Offshore investment is often considered an illegal activity. Primarily due to the role that the media has played in painting this picture. And while there may be a few investors who illegally stash their money in an offshore company on the Caribbean islands. That’s not always the case. Most offshore investing is legal, and as an investor, you can enjoy several benefits by investing offshore. However, the U.S. economy may not benefit from your offshore investment.
In this post, we look at what offshore investment is and why investors opt for offshore investment. Moreover, we also explain how the U.S. tax laws are changing in response to tax revenue lost offshore.
So let’s get started.
What Is Offshore Investment?
Offshore investment refers to an array of investment strategies designed to capitalize on the advantages offered to investors when they invest outside of their home countries. From the perspective of an American investor, “offshore” is anywhere outside the jurisdiction of the U.S. government.
While many investors may assume that it is legal. You can find several investment opportunities offered by offshore companies that are legal and reputable.
Why Do Investors Go For Offshore Investment?
Offshore investing brings several benefits to investors; however, the benefits depend on your situation. Given the right situation, you can enjoy tax benefits, asset protection, and better privacy when you opt for offshore investing.
Offshore Tax Investing Benefits
Many countries that are the hub of offshore investing offer tax incentives to foreign investors. They are known as tax havens as they offer favorable tax rates to investors. Tax havens intend to promote a healthy investment environment to attract wealthy investors from around the world. By offering tax benefits to an investor, a tax haven can attract capital and investment, and even with limited resources of its own, it can benefit from increased economic activity.
However, you can enjoy offshore tax benefits when you invest in a foreign country and form a registered corporation. The corporation then serves as a protection for the investors saving them from the higher tax burden that the investor would have to pay in their home country. In some tax havens, many foreign companies also enjoy tax exemption when they invest. However, there is no such benefit to an individual.
U.S. Government’s Response to Tax Revenue Lost Offshore
While offshore investment offers several benefits to investors with tax benefits being the biggest advantage, offshore investments are not always in the best interest of the U.S. economy. To counter the tax revenue lost when investors invest offshore, the U.S. government is changing its law.
The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) approved in December 2017 has set the U.S. corporate tax rate at 21% while adding provisions that discourage foreign investments. Known for being more territorial compared to previous international tax laws. The TCJA exempts foreign profits from domestic tax. However, there are a few provisions for exceptional high foreign profits.
Tax havens offer tax savings to the investor, but they also offer benefits on credit. Hence, it is cheaper to for a U.S.-based company to borrow funds internationally. This type of borrowing and fund acquisition is also subject to reporting within the U.S. tax law guidelines, GAAP, and standards under IFRS.
Offshore Investing and FATCA
In recent years, the U.S. government is becoming increasingly conscious of the lost tax revenue when investors opt for offshore investing and hence has created more defined laws to minimize the tax loopholes and increase the inflow of revenue earned offshore. One of the examples of such measures is the U.S. Foreign Account Tax Compliance Act (FATCA), which requires all U.S. citizens (all citizens living domestically and overseas) to file annual reports on any foreign account holdings.
The FATCA requires the filing of a Schedule B and/or Form 8938. The filing provides disclosure of foreign account holdings in case the investments exceed the value of $50,000. Moreover, the FATCA may require foreign account holders to separately file for Form 114. As well as, reports of foreign banks and financial accounts. However, there may be exemptions and inexpensive access to credit, so it’s best to consult a tax lawyer for your specific situations so you can ensure proper reporting as an offshore investor.
Moreover, according to the Internal Revenue Service (IRS), they tax all U.S. citizens (including residents and individuals living overseas) on their global income. Hence, investors resort to offshore entities as a measure to escape U.S. tax policies. Including income tax on capital gains, can be accused of tax evasion. So while lower interest and tax expenses of offshore companies may produce better returns for the investors. The IRS ensures that U.S. taxpayers do not escape the tax policies by shifting their tax liabilities to a foreign entity.
While the U.S. government and policymakers ensure that the U.S. economy continues to benefit even when U.S. investors opt for offshore investing. They still have loopholes in the system that they need to resolve.
If you are considering offshore investing to enjoy the tax benefits, asset protection, and more privacy but are concerned about other U.S. regulations and reporting standards. It is best to find an attorney who specializes in tax laws and offshore investing. Because they ensure that you and your offshore investment are protected against all legal and tax-related concerns. Moreover, by working with a specialized attorney, you can enjoy all the benefits of offshore investment while complying with U.S. laws. Find out more about U.S. tax laws and offshore investing here.