in the U.S. markets.”
Hanlon said that then when tax treaties between the United States and traditional tax haven nations are entered into, less investment tends to come from those locations.
“People always try to evade taxes, but [more tax treaties] will make it harder,” Hanlon suggested. “And the more costly and risky it becomes, the costs will outweigh the benefits, at least on the margin, and the less likely people are to do it.”
The United States is one of the few countries requiring that its citizens pay income taxes regardless of the country in which that money was earned, the Voice of America noted.
It’s not just individuals who use offshore tax haven protection. Sen. Carl Levin, D-Mich., estimated U.S. corporations avoid another $30 billion annually with offshore tactics.
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