Hypocrisy Around Closing Tax Havens

Wednesday, 06 Mar 2013 07:41 AM

By Ashish Advani

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Tax collections are being aggressively targeted around the world. Almost all governments are desperate to collect more taxes at any cost.

While in Europe last week, I was reading about the growing anger around big companies not paying any taxes in countries they do business in. The masses and governments are furious about companies using accounting tactics to pay low taxes in tax havens rather than where the companies do business.

In France, the anger has focused on big companies such as Amazon and Starbucks. They have faced consumer boycotts. Over in England, Prime Minister David Cameron has put tackling corporate tax-avoidance at the top of the G8 agenda.

America has taken aim at tax-dodging individuals and the banks that help them. Congress has passed the Foreign Account Tax Compliance Act (FATCA), which forces foreign financial firms to disclose their American clients. Jack Lew, our new Treasury secretary, is under fire for once having an interest in a Cayman fund.

The mention of tax haven conjures up palm-fringed islands. However, not all tax havens are in sunny locales or even islands. Politicians seem to gain political mileage when they point to notorious tax havens like Ugland House in the Cayman Islands, which have 18,000 companies residing there.

While it may sound horrid and indicate widespread tax cheating, there is one tax haven that no U.S. politician talks about.

Delaware has a total population of less than 1 million. But it is home to 945,000 companies, many of which are mere shell companies of larger corporations. One of the world’s largest offshore banking centers is in our own backyard — Miami. It offers depositors from emerging markets the sort of protection from prying eyes that their home countries can no longer get away with.

Over in Europe, London, which invented offshore trading in the mid-20th century, still specializes in helping non-residents evading tax rules. London is no better than the Cayman Islands when it comes to controls against money laundering. Countries like Luxembourg, Ireland and the Netherlands often show up in setting up offshore companies so that profits can be diverted and taxes avoided.

The old adage that it is OK to avoid taxes not evade taxes is now no longer valid to the bankrupt governments. They will not stop at any antics to gain any income that they can lay their hands on.

In reality, over the past 100 years, such offshore centers are prospering and will continue to do so. If a tax haven is a location that offers low or zero taxes and offers low regulations, can someone tell me why companies would not gravitate toward such centers?

Instead of banning such locales and persecuting companies that want to register themselves there, governments need to learn some lessons here. Tax laws and regulations need to be made business friendly so that companies do not need to seek such locales offshore. Easing the tax code in the United States would keep companies here and bring back companies that have left.

Instead the United States is busy drafting draconian laws such as FATCA and Dodd-Frank to penalize them. The U.S. government is forcing small offshore centers to hand over more data to the United States. But in reciprocity, America refuses to share information with the Latin American countries whose citizens hold deposits in Miami.

If we really want to close down tax havens, we have to remain fair to each other. Such hypocrisy will not win us friends and will certainly continue to drive away businesses.

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