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.
Earlier today, ten of the nation’s largest banks received permission from the Treasury to repay a fraction of the amounts loaned out.
I know, it’s kind of bizarre. Permission to pay back a loan early? You’d think the feds would be thrilled.
Here’s the scoop. While some of the banks were begging for funds, others were forced to take the funds at the insistence of the Bush administration in an attempt to stabilize the financial system. The idea was that forcing banks to take the money would free up capital for small business loans and home mortgages. Whether that happened or not has been argued at length. But at least ten banks have convinced the Obama administration that they now have sufficient capital to begin repayment efforts. Those banks are: American Express, Bank of New York Mellon, BB&T, Capital One, Goldman Sachs, JP Morgan, Morgan Stanley, Northern Trust, State Street and U.S. Bancorp have all been approved by the Treasury to return some funds. None of the banks have disclosed when and exactly how much they will repay. My money’s on soon.
Why the rush to pay it all back? Congress has put limits all over financial institutions with TARP funds – from tax limitations to executive comp caps to restrictions on immigration visas. Not surprisingly, private corporations don’t like the politics so much and they want to get out.
The feds expect to get about $68 billion back from those banks. Smaller banks have already repaid about $2 billion (sad, isn’t it that we’ve gotten to the point where $2 billion seems like a tiny amount of money?). This means that more than a third of the money initially handed out to banks will be coming back to the Treasury. The $200 billion bank hand out is part of the overall $700 billion bail out using federal dollars to boost the economy.
Despite the “good” news, the Dow did not rally today, ending just slightly lower. It’s hard to know what that means – the market is so volatile these days. Is the worst over? We can hope.
You won’t get it today.
Newly confirmed Secretary of the Treasury Timothy Geithner was slated to announce details of the revised bank bailout plan on today but that’s not going to happen. The Treasury is moving the planned speech ahead to tomorrow in order to focus on the economic stimulus bill. The bill is being debated today in Congress and most pundits expect a long day.
A spokesperson from the Treasury, Isaac Baker, said, “With record high job losses, and weakening economic forecasts, we’re focused on working with Congress to pass an economic recovery bill so we can create the jobs and make the investments necessary to get our economy moving again.” His announcement comes amid news of more layoffs. Nissan has indicated that it will axe more than 20,000 jobs today.
Realistically, more taxpayers likely care about the stimulus plan than the revisions to the Troubled Asset Relief Fund, or TARP, which was created to save the nation’s banks. Considering the news of office renovations, planned purchases of private jets and sports teams and disturbingly high bonuses for underachievement which have been earmarked by the banks so far, taxpayers are growing increasingly cynical (if that’s possible) that any additional money will be put to good use. Banks are not making new loans in the amounts anticipated and they have not made any advances on stilling a growing tide of foreclosures. It has made many taxpayers question what the point of throwing money at the banks was in the first place.
Despite the mood on Main Street, Geithner will announce how Wall Street will get to use the remaining $350 billion. Most experts anticipate that Geithner will announce a mixed bag of TARP measures, from buying up “bad assets” to insuring other assets, including mortgages and adding new capital.
But what will be done about the foreclosures? This is politically tricky. It’s important to stop the bleeding, all sides agree, but many taxpayers are wary of their own money being used to “rescue” homeowners who may have overborrowed. President Obama has indicated that nearly $50 billion to $100 billion will be spent to save homes. How that money will be spent is still uncertain.
It’s a scary proposition, isn’t it? Government throwing money – in amounts that we can’t even really grasp – at a problem with no guarantees that anything will change. In fact, since the TARP money has been paid out, initially under the Bush administration, with sums totaling more than $350 billion, little to no real change has happened. Arguably, the economy has gotten worse with more foreclosures and more layoffs. The so-called experts say that if we fix the banks, we can fix the economy. So, what’s the answer to the banking industries’ woes? We’ll have to wait one more day to find out.
Boy, am I glad that the government pumped billions of dollars into the banking industry!
Since that time, borrowing has become significantly easier. Wait, that hasn’t happened?
Well, at least the Dow regained its faith in the market. Wait, that didn’t happen either?
What did happen? Oh yeah, banks made more money.
Need proof? I mean, beyond the loss of bad debt and influx of capital, courtesy of we, the taxpayers? Look no further than PNC Financial Services Group Inc. According to reports, PNC will save billions in federal taxes after its purchase of National City Corp now that the IRS has issued a controversial notice following the failure of the original bail-out package.
So here’s what happened. It used to be the case that the built-in loss that a buyer could use to offset income after an acquisition was capped at 5% of the purchase price per year for five years. The new rule removes the limit for the banking industry – and only the banking industry – resulting in an immediate and significant tax benefit. The new rule is effective “unless and until” additional guidance is issued, whenever that might be.
How much of a benefit does that give PNC? Tax analysts have tossed around numbers as high as $5.1 billion. And PNC isn’t the only bank to benefit. Banks which gobble up other banks with just bad housing debt (not counting other bad debt) may now save up to $140 billion in taxes – about 20% of the total banking bailout put up by the feds. And who pays for that? Who do you think? Tax savings for those banks equals lost revenue in an already strained economy.
And you don’t even have to be a “real bank” to qualify. All banks, including credit card companies, industrial loan companies, trust companies and thrifts (used for mortgages) are included.
Congressional officials – who weren’t consulted on the IRS notice – are not necessarily thrilled with the results. Senator Charles Schumer (D-NY) who sits on the Senate Banking Committee voiced concerns that the ruling would give some banks an unfair advantage. For example, Schumer claims that Wells Fargo will save $19.4 billion in federal taxes for its win over Citibank to purchase Wachovia, an amount which surpasses the proposed purchase price.
Those cheering the notice say that this gives banks an additional incentive to buy “struggling” banks. But opponents say it just feeds merger mania, giving mega-banks an disproportionate financial incentive to take on more bad debt. Further, those in other sectors of the economy question why incentives were limited to the banking industry; so far, the IRS has not issued additional comment.
I’m not sure where I fall. I believe that something needs to be done to get us out of this mess – but the fixes seem haphazard and short sighted. Plus the timing and process of this tax incentive doesn’t quite meet the smell test: one day after Congress rejects the bailout, the Treasury changes the rules on its own? What do you think?
You can read the entire text of Notice 2008-83 here.
