It’s December on Miami Beach and convertibles are cruising down Ocean Drive with their tops down. Tourists are wearing T-shirts and shorts and sipping mojitos in bars and restaurants. In the late afternoon, and a comfortable 26 degrees Celsius. Most of the 15 million foreigners who visit Florida each year come to escape the winter.
But some aren’t here for the sun and cocktails. They come to launder their money, or at least, hide it from the taxman. And soon, once the Trump administration’s new tax reform comes into effect, there may well be a lot more of them.
People like Michael are there to help them. Smartly dressed in a blue suit, light-gray shirt and thin tie, he’s chosen to meet with us at a discreet table in a café, Pasion del Cielo. He only gives his first name and has warned about asking any personal questions – if we do, the interview will be over.
Michael tells us about his job as director of more than 120 limited liability companies where rich people can hide their wealth from the tax authorities.
He won’t tell us if he has any German clients but he will tell us his fee is $6,000 per year — peanuts for each individual tax evader, but add that together and it makes for a sizeable income for Michael.
He started off by doing favors for friends from South America who were looking for a safe haven for their money, far from the dangers of government coups and drug cartels. “I felt morally obligated,” he said. That’s the same argument Swiss banks used during the Cold War: They said they were merely providing sanctuary for the assets of Germans who were worried the Soviets might invade.
The Swiss model of banking secrecy only ended a few years ago when the US started to pressure the Swiss. Meanwhile the US itself has quietly evolved to become the biggest tax haven in the world, easily rivaling its Caribbean and European competitors.
Scandal after scandal has been made public – Lux Leaks, Swiss Leaks, the Panama and Paradise Papers – but the US has gotten off scot-free so far, even though a number of US states such as Florida, Delaware and Nevada make it exceptionally easy for tax cheats to hide their money with the help of trustees and pseudo-company directors.
The biggest winners from the Trump tax reform will be firstly, the mining sector closely followed by holding companies.
America wasn’t included in the blacklist of 17 tax havens published by EU ministers for the first time this month, even though the US doesn’t meet all European standards. Evidently, the Europeans were keen to avoid conflict with the combative Mr. Trump, even though the US itself demands that other countries hand over all bank data of US citizens – and doesn’t respond to equivalent requests from abroad, including from Germany.
Mr. Trump’s tax reform will enable the US to use taxation as an even sharper weapon in the fight for global capital and investment. It will involve a big drop in tax rates, special taxes on imports and a 100 percent write-off for business investments. It will even make tax-dodging even easier in the US.
The rest of the world is watching this fiscal Trumpism with a mixture of shock and fascination. “That’s really throwing down the gauntlet,” said the manager of one blue-chip German company. And Eric Schweitzer, president of the Association of German Chambers of Commerce and Industry, warned that Germany would be affected and must respond. “The planned additional burden on imports will have a negative impact on investment and supply chains for many companies,” he said. “The next German government must examine closely whether the tax environment for our companies is still up to date.” He added that the corporate tax burden of around 30 percent in Germany needed to be reduced and quickly.
The finance ministers of Europe’s five largest economies, Germany, France, Britain, Italy and Spain, recently sent a letter to Treasury Secretary Steven Mnuchin warning that the tax plan may hurt international trade and break international treaties on double taxation.
“It is important that the US government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up,” the letter said. “The inclusion of certain less conventional international tax provisions could contravene the US’ double taxation treaties and may risk having a major distortive impact on international trade,” the ministers wrote.
Copies of the letter were also sent to the Senate and House of Representatives. Officials said the letter was principally targeted at lawmakers, not Mr. Mnuchin. Not that they appeared to pay much attention.
Initiated by Germany, the letter highlights how concerned the Europeans are about the US tax plans. The ministers said some of the US tax measures could be in breach of World Trade Organization (WTO) rules – a veiled threat that the EU could file a lawsuit with the entity.
Closer inspection of the US Tax Cuts and Jobs Act shows that it ignores Organization for Economic Cooperation and Development (OECD) rules by cutting taxation of foreign license fees charged in the US. “In doing so, America is resorting to an internationally frowned upon instrument of tax competition that even Ireland has abandoned,” said Reimar Pinkernell of Bonn-based law firm Flick Gocke Schaumburg.
In effect, Mr. Trump is ignoring the OECD’s long-running efforts to curb aggressive tax avoidance schemes by companies.
In the US, limited liability companies, or LLCs, can be set up in 10 minutes and are well suited to obscuring the ownership of assets. Often you don’t even need an ID card or a drivers’ license to register one. “In some states it’s easier to set up a company than apply for a library card,” said Joseph Spanjers of the think tank, Global Financial Integrity.
And there are too many banks that ask too few questions. German financial authorities aren’t informed about deposits and withdrawals from US bank accounts, the German finance ministry said in response to an enquiry. The only information provided is data on interest and dividend payments.
Even the World Bank is alarmed, warning that it’s virtually impossible to ascertain whether LLCs are proper firms with business operations or just letterbox companies set up by intermediaries to obscure financial arrangements.
In fact, shortly after the tax bill passed, analysts at the Penn Wharton Budget Model from the University of Pennsylvania found that the biggest winners from the Trump tax reform will be firstly, the mining sector closely followed by holding companies.
Delaware or Nevada instead of Barbados or the Bermudas – it’s all about America first.
Florida, Delaware, Wyoming and Nevada are favorite states for LLC founders. Even if the federal government in Washington wanted to take action to curb them, it wouldn’t be able to because the rules on setting up companies are a matter for state authorities. Some appear to be competing to come up with the laxest rules and the least transparency.
Private individuals tend to opt for the sunny climes of Florida but companies prefer to head to Wilmington, Delaware, some 1,800 kilometers further north. Two thirds of all Fortune 500 companies, including GM, Coca Cola and Exxon, as well as German heavyweights like Deutsche Bank and Volkswagen are registered here. One single address is home to 285,000 companies: 1209 Orange Street. Visitors expecting a gleaming skyscraper with grand offices will be disappointed: it’s a decidedly unassuming single-storey brick building.
More than a million companies are registered in Delaware; in fact, it has more firms than inhabitants. What attracts them is the state’s total tax exemption on income from brand and patent rights. Toys “R” Us for example has its branches pay fees for the use of names and logos to its subsidiary in Delaware – and that’s all that’s needed to legally avoid tax.
Some US states like Pennsylvania or New York are fighting this tax creativity while others have decided if you can’t beat ’em, join ’em. Specialized service companies such as Corp 95 openly offer to set up companies in South Dakota, Wyoming, Nevada or Delaware for a fee of $379 or higher. Their website states that they specialize “in the formation of companies within the lowest-taxed and most business-friendly states.” The advantages are evident: There’s no tax due apart from federal tax, and not many questions are asked.
The Trump reforms will make Delaware or Nevada even more attractive in the future, especially for big US companies, because they will no longer have to stash their foreign earnings offshore. In March 2017, Apple had cash holdings of $216 billion, Microsoft $109 billion and Cisco $60 billion – gigantic war chests which will help them conquer even more of the world.
Under the Trump reform, they will be offered a one-off tax rebate of up to 12 percent for transferring their assets back home. That’s a small price to pay given that they will be able to deposit their money in states where they will pay virtually no tax other than federal tax. Delaware or Nevada instead of Barbados or the Bermudas – it’s all about America first.
This text first appeared in Wirtschaftswoche and was written by Tim Rahmann, Christian Ramthun and Silke Wettach. This story was adapted in English for Handelsblatt Global. To contact the authors: email@example.com, firstname.lastname@example.org, email@example.com