DEVIN NUNES raised eyebrows in
2013 when, as chairman of a congressional working group on tax, he urged
reforms that would make America “the largest #tax_haven in human history”.
Though he was thinking of America’s competitiveness rather than turning his
country into a haven for dirty money, the words were surprising: America is
better known for walloping tax-dodgers than welcoming them.
Its assault on
Swiss banks that aided tax evasion, launched in 2007, sparked a global
revolution in financial transparency.
Next year dozens of
governments will start to exchange information on their banks’ clients
automatically, rather than only when asked to. The tax-shy are being chased to
the world’s farthest corners.
And yet something odd is
happening: Mr Nunes’s wish may be coming true. America seems not to feel bound
by the global rules being crafted as a result of its own war on tax-dodging. It
is also failing to tackle the anonymous shell companies often used to hide
money. The Tax Justice Network, a lobby group, calls the United States one of
the world’s top three “secrecy jurisdictions”, behind Switzerland and Hong
Kong. All this adds up to “another example of how the US has elevated
exceptionalism to a constitutional principle,” says Richard Hay of Stikeman
Elliott, a law firm. “Europe has been outfoxed.”
The Foreign Account Tax
Compliance Act (FATCA), passed in 2010, is the main shackle that America puts
on other countries. It requires financial institutions abroad to report details
of their American clients’ accounts or face punishing withholding taxes on
American-sourced payments. America’s central role in global finance means most
comply.
FATCA has spawned the Common
Reporting Standard (CRS), a transparency initiative overseen by the OECD club
of 34 countries that is emerging as a standard for the exchange of data for tax
purposes. So far 96 countries, including Switzerland, once favoured by rich
taxophobes, have signed up and will soon start swapping information. The OECD
is also leading efforts to force multinationals to reveal more about where and
how profits are made, and the deals they cut with individual governments, in
order to curb aggressive tax-planning.
Because it has signed a host
of bilateral data-sharing deals, America sees no need to join the CRS. But its
reciprocation is patchy. It passes on names and interest earned, but not
account balances; it does not look through the corporate structures that own
many bank accounts to reveal the true “beneficial” owner; and data are only
shared with countries that meet a host of privacy and technical standards. That
excludes many non-European countries.
All this leads some to brand
America a hypocrite. But a fairer diagnosis would be that it has a split
personality. The Treasury wants more data-swapping and corporate transparency,
and has made several proposals to bring America up to the level of the CRS. But
most need congressional approval, and politicians are in no rush to enact them.
Some suspect that their reluctance, ostensibly due to concerns about red tape,
has more to do with giving America’s financial centres an edge.
Meanwhile business lobbyists
and states with lots of registered firms, led by Delaware, have long stymied proposed
federal legislation that would require more openness in corporate ownership.
(Incorporation is a state matter, not a federal one.) America will often
investigate a shell company if asked to by a foreign government that suspects
wrongdoing. But incorporation agents do not have to collect ownership
information. This is in contrast to Britain, which will soon have a public
register of companies’ beneficial owners.
America the booty-full
No one knows how much
undeclared money is stashed #offshore. Estimates range from a couple of trillion
dollars to $30 trillion. What is clear is that America’s share is growing.
Already the largest location for managing foreign wealth, it has picked up
business as regulators have increased information-exchange and scrutiny of
banks and trust companies in Europe and the Caribbean. Money is said to be
flowing in from the Bahamas and Bermuda, as well as from Switzerland.
A recent investigation by
Bloomberg, a news provider, found several wealth managers whose American arms have
benefited, including Rothschild, a British firm, and Trident Trust, a provider
of offshore services. New business has been booked through subsidiaries in
states with strong secrecy laws and weak oversight, such as South Dakota and
Nevada. Another investigation, by Die Zeit, a German
newspaper, concluded that for the tax cheat looking to pull money out of
Switzerland, America was now the safest bet. “It’s going nuts. Everyone is
doing it or looking into it,” says a tax consultant, speaking of the American
loophole. Some transfers are being requested for legitimate reasons of
confidentiality—for instance, by Venezuelans who fear extortion or kidnap if
their wealth is known. But much is of dubious legality.
America is much safer for
legally earned wealth that is evading taxes than for lucre that was filthy from
the start. It has shown little appetite for helping enforce foreign tax laws
and, unlike some other countries, does not count the banking of undeclared
money as money-laundering. “Foreigners looking to evade tax in America are
usually safe because of its secrecy,” says Jason Sharman of Griffith University
in Australia. “But for those with dirtier money there is a small though real
risk the US will investigate and apply the full force of the law, which is a
scary prospect.”
Dividing the spoils
Foreign banks losing business
to America can sometimes share in the profits, explains one tax consultant. A
Swiss bank, say—generally a smaller one, as big ones are too scared—tells its
client to close an account and open one with an American custodian bank. The
client then appoints the Swiss bank as investment manager on the custodian
account, and that bank instructs the custodian which funds to buy, often the
Swiss bank’s own products. The Swiss bank earns fees for advice and fund-management;
the custodian picks up business; and the account is deemed for regulatory
purposes to be American, meaning it avoids the disclosure rules that apply only
to countries signed up to the CRS.
Only a few other financial
centres have declined to commit themselves to the CRS, among them Bahrain and
Nauru. Hong Kong has signed but will implement it one tax-treaty partner at a
time rather than using a multilateral shortcut; some regard this as a delaying
tactic. Undeclared Asian and Middle Eastern money is moving to Taiwan and
Lebanon, respectively, both of which are outside the club. Panama, which vies
with Miami for Latin American money, looks set to back out of its tentative
commitment to the CRS, using America’s double standards as an excuse (see article).
Frustration with America has
grown in Europe, which forms the core of the CRS. A group in the European
Parliament argues that, if America refuses to reciprocate fully, it should be
hit with a reverse FATCA: a levy on payments originating in the EU that flow
through American banks. “We don’t want a tax war, but nor can the US have it
all its own way,” says Molly Scott Cato, one of the MEPs. One obstacle is that
tax measures must be approved unanimously by the EU’s 28 member states.
Others point out that the CRS
itself has flaws. It was drafted in a rush, and one expert thinks it would fail
to catch 80% of tax-dodging. Financial firms have been calling to report
loopholes that could benefit less scrupulous rivals, most of which will be
closed before it comes into force or soon after, promises the OECD. (Keeping
banks’ compliance costs within reasonable limits means that some will
inevitably remain.)
America deserves great credit
for taking on Switzerland and other long-standing tax havens. And a Treasury
official insists that stashing undeclared loot there will not remain possible
for long: “This is something that will be fixed.” Until it is, America will be
the biggest tax loophole of all.
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