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Tax Shelter Essay

275 words - 2 pages

TAX SHELTER

A “tax shelter” is a way of reducing your taxable income. This will reduce the payments you pay out to state and federal governments. Also, your method of using it can change depending on local and international tax laws. “In North America, a tax shelter is generally defined as any method that recovers more than $1 in tax for every $1 spent, ...view middle of the document...

If found that you are you will owe back taxes and all accrued penalties/interest. The IRS has made a list of abusive transactions, if what someone is doing resembles one of transactions, then it would be considered abusive and the user may face penalties. Due to differing tax rates and legislation in each country, tax benefits can be exploited. If I buy $1 of goods from Japan and I sell them for $3, I will pay tax on $2 of taxable income. However, tax benefits can be exploited if I set up an offshore subsidiary in the British Virgin Islands to buy the same goods for $1, then my subsidiary sells the goods back to me for $3 and then I sell it again in the domestic market for $3. This allows me to report taxable income of $0 (because it was purchased for $3 and sold for $3), thus paying no tax. While my subsidiary will have to pay tax on $2, the tax is payable to the tax authority of British Virgin Islands. Since the British Virgin Islands has a corporate tax rate of 0%, no taxes are payable.

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