The EU'S Fake War on Tax Havens

Trillions - - In This Issue -

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.

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 in­clude:

• Amer­i­can Samoa

• Bahrain

• Barbados

• Gre­nada

• Guam

• Ma­cau

• Mar­shall Is­lands

• Mon­go­lia

• Namibia

• Palau

• Panama

• Saint Lu­cia

• Samoa

• South Korea

• Trinidad and Tobago

• Tu­nisia

• 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 nonEU 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 il­le­gally pro­vides highly pref­er­en­tial tax treat­ment and le­gal shel­ter in re­turn for some com­pa­nies lo­cat­ing there. Ap­ple Inc. is one of the com­pa­nies with an in­ter­na­tional head­quar­ters in Ire­land and had been crit­i­cized for us­ing the coun­try for shel­ter­ing taxes and hid­ing money.

In 2016, the EU or­dered Ire­land to im­pose €13 bil­lion in taxes on Ap­ple. Ire­land has ap­pealed the de­ci­sion. Ap­ple's re­sponse has been to also ap­peal the de­ci­sion and move its money to Jersey, a Bri­tish tax haven and cen­ter of Satanism that is owned by the Queen and un­der the con­trol and pro­tec­tion of the royal fam­ily. Last month Ap­ple did agree to start de­posit­ing some of the €13 bil­lion while the ap­peal con­tin­ues.

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 ac­tu­ally 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 now 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 risk man­age­ment and may 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 the gov­ern­ment owns you, although many gov­ern­ments would dis­agree.

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