IRS Targeting Offshore Employee Leasing Arrangements

by Leroy Baker, Tax-News.com, New York

09 April 2003

The Internal Revenue Service and Treasury Department is encouraging previous participants of certain deferred compensation arrangements with offshore employee leasing firms to take part inw its Offshore Voluntary Compliance Initiative (OVCI) or face penalties.

These leasing arrangements are designed to minimise the amount of personal and corporate taxation both employees and employers pay. Under the scheme, an employee would 'resign' from his job and sign a contract with an offshore based employee leasing firm. This leasing firm would then lease the employee's services back to his original employer indirectly through one or more entities.

This type of operation has been used widely in the medical profession, and a recent outreach project by the IRS sought to warn doctors in particular that it will prosecute if it deems the arrangement to be purely a tax avoidance mechanism. This can be judged to be the case, according to the IRS, if the professional is, in effect, performing the same service for the same employer at the same level of pay.

"Numerous cases have been litigated in which substance rather than form determines tax treatment. In the arrangement described above, the form of the transaction has changed, but the substance has not," the tax agency explained in a statement released to coincide with the outreach project.

The IRS's OVCI is also offering an amnesty from prosecution to Americans drawing income through offshore debit and credit cards. It expires on April 15.

 

 

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