How Tax Havens Operate
Capital gains, such as the profit that you make when selling an investment, is exempt from tax for most people in the United States. Other tax expenditures have a similar effect. That’s because capital gains are treated the same as income: They are taxed in the same way, which means if you get $100 in taxable income, the first $100 is taxed at the normal income tax rate, and the rest is taxed at the low capital gains tax rate. For wealthy investors, however, capital gains may come as a big windfall.
More and more of the new casino sites coming online aren’t necessarily based in tax havens anymore, but what are the reasons for the existence of tax havens? There are many reasons wealthy individuals may want to hide their wealth in offshore tax havens. One of the most common reasons is that they can avoid paying taxes by keeping profits in places with low tax rates. Those include, but are not limited to, the Cayman Islands, Bermuda, Ireland, and Switzerland. Sometimes they do this by buying real estate in those places.
Many tax havens allow wealthy Americans to easily avoid paying taxes by claiming they are trying to engage in “facilitation” of real estate investments. They generally claim they only engage in this activity, or plan to engage in this activity in the future, to make it look like they are buying real estate to rent or to resell. Of course, they are in no way buying real estate for anyone to rent or resell. Their goal is to avoid paying tax.
What Happens When You Make A Tax Haven Claim?
One of the most common complaints about tax havens is that wealthy Americans, often with real estate investments, use them to pay virtually no taxes on income earned from tax havens. As a result, the foreign investments generate almost no tax revenue. Taxpayers, for their part, are required to either take the tax-free offshore earnings from their real estate investments or pay tax at the normal income tax rate on those earnings.
As tax scholar Douglas A. McIntyre explained in 2012, in the case of tax havens, it isn’t enough to make a legitimate investment. The tax-free income from the tax haven investments must also exceed the tax-free income from the legitimate investment. That means the investment must be a net financial gain. That means it can’t generate an internal rate of return higher than the tax-free rate. In the case of the Cayman Islands, for example, the tax-free rate is zero. If the tax haven investment generates a net financial gain that’s higher than the tax-free rate, the tax on the other income generated by the investment is not paid.
Contrary to what many critics claim, this isn’t a loophole in the tax code. There are no loopholes in the tax code that let wealthy Americans avoid paying tax on income generated by their investments in tax havens. It’s simply impossible. Once a tax haven investor gets into this pattern, it isn’t possible to escape the pattern of generating income from tax havens.
To make things worse, in some instances wealthy investors make claims that get them off the path to becoming tax regular.