The Biggest Tax Havens are Onshore

There was an interesting question by Deputy Geoff Southern for the Chief  Minister to answer in the recently published Hansard:

Will the Minister explain to members why it is not in the Island's interest to join Guernsey and the Isle of Man in signing up to the automatic information exchange under the European Union (EU) Savings Tax Directive?

What is revealing about the reply is that it shows that while Jersey is getting the "big guns" of the Guardian targeting the Island's finance industry, there are other targets that are not as "soft", which are blind spots in the recent fulminations about offshore tax havens. Because, of course, they needn't be literally offshore. Ian Gorst replied:

When in 2004 Jersey agreed to help the EU Member States in the implementation of the EU Savings Tax Directive (EUSD) the initial thought was to follow the Member States in adopting automatic exchange of information. However  when a key competitor among the Member States, Luxembourg, and others, decided to favour the withholding tax option Jersey, along with Guernsey and the Isle of Man, considered that it should follow suit to protect its economic interests.  However the agreements signed with each of the 27 EU Member States provided that as soon as all the Member States adopt automatic exchange of information Jersey would do the same.

The question posed is why is Jersey's position different from that of Guernsey and the Isle of Man both of whom have adopted automatic exchange of information for the EUSD without waiting for the EU. The answer lies in the fact that Jersey has a different business mix and therefore a different degree of competitive pressure.

Of course Luxembourg and Belgium Austria and would like a privileged position, where one set of rules applied to jurisdictions outside the EU, and another set to rules inside the EU. But the position - in the European Union Savings Directive 2003 - allows for this to last for "at least nine years". As the Directive states:

For a transitional period, Luxembourg (along with Belgium and Austria) will apply a withholding tax on interest income by default. This transitional period will last at least nine years and will only end from the date of entry into force of agreements with third countries providing for the exchange of information upon request.

What is the withholding tax? It applies applies only to certain interest, such as bank deposit interest and bond interest, is passed on anonymously to the EU countries concerned, where the residents hold bank accounts in the countries involved and is known informally as the EU Withholding Tax.

Back in 2003, the jurisdictions applying withholding tax were Andorra, Guernsey, Luxembourg, Switzerland, Austria, Isle of Man, Monaco, Belgium, Jersey, Netherlands Antilles, Turks and Caicos Islands, British Virgin Islands, Liechtenstein, San Marino. Belgium, Guernsey and the Isle of Man have ceased to apply withholding tax, but Luxembourg and Austria continue to hold out, with no sign of any change. They must be getting something out of this - the tax has risen from 15% to a current position of 35%. But if the tax you would be paying in your home jurisdiction is greater than 35% on that income, the withholding tax is clearly advantageous.

Geoff Southern's second question related to Jimmy Carr and tax vehicles to legally avoid paying tax:

To prevent any repeat of the recent K2 publicity and to improve our reputation for transparency, will the Minister explain whether the coverage of the EU Savings Tax Directive will be extended to include disbursements from Jersey based trusts to residents in the UK and elsewhere and, if not, why not?

Ian Gorst's reply again mentioned Luxembourg and Austria, both of whom lobby within the EU against greater transparency:

Luxembourg and Austria are currently blocking progress on the planned extension of the scope of the EUSD to cover trusts and companies.  Jersey has indicated to the European Commission that it is prepared to give further support to the EU by providing for the extension through the necessary amendment to the existing EUSD Agreements with the individual Member States. However, it has also been mentioned to the Commission that it may prove difficult to obtain the States' ratification of the amended Agreements if at that time Jersey is being discriminated against by Member States in allowing access to financial markets within the EU.... We are therefore waiting on the EU, for the extension of the existing EUSD Agreements to cover trusts and companies is not something that can be done independently of the EU.

The third question was on beneficial ownerships:

Will the Minister also state whether the introduction of a requirement for full public disclosure of the ultimate beneficial owners of all companies registered in Jersey has been considered and, if not, why not?

And this time, it was the USA who turned out to be the impediment to progress:

At a recent Tax and Crime Forum held by the OECD in Rome Jersey was held up by the World Bank as the example for others to follow in complying with the current international standards. Specifically it was stated that Jersey leads the way in combining effective company registry requirements with the rigorous regulation of trust and company service providers to ensure that beneficial ownership information is available. Mention was also made of the fact that in the World Bank report on "how the corrupt use legal structures to hide stolen assets and what to do about it" the Jersey model is used to describe the conditions under which the company registry can be considered a viable option for providing beneficial ownership information  At meetings of FATF working groups the USA also has referred to Jersey as a leader, and has indicated that because of resistance from individual States such as Delaware they believe it is unlikely that they will be able to get agreement in the foreseeable future on the placing of the same high level of obligations on those providing trust and company services.

Jersey is committed to complying with all relevant international standards. Currently there is no indication of international support for the full public disclosure of ultimate beneficial ownership. None of the international standard setters have proposed this. The FATF has just revised its recommendations and issued a new interpretative note on beneficial ownership which states that countries should ensure that either; (a) information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or (b) there are mechanisms in place so that the beneficial ownership of a company can be determined in a timely manner by a competent authority. Jersey fully meets the latter requirement, as independent assessments have shown.

If in the future the international standard setters agree on a global requirement for public disclosure of ultimate beneficial ownership Jersey can be expected to respond to this alongside other countries. In the meantime we will watch with interest the steps taken by the USA, UK and others to match Jersey in the availability of information on beneficial ownership which can also be accessible when it is properly required.

Delaware, of course, is really an onshore tax haven operating in America

"The state of Delaware fits the qualifications of a tax haven. There is no taxation for "offshore" limited liability companies, the states provides privacy for the beneficial owners of Delaware LLCs among other factors. A tax haven is considered to be a country or territory which opens itself up to foreign investors by implementing a zero tax or low tax regime coupled with very strict privacy and confidential laws to protect clients. The client base of most tax havens comes from foreign countries."

- No accounting / reporting requirements
- A Delaware LLC is tax-free, except for a $250 annual franchise tax
- A minimum of one Member is required who can be resident outside the U.S.A.
- Ownership of Delaware limited liability company is strictly confidential
- Delaware imposes no state income tax on a business that does not operate within the state.
- Delaware does not tax Limited Liability Companies (LLC) which do not have business operations in the state. So any company which operates in another state can simply register an LLC subsidiary in Delaware and transfer its revenue to the tax haven, thus avoiding taxation on their profits.

This is very close to the Jersey Exempt Tax company which was phased out because it broke with EU regulations in having two kinds of company taxation, one internal to the jurisdiction, and one external for the sole purpose of selling to outsiders. It can be seen that Delaware has a vested interest in preventing any public disclosure of ultimate beneficial ownership,

And according to one website, you can "incorporate your Delaware Corporation or Delaware LLC -in 5 minutes!" That's probably an exaggeration, but it is certainly the case that setting up a shell company in Delaware is a quick and easy process. According to the New York Times it takes less than an hour to incorporate a company in Delaware and involves less paperwork than applying for a driver's license. A 2012 survey noted that over 60% of Fortune 500 listed US companies are registered in Delaware, enjoying the legal tax benefits and the privacy afforded to them by the State. And nearly half of all the public corporations in the United States are incorporated in Delaware! And, at last count, Delaware had more corporate entities, public and private, than people - 945,326 to 897,934!

But it's not just Delaware. Nevada, Wyoming and Oregon have also started doing big business with shell companies. And as the New York Times reported on Beneficial Ownership disclosures:

"The secretaries of state, along with Delaware, argue that the Levin measure would be costly and burdensome, and would discourage business incorporation and capital formation. They add that their offices are generally ill-equipped to process the additional data that would be required. Even more, determining beneficial ownership may not be a simple matter."

Will there be a move to worldwide disclose of beneficial ownerships? With opposition from within the USA, and the well known propensity for "exceptionism" for the USA - complaints about the Caymans, silence over Delaware - it is unlikely that anything will budge. There are powerful and rich vested interests involved, and so far there has been no progress on the matter. As with the EU and Luxembourg and Austria, the vested interests are internal, and far more effective at blocking any changes than a small Island which will comply with increased transparency once the "big boys" have done so.