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Internal Revenue Service

Internal Revenue Service


Income Tax Evasion
and the U.S. Congress




my humble opinion

AVOIDING local, state and federal income taxes is honorable, frugal, wise, sound, sagacious and prudent.  Everyone does it and those who do not, should.

EVADING income taxes is a crime.

The tropical paradise of the Cayman Islands, located 400 miles South of Miami and 180 miles South of the Island of Cuba in the Carribean Sea, has been in the news for years and especially now during this 2008 presidential campaign.  The political candidates have been proclaiming loudly and vehemently about how they will slam shut the tax haven door thereby raising billions and billions of heretofore uncollected tax dollars if you will only vote for them.  Elect me and we will all become rich.

During the presidential debates, Senator Barack Obama of Illinois, said that as president he would crack down on corporate loopholes and tax savings, particularly those involving offshore transactions.  Obama said "There's a building in the Cayman Islands that houses, supposedly, 12,000 U.S.A. based corporations. . ."That's either the biggest building in the world or the biggest tax scam in the world. And I think we know which one it is.''    Presidential candidate John Edwards said, "If we want a truly fair tax, then we also have to end the injustices in our system that allow many wealthy people and corporations to avoid taxes altogether. As president, I will declare war on offshore tax havens."  Presidential candidate Hillary Clinton declared "Tucked away on the Cayman Islands sits Ugland House, an unassuming, nondescript building of modest scale and size.". . .“In the past few years, the number of corporations flocking to places like the Cayman Islands to evade U.S. taxes has exploded.”. . ."Instead of rewarding companies that exploit tax shelters and corporate tax havens, let's ban the federal government from contracting with companies that hide profits offshore."

Impressive!  

Ignorant, but impressive.

Cayman laws make it very simple to create International Business Companies (IBC’s), establish trusts or to simply open checking or savings accounts.  More than 68,000 companies were registered in the Cayman Islands as of 2003, including 280 banks, 300 trusts, 800 insurers, and 9,000 mutual funds. A stock exchange, which is registered with the London Stock Exchange, was opened in 1997.  The cost of doing business for a Cayman entity is modest and easy.  The expenses of formation range from $150 to $350 with annual fees thereafter from $400 to $565.  Add a modest legal fee for document preparation and you can form a Cayman Island company for approximately $1,000.  For individuals a minimum deposit of $2,500 and $100 covering document filing and you now have an offshore account.

Ugland House, on 335 South Church Street, PO Box 309, in Georgetown, Grand Cayman, is home to the international law firm Maples & Calder which represents 18,857 separate corporate and individual entities.  Maples & Calder of Ugland House is the largest law firm in the Caymans but other popular locations on the island include Bermuda House, Caledonian House, Butterfield House, Harbour Place and many others.   

Cayman Islands (Left of Center)

Cayman Islands
Click on image for a larger view
Ugland House - Georgetown, Grand Cayman

Ugland House - Georgetown, Grand Cayman
Click on image for larger view

The good people at Maples & Calder of Ugland House will, for a fee, provide stenographic services, receive your mail, forward it to any address provided, or, if you wish, open and fax the mail to any fax number provided and even accept and forward all telephone calls.  A complete and full functioning office with these and other services are available.  All this, and the benefits of Cayman statutes mandating anonymity.

Did you ever wonder, why people and companies bother forming IBC’s, personal and corporate entities, on the Cayman Islands?  Well, among the reasons, anonymity, safety, tax avoidance and, yes, tax evasion.

Let’s look at some of these reasons.  Anonymity and safety.  Suppose your dastardly ex-wife or ex-husband wants a bigger share (or all) of your money.  Move your money to a Cayman Island account and it cannot be found.  Suppose you are the defendant in major litigation.  (Unjustly, of course.)  Medical doctor malpractice suits and product liability claims come to mind.  Move your assets to a Cayman Island account and they cannot be attached.   Do you need to protect your estate from unscrupulous business partners, greedy relatives, in-laws or other despicable individuals?   Do you live in a despotic, corrupt country like Mexico or Venezuela where the currency is unstable or subject to governmental seizure?  Think Caymans.  You may open your account and make subsequent contributions with any world currency such as US Dollars, peso or bolivares, then convert and store those funds in any other world currency such as US Dollars, Euro, Sterling or Yen.  There are many legitimate and prudent reasons to employ the benefits of private and confidential placement of your assets.  Politicians, of course, cry "Tax Evasion."

I suspect the vast majority of companies registered in the Caymans are there for the purpose of "Tax Avoidance."  Among the U.S. companies Obama, Hillary, and the other political candidates are referring to, include Coca-Cola, Procter & Gamble, General Motors, Intel, Martin Marietta, FedEx, Sprint and many, many others.  Currently, 40 of the world's top 50 banks have branches or subsidiaries in the Cayman Islands.  Politicians need to be careful about whom they are willing to “ban” from government contracts.

The U.S. is one of only two nations that taxes its citizens and corporations on their income from wherever it is derived.  Anywhere and everywhere in the world.  U.S. citizens are also taxed on investments directly or indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBC's. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that a U.S. citizen doing business there will enjoy only low or no taxes on the personal income made. There are simply no PERSONAL income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is telling you a falsehood.   The U.S. congress does not care WHERE you make your income, they simply demand their share.

However, corporations are different.  They are legal entities holding citizenship in the country where they are organized.  For illustration, we will create a company named the Great Widget Company (GWC) and incorporate in the U.S.A.  They build manufacturing plants and sell their wonderful widgets in the U.S., Ireland and Germany and taxable profits of $10M are earned in each of the three countries.  The chart below illustrates the simple corporate tax liability for GWC.


Country Cayman Is. U.S.A. Germany Ireland Total
Taxable Earnings   30,000,000 10,000,000 10,000,000  
Nominal Tax   35% 15% 12.5%  
Tax   10,500,000 1,500,000 1,250,000 13,250,000
Deduction*   2,750,000     2,750,000
Nominal Tax   7,750,000 1,500,000 1,250,000 10,500,000
* Deduction - The U.S. permits offsetting income taxes paid to other countries


Now we will look at the same calculations if the Great Widget Company were
 organized in the Cayman Islands and registered in the U.S. as a foreign corporation
 doing business in the U.S. as the Great Widget Company, USA.


Country Cayman Is. U.S.A. Germany Ireland Total
Taxable Earnings 0 10,000,000 10,000,000 10,000,000 30,000,000
Nominal Tax No Taxes 35% 15% 12.5%  
Tax 0 3,500,000 1,500,000 1,250,000 6,250,000
Deduction          
Nominal Tax 0 3,500,000 1,500,000 1,250,000 6,250,000


As the above chart shows GWC reduced their taxes from $10,500,000 to $6,250,000 for a tax savings of $4,250,000 or 40% simply by eliminating U.S. taxes on the German and Irish earnings. (mandatory disclaimer - results may vary)  

One must bear in mind that our imaginary company is relatively small and operating in only three countries.  Just envision the potential savings of very large corporations earning billions of dollars in profits and operating in sixty or seventy countries.  Increasing the above profit chart from millions to billions and suddenly the 40% tax savings become significant.  It does not require gifted intellect or imagination to understand why nearly twenty thousand companies are registered at Ugland House.  THIS IS NOT TAX EVASION.  It is ordinary, practical, everyday common sense of TAX AVOIDANCE.

Ask yourself, if GWC builds and operates a factory in Ireland, hires Irish people to work the factory, Irish people purchase and consume their product, GWC pays income taxes to Ireland, what makes the U.S. congress think they have a right to share in GWC’s Irish profits?  GWC went through the efforts to organize in Cayman to AVOID U.S. taxes on Irish income.  This is intelligent, sound business practice.  In reality, if GWC did NOT organize in Cayman, the shareholders should sue the executives and directors for malfeasance and mismanagement.

The U.S. holds the honor of being the highest tax nation on Earth and probably in the solar system.  This is the principal reason that Ugland House exists.  Some politicians want to compound the problem by raising corporate taxes even higher.  Barack Obama, Hillary Clinton and other Democrats have even promised, if elected, to impose a windfall profits tax on Exxon-Mobile and other oil companies.  Exxon is the largest oil company in the U.S. and the 14th largest in the world.  Exxon has operations all over the world and they already have huge regional offices in Abu Dhabi, United Arab Emirates, Oman and Yemen.  Those countries tax corporations only on income earned in those countries and if Exxon is creating profits there, they are already paying those taxes.  Should the U.S. congress be successful in legislating a windfall profits tax on Exxon, just how long do you think it would be before Exxon packed up and moved their headquarters from Houston to one of their regional offices on the Arabian peninsula?  Say goodbye to ANOTHER U.S. corporation.

Why do you think U.S. Senator Edward M. (Ted) Kennedy has moved his entire personal estate assets to an offshore trust located in Tortola, BVI?  Possibly because BVI has no estate or death tax?  Kennedy has few personal assets in the U.S.  The family pays an annual rent (to cover property taxes, insurance, maintenance, operations, etc.) to his BVI trust for his considerable luxury compounds located in Martha's Vineyard, Palm Beach and elsewhere.  I am a man of modest means, but when we both die I suspect my death tax bill will be larger than his.

The U.S. Congress is the reason Ugland House exists and an increase in corporate taxes, or a windfall profits tax, will not increase U.S. tax revenues, but it will cause massive corporate restructuring, relocation and force Ugland House to build a new wing.

That’s the way I see it.

David

September 9, 2008


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Bibliography

http://taxjustice.blogspot.com/2008/07/18857-firms-one-registered-address.html

https://www.cia.gov/library/publications/the-world-factbook/geos/cj.html

http://cayman.com.ky/banking.htm

http://www.ncbcayman.com/

http://www.cimoney.com.ky/section/regulatoryframework/sub/default.aspx?section=PD&id=666

http://www.global-money.com/item.php?id=103

http://www.worldwide-tax.com/















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