Fear and regulatory loathing makes America the top tax haven
The US is becoming the largest tax haven in the world, says John Dizard
Fear and regulatory pressure is pushing the globalised rich to bring tens or even hundreds of billions of portfolio investments out of Europe and into the US, and to do so within the next year and a half.
The fear is not just created by Isis, the Islamist militant group, targeting Europe, but by the unintended consequences of the accelerating schedules European institutions face for complying with “Gatca”, an acronym for the international sharing of data among tax authorities — rules that US authorities believe bind others, but not themselves. Swiss-based investment managers will tell you that this is another example of American hypocrisy, and they are correct.
As Christian Kalin, chairman of Henley & Partners, an ultra-multinational residency and citizenship advisory firm, says: “The US is a black hole of information for other countries now. Financial information goes in to the US, but does not come out.”
This is true. The 2010 Foreign Account Tax Compliance Act requires international financial institutions to report details of their US clients’ accounts. The American drive to force compliance with Fatca led, in turn, to the OECD’s Common Reporting Standard (CRS). So far, more than 96 countries have agreed to reply, with one notable exception: the US itself.
While the US administration and the Treasury declared themselves all in favour of adopting the CRS, they do not have the budget authorisation or appropriation from Congress to spend anything to do so. Therefore, while Switzerland set a deadline of January 1 2017 as the “effective date” for starting CRS-based tax information sharing with the other 95 signatories, the US Internal Revenue Service will not give its “reciprocal” partners any information about the foreign beneficiaries of any “entities”, such as Nevada or South Dakota trusts.
The Swiss lawyers and asset managers are right. The US government is being hypocritical. Coincidentally, asset managers in places such as Miami, New York, Boston and Nevada stand to benefit from that hypocrisy.
Tax justice activists say the US failure to reciprocate the information sharing it demands from others is turning the US into the largest tax haven in the world. But there is more to it than that. Developed-world financial institutions and lawyers are putting themselves at grave risk if they openly encourage tax evasion.
Having said that, as Mr Kalin points out: “If a Swiss bank shares information about an Indonesian national’s assets with the Indonesian government, that information can readily be sold by corrupt Indonesian officials. Then the Indonesian national and his family are at risk of kidnapping and extortion.”
Peter Cotorceanu, a lawyer at Anaford, a Zurich-based law firm, says: “The move to put money in the US [out of the reach of the CRS] does not have to be tied to personal security issues. There is also this inchoate concern about having financial data unnecessarily flowing around the world. The superwealthy are just very concerned about privacy.”
This all requires some fine legal parsing and carefully built financial structuring. After all, if you are a non-US resident, you are governed by the “anti-avoidance” rules of the CRS. Those rules invalidate anything done to avoid CRS reporting, as distinct from maintaining privacy. The anti-avoidance laws and their implementation dates vary from country to country.
Except in one country. As Mr Cotorceanu says: “No such anti-avoidance measures have been implemented by the US, even under Fatca, for foreigners. And none are likely in the current environment.”
So if a foreigner wants to set up a CRS or Gatca-safe structure in the US, that is his government’s problem, not the problem of the US government. Not surprisingly, Mr Cotorceanu says: “If I were a US portfolio manager, I would be telling as many people as possible about the benefits of putting their money in the US and in a US entity.”
The effect of CRS and Gatca strong-arming global money into the US is another example of the broad consequences of the return of nationalism.
Pat Buchanan, the outspoken nationalist Republican politician, says on the US signing on to the CRS: “I don’t think Congress will do anything like that. On the contrary, on both the left and the right, the whole movement is against the Trans-Pacific Partnership treaty, the TTIP [Transatlantic Trade and Investment Partnership] with Europe, all of that.”
I would recommend Cosmopolites, a book by Atossa Abrahamian about the economics of nationality acquisition. Rich globals can whisper through EU passport controls with a Maltese passport and their money can be shielded by US portfolio managers. Most people will be waiting in line eternally, holding their wads of rupiahs and shillings.
Globalism has come and gone before. Consider those rich cosmopolites who lived in the Silk Road cities of central Asia. Their houses and wealth left only sand-filled lines of brick in the sand.