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Offshore financial centers are often
used to run tax shelters. They have
little or no taxes, and little or no
financial regulations. For example,
in the British Virgin Islands,
corporations can be formed without
the public disclosure of the names
of the directors or officers of the
corporation. Favorite offshore tax
havens include colonial relics such
as the Cayman Islands (British), the
Dutch Antilles and Curacao
(Netherlands). Other places are
feudal relics like Monaco,
Liechentenstein and Andorra in
Europe, or other nominally
independent small nations from the
old British, Dutch and French
Empires. Other places historically
in the U.S. zone of influence are
Panama and the U.S. Virgin Islands.
The leading offshore center is the
Cayman Islands, which is now the
fifth largest banking center in the
world, after New York, London, Tokyo
and Hong Kong. This is the backdrop
on looking over legal papers from a
court opinion on July 20th 2006. The
judge in Texas District court ruled
that certain technicalities of the
case against the BLIPS tax shelter
were wrong. This will have some
effects in the case against 8 KPMG
Accounting Firm former executives.
KPMG itself has already pled guilty
and paid a $456 million fine. One
gets a feeling how these illegal tax
shelter were carried out from these
papers. BLIPS stands for Bond Linked
Issue Premium Structure. It created
a financial structure to make the
capital gains tax deductions,
through a capital loss. However,
this “loss” had been paid at the
beginning of the deal as the
“premium”, hence the “BLIPS”.
The mechanism was as follows: Two
companies in the Isle of Man (UK),
St. Croix and another investment
firm “Rogue” each borrowed $41.7
million from National Westminster
Bank. The loans were for 7 years at
fixed interest rates. The loans paid
Interest Only, until a balloon
payment at the end of the 7 years.
St. Croix and Rogue agreed to pay
high interest rates of 17.97%, in
exchange for a $25 million payment
to them from Nat West at the time
the loans originated. So St. Croix
and Rogue, received at the beginning
of the loans a total of $66.7
million. Then the $66.7 million plus
$1.5 million from each was put in an
interest bearing loan at Nat West.
In addition, St. Croix and Rogue
agreed to pay $25 million to NatWest,
if they paid off the loan early,
which is exactly what they did a
couple of weeks later, May 25th,
2000. To make it a little juicier,
the two onshore companies behind the
offshore companies had an interest
swap deal with NatWest, where they
received a floating interest rate,
in exchange for the high fixed
interest rate. Those under
indictment argued that the $25
million that they received upfront
was a liability or not. It was money
they received, but it was not
actually “loaned” to them.
Plaintiffs argued that it was not a
liability under IRS section 762,
because this money was never lent to
them. The tax shelters aim to create
an illusion of capital losses, and
also interest payments, both of
which are tax deductible.
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