The Offshore Corporation
This is the favorite playground of the rich. It is estimated that one-third of the world’s wealth (over $5 trillion) is held offshore. This is a very BIG business. The world’s largest banks are all involved. Barclays Bank’s (11th largest bank in the world) most profitable branch is in the offshore jurisdiction of Jersey, Channel Islands. The Canadian Imperial Bank of Commerce (CIBC) earned most of its $1.69 billion profit from its Caribbean operations. The Cayman Islands handles more deposits than any other country, except the US and Japan. There are 418 banks licensed to do business in the Bahamas. By comparison, Canada has 84. Once the exclusive domains of the super rich – the legal fees cost a fortune – offshore investing in the global economy is now available to people with as little as $10,000 to invest.
In the case of a web publisher, he would set up an offshore International Business Company (IBC) and this new company would own the websites. It’s pretty simple and straight forward to tell Google and the other ad networks to send payments to this new company. You are now earning all your Internet income tax free because the IBC is set up in a country with no income tax. There are about 45 countries that do not have income tax, capital grains tax or estate tax. Other offshore markets, like Panama or Costa Rica, do have income tax but have legislation exempting IBCs or they allow the IBC to earn income tax free if it’s earned outside of their country.
The problem comes when you try to bring the money back into the home country. The easiest way to do it to set up a company in the home country to do “consulting” for the offshore company. You can have the offshore company pay you enough to cover living expenses. You will get taxed on this money but if you don’t need much to live on, you should stay in the lower tax brackets. The other way to bring money back is to fly to the offshore district, take out $9,999 in cash and fly back home. As long as you not bringing home more than $10K, you don’t have to declare it.
The Offshore Subsidiary
The offshore subsidiary is a move multinational corporations do to avoid high corporate taxes in their home country. Let’s say Canada Mega Corp posted $10 million in net profits. They would need to pay 47% tax on that earning, leaving only $5.3 million for the shareholders.
What Canada Mega Corp would do is have their subsidiary in Barbados (Barbados Mega Corp) invoice them for $10 million worth of services. Suddenly, Canada Mega Corp has a net income of zero. The Barbados subsidiary now has a net income of $10 million, which will be subjected to the Barbados corporate income tax rate of …… 3%.
The Barbados subsidiary would then send the money back to Canada Mega Corp as a tax-free dividend because Barbados and Canada have a tax treaty. The money has already been taxed and therefore shouldn’t be taxed again.
The final score: Canada Mega Corp shareholders – $9.7 million, Barbados government – $300K, Canada Revenue Agency (CRA) – $0. Now you know why most of the Canadian Imperial Bank of Commerce’s $1.69 billion profit came from its Caribbean operation (the corp tax there is 3% as well).
The Letter of The Law vs. The spirit of The Law
While the above strategies may satisfy the letter of law, some would say they go against the spirit of the law. Let’s see. Which do you think is more corrupt: government buying votes with your money, or the efforts of every citizen to deny the government as much money as legally possible so as to force it back on the road to financial responsibility?
There a framed letter (in both English and French) in every CRA office that lists the rights of the taxpayer. One of the things the letter states is that you have the right to arrange your financial affairs to pay as little tax as possible. I’m just following the letter.