A recent probe reveals that several world leaders and some of the wealthiest people around the globe have been concealing their assets in the United States (US). The information from this investigation brought new attention to the growth of tax havens. A document leak dubbed the Pandora Papers shed light on the intricate financial activities of the elite and the corrupt, who are using offshore accounts and tax havens to safeguard several trillions of dollars in assets.
About Offshore and US-Based Tax Havens
Aside from the well-known offshore havens, the document leak revealed secret accounts in trusts throughout the US, with 81 in South Dakota, 37 in Florida, and 35 in Delaware.
Why Are US States Becoming Tax Havens?
Several factors contribute to the appeal of these states as tax havens:
No Rule against Perpetuities
Lawmakers in these states have done away with the rule against perpetuities, facilitating the formation of dynasty trusts. These enable wealth transfer from one generation to another without incurring federal estate taxes.
Asset Protection Trusts
Certain states permit asset protection trusts that secure wealth from claims by creditors. Such trusts can be enticing to affluent lawyers and doctors as a means to safeguard their assets from malpractice claims.
Tax Exemption for Trusts
Many states impose a tax on trust income, but trusts established in Delaware are exempted from state income tax if beneficiaries do not reside in the state. Moreover, South Dakota does not tax personal income, corporate income, or capital gains.
Privacy Protection
South Dakota offers extensive privacy protections for assets held in trusts and keeps related court documents and proceedings under wraps. Delaware is a favored venue for registering Limited Liability Companies (LLC), which can include shell companies established solely to conceal assets or financial transactions. Delaware law does not require the public disclosure of the names of LLC owners or members.
Benefits for States
The trust industry not only benefits wealthy individuals and companies that help them hide assets but also boosts government reserves from the hefty franchise taxes paid by trust companies.
Steps Taken
While some US Congress members are demanding stricter scrutiny of trust companies dealing with foreign clients, the reaction to the Pandora Papers in Delaware has been limited so far.
Tax Havens
Tax havens are typically offshore countries that offer minimal or no tax liability to foreign individuals and businesses in a politically and economically stable environment. They usually feature low or no income taxes, minimal reporting of information, lack of transparency obligations, lack of local presence requirements, and promote tax haven vehicles.
Popular Tax Havens
Some widely known tax haven countries include Andorra, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, Hong Kong, Mauritius, Lichtenstein, Monaco, Panama, and the Cayman Islands.
Regulatory Oversight
Globally, certain programs are designed to intensify the enforcement of offshore investment reporting. An example is the Automatic Exchange of Financial Information, supervised by the Organization for Economic Co-operation and Development (OECD).