Tax havens are once again in the news.
Revelations have surfaced that the nation’s largest Iraq war contractor "evaded" hundreds of millions of dollars in federal Medicare and Social Security taxes. The company in question, Kellogg Brown & Root (KB&R), avoided these taxes by hiring workers through companies based in the Cayman Islands.
That’s led career politicians like former presidential candidate Sen. John Kerry (D-Mass.) to attack the practice. Kerry accuses KB&R and other U.S. companies operating overseas businesses through offshore subsidiaries of "corporate greed." Kerry (along with presidential candidate Barrack Obama) has introduced legislation to close this "loophole."
Excuse me, Senator. This is no loophole. Virtually every other country in the world has the same policy. They quite properly and logically exempt businesses operating outside their borders, using employees working outside their borders, from withholding taxes on the income of their employees.
It escapes me why it outrages anyone that a company doing business outside the United States can legally avoid paying U.S. tax. What’s wrong with KB&R organizing its affairs in such a way as to avoid paying U.S. taxes on its non-U.S. operations? If there’s greed involved, it’s in the minds of career politicians like Sen. Kerry.
Under current U.S. law, even a one-person company can pull off the same strategy as KK&R. All you need to do is live and work outside the United States, form an offshore company, and pay yourself a salary from that country.
Here’s how it works. Companies that are chartered by any U.S. state must generally withhold federal Medicare and Social Security taxes on their employees, anywhere in the world. The exceptions exist by virtue of "totalization agreements" the United States has signed with about 20 countries—you can read about them here.
But if a U.S. taxpayer forms a non-U.S. company and pay wages to employees outside the United States, there’s no obligation to withhold any U.S. tax to the employees. That’s true even if the employees are U.S. citizens.
This only makes sense, because the foreign company will usually be required to withhold tax payments in the foreign countries in which it’s operating. It’s only fair that the U.S. Treasury maintains a hands-off attitude.
An added bonus: under the "foreign earned income exclusion," the first US$85,700 in wages you pay yourself are legally exempt from U.S. income tax. If you’re married, and your spouse accompanies you offshore, both of you enjoy this exclusion. Thats a total of US$171,400/year in wages, completely free of all U.S. tax obligations.
My book The Lifeboat Strategy covers this completely legal tax avoidance tactic in depth. Click here to learn more about it.
Copyright © 2008 by Mark Nestmann
