Around Much of the World, U.S. Is Considered a Tax Haven

Published June 3, 2013

Some international tax experts note a big irony in a U.S. Senate subcommittee recently taking Apple Inc. to task for allegedly using “offshore tax havens” to avoid paying U.S. taxes on foreign income. They note more irony in continued U.S. government pressure to compel overseas banks to give up information on Americans with bank accounts in the belief those people may be hiding money from the taxman.

The irony: Much of the world considers the United States to be one of the world’s biggest tax havens.

“The U.S. happens to be one of the most concerning offshore havens in the world, and the reason is, it’s very easy for anybody in the world today to set up, let’s say, a Delaware Corporation. You can do it online. You have to give very little information to get it up and running. And Delaware’s not alone. There are other states where you can do it as well,” said Jim Duggan, a tax, wealth and estate planning attorney with the Duggan Bertsch LLC law firm in Chicago.

Lowest Hurdle to Hide Wealth’

“But if you’re a U.S. citizen and you go offshore to try to set up a company or a bank account, there are tremendous amounts of [U.S. government-mandated] due diligence and know-your-client information [banks must follow and obtain]. . . . They have to comply with the PATRIOT Act, and now they have to worry about FATCA [Foreign Account Tax Compliance Act] compliance. We are actually probably the lowest hurdle to creating structures to hide wealth in the world,” Duggan said.

He’d get no argument from Kevin Packman, chairman of the Offshore Tax Compliance Team at the Holland & Knight international law firm.

“There are a number of countries that have said the U.S. is the biggest tax haven in the world,” Packman said. “There’s something to be said for that view.”

He noted there are many countries where people are rightly concerned about government moves to impose confiscatory taxes or seize assets. They view the United States as more respectful of property rights and therefore look for ways to move investments into the U.S., including by setting up Delaware or other corporations, and parking money in U.S. banks.

“It’s really hit or miss with many countries, especially in South America,” Packman said. “They have the Crazy of the Month down there. We used to joke [the late president of Venezuela, Hugo] Chavez was good for business because of the number of people from there who were coming here with their money. Issues in Mexico are pushing people over here, too.”

U.S. Seeks Money Everywhere

Packman points out the United States “is one of only three countries” that taxes worldwide income. No other industrialized nation does that, using territorial tax systems instead.

In a territorial tax system, tax is paid wherever income is earned. So, for instance, Germany would not try to tax income earned in the United States by German carmaker Volkswagen. That money would be taxed in the U.S. Under the nearly unique worldwide tax system the United States uses, the U.S. claims power to tax income earned by Ford or other U.S companies in Germany or anywhere else. If Ford or other U.S. companies were to “repatriate” income earned in other counties, where tax was already paid, the U.S. government would tax that money.

There is a foreign tax credit to offset some of the U.S. tax the corporation would otherwise have to pay. The U.S. has a 35 percent federal corporate income tax. If a corporation in the 35 percent tax bracket were to repatriate $1 million of income earned abroad, it would owe $350,000 in federal tax. But if it had already paid, say, $250,000 in tax to the country where the income was earned, it would pay another $100,000 in U.S. tax.

Though the U.S. waits to tax most foreign earnings when they are repatriated, it does tax “passive” income, which includes many types of investment income.

Apple Paid $6 Billion in Tax

Last month Apple executives including CEO Timothy Cook testified the company is “a powerful engine of job creation in the United States” that “pays an extraordinary amount in U.S. taxes.” Apple’s U.S. tax bill last year was approximately $6 billion.

Over the past four years Apple has earned about $44 billion in overseas income. “Apple has substantial foreign cash because it sells the majority of its products outside the U.S.,” the company said.

Subcommittee Chairman Carl Levin (D-Mich.) complained “Apple wasn’t satisfied with shifting its profits to a low-tax, offshore tax haven. Apple sought the Holy Grail of tax avoidance.”

Even U.S. citizens are subject to worldwide taxation. The Foreign Account Tax Compliance Act, which goes into effect January 1 of 2014, requires every foreign bank, insurance company, or other financial institution to report all U.S. citizens they do business with, “or we’ll impose a 30 percent withholding tax on you. A great portion of that would have been tax-exempt, now it will be a blanket 30 percent” unless they report on their U.S. customers, said Packman.

‘Media Just Wants Names’

“Just because people have foreign trusts, foreign companies, or foreign bank accounts doesn’t mean they’re doing anything wrong,” he said. “But the news media doesn’t care about that. The media just cares about the names.”

He said there are many legitimate reasons for Americans to have overseas accounts.

“If you go abroad as a student, you’ll need a bank account,” Packman said. “What if you do a lot of business overseas or you’re a corporate executive and you’re sent abroad for work? You’ll have to put that on a FBAR [Foreign Bank and Financial Accounts Report] and 1040 tax form. I have clients who want foreign accounts for diversification because they’re afraid the U.S. market will fall apart. Few people have a foreign account to evade tax.”