Otherwise known as taxation. As the removal of capital controls (mostly during the 1980s) opened up international investment opportunities, regulators and national tax authorities were faced with a rapid growth in offshore assets which were outside national tax nets, but in the ownership of their citizens. These assets were a mixture of bank deposits, fund investments, property assets and shareholdings, and were held through a variety of mechanisms, the most important being direct ownership, trusts, and holding companies.

With varying degrees of speed and efficiency, the rich (highly-taxed) countries moved to stop up the loopholes through which tax on offshore assets is 'lost', as they put it. The mechanisms include:

• Controlled Foreign Company (CFC) legislation or equivalent, which imposes tax on the undistributed profits of a foreign company controlled by a resident in a high-tax country;

• Anti-avoidance legislation aimed at removing the tax advantages of trust settlements;

• Taxation of foreign gains as income even if they are capital in nature (especially nasty, this one);

• Pressurising offshore jurisdictions to agree to 'exchange of information' and mutual assistance treaties.

• The taxation of savings interest income for European residents via the introduction, in 2005, of the Savings Tax Directive.

As an example of how bad it can get, here is a description of how the US effectively prevents its residents from holding foreign fund assets.

US legislation introduced in 1986 imposed taxation of the accumulated income of Passive Foreign Investment Corporations (PFICs). An offshore fund is a PFIC if 75% of its income is passive income, or if 50% of its assets produce passive income. Passive income includes dividends, interest, royalties, rents, annuities, net gains on disposals of passive-income-producing assets, gains from foreign currency and commodity transactions. Can you think of anything they left out? In fact, it is hopeless for a fund to try to escape.

A US resident holding only a small proportion of a PFIC's assets (effectively, almost all investors other than extremely wealthy people) is charged with US income tax at the top rate on the increase in the fund's assets each year (and US income tax rates are higher than capital gains tax rates). The tax is not payable until the fund shares are disposed of, but interest is charged on the annual tax assessments, which are calculated retrospectively by allocating the final gain equally to the years since acquisition. A taxpayer can make a QEF election (with permission!) to pay tax annually on the gain in the fund's asset value (usually excluding unrealised capital gains) but a fund with QEF-election shareholders faces a massive task in providing the shareholders with the information they need to satisfy the IRS.

The situation with regards US investors got a whole lot worse with the enactment of the Foreign Account Tax Compliance Act in March 2010. This legislation makes a number of changes to tax law affecting individuals with foreign bank accounts and assets held abroad.

The FACTA amends the Internal Revenue Code to revise and add reporting and other requirements relating to income from assets held abroad by requiring foreign financial and nonfinancial institutions to withhold 30% of payments made to such institutions by US individuals unless such institutions agree to disclose the identity of the individuals and report on their bank transactions. The law also denies a tax deduction for interest on non-registered bonds issued outside the United States.

Any individual who holds more than USD50,000 in a depository or custodial account maintained by a foreign financial institution is required to report on any such account under this legislation.

Underpayments of tax attributable to undisclosed foreign financial assets will attract enhanced penalties under the new reporting regime. In addition, the limitation period for assessment of underpayments with respect to assets held outside the United States is being extended.

Other provisions require US shareholders of a passive foreign investment company to file annual information returns, and allow the Secretary of the Treasury to require certain financial institutions to file returns related to withholding on transactions involving foreign persons on magnetic media (currently, electronic filing is required only for taxpayers filing at least 250 returns).

Furthermore, the FACTA imposes reporting requirements on owners of foreign trusts and sets forth tax penalties for failure to report on transfers to and distributions from such trusts.

You can see that between the dangers of accepting US investors in the first place, and the administrative overhead and loss of privacy involved in satisfying QEF-election information requirements, many funds would think that US investors are more trouble than they are worth, unless a fund is designed from the ground up to accommodate them.

Although the US PFIC legislation is very nasty (and far more complicated than the highly simplified account given above), the rules in most OECD countries are much less extreme, and in many high-tax countries there are plentiful tax-planning opportunities for residents who want to make offshore investments. So don't give up! But do take advice from competent professionals - there are traps in tax legislation, and financial or criminal penalties for those who get it wrong.