The complicity of American states in aiding large scale tax evasion puts a question mark on US rhetoric.
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American states culpable in Pandora Papers
- The story: The release of the Pandora Papers report by ICIJ (International Consortium of Investigative Journalists) has shed light on the financial dealings of the elite and the corrupt. The report exposes how the elite and the corrupt have used offshore accounts and tax havens to shield trillions of dollars in assets, thus robbing of nation-states of their due taxes. In this, the words of America speak louder than its actions.
- America the culprit: It has shockingly exposed accounts in trusts scattered throughout the United States, including 81 in South Dakota, 37 in Florida and 35 in Delaware. Among those who have used South Dakota trusts as tax havens are Guillermo Lasso, president of Ecuador, and family members of Carlos Morales Troncoso, former vice president of Dominican Republic.
- A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment.
- What attracts money to these states is elimination of rule against perpetuities by tax havens, thus allowing the establishment of so-called dynasty trusts in which wealth can be passed across generations while avoiding federal estate taxes.
- Rule against perpetuity limits the maximum time period beyond which property cannot be transferred. Laws in South Dakota and Delaware allow asset protection trusts which aid wealthy lawyers and doctors to shield their assets from malpractice claims.
- They can be used to protect assets from ex-spouses, future spouses, disgruntled business partners or angry clients. They also provide wealthy people with considerable flexibility in establishing, controlling and modifying trusts as they see fit. Trusts established in Delaware are not subject to state income tax if the beneficiaries are not Delaware residents.
- South Dakota does not tax personal income, corporate income or capital gains. It provides extensive privacy protections for assets held in trusts while Delaware registers limited liability companies, including shell companies to hide assets or financial transactions.
- Why do the states do it: The state of Delaware collected almost $81 million in franchise taxes from banks and trust companies in fiscal 2020. A 2011 report estimated that out-of-state trusts had contributed between $600 million and $1.1 billion per year to Delaware’s economy.
- What was done about it: Tighter scrutiny of trust companies working with foreign clients has been called. The Corporate Transparency Act requires many businesses to identify their beneficial owners who exercise substantial control or who own or control at least 25% of the ownership interests. The law also aims at banning anonymous shell companies that have been used to hide financial dealings and launder money, but it includes several exemptions.
- The big fish: Among the spectacular disclosures was that King Abdullah II of Jordan used shell companies based in the British Virgin Islands to buy, among other properties, a $23 million California mansion. The King’s covert purchase of high-end U.S. real estate through BVI companies, juxtaposed with the United States’ role as Jordan’s largest provider of bilateral assistance (amounting to more than $1.5 billion in 2020), dramatically underscores the tension inherent in U.S. jurisdictions serving as tax havens.
- American hypocrisy: While the Internal Revenue Service and the Department of Justice have devoted resources to combating the evasion of U.S. tax obligations — through programmes such as the IRS Offshore Voluntary Disclosure Program and the DOJ Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks —efforts to constrain the use of U.S. jurisdictions as tax havens for the benefit of non-U.S. taxpayers have not been pursued with equal fervour. The Tax Justice Network 2020 Financial Secrecy Index ranked the United States the second most secretive jurisdiction, compared with 132 others, noting that “after initially agreeing to multilateral information exchange, the [U.S.] made a rapid U-turn and has since refused to provide information to most other jurisdictions—despite continuing to insist, with menaces, on receiving information from others.”
- EXAM QUESTIONS: (1) Explain the hypocrisy evident in the American stance on tax havens. (2) What can other nations do to ensure America follows its own rhetoric on curbing tax evasion?
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