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And The Most Secretive Financial Jurisdiction in the World Is…? (Hint: there’s no cheese involved)

November 2, 2009 · 6 comments

The Tax Justice Network has recently released its list of the most secretive financial jurisdictions in the world. And who topped the list? Luxembourg? Switzerland? Hong Kong? Caymans?

Nope, it’s the United States. Yeah, of America.

But don’t get too excited with your finger pointing. It has little to do with most of the US. It’s all about Delaware (you don’t hear that very often).

The Tax Justice Network has identified what they consider “a number of key contributors to global financial secrecy on a jurisdiction-by-jurisdiction basis.” They then map that data and it’s published as the Financial Security Index (FSI).

Delaware’s status as the “incorporation haven of the USA” and its, well, *favorable* tax laws, have contributed to its ranking. The TJN noted, for example, that “the growth of private individual deposits by non-residents was most robust in the United States outranking other popular financial jurisdictions such as the Cayman Islands, United Kingdom, and Luxembourg with total non-resident deposits equalling $2.6 trillion in 2007.”

Banking crisis in the US? What banking crisis?

The TJN considered the data substantial enough to place Delaware ahead of Luxembourg (2nd), Switzerland (3rd), the Cayman Islands (4th) and the United Kingdom (5th).

Of course, anyone familiar with Delaware already knows about its favorable laws. Many of our international clients approach us about a Delaware incorporation and often, they have already been advised by their local counsel abroad to incorporate in Delaware to avoid certain state and local taxes. Of course, what they’re often not advised is that merely being incorporated in one state doesn’t offset physical presence tests in other states that might eventually drag them into other states for tax purposes. The classic example is a manufacturing company which is advised to incorporate in Delaware even though they may be, say, building a facility in New Jersey. The presence of the building in NJ will subject them to NJ state tax, irrespective of their Delaware “tax home.”

Delaware also has laws and courts which promote asset protection and dynasty trusts inside the state. I should know since I used to work for a trust company in Delaware. I reviewed and helped administer many high dollar trusts, including a number of family trusts for names that definitely rang a bell. Again, sticking a trust inside Delaware is much like incorporating inside of Delaware – you have to know what you’re doing to take advantage of the tax laws. You can’t just throw money in a trust and yell, “Ha!”

What does this mean for the US and its reputation as it attempts to foil banking secrecy laws in other jurisdictions? Absolutely nothing. Zero.

It makes for a bunch of fun headlines but I don’t think it changes the US’ standing in the world in terms of financial secrecy. Truth be told, the TJN arranges its data as it sees fit but there’s just no comparing the secrecy of incorporation records (which can be public anyway) to the strict, no holds barred secrecy of Luxembourg and Swiss banking laws. It’s just not the same thing.

I also think the TJN has a way to go in terms of making its data mean something to those outside of its network. A relatively young organization, it was formed in March 2003. According to its website, “[i]t is dedicated to high-level research, analysis and advocacy in the field of tax and regulation. We work to map, analyse and explain the role of taxation and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens.”

As a tax geek, I have to say that I enjoy the research and data. I just think you have to make it mean something beyond a sound byte.

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{ 4 comments… read them below or add one }

1 Steve November 2, 2009 at 3:56 pm

Taxgirl, I was wondering … what’s in it for the state of Delaware to have these “favorable” tax laws? Has this resulted in more businesses relocating to Delaware that wouldn’t be there normally, more residents moving to Delaware or is the little state just trying to be unique?

2 Kelly November 2, 2009 at 7:41 pm

Steve,
Lots of things… For one, they collect corporate fees – a plus for the state. It attracts lots of business that supports other business: agency fees, banks, trust companies, etc. Those businesses hire more employees to support business and they pay taxes.
It’s largely collateral, in much the same way that Luxembourg and Switzerland have built their economies around banking.

3 Charles Thomas November 2, 2009 at 9:57 pm

Kelly,

Your mention of dynasty trusts reminded me of another quirk of Delaware law — they still recognize the fee tail, keeping real estate in the family with a large chemical company and a French name.

4 Mrs. Micah November 6, 2009 at 5:43 pm

@Steve

*clears throat* As someone born & raised in Delaware, I’m going to chip in with what may be some boring history but helps explain Delaware’s regulations on businesses and finance.

In the early 1800s, the DuPont family settled in Delaware and began what turned into a large dynamite (and then other chemicals) industry. Since Northern Delaware wasn’t as good for farming as much of Southern Delaware, this took off. The Civil War was a boon for Delaware because of munitions, and despite its being a slave state of sorts, the DuPonts kept it with the North.

In the first few decades of the 20th century, DuPont was broken up under antitrust laws (fairly, I studied the company’s history & they were pretty cut-throat in becoming a monopoly). However, the three resulting companies maintained a strong Delaware presence until the mid 20th century. At that point, manufacturing was declining and Delaware was desperate for a way to attract more businesses and jobs, as Kelly said. So they expanded the laws of banking and incorporation. This brought a LOT of jobs to Delaware.

MBNA was a huge employer, and BofA has maintained a presence. Plus you’ve got ING, Chase, etc. Most of my friends’ parents were in chemistry or banking/credit cards, whether on the software side or elsewhere. MBNA’s long-time CEO Charles Cawley was an awesome patron of the arts in Delaware. He sponsored a talented young violinist who was in my highschool French class, putting on several concerts which spotlighted my friend’s talent–and donated all the ticket money to a local charity.

For the more densely-populated Northern Delaware, it seems to have been a profitable decision.

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