Until the Tax Reform Act of 1986, Saipan, which is part of the Mariana Islands east of the Philippine Islands, was a legal--and popular--tax haven. Under the old law, U.S. citizens could become legal residents of U.S. possessions, such as the Mariana Islands, and satisfy their U.S. tax obligations by satisfying their obligations in their legal residence. But this activity is outlawed under the reform act. "It's simply illegal," says Richard Heller, a partner in the Los Angeles office of Peat, Marwick Main & Co.
There is still another reason your friends have heard about Saipan tax shelters. According to the IRS, Saipan gives a 95% tax rebate on income generated by the sale of goods and services within the Mariana Islands. Some tax shelter promoters have interpreted Saipan's policies to mean that the rebate applies to companies registered on the Mariana Islands and have suggested that Americans run their U.S. operations through a Saipan corporation.
Not surprisingly, the IRS has a different interpretation. The U.S. government contends that the 95% rebate applies only to income generated on the Mariana Islands and that U.S. tax laws and rates apply to income from U.S. operations. Further, the IRS wants you to believe that they are wise to Saipan tax shelter operations.