Tax Havens and the U.S. and Japanese Tax Codes
This paper will discuss the attributes of tax havens and their use by U.S. taxpayers, the characteristics of three particular havens, and various U.S. and Japanese tax code provisions aimed at discouraging the use of havens by their residents.
The Department of the Treasury has listed four different types of uses of tax havens. The first use involves transactions which are not tax-motivated and may have little or no income tax impact; in such instances, the haven may be used to minimize the effect of currency and other controls. The second use involves transactions which are tax-motivated but fall within the letter of the law (also known as "tax planning"). These transactions include banking through subsidiaries, sales to unrelated parties through tax haven subsidiaries, and the structuring of tax haven operations to take advantage of certain de minimis exceptions to anti-tax haven legislation. One example would be the conversion of U.S. source income to foreign source income in order to increase the limitation on the amount of foreign income tax paid by a U.S. taxpayer that can be credited against U.S. taxes. A third use involves transactions which take advantage of an unintended legal or administrative loophole, also known as "tax avoidance." The usual purpose is to shift profits to controlled entities in tax-free areas. One example of this is the establishment of "captive" insurance companies, entities which are controlled by a parent company and which reinsure risks written in the U.S. A fourth use involves transactions which are designed to escape taxation entirely through fraudulent means, also known as "tax evasion."
Tax Havens possess several distinct characteristics which make them attractive to individuals and corporations. (1) Low rates of taxation: the typical haven has either no income tax or an effective rate (on all or certain types of income) lower than that of cou...