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Things are getting more cloudy in Panama City. (Photo: Adam Jones

The hypocritical debate on tax havens

Shortly before last week's anti-corruption summit in London David Cameron, the host, called corruption “the cancer at the heart of so many of the world’s problems” and “one of the greatest enemies of progress in our time”. He is trying to stylise himself as an anti-corruption and transparency advocate, bringing financial secrecy to an end and dry out offshore tax havens. Yet British Oversees Territories and Crown Dependencies, such as the British Virgin Islands, were the most commonly used tax havens by Monsack Fonseca, recently revealed in the Panama Papers leak (Cameron had owned shares in an offshore company set up by his father through Monsack Fonseca).

by the Know Nothing Enquirer    18/05/2016

According to the Economist, the British Oversees Territories account for over a quarter of global offshore activity and are very closely linked to the City of London. Those looking for tax havens or places where  they can easily launder their money have numerous options, including the UK and the US. Until 2013, wealthy individuals purchasing property in the UK by using overseas trustee companies did not have to pay stamp duty. At least £100 billion worth of property has been bought in London since 2008 through oversees companies, most of them based in Jersey, Guernsey, the Isle of Man and the British Virgin Islands. Individuals buying property through companies registered in these territories often use them to conceal their identity. In effect, to avoid paying inheritance or corporate gains taxes. A large number of property bought through these channels is also likely to be linked to money laundering and corruption. The Private Eye has put all these properties into an interactive map

Cameron has recently announced that he will make an end to this practice and push further on making property ownership "fully transparent". Specifically this will entail that the government "will insist that all foreign companies that own properties in the UK will also have to register publicly who really controls them, and that no foreign company will be able to buy UK property or bid for central government contracts without joining this register".

In the US tax avoidance is even easier and you do not even have to leave the country to set up a company without stating the beneficiaries. These anonymous companies have been used to conceal assets, significantly reduce tax liability and commit crimes. Delaware is the most popular tax haven in the country. The state is home to more companies than people. 1209 North Orange Street, Wilmington is the registered address of more than 285,000 companies, including some of America's largest corporations. 65% of Fortune 500 parent companies are registered in the state. Shell companies are not the only reasons why so many corporations, including foreign companies (with over 2,000 registered FTSE 100 subsidiary companies), choose Delaware as their preferred tax haven.  

The state is not only very business friendly (and shareholder unfriendly), but companies can also be set up within a few hours without providing any details on the true owners (only requiring a "registered agent"). And then there is also the "Delaware loophole".

1209 North Orange Street - home of over 285,000 companies. 

The Institute on Taxation and Economic Policy (ITEP) points out that Delaware is not a classical tax haven with no corporation tax (such as South Dakota). Rather, it has become so popular because it does not levy taxes on income from intangible assets, including interest and investment income as well as income generated from intellectual property, held by a “Delaware Holding Company” or a “Passive Investment Company". Corporations set up holding companies in the state that the parent company or other subsidiaries pay for using intellectual property - without paying any taxes on that income. Meanwhile the parent company can deduct these expenses from their tax liability in their home states. Therefore, significantly reducing the amount of taxes paid by the company. According to the ITEP, companies using the "Delaware strategy" can reduce their tax liability by 15% to 24%.

South Dakota, Nevada and Alaska are lesser known US tax havens. South Dakota is the most popular state to setup trusts - there is no personal or corporate income tax, under certain circumstances no inheritance tax and strong asset protection laws. State laws only require that someone from the state serves as director, administrative work has to be carried out within the state and two board meetings have to be held in the state. Trusts often share offices and receptionists. The building in 201 South Phillips Avenue in Sioux Falls administers over $80 billion. Assets administered by trusts in South Dakota have increased form $32.8 billion in 2006 to more than $226 billion in 2014. 

FT Investigation's podcast on family trusts in South Dakota.

$80bn worth of trust assets are administered in this building. 

Western leaders agree that tax havens should be abolished and have started to act more consistently. Barack Obama recently said in a White House press briefing that tax havens are "gaming the system". Hillary Clinton has called offshore tax havens "a perversion" of the legal code (even though her Delaware-based company has collected more than $16 million worth of speaking fees and book royalties). According to Boston Consulting Group estimates, there is $800 billion of offshore wealth in the US. This is still well behind Switzerland’s $2.7 trillion, but it is expected to grow nearly 6% annually. While the US is acting aggressively to end the existence of tax havens abroad and foreign banks helping US citizens hide their money, it is actually offering similar services to foreigners in Delaware or South Dakota (even though the White House announced last week to end this, the proposals would not change much according to the FT). 

 

The US is in an extremely powerful position due to its huge economy. Without America joining the other major economies in their fight against tax havens, any international negotiations are useless. When asked about America's position in the international negations against tax evasion, Wolfgang Schäuble, Germany's finance minster, said that even if the US did not act perfectly it is "better than nothing".  

 

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