The US as tax haven

The United States, traditionally viewed as a leading force against global tax evasion, has paradoxically emerged as a prominent tax haven. This development is characterized by favorable tax laws, financial secrecy, and regulatory environments that attract foreign wealth and corporations seeking to minimize tax liabilities.

Understanding Tax Havens

A tax haven is a jurisdiction that offers minimal or no tax obligations, financial secrecy, and a lack of transparency, attracting individuals and corporations aiming to reduce their tax burdens legally. Key features include:

• Low or Zero Tax Rates: Especially on foreign income.
• Financial Secrecy: Strict laws protecting the confidentiality of account holders and beneficial owners.
• Lax Regulatory Oversight: Minimal requirements for financial disclosure and corporate governance.

While traditionally associated with small island nations, the U.S. has adopted characteristics aligning with these features.

The U.S. as a Tax Haven

1. Selective Participation in Global Transparency Initiatives

In 2010, the U.S. enacted the Foreign Account Tax Compliance Act (FATCA), mandating foreign financial institutions to report accounts held by U.S. citizens to the IRS. However, the U.S. has notably declined to join the Common Reporting Standard (CRS) developed by the OECD, which facilitates reciprocal information sharing among participating countries. This asymmetry allows the U.S. to receive financial information from abroad without providing equivalent data to other nations, making it attractive for foreign entities seeking confidentiality.

2. State-Level Policies Encouraging Financial Secrecy

Certain U.S. states have enacted laws that facilitate the creation of anonymous shell companies:

• Delaware: Known for its business-friendly legal system and minimal disclosure requirements.
• Nevada and Wyoming: Offer similar advantages, including no requirement to disclose beneficial ownership and low or no corporate taxes.

These states have become popular destinations for forming entities that can hold assets anonymously, attracting both domestic and international clients.

3. Attractive Tax Provisions for Non-Residents

The U.S. tax code includes provisions that benefit non-resident investors:

• Exemption from U.S. Taxes: Certain types of income, such as portfolio interest and capital gains, are exempt from U.S. taxes for non-resident aliens.
• No Reporting Requirements: Non-residents are not required to disclose foreign bank accounts or other financial assets to U.S. authorities.

These policies make the U.S. an appealing destination for foreign investors seeking to protect their wealth.

4. Use of Trusts and Foundations

The U.S. legal system allows for the creation of trusts and foundations that can be used to shield assets:

• Dynasty Trusts: Certain states permit trusts that can last indefinitely, allowing wealth to be passed down through generations without incurring estate taxes.
• Asset Protection Trusts: Designed to protect assets from creditors and legal judgments.

These instruments are often utilized by both domestic and international clients to preserve wealth and minimize tax liabilities.

Implications and Criticisms

1. Erosion of Global Tax Bases

The U.S.’s role as a tax haven contributes to the erosion of other countries’ tax bases:

• Loss of Revenue: Countries lose significant tax revenues as individuals and corporations shift profits to the U.S. to avoid higher taxes at home.
• Undermining Global Efforts: The U.S.’s non-participation in CRS hampers international efforts to combat tax evasion and promote transparency.

2. Domestic Inequality

The influx of foreign wealth can exacerbate domestic economic disparities:

• Rising Property Prices: High demand from wealthy foreigners can drive up real estate prices, making housing less affordable for locals.
• Strain on Public Services: While foreign investors benefit from U.S. infrastructure and services, they may contribute little in taxes, placing a greater burden on domestic taxpayers.

3. Reputational Risks

The U.S.’s status as a tax haven can damage its international reputation:

• Perception of Hypocrisy: Critics argue that the U.S. promotes transparency abroad while enabling secrecy at home.
• Potential Sanctions: Other countries may impose sanctions or take retaliatory measures against the U.S. for facilitating tax avoidance.

Conclusion

The United States’ emergence as a tax haven is the result of deliberate policy choices that prioritize financial privacy and attract foreign capital. While these policies can stimulate investment and economic activity, they also pose significant challenges, including undermining global tax cooperation, exacerbating inequality, and risking reputational harm. Addressing these issues requires a balanced approach that considers both the benefits of attracting foreign investment and the imperative of maintaining fair and transparent tax systems.

The United States, ironically, has garnered increasing attention and criticism in recent years for its role as a significant hub for global financial secrecy, leading many to label it a de facto “tax haven” for non-U.S. citizens and foreign wealth.¹ While the U.S. has been a staunch advocate for global financial transparency initiatives, particularly through the Foreign Account Tax Compliance Act (FATCA), its refusal to fully reciprocate information sharing with other countries under the Common Reporting Standard (CRS) and the lack of robust beneficial ownership registries at the state level have created loopholes that attract illicit financial flows and enable tax evasion by foreign individuals and entities.

The Paradox of U.S. Transparency

The U.S. has often championed global efforts to combat money laundering and tax evasion.² Its enactment of FATCA in 2010 requires foreign financial institutions (FFIs) to report information about accounts held by U.S. persons to the IRS.³ Failure to comply can result in a 30% withholding tax on U.S.-source payments to the FFI. This aggressive stance effectively put pressure on foreign jurisdictions to share data with the U.S., significantly enhancing the IRS’s ability to track offshore assets of American taxpayers.

However, the U.S. has conspicuously refrained from adopting the Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD).⁴⁵ CRS is a global standard for the automatic exchange of financial account information between participating jurisdictions,⁶ encompassing over 100 countries.⁷ While FATCA is a unilateral system focusing on U.S. persons’ accounts abroad, CRS is a multilateral system designed for reciprocal information exchange based on tax residency.⁸

This disparity creates a significant asymmetry: foreign financial institutions share information about U.S. accounts with the IRS, but the U.S. generally does not reciprocate by sharing information about foreign accounts held within its borders with other tax authorities.⁹ This “one-way street” has inadvertently positioned the U.S. as an attractive destination for foreign individuals seeking to hide wealth from their home countries’ tax authorities.

Key Mechanisms Contributing to U.S. Financial Secrecy

Several factors and state-level legal frameworks contribute to the U.S.’s perceived status as a tax haven for foreign wealth:

1. Non-Participation in CRS:
   • The Primary Driver: The most critical reason for the U.S.’s role as a tax haven is its non-participation in the CRS. This means that financial institutions in the U.S. are generally not required to automatically report information about accounts held by non-U.S. residents to their respective home countries’ tax authorities.
   • “Safe Harbor” for Illicit Funds: This creates a “safe harbor” for foreign wealth, as individuals and entities from CRS-participating jurisdictions can funnel money into the U.S. with a reduced risk of their home tax authorities being automatically informed.
   • Limited Exchange: While the U.S. does engage in some bilateral tax information exchange agreements (TIEAs) and under certain tax treaties, these are typically on request (rather than automatic) and are often insufficient to match the comprehensive nature of CRS.
2. State-Level Corporate Secrecy Laws:
   • Lack of Beneficial Ownership Transparency: Until recently, many U.S. states allowed the formation of legal entities, such as Limited Liability Companies (LLCs) and corporations, without requiring the disclosure of their ultimate beneficial owners.¹⁰ This anonymity made it easy for foreign individuals to set up shell companies to own assets (like real estate or investments) in the U.S. without revealing their true identity.¹¹
   • “Bearer Shares”: Some states historically permitted bearer shares (ownership determined by possession of the physical certificate), though this practice has largely been curtailed.
   • Key “Secrecy States”:
     • Delaware: Famous for its corporate-friendly laws, including low franchise taxes for companies not doing business in the state, no state corporate income tax for out-of-state revenue, and minimal disclosure requirements for directors and shareholders. While it still charges an 8.7% corporate income tax on income generated within Delaware, its corporate registry has historically offered significant anonymity.
     • Nevada: Offers no state corporate income tax, no state personal income tax, and strong asset protection laws (charging order protection).¹² It also traditionally provided high levels of privacy regarding ownership and management information.¹³
     • Wyoming: Similar to Nevada, Wyoming boasts no state income tax, strong asset protection, and significant privacy protections for LLC members and managers, making it attractive for holding companies and foreign investors.¹⁴
     • South Dakota: Has emerged as a leading jurisdiction for complex trusts, offering unparalleled asset protection (including against foreign judgments and certain types of creditors), perpetual trusts (dynasty trusts), and robust privacy laws for trust beneficiaries and settlors.¹⁵ These features make it particularly attractive for high-net-worth foreign individuals seeking to shield wealth across generations.
3. Trust Laws and Asset Protection:
   • Domestic Asset Protection Trusts (DAPTs): A growing number of U.S. states (including Alaska, Delaware, Nevada, South Dakota, and Wyoming) have enacted DAPT laws, which allow individuals to create irrevocable trusts to protect their assets from future creditors, even if the individual remains a beneficiary.¹⁶ For foreign individuals, these trusts offer a robust layer of asset protection that might not be available or as strong in their home countries.¹⁷
   • Perpetual Trusts (“Dynasty Trusts”): States like South Dakota permit trusts to last for hundreds of years or in perpetuity, enabling multi-generational wealth transfer without being subject to estate or inheritance taxes in the U.S. or potentially in their home country.¹⁸
   • Privacy of Trust Information: Many of these trust jurisdictions also offer strong privacy protections, keeping trust records non-public and shielding information about beneficiaries and assets from disclosure.¹⁹
4. Real Estate Ownership:
   • Anonymous Ownership: Historically, foreign individuals could anonymously purchase U.S. real estate through shell companies (often LLCs or corporations formed in states like Delaware or Nevada) without their beneficial ownership being publicly disclosed.²⁰ This has made U.S. real estate a popular vehicle for money laundering and hiding wealth.
   • Recent Scrutiny: While efforts are underway to increase transparency in real estate, particularly in certain high-value markets, it remains a significant avenue for opaque foreign investment.²¹

Impact and International Criticism

The U.S.’s role as a financial secrecy jurisdiction has drawn significant criticism from international bodies, transparency advocates, and other governments:²²

• Financial Secrecy Index: The Tax Justice Network’s Financial Secrecy Index has increasingly ranked the U.S. as one of the world’s leading enablers of financial secrecy. In 2020, the U.S. ranked second globally, and in 2022, it topped the list, surpassing traditionally recognized tax havens like Switzerland and the Cayman Islands. This ranking reflects not just secrecy laws but also the sheer scale of the U.S.’s offshore financial services.
• Facilitating Illicit Financial Flows: Critics argue that the U.S.’s lax transparency measures contribute to global illicit financial flows, enabling money laundering, corruption, and tax evasion by criminals, kleptocrats, and wealthy individuals seeking to avoid their home countries’ tax obligations.²³
• Erosion of Global Transparency Efforts: The U.S.’s refusal to join CRS undermines the effectiveness of global transparency initiatives, creating a significant loophole that can be exploited by those seeking to evade financial scrutiny. It creates a “race to the bottom” where countries might hesitate to fully embrace transparency if a major financial power like the U.S. does not reciprocate.
• “Reverse FATCA”: Some international observers have sarcastically referred to the U.S. as a “reverse FATCA” haven, given that it demands information but does not provide it in return.

Efforts Towards Greater Transparency (and Their Limitations)

The U.S. has taken some steps to address concerns about financial secrecy, though many argue these are insufficient to fully close the loopholes:

1. Corporate Transparency Act (CTA) of 2021:
   • Beneficial Ownership Registry: This landmark bipartisan legislation requires most new and existing U.S. corporations, LLCs, and similar entities to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S.²⁴ Treasury Department. The information will be stored in a secure, non-public database accessible to law enforcement and, in some cases, financial institutions with customer due diligence requirements.
   • Impact: The CTA aims to shed light on who truly owns and controls shell companies, making it harder for illicit actors to hide behind anonymous entities. This is a significant step towards addressing the issue of anonymous company formation.
   • Limitations:
     • Access Limitations: The database is not publicly accessible. While a step forward for law enforcement, it does not provide the broad public transparency advocated by some groups.
     • Exemptions: There are numerous exemptions for certain entity types (e.g., publicly traded companies, regulated entities, large operating companies), which may still allow some avenues for secrecy.
     • Legal Challenges: The CTA has faced legal challenges to its constitutionality, creating some uncertainty about its long-term implementation.²⁵
2. Efforts to Combat Money Laundering in Real Estate:
   • FinCEN has issued Geographic Targeting Orders (GTOs) in certain high-risk metropolitan areas, requiring title insurance companies to identify the beneficial owners of shell companies used to make all-cash purchases of high-end residential real estate.²⁶
   • The CTA will also apply to entities used to purchase real estate, providing broader beneficial ownership information for real estate holdings.
3. Bilateral Information Sharing:
   • The U.S. continues to engage in bilateral tax information exchange under tax treaties and TIEAs, but this is less comprehensive and automatic than CRS.²⁷

Conclusion

Despite its strong stance against global tax evasion and money laundering, the United States has, by virtue of its non-participation in CRS and historical lack of beneficial ownership transparency at the state level, inadvertently become a major destination for foreign wealth seeking secrecy.²⁸ The “one-way street” of FATCA, coupled with favorable state laws in jurisdictions like Delaware, Nevada, South Dakota, and Wyoming, has created an environment that is attractive to those seeking to shield assets from taxation and scrutiny in their home countries.

While the Corporate Transparency Act is a significant step towards greater transparency, its full impact and scope remain to be seen, particularly with ongoing legal challenges and the limitations on public access to information.²⁹ Until the U.S. fully embraces global standards for automatic information exchange, such as CRS, and ensures comprehensive beneficial ownership transparency across all its jurisdictions, it will likely continue to face criticism for its role in enabling global financial secrecy, presenting a paradox in its international financial policy.