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Luxembourg

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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UK Tries Out Amnesty for Offshore Accounts

July 29, 2009 · 0 comments

In an effort to recover income from funds that might have been hidden offshore, the US introduced a Voluntary Compliance Program that offers reduced civil penalties and no criminal penalties.

At the time, IRS Commission Doug Shulman described the program as stating:

The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can… We set up a penalty framework that makes sense for them. They need to pay back taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years.

The program, which has tentatively been referred to as a success, wraps up on September 23, 2009.

But while the US program is winding down, the British program is just getting started. The UK has announced an amnesty program for unpaid taxes on income linked to offshore accounts.

The program is called the New Disclosure Opportunity and has similar provisions to the US program. The amnesty program begins September 1 and runs for six months. During that time, taxpayers have the opportunity to work out agreements to pay back taxes with a reduced penalty rate and little risk of prosecution.

The UK had previously resisted the urge to offer an amnesty program, hoping instead to force tax havens like Switzerland and Luxembourg to make disclosures. However, with government borrowing hitting an all time high, $21.4 billion last month, they decided to give it a second look. HM Revenue and Customs believes that the initiative could raise as much as $825 million over 4 years.

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Oh Yeah?! Well, Your Cheese Stinks!

May 11, 2009 · 2 comments

Germany, like the US, has been highly critical of countries considered to be tax havens. Mostly, those are countries outside of Europe with financial and banking secrecy laws meant to woo (mostly) westerners with the lure of escaping taxation. There are a few notable exceptions within Europe: Luxembourg, Liechtenstein and Switzerland.

All three are small, wealthy countries which lean heavily upon their allies. Luxembourg, in particular, has no navy, no air force and approximately 800 citizens in its army. It looks to its neighboring allies for military protection, as well as for sources of income. Heavily dependent on finance, it follows the US as the second largest investment fund center in the world and is the most important private banking center among countries that have converted to the Euro.

So while the three claim to not care what other countries think about their banking secrecy laws – and the source of their wealth – they clearly do, with both Switzerland and Liechtenstein taking steps to appease their friends and neighbors with promises of a more transparent banking process.

But Luxembourg won’t go quietly. The tiny country is now fighting a very public war of words with Germany. On Sunday, Luxembourg’s prime minister complained about recent comments made by Germany’s Finance Minister Peer Steinbrueck. Steinbrueck has been extremely critical of Switzerland, Luxembourg and Liechtenstein, down to outright accusing them of aiding tax evasion. Steinbrueck has actually encouraged others to crack down on those countries engaging in such behavior, with his party chair going so far as to say that “in the old times one would have sent in troops” to combat tax havens.

Luxembourg Prime Minister Jean-Claude Juncker was not laughing. “We don’t find that funny,” he was quoted by Der Spiegel. “We suffered under German occupation. Thank God we no longer resolve our problems with soldiers.” He continued, “We don’t talk that way about the Germans. And the Germans have no right to talk that way about Luxembourgers.”

German Chancellor Angela Merkel made what almost sounds like an apology (almost) when she said, “If there has been irritation, I as head of government will do everything I can so that it is dispelled quickly.”

Merkel, however, also made it clear that she welcomed changes in banking secrecy laws as promised by her neighboring countries. It is not certain when those changes will occur as Luxembourg, Liechtenstein and Switzerland have made no secret of the fact that they feel bullied into accommodating the wishes of their allies. Not surprising, since the three countries are somewhat stalwarts of tradition. Luxembourg’s motto perhaps sums this up best: “Mir wëlle bleiwe wat mir sinn” or “We want to remain what we are.”

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And the best place to live in the world is…

April 29, 2009 · 5 comments

Vienna.jpgNobody wants to pay more tax. But a recent study by Mercer seems to suggest that a higher tax rate does not serve as a deterrent to quality of life and, in some cases, is quite the opposite. Many of the cities which topped Mercer’s quality of life survey are those with relatively high tax rates.

The point of the study was to compare the quality of life in a range of cities across the globe to assist governments and major companies with international assignments. The study took into consideration such factors as political stability, available banking services, health and sanitation, schools and education, infrastructure, housing and climate. Using New York as a base, each city was scored accordingly.

Using that criteria, Mercer determined that the best place to live in the world is… Vienna. Income tax rates in Vienna are as high as 50% and like the US, Austria believes in worldwide taxation.

What does a high tax rate buy you in Vienna? Lots of parks and green space. Efficient and relatively inexpensive transit. More than 100 museums and free open air concerts in the summer. Social health insurance (apparently with freedom of choice for doctors and services). Extensive network of social services. Affordable housing.

In fact, despite relatively high tax rates (compared to the US), 13 of the top 20 cities touted as being the best places to live and work in the world are located in Europe. After Vienna, the list includes Munich (where my husband used to live), Zurich, Bern, Dusseldorf, Luxembourg, Amsterdam, Geneva, Copenhagen, Brussels, Frankfurt, Stockholm and Berlin.

Just three North American cities cracked the top 20: Vancouver, Toronto and Ottawa – all Canadian (darn those Canadians!).

The top US cities on the list were Honolulu (ranked 29) and San Francisco (ranked 30). New York came in at 49th with Washington (DC), Boston, Portland (OR) and Chicago faring better.

In Central and South America, San Juan, Puerto Rico (one of my favorite cities!) was ranked highest, with a 72. Port au Prince, Haiti (206) was ranked lowest, not surprisingly.

The Middle East and Africa suffered in the rankings, largely due to civil unrest and lack of infrastructure. Dubai managed to be ranked 77th, as its transit system has improved. Baghdad sits near the bottom of the rankings at 215th, though it scored better than last year; it’s infrastructure scored a 19.6 compared to the New York baseline of 100.

There were surprises for me on the list. In the Pacific Rim, Auckland (NZ) placed very high, ranking 4th. Sydney (AU) was next in the region with a ranking of 10. Asian cities were much lower on the list, with Singapore ranking 26th. Beijing experienced an “Olympic bump” to 113. Bangkok and Mumbai, not surprisingly, have dropped in the rankings.

Income tax rates in New Zealand remain relatively high, despite an emphasis on tax reform. Income tax rates have stabilized to about 39% for individuals (their pattern of increases and decreases is similar to that in the US) but have remained at 30% for corporations.

Does any of this matter? Our guts would say that high taxes would drive individuals and companies away. But the data doesn’t tend to bear that out. While it’s true that you’ll have the occasional Bono who runs to a tax haven to escape taxes, tax is usually one small part of the bigger picture to determine where to live and work. In fact, Slagin Parakatil, a Mercer rep, noted that taxes rarely affected the decisions of multinational companies in deciding where to deploy staff: “I don’t think tax would be an issue. If you need to send someone, you will definitely send someone, no matter whether the tax regime is high or not.”

I would tend to agree. Despite the hemming and hawing of companies over tax burdens, many cities – especially international cities – offer amenities (and yes, admit it, cachet) that far outweigh the cost of the tax. While I’ve had clients that have complained about tax burdens, including those in my own City of Philadelphia, few have found it the most compelling reason to move. I’ve often joked that major corporations which threaten to move out to the suburbs really don’t want to put on their letterhead, “London, Paris, Conshohocken” – I still find that to be true.

But please understand what I’m saying. I do think tax matters. I do think it’s important to be competitive when it comes to tax rates. I do think that a proper financial analysis should include a comprehensive review of tax schemes in regions where you want to do business. I just think that there are often intangibles – like not losing 10 hrs a week of your life in a car commuting to and from work – that should also be factored in to the equation. Using a variety of factors (I think there were 29), Mercer made an effort to look at the bigger picture.

Did they get it right? I don’t know. I can’t imagine wanting to live in, say, DC over Philly. But I think they were on the right track.

I’ve been fortunate to live and work in some amazing places all over the world. There is something to be said for quality of life. And sometimes (not always), it costs a bit.

What do you think? Is a higher quality of life worth a boost in taxes? And what constitutes a higher quality of life to you?

Image by Kennito454, courtesy of Wikimedia, via a Creative Commons Share Alike license

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