United States as a tax haven

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The United States "is effectively the biggest tax haven in the world"

Contents

Andrew Penney, Rothschild & Co. [1]

In 2010, the United States implemented the Foreign Account Tax Compliance Act; the law required financial firms around the world to report accounts held by US citizens to the Internal Revenue Service. The US on the other hand refused the Common Reporting Standard set up by the Organisation for Economic Co-operation and Development, alongside Vanuatu and Bahrain. [2]

This means the US receives tax and asset information for American assets and income abroad, but does not share information about what happens in the United States with other countries. In other words, it has become attractive as a tax haven. [1]

Extent

"The United States, which has for decades hosted vast stocks of financial and other wealth under conditions of considerable secrecy, has moved up from sixth to third place in our index. It is more of a cause for concern than any other individual country – because of both the size of its offshore sector, and also its rather recalcitrant attitude to international co-operation and reform. Though the U.S. has been a pioneer in defending itself from foreign secrecy jurisdictions, aggressively taking on the Swiss banking establishment and setting up its technically quite strong Foreign Account Tax Compliance Act (FATCA) – it provides little information in return to other countries, making it a formidable, harmful and irresponsible secrecy jurisdiction at both the Federal and state levels."

Tax Justice Network [3] [4]

The Tax Justice Network ranks the US third in terms of the secrecy and scale of its offshore financial industry, behind Switzerland and Hong Kong but ahead of the Cayman Islands and Luxembourg. [2] The United States has been popular as a destination for offshore funds for Chinese investors, said Canadian financial crimes expert Bill Majcher, because investors think it will resist pressure from China. [5] Andrew Penney from Rothschild & Co described the US as "effectively the biggest tax haven in the world" and Trident Trust Co., one of the world's biggest providers of offshore trusts, moved dozens of accounts out of Switzerland and Grand Cayman, and into Sioux Falls, saying: "Cayman was slammed in December, closing things that people were withdrawing ... I was surprised at how many were coming across that were formerly Swiss bank accounts, but they want out of Switzerland." [1]

A 2012 study by various US universities showed that the US has the most lenient regulations for setting up a shell company anywhere in the world outside of Kenya. [6] Tax havens such as the Cayman Islands, Jersey and the Bahamas were far less permissive, researchers found, than states such as Nevada, Delaware, Montana, South Dakota, Wyoming and New York. [2] [6] "[Americans] discovered that they really don't need to go to Panama", said James Henry of the Tax Justice Network. [2] For example, a single address in Wilmington (1209 North Orange Street) is listed as the headquarters for at least 285,000 separate businesses [7] due to Delaware's desirable corporate taxes and law. As of 2016, it was estimated that 9 billion dollars of potential taxes were lost over the past decade, due to the Delaware 'loophole'. Both Hillary Clinton and Donald Trump have firms registered in North Orange Street, [8] and lawyers, trust companies and financial firms including Rothschild & Co are moving offshore accounts from locations such as Switzerland and the Cayman Islands into the US to take advantage of the country's loose regulations, calling it the "new Switzerland" (see Banking in Switzerland). [1]

Mark Hays of Global Witness said "the US is one of the easiest places to set up so-called anonymous shell companies", [2] and Stefanie Ostfeld from the same organization said that "the US is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama". [9] More than 1.1 million live legal entities were incorporated in Delaware at the end of 2014. An increasing number – more than 70% – of those were LLC. [10] The Delaware Division of Corporations said in August 2015 that "an LLC entices all types of people since it is easy to operate and oversee", and Delaware is currently one of the few states without sales tax. [11] Delaware does not tax companies which operate there, nor their royalty income. However, the LLC is more popular and often less expensive in states such as Wyoming, Nevada and Oregon. Approximately 668,000 anonymous LLCs are registered just in those three states. [10]

Parts of the country serve as havens for others, and for covert governmental actions. [12] In the 1980s the Central Intelligence Agency (CIA) used Guam as the location for a trust incorporation. [12] The CIA then used Guam as an offshore haven both from taxes and from scrutiny in the course of operating a Hawaiian front company. [12] : 334 

Offshore tax avoidance

Despite this[ clarify ], the US Public Interest Research Group (PIRG) said in 2014 that the United States loses roughly $184 billion per year due to corporations such as Pfizer, Microsoft and Citigroup using offshore tax havens to avoid paying US taxes. According to PIRG:

Pandora Papers, 2021

The October 2021 release of the Pandora Papers revealed details of a number of non-U.S. figures who have used U.S. tax haven services. These include 35 world leaders and over 100 billionaires, celebrities, and business leaders.

See also

Related Research Articles

<span class="mw-page-title-main">Economy of the Cayman Islands</span> National economy fueled by financial services and tourism

The economy of the Cayman Islands, a British overseas territory located in the western Caribbean Sea, is mainly fueled by the tourism sector and by the financial services sector, together representing 50–60 percent of the country's gross domestic product (GDP). The Cayman Islands Investment Bureau, a government agency, has been established with the mandate of promoting investment and economic development in the territory. Because of the territory’s economic success and it being a popular banking destination for wealthy individuals and businesses, it is often dubbed the ‘financial capital’ of the Caribbean.

Corporate haven, corporate tax haven, or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes, and/or favourable secrecy laws, and/or favourable regulatory regimes.

<span class="mw-page-title-main">Banking in Switzerland</span>

Banking in Switzerland dates to the early eighteenth century through Switzerland's merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Banking is seen as emblematic of Switzerland. The country has a long, kindred history of banking secrecy and client confidentiality reaching back to the early 1700s. Starting as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of the landmark federal law, the Federal Act on Banks and Savings Banks. These laws, which were used to protect assets of persons being persecuted by Nazi authorities, have also been used by people and institutions seeking to illegally evade taxes, hide assets, or generally commit financial crime.

An offshore bank is a bank regulated under international banking license, which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.

Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes. Tax avoidance should not be confused with tax evasion, which is illegal.

<span class="mw-page-title-main">Shell corporation</span> Company with few, if any, actual assets or operations

A shell corporation is a company or corporation that exists only on paper and has no office and no employees, but may have a bank account or may hold passive investments or be the registered owner of assets, such as intellectual property, or ships. Shell companies may be registered to the address of a company that provides a service setting up shell companies, and which may act as the agent for receipt of legal correspondence. The company may serve as a vehicle for business transactions without itself having any significant assets or operations.

Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are used to pay less tax in many countries by large and small-scale investors. Poorly regulated offshore domiciles have served historically as havens for tax evasion, money laundering, or to conceal or protect illegally acquired money from law enforcement in the investor's country. However, the modern, well-regulated offshore centres allow legitimate investors to take advantage of higher rates of return or lower rates of tax on that return offered by operating via such domiciles. The advantage to offshore investment is that such operations are both legal and less costly than those offered in the investor's country—or "onshore".

A tax haven is a jurisdiction with very low "effective" rates of taxation for foreign investors. In some traditional definitions, a tax haven also offers financial secrecy. However, while countries with high levels of secrecy but also high rates of taxation, most notably the United States and Germany in the Financial Secrecy Index ("FSI") rankings, can be featured in some tax haven lists, they are not universally considered as tax havens. In contrast, countries with lower levels of secrecy but also low "effective" rates of taxation, most notably Ireland in the FSI rankings, appear in most § Tax haven lists. The consensus on effective tax rates has led academics to note that the term "tax haven" and "offshore financial centre" are almost synonymous.

<span class="mw-page-title-main">Tax inversion</span> Corporate relocation to a lower tax location

A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the original parent company becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country. Executives and operational headquarters can stay in the original country. The US definition requires that the original shareholders remain a majority control of the post-inverted company.

<span class="mw-page-title-main">Ugland House</span> Headquarters of Maples and Calder

Ugland House is a building located in George Town, Cayman Islands. Located at 121 South Church Street, the building is occupied by the law firm Maples and Calder and is the registered office address for 40,000 entities, including many major investment funds, international joint ventures and capital market issuers.

<span class="mw-page-title-main">Offshore financial centre</span> Corporate-focused tax havens

An offshore financial centre (OFC) is defined as a "country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy."

The International Consortium of Investigative Journalists, Inc. (ICIJ), is an independent global network of 280 investigative journalists and over 140 media organizations spanning more than 100 countries. It is based in Washington, D.C. with personnel in Australia, France, Spain, Hungary, Serbia, Belgium and Ireland.

The Financial Secrecy Index (FSI) is a report published by the advocacy organization Tax Justice Network (TJN) which ranks countries by financial secrecy indicators, weighted by the economic flows of each country.

<span class="mw-page-title-main">Mossack Fonseca</span> 1977–2018 Panamanian law firm and corporate service provider

Mossack Fonseca & Co. was a Panamanian law firm and corporate service provider. At one time it was the world's fourth-largest provider of offshore financial services. From its 1977 foundation until the April 2016 publication of the Panama Papers, it remained mostly obscure, even though it sat at the heart of the global offshore industry and acted for about 300,000 companies. More than half were registered in British tax havens, as well as in the United Kingdom.

The Common Reporting Standard (CRS) is an information standard for the Automatic Exchange Of Information (AEOI) regarding financial accounts on a global level, between tax authorities, which the Organisation for Economic Co-operation and Development (OECD) developed in 2014.

<span class="mw-page-title-main">Panama Papers</span> 2016 document leak scandal

The Panama Papers are 11.5 million leaked documents that were published beginning on April 3, 2016. The papers detail financial and attorney–client information for more than 214,488 offshore entities. The documents, some dating back to the 1970s, were created by, and taken from, former Panamanian offshore law firm and corporate service provider Mossack Fonseca.

The Republic of Panama is one of the oldest and best-known tax havens in the Caribbean, as well as one of the most established in the region. Panama has had a reputation for tax avoidance since the early 20th century, and Panama has been cited repeatedly in recent years as a jurisdiction which does not cooperate with international tax transparency initiatives.

<span class="mw-page-title-main">Conduit and sink OFCs</span> Classification of tax havens

Conduit OFC and sink OFC is an empirical quantitative method of classifying corporate tax havens, offshore financial centres (OFCs) and tax havens.

<span class="mw-page-title-main">Ireland as a tax haven</span> Allegation that Ireland facilitates tax base erosion and profit shifting

Ireland has been labelled as a tax haven or corporate tax haven in multiple financial reports, an allegation which the state has rejected in response. Ireland is on all academic "tax haven lists", including the § Leaders in tax haven research, and tax NGOs. Ireland does not meet the 1998 OECD definition of a tax haven, but no OECD member, including Switzerland, ever met this definition; only Trinidad & Tobago met it in 2017. Similarly, no EU–28 country is amongst the 64 listed in the 2017 EU tax haven blacklist and greylist. In September 2016, Brazil became the first G20 country to "blacklist" Ireland as a tax haven.

<span class="mw-page-title-main">Panama Papers (North America)</span> Details from the Panama Papers concerning North America

The Panama Papers are 11.5 million leaked documents that detail financial and attorney–client information for more than 214,488 offshore entities. The files were uncovered and exposed by the International Consortium of Investigative Journalists, the German newspaper Süddeutsche Zeitung and other news organizations. The documents, some dating back to the 1970s, were created by, and taken from, Panamanian law firm and corporate service provider Mossack Fonseca, and were leaked in 2015 by an anonymous source.

References

  1. 1 2 3 4 Drucker, Jesse (January 27, 2016). "The World's Favorite New Tax Haven Is the United States". Bloomberg Businessweek. Retrieved April 23, 2016.
  2. 1 2 3 4 5 Swanson, Ana (April 5, 2016). "How the U.S. became one of the world's biggest tax havens". Washington Post. Retrieved April 23, 2016.
  3. ↑ "Financial Secrecy Index 2015 reveals improving global financial transparency, but USA threatens progress" (PDF). Tax Justice Network. November 2, 2015. Retrieved May 2, 2016.
  4. ↑ Wood, Robert W. (January 27, 2016). "The World's Next Top Tax Haven Is...America". Forbes. Retrieved May 2, 2016.
  5. ↑ Yasuo Awai (23 April 2016). "A third of Panama Papers shell companies set up from Hong Kong, China". Nikkei Asian Review. Archived from the original on 15 May 2016. Retrieved 23 April 2016.
  6. 1 2 Michael Findley, University of Texas at Austin; Daniel Nielson, Brigham Young University; Jason Sharman, Griffith University. "Global Shell Games: Testing Money Launderers' and Terrorist Financiers' Access to Shell Companies".{{cite journal}}: Cite journal requires |journal= (help)
  7. ↑ Leslie Waynejune: How Delaware Thrives as a Corporate Tax Haven, The New York Times , June 30, 2012
  8. ↑ Neate, Rupert (2016-04-25). "Trump and Clinton share Delaware tax 'loophole' address with 285,000 firms". The Guardian. ISSN   0261-3077 . Retrieved 2016-04-25.
  9. ↑ Drucker, Jesse (April 5, 2016). "Panama Has Company as Bank-Secrecy Holdout, as U.S. Offers Haven". Bloomberg. Retrieved May 2, 2016.
  10. 1 2 "In the City: Shady sunspots". Private Eye. No. 1416. April 15, 2016. p. 41.
  11. ↑ Melsen, Brett (August 31, 2015). "Delaware Division of Corporations 2014 Annual Report". www.delawareinc.com. Delaware Division of Corporations. Retrieved April 24, 2016.
  12. 1 2 3 Rogers, Robert (1995). Destiny's Landfall : A History of Guam. University of Hawai'i Press. pp. xi+380. ISBN   0-8248-1616-1. ISBN   0-8248-1678-1.
  13. ↑ "Picking Up the Tab 2014". U.S. PIRG. April 15, 2014.
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