In December, the European Union (EU) came out with what is to be a first step in cracking down on select tax havens that compete with European and American tax havens.
Apple is one of the worst tax dodgers and legally stashes almost $250 billion offshore. It recently moved its hoard from Ireland to the British island of Jersey when Ireland tried to impose some modest tax. Photo: William Murphy, CC 2.0
That first step by the EU formally identified 17 locations it has labeled as being on its “blacklist.” These are for the most part offshore entities that the EU claims do not meet financial transparency and tax fairness requirements and that have also refused to do anything about these issues in the future. By blacklisting those countries, the EU is putting them on notice that it and its member countries will not work with them and that it is aware the tax havens are suspected of being used for illegal purposes. It is also notifying individuals and corporations who may transfer assets to or operate in those locations that they will be watched far more closely in the future.
The 17 blacklisted countries are:
- American Samoa
- Marshall Islands
- Saint Lucia
- South Korea
- Trinidad and Tobago
- United Arab Emirates
The countries that ended up on this list were first notified by the EU in October of major deficiencies in their compliance with transparency and fairness regulations, which they needed to clean up. They were also told they would eventually have to submit to the Organisation for Economic Co-operation and Development’s (OECD’s) common reporting system as well as its “Automatic Exchange of Information” system. Those that stayed on the blacklist after this point either refused to do what was asked or just did not respond to the request.
The EU has been under pressure to take some step against this ongoing international problem. A major prod to force it was the release of what were known as the “Panama Papers” in 2016. That began with a leak of information from a major Panamanian legal group that was and still is heavily involved in offshore business and financial industries. With these papers in hand, the International Consortium of Investigative Journalists (ICIJ) and media partners across the globe dug into the findings and discovered far more than the papers had initially revealed.
Many of the countries on the EU blacklist are either well-known to have been illegal havens for some time or are tiny micro states, many of whose sole economic function appears to be laundering and/or protecting assets behind a tight security shield.
Another positive feature of the blacklist is that it includes four countries (South Korea, Mongolia, Namibia and Tunisia) that are neither micro states nor have been known in the past for tax haven irregularities. This suggests that the EU did some digging in the matter beyond what was revealed in the Panama Papers.
The problem with the blacklist is that it still misses some major tax havens that fall into the EU criteria for needing far more transparency and tax fairness. Worse still, what was left out may be an indication of the EU’s desire to protect the countries that their politicians and wealthy backers still want protected from their gaze. Examples of these are Bermuda, the British Virgin Islands and the Cayman Islands. They are all British Overseas Territories notorious for their past and present active involvement in helping multinational companies hide their wealth and keep money out of the eyes of international monitoring agencies.
The British Virgin Islands omission is odd in part because it was where the law firm behind the Panama Papers leak, Mossack Fonseca, was registered – along with many of the clients it helped set up. Bermuda is a similarly strange omission because Appleby, a law firm at the locus of the Paradise Papers leaks and further offshore shelter deals that ICIJ helped uncover, was located there. Why the British Virgin Islands is not on the blacklist is not clear. Others in this group – Bermuda, the Cayman Islands, Vanuatu, Jersey, Guernsey and Isle of Man – had been put on notice previously by the EU and agreed to commit “to addressing the concerns related to economic substance by 2018.” That “economic substance” is code-speak for the process of setting up shell companies without any real economic activity behind them.
Aruba, Cook Islands, Mauritius, Seychelles and Switzerland went on record to say that they would be amending or completely eliminating unfair and shielded tax practices by 2018. So they escaped the blacklist – at least temporarily.
The anti-poverty organization Oxfam followed up with its own list of countries to blacklist. It included 35 non-EU countries not on the EU list. It also included four countries within the EU itself that are well-known for their protective practices and “flexible” approaches to protecting overseas investors: Ireland, Malta, the Netherlands and Luxembourg.
The Netherlands has long been a protector of major well-known international corporations such as Starbucks, which after criticism for its tax evasion schemes moved its European offices to London a few years ago. Among the practices that Starbucks – and its sheltering country, the Netherlands – had been accused of was using its previous headquarters in Amsterdam as a unique intellectual property licensing hub. By adjusting the fees it charged local subsidiaries for the use of the Starbucks logo and other related properties, Starbucks was allegedly able to transfer income from higher-tax areas like the United Kingdom into lower-tax countries such as the Netherlands. It would do so by asking for higher fees from countries with higher taxes.
Ireland is also a well-known tax haven and the home of many European subsidiaries as well as the global headquarters of many companies one might not even realize are officially registered there. The reason is that it often provides highly preferential tax treatment and legal shelter in return for companies locating there. Apple Inc. is one of the companies with an international headquarters in Ireland and has been criticized for using the country for sheltering taxes and hiding money.
The United States Takes Its Share in the Tax Haven Industry
As the EU gets pressured to update its tax haven lists to be tougher, a surprise that could be coming is the inclusion of multiple legal tax havens present within the United States. With the Panama Papers having shown at least 200 people with U.S. addresses among the client lists of Mossack Fonseca, it might be easy to assume that this connection is the place to look. The truth is much different, however. The reason is that unlike other countries within the EU jurisdiction, the U.S. and local state laws make it extremely easy to hide company ownership and manipulate everything from financial transparency to effective tax rates. As Shruti Shah, vice-president of programs and operations at the anti-corruption group Transparency International, said in a 2016 interview, “You don’t really have to go to Panama or other tax havens. They are not the only ones making it possible for corrupt officials and other criminals to launder their money. You can do it in every state in the U.S.” If someone wants to create a shell corporation, it is in fact quite easy. Shah went on to say: “In every state in the U.S., you can incorporate an LLC – [a limited liability company] – or another legal entity and you don’t have to disclose who the beneficiary on it is. In fact, Delaware is so synonymous with anonymous companies and ghost corporations that it was named in Transparency International’s Unmask the Corrupt campaign as one of the most symbolic cases of corruption.”
Multiple states are actively adjusting their own laws of incorporation, financial disclosure and taxation to encourage shell corporations to locate within their borders. Delaware, which long ago positioned itself as business-friendly, has been so successful in attracting corporate registrations that more than one million business entities are officially incorporated in the state. With more than 50% of all publicly-traded companies and over 60% of the Fortune 500 there, it is likely that many reading this article are currently working for a company incorporated in Delaware, regardless of where its physical headquarters may be.
Part of why Delaware is such an important location is that it has many laws that protect businesses from their customers, employees, shareholders and suppliers. It also has a track record of those laws operating effectively and having survived many legal challenges regarding how they are written. More important for the tax haven side of things for Delaware is how easy it is to set up a company without having to disclose much of anything about its ownership or even necessarily what the company does.
All states in the United States allow corporation registration without having to report any information about “beneficial ownership,” and Delaware is no exception. Within Delaware, however, the protections go a step further, with it actually being harder to apply for a library card (which requires a driver’s license or a utility bill with one’s address on it) than for a corporate registration.
Along with Delaware, Nevada and Wyoming also top the lists for being equally a little too easy to do business for an outside entity. Texas and Florida are close runners-up. This makes them attractive for foreign as well as domestic investors who want a place to park their companies and keep their incomes secret.
Special tax treatment within the states is also attractive. This is part of why Braeburn Capital Inc., an asset management company that happens to be owned by Apple Inc. but is operated with no obvious designation of its relationship to Apple, is headquartered in Reno, Nevada. As to how it operates, that’s best examined by detailed financial analysts, but suffice it to say that Apple has managed to squirrel away a sizable amount of profits from its other businesses and transfer them into Nevada, some of which likely made their way there because of far lower taxes there than in Apple’s real “home state” of California. As of 2016, for example, total assets under management by Braeburn Capital were approximately US$220 billion. This is all part of why when a 2015 analysis of the most attractive tax havens globally was published by the Tax Justice Network, the United States ranked third on the list.
Number one was Switzerland and number two Hong Kong. Despite its recent notoriety, Panama, a rank amateur when it comes to tax evasion compared to its more developed competitors in the tax haven business, came in at number 13 on the list. The United States is more than willing to talk tough when it comes to overseas investments. It also has very tight reins on the flow of money regarding any international bank that wishes to transfer dollars from one bank to another. And until the Chinese yuan, for example, becomes strong enough that some international banks may be able to operate without dollars having to be transferred, the power that comes with that for the United States is not likely to wane anytime soon.
And with America's new tax law theoretically tightening the noose around American corporations that might attempt to launder money overseas, the United States is likely going to get more aggressive on the matter even sooner. Despite that, the United States appears to be more than content with protecting banks and tax havens within its own borders. As can be seen from the state tax shelter competition, it is easier to hide money from U.S. regulators within the United States than it is for the major banks (outside of the most illicit tax havens) located outside of the country.
Look for further legislation from the Republican Congress to make this set of protections even more evident soon. This will get even worse when Mick Mulvaney, currently the Trump White House budget director and the new interim director of the Consumer Financial Protection Bureau, takes control of his new office. It is clear from what has already come out that Mulvaney will emphasize easing regulations rather than getting tougher on enforcement. As proof of where he is heading, the pre-Mulvaney version of the bureau’s website used to say“The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” The new version of that reads“The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law and by empowering consumers to take more control over their economic lives.”
In other words, the role of the bureau is about eliminating legal restrictions and leaving it to consumers to fend for themselves. One can expect further “benefits” of these legal restrictions being eased being bigger profits for the financial services industries, plus possibly a higher ranking in the potential tax haven list worldwide.
In retrospect, at least the EU seems to be trying to do something to tighten the rules on certain tax havens. The actions of EU nations to protect their own, however, in the form of all U.K.-ruled tax havens plus the Oxfam-listed countries of Ireland, Malta, the Netherlands and Luxembourg, shows a real lack of commitment to weeding out such corruption from the globe.
Trump’s United States, which if anything is about to make it even easier to have a tax haven, is more than ever about “America first,” as the President puts it. When he and the Republicans are finished with their damage to the country, tax havens will likely be even more protected and embedded than ever in the fabric of daily American economic life.
It is important to note that just because someone keeps their money in a different country than their main residence it doesn't necessarily mean that they are dodging taxes or engaged in any type of nefarious activity. An offshore account can be an important component of financial risk management and can be essential when doing business internationally.
Then there is the issue of tax slavery. Some countries certainly over-tax residents and do not use all of the money for the benefit of the people. The United States is a prime example of how tax dollars are looted by a criminal oligarchy that uses tax money to enrich itself as the expense of the working class.
Tax avoidance can be an important way to reduce one's personal responsibility for the evil deeds carried out by one's government.
Being a citizen of a particular country does not mean that its government owns you, although many governments would disagree. Humans have a right to not be overtaxed and to take necessary steps to defend their rights.