The United States is emerging as a top tax haven alongside the likes of Switzerland, the Cayman Islands and Panama, those seeking reform of the international tax system say. And states such as Delaware, Nevada, South Dakota and Wyoming, in particular, are competing to provide foreigners with the secrecy they crave.
“There’s a big neon sign saying the US is open to tax cheats,” says John Christensen, executive director of the Tax Justice Network.
America’s openness to foreign tax evaders is coming under new scrutiny after the leak this week of 11.5 million confidential documents from a Panamanian law firm. The Panama Papers show how some of the world’s richest people hide assets in shell companies to avoid paying taxes.
Christensen’s group, which campaigns for a global crackdown on tax evaders, says the United States ranks third in the world in financial secrecy, behind Switzerland and Hong Kong but ahead of notorious tax havens such as the Cayman Islands and Luxembourg.
Under a 2010 law, passed after it was learned that the Swiss bank UBS helped thousands of Americans evade U.S. taxes, the United States demands that banks and other financial institutions disclose information on Americans abroad to make sure they pay their U.S. taxes.
But the U.S. doesn’t automatically return the favor.
More than 90 countries have signed on to a 2014 information-sharing agreement set up by the Organization for Economic Cooperation and Development, but the U.S. is among the few that haven’t joined. American banks don’t even collect the kind of information foreign countries would need to identify tax dodgers.
“The banking lobby has resisted changes in the law that would allow more sharing of data,” says Peter Cotorceanu, a Zurich-based lawyer who specializes in private banking.
In a report last year, the Tax Justice Network complained that “Washington’s independent-minded approach risks tearing a giant hole in international efforts to crack down on tax evasion, money laundering and financial crime.” It said foreign elites have “used the United States as a bolt-hole for looted wealth.”
Pascal Saint-Amans, head of the OECD’s Center for Tax Policy and Administration, says the U.S. often makes information available to other countries upon request. But that means countries can get details only on those they already suspect of tax evasion.
Christensen says Swiss banks report that “many of their tax-dodging clients are talking about moving to the U.S. You go to Switzerland, and that’s all they’re talking about.”
Individual states, including Nevada, Wyoming and South Dakota, are making things worse, critics say.
They compete to make it easier to set up corporations, with few questions asked about who’s behind the business. “We have states that set up corporations where there’s no information about ownership,” says Jack Blum, a Washington lawyer who specializes in financial crime.
Nevada, for instance, makes it easy to incorporate secretly and charges a $500 annual business license fee for corporations and $200 for other businesses. The money is earmarked for teacher salaries.
Many of the businesses are mere shells, financial contrivances that don’t employ people or make any investments.
In 2014, a group of academics looked at tax havens for their book “Global Shell Games.” Posing as investors who wanted to set up businesses in different places, they kept track of whether the consultants helping them incorporate asked for basic information such as photo IDs or other documents that proved who they were. In the United States, only 25 percent did; in Delaware, only 6 percent.
The U.S. Treasury Department says it plans to propose regulations requiring foreign-owned “limited liability companies” to get tax identification numbers disclosing the identities of their owners. Once the rules are in place, the department said in a statement, the Internal Revenue Service will be better equipped to respond to requests for help from foreign governments.
Still, Treasury says, Congress needs to come up with a broader, better solution. Lawyer Cotorceanu doubts that will ever happen.
American lawmakers “do not want to hurt the U.S.’s banking industry,” he wrote last year in the journal Trusts & Trustees. “It is no secret that U.S. banks, particularly in Miami, are awash in undeclared Latin American money. … How ironic _ no, how perverse _ that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour.”