Offshore Investing Creates US Jobs
There was an explosion of outrage about Mitt Romney’s $25 million investment in the offshore tax haven country of the Cayman Islands, as if there was something illegal or mysterious about the investing offshore. Yet there is no similar media outrage when Google pays only 2.4 percent in total income taxes because they utilize an extremely effective legal “offshore” investment and tax strategy known as a “Double Irish Sandwich”.
It’s a disgrace that the media and the government characterize legitimate investors, who invest in “tax havens,” as somehow circumventing American tax law and acting in an un-American illicit manner. The problem is that most Americans do not understand that if you have investments in mutual funds you most likely have investments “offshore”.
A “tax haven” is merely a country that offers foreign investors special tax benefits and incentives to invest in that particular country. Americans are shocked to learn that one of the largest “offshore tax havens” in the world is the – United States. For example, there is a foreigner investment program, whereupon foreign investors that invest a minimum of $500,000 into new U.S. businesses receive a Green Card. In addition, foreign investors in the U.S. do not have to pay capital gains taxes, income taxes or any other taxes associated with that investment or work.
For the media and the American government to disparage offshore investing is intellectually dishonest. For instance an American investing in Google is investing in a multinational corporation with offshore operations. Also there are investments known as American Depository Receipt (ADR), which are foreign corporations that are permitted to trade on American stock exchanges so long as they meet certain Generally Accepted Accounting Principles (GAAP).
Since ADRs are deemed completely legitimate and officially sanctioned by the American government, then by extension it stands to reason that it is perfectly legal and legitimate for American investors to invest in foreign (offshore) corporations through other countries that are considered tax havens. If they were not tax havens then why invest?
The United States tax law establishes that free Americans, unlike the evil socialist governments of Europe, are subject to American tax law regardless of where Americans work or live. In essence American rights and freedoms are subservient to America’s tax law. However a British citizen, unlike an American citizen, is not subject to taxes on income generated in America. Hence the reason the Beatles moved to the United States.
So to claim that American investors, who are investing in countries like the Caymans, are attempting to avoid taxes is like claiming that a New Yorker incorporating his business in Wyoming is attempting to circumvent taxes in New York State. It is simply disingenuous. The point is that Americans, regardless of where they work, live or invest are subject to and monitored by U.S. federal tax law.
Offshore tax havens control a great deal of investment capital globally. The fact that some offshore tax havens have been used to “launder” drug money is mostly hype created by the media in order to sell you misinformation.
If you analyze the issue of “laundering drug money” one can only conclude that one of the problem is being fostered by the federal government due to failed drug policies which are creating and encouraging a $360 billion annual drug industry. And for the record the United States is responsible for laundering its fair share of drug money. For example a story in the New York Times in December 2011, discusses the fact that the U.S. federal agents launder drug money for drug cartel kingpins. And the CIA partically funds operations with drug money and drug trafficing.
Offshore investing is very simple these days. And if you are currently investing in an “international” mutual fund you are investing in offshore companies. If you use Google as your search engine you are supporting an American corporation with extensive offshore operations.
For instance, Google uses an Irish corporation for income, in which the income is then transferred to an offshore Dutch corporation and then transferred to a Caribbean offshore tax haven in Bermuda. This strategy is all perfectly legal and apparently sanctioned by President Obama because Google’s chairman, Eric Schmidt, sits on the president’s job creation board. And the reason that Google states as the rationale for using this tax strategy is because U.S. corporate tax laws are too burdensome.
To place offshore investing into perspective you can look at it from the perspective an Individual Retirement Account (IRA) or 401k. Essentially, opening up an offshore investment account is as simple as opening an online trading account. Even though you must pay taxes on income, capital gains and dividends must pay taxes on gains “recognized”, which means that if you take money from an offshore account you must pay taxes on the amount earned.
Therefore, an American opening up an account in the Cayman Islands can grow their money tax “deferred” without any limits, much like you can in a traditional 401k or IRA. However, once you begin taking distributions then you must pay taxes on the “repatriation” of capital back into the United States.
One reason that individuals invest offshore is the hope that in the future the United States will once again reduce and/or eliminate the tax structure in the U.S. Corporations use offshore locations for a number of reasons.
For example, one reason one of the top 4 accounting firms such as “Price Waterhouse Cooper”, have offices in “offshore tax havens” in the Bahamas is that they are often times unable to legal conduct certain accounting activity in the U.S. because of legal, regulatory and often times “liability” issues. Often times, because of Sarbanes Oxley and other regulations, an international accounting firm with offices in the U.S. will not complete due diligence requested by an investment bank in the U.S. primarily due to liability issues in which potential investors can file frivolous lawsuits.
So before you go flying off the handle and begin demonizing evil “offshore” investors keep in mind you may be one of them. But more importantly, offshore investing is perfectly legitimate, legal and an intelligent investing strategy and tax avoidance strategy. And finally, offshore investing is critical to the U.S. economy because it is offshore investors that often times invest in new startup companies in America. And without those investments in new U.S. businesses, 70 percent of all the jobs created in America annually would not exist.