Taxpayers who receive more than $1,500 in taxable interest and/or ordinary dividends during the year are required to fill out IRS Form Schedule B, which accompanies IRS form 1040. Schedule B requires the taxpayer to provide the name of each payer (such as an investment firm or bank) and the amount of interest or dividends received from each payer. The information taxpayers must report on form Schedule B is typically reported to the IRS by the payer, with a copy sent to the taxpayer, using form 1099-INT for interest and form 1099-DIV for dividends. Taxpayers must report the interest and dividends they receive to the IRS because these sources of income are taxable.

Other, less common reasons why taxpayers might need to fill out a Schedule B include the following:

• To report interest income received from a seller-financed mortgage where the borrower uses the property as their personal residence.
• To report accrued bond interest.
• To report a bond’s original issue discount in an amount less what is reported on Form 1099-OID.
• To reduce interest income on a bond by the amount of the bond’s amortizable premium.
• To claim an exclusion of interest from series EE or series I U.S. savings bonds issued after 1989.
• To report interest or ordinary dividends received as a nominee (on behalf of someone else).
• To report a financial interest in, or signature authority over, a foreign account.
• To report a distribution from, being grantor of, or transferor to, a foreign trust.

Schedule B should not be used to report any tax-exempt interest shown on form 1099-INT; that information should be reported on form 1040.

Tax software can simplify the process of determining whether Schedule B is required and completing the form correctly if it is required. The totals from Schedule B are transferred to form 1040, where they are included in the computation of taxable income.

Some of the circumstances that require a taxpayer to file Schedule B also require the filing of other forms. For example, taxpayers with foreign accounts or trusts may be required to submit Form 8938, Statement of Specified Foreign Financial Assets. 

The manner in which a parent company structures the spinoff and divests itself of a subsidiary or division determines whether the spinoff is taxable or tax-free. The taxable status of a spinoff is governed by Internal Revenue Code (IRC) Section 355. The majority of spinoffs are tax-free, meeting the Section 355 requirements for tax exemption because the parent company and its shareholders do not recognize taxable capital gains.

While a company’s first responsibility in determining how to conduct a spinoff is its own continued financial viability, its secondary legal obligation is to act in the best interests of its shareholders. Since the parent company and its shareholders may be subject to sizable capital gains taxes if the spinoff is considered taxable, the inclination of companies is to structure a spinoff so that it is tax-free.

There are two basic structures, or means, for a parent company to conduct a tax-free spinoff. Both result in the spinoff becoming its own legal entity, a publicly traded company separate from the parent company, although the parent may hold a substantial amount of stock – up to 20% by IRC guidelines – in the newly created company.

The first method of conducting a tax-free spinoff is for the parent company to distribute shares in the new spinoff to existing shareholders in direct proportion to their equity interest in the parent. If a stockholder owns 2% of the shares of the parent company, he receives 2% of the shares of the spinoff company.

The second tax-free spinoff method is for the parent company to offer existing shareholders the option to exchange their shares in the parent company for an equal proportion of shares in the spinoff company. Thus, shareholders have the choice of maintaining their existing stock position in the parent company or exchanging it for an equal stock position in the spinoff company. The shareholders are free to choose whichever company they believe offers the best potential return on investment (ROI) going forward. This second method of creating a tax-free spinoff is sometimes referred to as a split-off to distinguish it from the first method.

A taxable spinoff, with potentially substantial capital gains tax liability for both the parent company and its shareholders, results if the spinoff is done by means of outright sale of the subsidiary company or division of the parent company. Another company or an individual might purchase the subsidiary or division, or it might be sold through an initial public offering (IPO).

There are any number of reasons why a company might wish to spin off a subsidiary company or division, ranging from the idea that the spinoff can be more profitable as a separate entity to the need to divest the company to avoid antitrust issues.

There are detailed requirements in IRC section 355 that go beyond the basic spinoff structure outlined above. Spinoffs can be quite complicated, especially if transfer of debt is involved. Therefore, shareholders may wish to seek legal counsel on the possible tax consequences of a proposed spinoff.

The Cayman Islands are one of the most well-known tax havens in the world. Unlike most countries, the Caymans don’t have a corporate tax, making it an ideal place for multinational corporations to base subsidiary entities to shield some or all of their incomes from taxation.

What Is a Tax Haven?

A tax haven is any location that has very lenient or even non-existent tax laws. There are numerous tax havens around the globe, including Switzerland, the British Virgin Islands, Bermuda and Dominica. The specific tax laws in each location vary. While some simply tax income at lower rates, sometimes as low as 2%, others have virtually no taxes. The British Virgin Islands, for example, has no corporate tax, estate tax, inheritance tax, gift tax or sales tax, and it has an effective income tax rate of zero.

How Do Tax Havens Work?

Tax havens provide offshore banking services to foreign individuals and businesses that allow them to avoid paying income taxes in their countries of residence. For example, a large corporation might establish an offshore subsidiary in the Cayman Islands and direct all sales through the subsidiary rather than through the parent company based in the United States.

In this case, the shell corporation earns the company’s profits and is subject to the tax laws of the Cayman Islands rather than the United States. Instead of being subject to the U.S. corporate tax rate, which stood at 38.9% in 2017, the company’s profits are subject to whatever corporate or income taxes apply in the Caymans.

Tax Laws in the Cayman Islands

The Caymans have become a popular tax haven among the American elite and large multinational corporations because there is no corporate or income tax on money earned outside of its territory. This includes interest or dividends earned on investments, making the Caymans especially popular among hedge fund managers.

Instead of taxes, offshore corporations pay an annual licensing fee directly to the government. This fee is based on the amount of authorized share capital the company has.

Like all tax havens, privacy laws are paramount. The Caymans make it easy for individuals and business owners to shield their assets and identities from prying eyes.

Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, as of 2015, pressure from the European Union has prompted the Andorran government to increase taxation, making it less of a haven than it was a decade ago.

What Is a Tax Haven?

A tax haven is a locale, or a country, state or territory, that is popular among wealthy individuals and businesses because its tax laws allow them to legally reduce their tax liabilities. Typically, this is done by allocating assets to offshore bank accounts or shell companies, or by taking up residency to benefit from lower tax rates.

No Offshore Incorporation

Unlike most other tax havens, Andorra does not provide for the easy creation of offshore companies, so it is better suited to wealthy individuals in need of offshore banking services than to businesses looking to squirrel away assets in Andorran-based subsidiaries. To own more than 10% of an Andorra-based company, nonresidents must request approval from the Ministry of Economy, which can prove difficult. It is possible for a foreigner to form a company after attaining residency, but the company’s net profits are subject to the 10% corporate tax applicable to resident businesses.

Andorran Tax Laws

Historically, Andorra has had no income, capital gains, sales, gift or inheritance tax, and gaining residency was relatively simple. The Andorran government implemented a 4.5% value-added tax (VAT) and a set of relatively stringent residency requirements, primarily based on an investment of no less than 400,000 euros. A capital gains tax will be introduced in 2016 that taxes profits from the sale of Andorran property at a maximum rate of 15% depending on how long the property has been held. Most other investment income remains tax-free.

In addition, a new income tax rate is set to take effect in 2016. The tax is still extremely low by U.S. standards, topping out at 10% for those who earn more than 40,000 euros per year, and it only applies to income for which tax has not been paid elsewhere, preventing any double taxation.

It is more beneficial to use net operating profit after tax, or NOPAT, as opposed to net income when making an investment decision because a company’s NOPAT is a measure of profit that excludes the cost and tax benefits of debt financing in that company’s capital structure.

What Exactly Is Net Operating Profit After Tax?

NOPAT is essentially a company’s earnings before interest and taxes, or EBIT, adjusted for the impact of tax structure. The equation for NOPAT is as follows:

Net Operating Profit After Tax = (operating income) x (1-tax rate)

Why Is a Company’s Net Operating Profit After Tax More Important to an Investor Than Its Net Income?

If, for example, a company has $100 of NOPAT but also has a $100 monthly interest payment, it looks unprofitable to an investor. It is possible, however, that the company could be actively paying down its debt or plans to take on an interest payment of this amount, meaning the operations might be fine, and thus worth a long-term investment.

Current tax laws do not allow the vast majority of capital expenditures to be fully tax-deducted for the year in which the expenditures occur. Businesses may be opposed to such tax regulations, preferring to be able to deduct the full amount of their cash outlays for all expenses, whether capital or operational.

For tax purposes, capital expenditures are generally defined as the purchase of assets whose usefulness, or value to a company, exceeds one year. Operational expenses are for assets that are expected to be purchased and fully utilized within the same fiscal year. Office supplies and wages are two examples of operational expenses. Capital expenditures are commonly more expensive outlays for things such as facilities, computer equipment, machinery or vehicles, but they can also include less tangible assets, such as research and development or patents. Operational expenditures can be fully tax-deducted in the year they are made, but capital expenditures must be depreciated, or gradually deducted, over a period of years considered as constituting the life of the asset purchased. Different types of assets are depreciated on a percentage basis over different time spans – three, five or 10 years or more.

It is advantageous for businesses to be able to deduct expenses in the year in which they occur. More deductions translates to a lower tax bill for the year, which leaves more cash on hand available for the business to expand, make further investments, reduce debt or make payouts to stockholders.

From the tax agency’s point of view, since capital expenditures purchase assets that continue to provide value or income for several years beyond the purchase year, it makes sense to have a multiyear taxation plan. Depreciation allowances can be looked at as a company gradually recovering the full cost of an item over its useful lifespan. Rules govern the number of years over which an asset is to be depreciated. For example, computer hardware is commonly depreciated over a period of five years, whereas office furniture is depreciated over a seven-year period.

The IRS has made some concessions to business owners through section 179, which allows 100% same-year tax deductions for some capital expenditures. There are rules on the total amount that can be deducted for capital expenses in a single year, and regarding what types of property qualify for the 100% deduction. For instance, only tangible property, not real estate, qualifies for the 100% deduction. S corporations are not allowed to pass the deduction on to stockholders unless the company has net income. Section 179 is designed to be of primary benefit to small or new businesses that need to make substantial outlays of capital to grow and develop.

Capital expenditures are usually substantial amounts of money that significantly reduce a company’s cash flow or require it to take on additional debt. Because businesses cannot completely deduct these expenditures in the year they are incurred, careful planning is required so that a company does not financially overextend itself through capital expenses.

Luxembourg has been the tax haven of choice of many corporations and mega-rich individuals around the world since the 1970s. It has thrived as a tax haven due to its political and economic stability and huge tax incentives, encouraging foreign companies to move there.

The country’s small state government has provided offshore bank holders with top-notch confidentiality and asset protection for years. Luxembourg’s tax system allows hundreds of U.S. corporations to store massive chunks of their business outside their home countries, which cuts billions from tax bills.

Favorable Tax Laws

Luxembourg draws the largest corporations from around the world that are seeking asylum from large corporate taxation, specifically in countries such as the United States where the corporate tax rate of 35% was once the third-highest in the world. In comparison, Luxembourg has a corporate tax rate of 21%. Although, as of 2018, that’s now the maximum U.S. corporate tax rate as well, Luxembourg offers other tax advantages.

For example, Luxembourg charges foreign corporations an extremely low tax rate to send money into and out of the country. Corporations that funnel profits through Luxembourg are charged around 1%. This is a huge incentive for large corporations that have the opportunity to save billions in corporate tax bills by moving cash to Luxembourg at such low rates.

The Bottom Line

Luxembourg is the most notable tax haven around the world. The country offers secrecy and advantageous tax laws for large corporations. U.S. corporations such as PepsiCo, Inc., American International Group, Inc. and Wal-Mart Stores, Inc. are well-known for creating subsidiaries and branches in offshore tax havens such as Luxembourg to cut taxes.

Macau, known as the “Las Vegas of Asia,” is considered a tax haven for its advantageous personal and corporate tax structure. Residents and non-residents benefit from ultra-low taxes levied against professional and business income. Situated on the southern coast of China, Macau is the country’s only jurisdiction providing legalized gambling. A Portuguese colony until 1999, Macau maintains its own stable currency, the Macanese pataca (MOP), and retains political autonomy with separate executive, legislative and judicial powers.

Individual Taxation

Citizens and foreigners who establish residency in Macau enjoy tax rates that are significantly lower than those levied in other developed Asia-Pacific nations such as Japan. Beneficial tax rates also extend to citizens and foreign nationals who work in the city. Macau’s per capita GDP of $91,376 was among the highest in the world, as of 2013, trailing only Luxembourg, Norway and Qatar. While foreigners usually cannot become citizens, they can gain residency by investing 3 million MOP ($375,000) in the local economy. Foreign earnings are not taxed, but residents are taxed on income earned from Macanese companies. The first 144,000 MOP earned is exempt from personal taxation, after which the top tier is taxed at 12%. Non-resident rates are identical to residents’ rates of taxation, but non-residents are subject to a 5% minimum tax rate. By contrast, the top tax rate in Australia is 45% with a 2% Medicare assessment for residents.

Property taxes accrue from ownership of all residential, commercial and industrial properties and are dependent upon assessed value or actual rental income, whichever is higher. Rental income is taxed at 10%, and a 6% rate applies to assessed value. There is no inheritance, gift or capital gains tax in Macau, but stamp duties between 1.05 and 5.25% are levied against transfers of tangible or intangible property.

Corporate Taxation

Corporations benefit from conducting business on the peninsula, as capital gains and corporate income are taxed at significantly lower rates than in European nations and the United States. The preferential tax treatment attracts numerous businesses, the majority of which are casinos that comprise a large percentage of Macau’s GDP.

With respect to corporate taxes, the first 600,000 MOP is tax exempt. Thereafter, income exceeding the exempt threshold is taxed at a top rate of 12%. Both residents and non-residents are treated equally with regard to corporate taxation. All profit earned is taxed within the Macau special administrative region.

Corporate entities are separated into two groups. Group A companies must adhere to proper accounting measures and maintain capital levels equal or greater than 1,000,000 MOP. Group B companies are either first-time filers or those entities that do not meet the capital requirements of group A businesses. Group B organizations are taxed on assessed profit measures, while group A entities are levied on certified tax returns submitted to the Macau Finance Bureau.

Ultimately, there is very little difference between state and federal withholding taxes. The chief distinction is that state withholding is based on state-level taxable income and federal withholding uses federal taxable dollars. State withholding rules tend to vary among the states, while federal withholding rules are consistent everywhere throughout the United States.

How Withholding Works

Both state and local governments may impose withholding on wage income, but only based on the state taxes; they may not withhold federal income taxes.

Employers can be required to automatically deduct withholding from their employees’ paychecks for federal and state income taxes and Social Security taxes. Individual taxpayers may elect to withhold additional taxes from their paychecks, annuity checks or other forms of income.

Examining Withholding Taxes

The modern tax withholding system was introduced in the 1940s as a response to funding needs for military operations during World War II. It expedited the tax collection process; it also made it much easier for governments to raise additional taxes without taxpayers being made aware of it.

Before the withholding system was put into place, income taxes were due at a certain time of year (originally in March) and taxpayers had to pay, in full, on that date. This made them keenly aware of their individual tax burden. Through withholding, taxpayers have their taxes automatically deducted throughout the year, so they might not be as likely to feel the bite.

For most Americans, every paycheck has a line titled “federal taxes withheld” and “state taxes withheld.” If you earn $1,000 in a paycheck but the government withholds $250, you only get to take home $750. If, by tax day, you had more money withheld than you should have paid in taxes, then the government sends you a tax refund.

The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation that strictly regulates the country’s offshore jurisdiction and financial services.

Panama’s Offshore Financial Sector

Panama’s offshore jurisdiction offers a wide array of excellent financial services, including offshore banking, the incorporation of offshore companies, registration of ships and the formation of Panama trusts and foundations. There are no taxes imposed on offshore companies that only engage in business outside of the jurisdiction. Offshore companies incorporated in Panama, and the owners of the companies, are exempt from any corporate taxes, withholding taxes, income tax, capital gains tax, local taxes, and estate or inheritance taxes, including gift taxes. Panama offers an additional benefit not available in many offshore tax havens: being able to conduct business within the offshore jurisdiction. However, any business conducted within the jurisdiction is subject to local taxes.

Financial Privacy

There are extensive laws in Panama to protect corporate and individual financial privacy. Strict confidentiality laws and regulations apply to documentation of offshore corporations, trusts and foundations, with severe civil and criminal penalties for violations of confidentiality. The names of corporate shareholders are not required to be publicly registered. Panama also has very strict banking secrecy laws. Panamanian banks are prohibited from sharing any information about offshore bank accounts or account holders. The only exception is a specific Panamanian court order in conjunction with a criminal investigation.

Panama has few tax treaties with countries that have strong economic ties to it, further protecting the financial privacy of offshore banking clients who are citizens of other nations. Panama also offers the benefit of having no exchange controls. This means that for individual clients of Panama’s offshore banking, as well as for offshore business entities incorporated in Panama, there are no limits or reporting requirements on money transfers into or out of the country.

For more on the Panama Papers leak see  Panama Papers Reveal The Secrets Of Dirty Money.