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 Using offshore entities and financial arrangements to evade taxes

We are accustomed to tax agencies warning taxpayers against using offshore financial arrangements to avoid tax obligations. There are, however, a number of legitimate business and personal reasons for California taxpayers to create entities and financial arrangements offshore. For example, in some foreign countries a United States company can only conduct business by creating a corporation in that country. Other reasons for creating entities and other financial arrangements offshore include:

  • Simpler regulatory frameworks.
  • Proximity to major economies or to countries attracting capital inflows.
  • A way to pool financial resources and knowledge among participants from more than one country.

We find, however, that entities and other financial arrangements are not always created offshore for lawful reasons. Most tax haven countries have little or no government oversight and have strict secrecy laws against disclosures of business and banking records. This combination can encourage offshore banks, attorneys, trustees, and other service providers to falsify, fabricate, or fail to provide records. Tax haven countries often promote the creation of entities and other financial arrangements as a means to:

  • Divert untaxed income and conceal assets for taxpayers who have no real operations in a foreign country.
  • Evade tax or launder money.
  • Take advantage of higher levels of anonymity to escape the notice of taxing agencies in the taxpayer's home country.
  • Prevent creditors and lawyers from placing liens or seizing bank records and accounts in tax haven jurisdictions.
  • Generate unsubstantiated expenses.

An example of one of these arrangements is the creation of an offshore company that generates unsubstantiated expenses for personal services that have not been performed by, but are reported by, a California corporation. Another example involves hiding income or passing it through a multitude of entities, to avoid reporting it as California income.

FTB is committed to the fair administration of California’s income tax laws, and reducing Calfornia’s tax gap, to prevent those who break the law from gaining an unfair competitive advantage. If you know of taxpayers who engage in these types of unlawful arrangements:

  • Fax the information to: 916.843.2060.
  • Write to: Franchise Tax Board, PO Box 1565, Rancho Cordova, CA 95741.

Get more information on California income and franchise taxes by visiting our website  ftb.ca.gov.