While the offshore entity existed, one was free to borrow money from it and deduct interest paid on the loans, thus expatriating more money. These foreign corporations or trusts were considered beyond the jurisdiction of the US tax code. Congress did not look kindly upon such transactions however, and beginning in 1932, gradually tightened up the law. The IRS did its part by writing pages and pages of complex, inconsistent, and incoherent regulations dealing with foreign entities controlled by Americans. The United States, by the way, is unique among the major civilised nations because it taxes the income of its citizens earned anywhere in the world.
Most countries collect taxes only on income earned within their borders.
Foreign entities that do not do business in the United States and are not controlled by US persons are not subject to US taxes. If a US person is found to have some controlling interest in a foreign entity, however, he may find himself with taxable income even though the entity has no other US contacts. US taxpayers heading overseas for tax savings represent two different approaches. These are transactions that the IRS could set aside if it knew all the facts but these taxpayers hope that the agency will never discover the whole truth. The other group of taxpayers wants to remain within the law.