Marching to a different beat
22 May 2022WRITTEN BY JAMES KALLMAN AND DERREN JOSEPH
It’s ironic that a measure initially meant to track down American tax evaders could ultimately lead to U.S. isolation in the area of international cooperation on tax reporting. As noted before, the success of the Foreign Account Tax Compliance Act (FATCA) in tracing U.S. tax evaders encouraged the OECD to introduce the Common Reporting Standard (CRS). Early adopters came at the start of 2016, but it is from January 1, that Indonesia and Singapore, together with the remainder of the 100 or so other signatories, have begun to collect financial information on individuals and entities for reporting in 2018.
The demands of CRS are far more stringent than those of FACTA, which may be one reason the U.S. is not a signatory, even though a vast majority of wthose countries formerly considered “tax havens” have signed, including Panama. Nor does the U.S. reciprocate in providing FACTA information, as domestic law doesn’t permit.
One CRS requirement is disclosing an entity’s beneficial owner—while it is perfectly legal to incorporate anonymous shell companies in states like Delaware, for instance. Moreover, the tax advantages in certain states are so attractive that more than half of U.S. public and Fortune 500 companies are incorporated in either Delaware or Nevada.
To further complicate matters, U.S. banking regulation is split between national and state authorities. With states vying against each other for lucrative company incorporation, the direction has been towards greater secrecy rather than transparency. Thus, while change is unlikely at state level, state representatives in Washington are also far too aware of their precarious standing to support any legislation as potentially disruptive to the status quo as CRS.
If not enough, the corporate tax cuts proposed by President Trump would make individual U.S. states increasingly attractive to foreign funds seeking to escape higher tariffs and closer scrutiny. Already some wealth advisors are seeking to move their clients’ holdings to states such as Nevada, Wyoming and South Dakota, from former havens in the Caribbean and elsewhere.
With banking secrecy laws that almost rival those of Switzerland in its heyday, the U.S. is moving in the opposite direction to the rest of the world. From being a world leader in fighting tax evasion and money laundering, the U.S. has become one of the few countries whose banking secrecy and tax reporting laws provide opportunity for others. Though the current administration likes to march to a different beat, it might find itself in splendid isolationism on international tax reporting matters.