Jun. 15, 2009
President Obama has put the fight against tax evasion high on his political agenda, especially with respect to money in global offshore centres. During his campaign Obama liked to joke that one building on the Cayman Islands had 12,000 registered US-tenants, being either the world’s largest building or the world’s biggest tax scam. Now the Cayman Islands are fighting back: In a press release they claim that 1209 North Orange Street in Wilmington Delaware is home to some 217,000 companies (including Ford, American Airlines, General Motors, Coca-Cola and Kentucky Fried Chicken).
The US-states of Delaware, Florida, Nevada, Alaska and Wyoming are notorious for business-friendly legislation and easy incorporation. The state of Delaware has especially come under scrutiny lately because of its tax laws. A company that is legally domiciled in Delaware is exempted from state income tax if the company and its shareholders remain non-resident and conduct no direct business in the state. The company has to pay only a very low franchise tax of 1% of authorised share capital. However, federal income taxes have to be paid. Foreign governments are criticising the US for its perceived double standard. The prime minister of Luxembourg, Claude Juncker, was quoted as saying that the US should be put on the same black list as other alleged tax havens because of internal “offshore centres” like Delaware. Brazil has even officially declared Delaware a tax haven with implications for transfer pricing of Brazilian companies. Foreigners can use the Delaware LLC (Limited Liability Company) since the identity of the owners of such LLCs need not be disclosed as also the transfer of ownership. There is also no state inheritance tax on stocks held by non-residents of Delaware. Richard Murphy of Tax Research UK comments “The Delaware LLC – it got to go!”
The other states in the US are putting pressure on their neighbouring states, the “internal” tax havens. About 20 US states have recently made laws that would effectively stop companies from using the tax advantages in Delaware. The New York Times quotes Shirley Sicilian, the general counsel of the Multistate Tax Commission, an intergovernmental state tax agency: “states increasingly want to make sure that income that’s earned in their state is actually taxed in their state, particularly in a bad fiscal situation like now.”
It seems that the global recession is heating up the debate on offshore centres and tax havens to a boiling point. Governments are chasing wealthy taxpayers be it as private citizens or as corporate entities, like some rare and extremely valuable animal. A glimmer of hope remains that with the recession easing the debate may actually shift from how to tax people out of their wealth to the issue on how people and companies can be induced to become innovative and productive again in order to generate new wealth. Governments should not forget that a cake has to be baked first before it can be cut-up and distributed.