The US: World’s #1 Tax Haven?

AMA4-7-15The phrase “tax haven: conjures up images of shady money being squirreled away in chilly Swiss banks or sunny tropical ones –a way for businesses and people to hide their dealings from the authorities at home.

Switzerland and the Cayman Islands top the list of the world’s best-known – or most notorious – tax havens, places where foreigners can stash money or assets to avoid taxes and other kinds of prying eyes in their home countries. But as a recent article from International Man reports, it turns out that the world’s leading tax haven is actually the United States.

A tax haven, as defined by the online investing glossary Investopedia, is a country that allows foreign businesses and individuals to deposit assets and conduct financial business with little or no tax liability in a stable political climate. That’s why steadfastly neutral Switzerland has been the world’s most recognizable tax haven for years.

But one of the most recognizably stable countries in the world is the United States. The US dollar continues to set the standard for international monetary trading, and for all its political polarization, the country has a firm foundation of political and economic stability that makes it a attractive to those in places where government wobble and currencies can lose value fast.

That’s why the US fits the definition of an ideal tax haven in every way, at least for now. US property laws are transparent, making it easy for foreign individuals and businesses to buy American real estate or other assets, and set up banking and investment accounts. And in some states, led by tiny Delaware, many transactions routinely stay out of public records.

The security and secrecy the offered by US banks and other institutions makes the country an attractive place for investors and businesses to protect themselves from tax laws at home and to keep many kinds of transactions out of the public eye – a plus not just for illegal dealings but for legitimate businesses that need to keep a low profile.

Those factors are partly behind the surge in foreign investment in US real estate, see by many throughout the world as a very safe investment that endures. It’s also behind another surge in foreign corporations establishing a presence on US soil as a way to avoid corporate taxes at home. And of course individuals also use US banks as safe place for cash and assets that might be vulnerable at home.

Though tax havens often carry a taint of the illegal or marginal, being a tax haven might actually be good for a country, especially one like the US, which welcomes billons of dollars a year into its economy from foreign deposits and investments. That level of foreign investment may boost the country’s overall economic health, and cement the status of the US as the world’s leading tax haven, but it also raises concerns among some financial experts and market watchers.

The heavy influx of foreign capital and corporations onto US soil, they say, ties the country to the whims of foreign governments and takes control from Americans, What’s more, they argue, the tax haven perks enjoyed by those foreign investors are not available to US citizens.

And that’s true, but for a good reason. The very definition of a tax haven states that its main function is to provide foreigners with a way to keep financial transactions secure with minimal tax liability. It’s the flip side of Americans using foreign havens like Switzerland or creating a “shell” company abroad in order to claim offshore tax status.

What’s more, the climate is changing for tax havens everywhere, with repercussions for the status of the US as a leading repository for foreign funds. A new law, the Foreign Account Tax Compliance Agreement, has been enacted in the US in order to force foreign banks to cough up information on their American accountholders.

On the international front, an extensive list of countries (including Switzerland and the Caymans) have signed off on the Global Account Tax Compliance Agreement, which requires reciprocity in reporting – or intend to in the next few years. These laws would require any bank holding foreign accounts or other investments to report them to the accountholder’s home country.

That means that even as the US legislation requires reporting from foreign banks, those banks could also require reporting on US account held by their citizens. That ushers in a new era of financial transparency that, say some civil libertarians, makes financial privacy of all kinds a thing of the past – and removes one of the major reasons tax havens can flourish.

For now, American investors and individuals can sidestep the new reporting rules and level the playing field by creating accounts and corporate identities in non-participating countries or moving offshore to escape harsh domestic corporate taxes. But as more and more countries join the campaign for financial transparency, tax havens everywhere may become an endangered species.  (Top image: Flickr/ evgeniy dodorov)

Read more from The American Monetary Association:

AMA 177: What;’s Happening With the World’s Debt with John Russo

Do New Laws Erode Finacial Privacy?

The American Monetary Association Team


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