Tax havens: The US is the new Switzerland
Looking to hide assets or avoid taxes in your home country? America welcomes your money. The US claimed the #2 spot on the Financial Secrecy Index (FSI), as measured and studied by the Tax Justice Network (TJN). In the fallout of the Panama Papers and the Paradise Papers, there is an increased focus on financial secrecy and how it facilitates illicit activity, tax evasion, and capital flight. Financially secretive jurisdictions, also known as tax havens, are no longer limited to small tropical islands with palm trees. Instead, they now include some of the largest countries in the world.
How did the US make it to #2, just behind Switzerland?
I suspect some of you are surprised to know that the US is the 2nd most financially secretive nation in the world. However, it really isn’t that surprising. Please let me explain.
The FSI ranks jurisdictions according to their secrecy and the scale of their offshore financial activities. It is a tool for understanding global financial secrecy, tax havens, and illicit financial flows.
Specifically, the FSI studies such things as:
Whether a country has a publicly accessable database of beneficial owners of companies
The extent of bank secrecy and anti-money laundering laws
The breadth of international cooperation in exchanging information and entering into bi-lateral tax treaties
Although the US scores highly in the strength of its anti-money laundering laws, it fails dismally in transparency of company ownership and automatic exchange of information with other countries.
Failing in automatic data exchange
The US has FATCA, the Foreign Account Tax Compliance Act. See my previous post on that here. There are two (2) important things to know about FATCA. First, it requires all foreign banks to share personal information of its US customers with the IRS or risk paying a 30% tax. However, for the purpose of secrecy, FATCA does not require the US to provide reciprocal services to the foreign bank. In other words, US banks are not mandated to share information on foreign nationals who have accounts in US banks. You can probably start to see the problem with this arrangement.
The US has not agreed to the international standard of common reporting (CRS) which provides a reciprocity of reporting between counties to prevent tax evasion. As of January 2018, 98 countries have signed an agreement on CRS. Instead, it sticks with FATCA (see above).
Lacking in beneficial ownership disclosure
The US has many states that provide extreme anonymity and secrecy in identifying the actual human being(s) that own(s) a company. Nevada, Delaware, Wyoming, and South Dakota are atop the list with minimal requirements for forming a company. For example, to form a limited liability company (LLC) in Delaware, one just needs to hire a registered agent and pay a filing fee. There is no requirement to name member(s) of the LLC. When you don’t know who ultimate benefits from the activity of the company, it is difficult to prevent potentially nefarious activities such as money laundering, kleptocracy enabling, or terrorist financing.