In Depth February 11, 2010, 5:00PM EST

A Caribbean Tax Holiday for U.S. Businesses

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One of the initial targets, Internet gaming company Bet on Sports, shut down in 2006 after the IRS alleged it illegally solicited bets from American citizens and routed payments to offshore bank accounts.

FriendFinder Networks, based in Boca Raton, Fla., runs dating Web sites, including some that appear to promote casual sex. Assembled from components of the adult entertainment company Penthouse Media Group, FriendFinder reported $224 million in revenue for the first nine months of 2009. The company processes the bulk of its credit-card revenue through a subsidiary in tropical St. Kitts, a low-tax jurisdiction, according to filings with the Securities & Exchange Commission. FriendFinder CEO Marc H. Bell declined to comment.

Now, more mainstream businesses are exploring sending card receipts abroad, according to card-processing experts. Charles Carillo says he spends 70% of his workday as a manager at the processor Offshore Merchants arranging IRS-compliant foreign accounts for U.S.-based businesses. These range from travel agents to loan modification companies to online vitamin marketers. He won't name his clients. "On average, we set up about 20 accounts a day for U.S. businesses," Carillo says.

Some American businesses say that because domestic banks view them as too risky, their only feasible option is to process card receipts abroad. "A lot of businesses—like ticket sales, or gym membership providers—can't get a U.S. merchant account," says Peter McFarlane, who writes a financial newsletter called The Q Wealth Report. "Regardless of their individual financials, they are deemed way too prone to charge-backs," meaning customers who cancel orders. Banks generally don't like doing business with smaller companies that have high rates of cancellation.

Others familiar with card processing say taxes almost always figure into the decision to go offshore. Robert Bauman, a former Republican member of the U.S. House of Representatives from Maryland, works with Sovereign Society, an asset protection company in Delray Beach, Fla. Apart from avoiding the attention of the IRS, he says, "There is simply no reason that a U.S. business needs to have card proceeds deposited in a low-tax locale."

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Less Taxing Places to Retire

The Daily Telegraph offered a different perspective on offshore tax havens in a Feb. 10 dispatch. The British paper suggested that retirees "may like to look further afield from the usual countries to get the best tax breaks and income tax rates." Monaco and Andorra, for example, offer a sense of romance, and neither country has taxes on income, inheritance, or wealth, the newspaper noted.

To read the full article from the Telegraph, go to http://bx.businessweek.com/tax-reduction/reference/

Silver-Greenberg is a reporter for BusinessWeek.com.