The United States of Switzerland?: How the US Emerged as a Premier Global Tax Haven
In April of 2016, over 11.5 million documents were leaked from Panamanian law firm and corporate services provider, Mossack Fonseca. One of the major consequences of this revelation, more commonly known as the Panama Papers, was the disclosure of hundreds of thousands of shell corporations and tax-avoiding vehicles employed by the rich and famous around the world. From high-ranking Chinese officials to the Prime Minister of Iceland, the leak spared no one. Yet, for all its economic and financial clout, the United States did not feature heavily in the documents. Considering the United States is home to more than 10.1 millionaire households, and has more billionaires than any other country on the planet, this fact is highly surprising. The US also has the distinction of being one of only two countries in the world that has citizenship-based taxation – i.e. one must file US income taxes regardless of where he or she lives or earns income. Taken together then, it stands to reason for the US to appear more prominently in the leaked documents. What then, could explain the discrepancy?
One possible explanation is that the US itself is a tax haven. Indeed, dubbed “The New Switzerland”, the US ranked 3rd in the 2015 Financial Secrecy Index. According to the Tax Justice Network, an international NGO dedicated to research on tax avoidance and evasion, the US’ high ranking resulted from a moderate secrecy score amplified by America’s enormous global scale and prowess in financial services. In fact, the US comprises of one fifth of the entire global market for offshore financial services.
The US, however, is not widely known for its banking and financial secrecy. The words “tax haven” usually conjure images of rustic Alpine villages in Switzerland or sandy, picturesque resort towns on small islands in the Caribbean. Yet, the United States has been a secrecy jurisdiction for decades. As early as 1921, the Revenue Act exempted interest income on any bank deposits owned by non-US residents, a move geared towards attracting foreign capital to American shores. Under the Reagan Administration, in an effort to replenish depleted capital accounts, the Portfolio Interest Exemption was passed, allowing non-residents the ability to invest directly in US bonds and receive interest payments completely tax-free, and usually in secrecy. In 2001, in an effort to crackdown on US tax evaders while retaining de jure status as a secrecy jurisdiction, the US opted for the Qualified Intermediary Program, which essentially unloaded the duty of collection of information onto banks and financial institutions. Essentially, these financial institutions were required to only collect information on US residents and pass only that information to authorities like the IRS, excluding any information on foreigners. Thus, the US government would not be able to share any information on foreign nationals because it could not pass on what it did not have.
Fast forward to 2014, the United States’ newest legislation, the Foreign Account Tax Compliance Act or FATCA, was introduced, ensuring America’s continued status as a preeminent financial secrecy destination. FATCA is essentially a platform for exchange between foreign financial firms (FFIs) and the US government, not between governments. FATCA requires FFIs to collect information on US taxpayers abroad, subjecting FFIs and other entities investing funds or clients’ funds in the US to a 30% withholding tax on US-source income for noncompliance. When one considers the weight of the US in global financial markets, this is a major loss of income for any financial institution.
In response to FATCA, the OECD, an economic organization comprising 35 of the world’s high-income countries, launched an initiative known as the Common Reporting Standard (CRS), to which 96 jurisdictions have signed. Building off FATCA, the CRS was designed to streamline the process of sharing financial information between international tax authorities. However, the US government has made clear that it will not sign on the agreement, arguing that its FATCA legislation fulfills the same goal. The US claims that it can share financial information with foreign authorities through intergovernmental agreements (IGAs) signed under FATCA. However, these agreements are not truly reciprocal. While foreign authorities are required to disclose all relevant information on offshore accounts held by US taxpayers, there are numerous exemptions for American authorities. The IRS, for example, does not have to share any information on cash accounts held by entities or shell companies, even if those entities are located in a partner country. There are also exemptions for non-cash accounts, regardless of where the entities are based, and for information on the controlling persons of any entities. The US Government even recognizes this discrepancy in its intergovernmental agreements. In Article 6 in all signed Model 1A IGAs is a clause that states: “The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner].” There are however no specifics or timeframe included to explain exactly how such “equivalent levels of reciprocal exchange” would be achieved. Thus, by choosing not to sign on to a global sharing scheme and passing legislation whose primary focus is US citizens abroad, the US has created a distinct, global competitive advantage for itself in the realm of financial secrecy.
This fact, coupled with the incredible advantages that the US has in its infrastructure and services, makes the US an even more attractive place to conduct business and invest in assets. The variation amongst states via the principle of federalism allows for very lucrative opportunities for US citizens and prospective global investors. This will allow the US to retain its primacy as global business hub.
Tax Justice Network. Narrative Report on USA. Rep. Financial Secrecy Index, 2015. Web. 12 July 2016
Omar Hakim, Esq. is an attorney at Mona Shah & Associates, a top 25 EB-5 law firm, in New York City. The firm is an established source for EB-5, assisting numerous Regional Centers/EB-5 Projects and Investors in navigating this complex, nuanced and constantly changing area of immigration law. Omar offers clients years of experience in corporate finance, the financial regulatory system, securities matters and in general corporate governance matters. He has successfully filed numerous entrepreneur, direct-pooled, and regional center projects and offering documents. Omar is experienced in EB-5 compliance and advising on policy and integrity measures, as well as handling the firm’s client regional centers I-924 annual filings. Sami Haidar has worked for two years at Mona Shah & Associates and has gained extensive experience with the entire EB-5 process. He is currently conducting research on EB-5 and its potential, with Professors Jeanne Calderon and Gary Friedland, two esteemed experts in the field. Sami is a graduate of the Leonard N. Stern School of Business at New York University, with a Bachelor of Science in Business and Political Economy, with a Minor in History with Honors.