Following are summaries of some identified schemes:
Limited Liability Companies (LLCs)
In response to efforts by the Organization for Economic Cooperation and Development (OECD) to eliminate harmful tax competition, some nations labeled as tax havens have accused OECD members of carrying on the very practices the members seek to stop. One example put forth is the ease with which nonresident aliens may do business through limited liability companies (LLCs) domiciled in the United States, in comparative anonymity.
Offshore Deferred Compensation Arrangements
Many highly compensated professional persons and business owners in the U.S. have been solicited to participate in "offshore deferred compensation plans". The U.S. taxpayer is encouraged to sever an existing employment relationship and substitute an arrangement in which the nominal employer is a foreign "employee leasing" company. The supposed result of this abusive arrangement is the taxation of a large portion of the professional's or business owner's salary is deferred while he/she gains immediate access to the funds through loans or offshore-based credit cards. An improper deduction for employee leasing expenses is also created on the corporate tax return.
Fictitious or Overstated Invoicing
Some U.S. taxpayers have entered into schemes in which the taxpayer's U.S. business is billed by a purportedly unrelated offshore entity for goods or services (e.g., "consulting services") that are either nonexistent or overvalued.
Factoring of Accounts Receivable
A U.S. taxpayer's business may discount or "factor" its receivables to a purportedly unrelated foreign business entity. The discount or factoring fee significantly reduces U.S. tax liability, and is moved to an offshore entity where it can either be invested free of U.S. tax or repatriated for the taxpayer's use and enjoyment.
Abusive Insurance Arrangements
Some promoters have devised arrangements characterized as insurance arrangements, giving rise to a deduction for the U.S. taxpayer for "premiums" paid to a purportedly unrelated offshore insurance company. Often these arrangements are merely self-insurance, lacking in real transfer of risk.
Shifting of Income Using Offshore Private Annuities
Some promoters suggest U.S. taxpayers may avoid or substantially defer tax on income streams or capital gains by exchanging property for an unsecured private annuity. In another abusive scheme an offshore private annuity is used in conjunction with an offshore variable life insurance policy as a devise to "decontrol" a foreign corporation or other entity used in an abusive sequence of transactions. As a result the promoter claims the foreign corporation or entity is owned by the insurance policy and is not a, controlled foreign corporation, passive foreign investment company, or any entity controlled by a U.S. person whose income could be taxed in the United States to its owner.
Offshore Internet Business
For businesses conducted primarily through the Internet, promoters offer "kits" which give the appearance that the business is foreign owned and operated. Transactions may be routed through offshore servers, and business receipts may be collected through offshore bank accounts or credit card merchant accounts. These schemes particularly target businesses offering delivery of computer software and other digital products such as music, pictures, or video. They may also provide a means of operating offshore gaming activities.
Over the last few years, gambling websites have proliferated on the Internet. Many of these virtual casinos are organized and operated from offshore locations, where the operators feel free from State and Federal interference. The operators of these activities may suggest players in the U.S. are not subject to tax on their winnings, and may handle collections and disbursements in ways designed to facilitate avoidance of U.S. taxes.
Repatriation of Offshore Funds Using Credit Cards
Credit cards (such as MasterCard and VISA) issued by tax haven domiciled banks are a preferred method used by U.S. taxpayers to anonymously and covertly repatriate offshore funds which may or may not have been previously taxed. American Express cards are used in the same way but differ in that these cards are issued directly by American Express rather than by member banks.