Is the US a massive tax haven?

The US may have imposed FATCA on the rest of the world and positioned itself as beyond reproach, But questions are starting to be asked - most notably, is America itself a massive tax haven?

In 2004, the creators of South Park released a Thunderbirds spoof, Team America, in which they lampooned the US for being the self-appointed "World Police". The characters bowled uninvited into every corner of the globe to sort out other people"s problems, with no concern for who they happened to blow up along the way - nor for the accusations of hypocrisy that came flying back.

The fiction was spot on - whether introducing democracy to Iraq or bringing down the gavel on the FIFA corruption scandal, the US does like to act as judge, jury and executioner in world affairs. And this extends to the financial world too. The US launched a campaign against Swiss banks and tax evasion in 2007, which led to it creating the unilateral Foreign Account Tax Compliance Act (FATCA). The law obliges other countries" banks and governments to hand over data about where US citizens are stashing their assets or face hefty penalties.

Yet while the US takes such a forthright stance on these issues beyond its borders, it seems it"s been playing by a very different set of rules itself. It now has full access to information about US taxpayers hiding their cash overseas, but it won"t share information on who"s keeping their money in the US. When the OECD took on what FATCA began and turned it into the Common Reporting Standard, a multilateral information exchange agreement that was signed by 96 willing countries, the US signature was conspicuously missing.

"The US is quickly developing into the biggest global block to a financially transparent world," says Markus Meinzer, Director at the Tax Justice Network. "It has a hypocritical stance: it"s unable and unwilling to deliver the kind of information to its partners that it demands in return."

It certainly appears hypocritical. In his presidential campaign of 2008, Barack Obama had his sights trained on Ugland House, an office in the Cayman Islands that he said was home to 12,000 US-based corporations. "That"s either the biggest building in the world or the biggest tax scam in the world," he said. "It"s the kind of tax scam that we need to end." 

Yet when the Tax Justice Network recently released its Financial Secrecy Index, which looks at various countries" openness when exchanging financial information, the US proved worse than the Cayman Islands, coming third - less transparent than only Switzerland and Hong Kong (see boxout).

This chain of events has led many to accuse the US of itself being a leading tax and secrecy haven for rich foreigners looking to hide assets. It certainly has its share of secretive Cayman-style shell companies, which can be bought off the shelf, together with an apparently long history and clean credit record. 

One address in Delaware, 1209 North Orange Street, is said to be home to more than 6,500 companies. In 2014, a reporter from Vice magazine set up a bogus shell company in the state over the phone, for $292, and a subsidiary in Nevada in one week, which cost less than $1,000.

"These are some of the weakest rules in the world right now," says Meinzer. "It"s possible to set up shells with no proof of ID whatsoever, and bank accounts with very lax requirements on revealing who owns the companies. There are many cases of US corporate entities being involved in bribes or hiding traces of corrupt flows. It"s been estimated that $3trn of foreign wealth is held in the US by non-residents."

Other states, such as Wyoming, South Dakota and Vermont, offer similarly weak oversight. German newspaper Die Zeit found that for the tax evaders looking to pull money out of an increasingly transparent Switzerland, America is actually the safest bet. 

The bigger picture
But it may not be a deliberate plan to profit, on the part of the US. "It"s reflective of their economic power and standing," says John Clacy, Head of Deloitte"s Guernsey office. "The US clearly feels the world needs to do business with them, not the other way round."

Then there"s the matter of pure practicality - the US happens to be home to far more investments than anywhere else. "Spending too much time worrying about other people"s tax would be a far bigger job for the US than for anyone else," says Richard Hay, Counsel to the International Financial Centres Forum. "It"s hard not to have that "hypocrite" reflex, but while it happens to be convenient that it works out to their advantage, it"s not necessarily a deliberate ploy."

Business figures in the US have countered that the nation is simply providing safe refuge, not secrecy. Yet when a power the size of the US takes third place in the Financial Secrecy Index, the whys and wherefores aren"t important. According to the Tax Justice Network, the US accounts for one-fifth of the global market for offshore financial services. And if it"s refusing to play ball on transparency, it undermines everyone else"s efforts. 

"It"s a flaw in the system," says Hay. "The OECD"s model requires near universality to be effective, so can it work when the major service provider isn"t involved? If the US enjoys regulatory arbitrage over everyone else and doesn"t have their regulations, then it must be tempting to leave more aggressive markets and go there."

Economic power
The other bad news is that, up to this point, the US has shown no sign of budging, and the UK has been alone in adopting a fighting stance. 

"The UK has been prepared to suspend business in the case of US companies, so they will have to give full KYC for their clients if working in the UK," says Hay. "But that creates problems for the UK, as most jurisdictions don"t apply that to the US. So US business may just steer clear and go to other easier countries."

Again, the problem is the sheer scale of the country"s purchasing power. And this also comes into play if you think the OECD may be the organisation to stop it. Meinzer argues that the US holds too much sway over the OECD for it to be effective, highlighting the EU as the only forum that can hit the US where it hurts. "Morals and ethics have long since fallen by the wayside in terms of US politics," he says. "Raw economic power is the only language that the US is able to understand."

To that end, one group of MEPs has argued that Europe should hit the US 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," Molly Scott Cato, one of the MEPs, is reported to have said.

Such a move would depend on the willingness of European governments to follow the UK"s lead. The question is, could that ever happen? 

"The German government seems to be reluctant to move anywhere near this kind of retaliatory policy, as it"s keen to be a key ally of the US, so is very wary to criticise," says Meinzer. "It may also feel uneasy with becoming an unambiguous proponent of financial transparency, as Germany has a huge amount of untaxed wealth in its own system, and it too has all sorts of safeguards on the automatic exchange of information."

Yet as the Common Reporting Standard and BEPS develop tax transparency into a global standard of best practice, it will gradually become more difficult to not be fully compliant, even if you"re the US.

"The US will be a late joiner to transparency, not among the first-wave adopters," says Clacy. "With its power it doesn"t make the same kind of economic sense for them to be in there first as it does for us."

Whatever happens, this kind of hypocrisy makes it harder for somewhere like the US to keep using the offshore tag as a handy stick with which to beat smaller jurisdictions. "You"d say undoubtedly that the Channel Islands are significantly more transparent than the US," says Clacy. 

He adds that Luxembourg has found itself in similar difficulties - with leakages of its tax treaties, despite being technically onshore and within the EU.

Meinzer"s argument is that the issue isn"t a simple question of onshore and offshore, but one of intent. "It"s about asking how far a country has gone down the road of devising laws with the intention of allowing businesses to come and benefit at the expense of others," he says. 

The answer, for many countries, is that it"s probably gone far enough. Where"s the world police when you need them?