Washington Made A Change To Its Tax Law, And Caribbean Countries Aren’t Happy About It

Faced with outrage from over a dozen otherwise placid Caribbean nations, D.C. officials are backtracking on a plan to openly call out countries it says allow big U.S. businesses to skip out on paying local taxes.

At issue is a change to existing tax law made through the 2016 D.C. budget that took effect last month. Here’s what happened.

In 2011, D.C. passed a law requiring combined reporting by large corporations. That means that national corporations with a local presence have to pay D.C.taxes on their combined income, instead of just paying the taxes on the income of the local affiliate alone.

Advocates say combined reporting laws make it harder for big businesses to skip out on taxes by moving money around to states and countries with lower tax rates — “tax havens” in populist parlance. When the change was implemented, the D.C. Chief Financial Officer estimated it would bring in $22 million in new tax revenue per year.

Until last month, D.C. law defined those tax havens certain attributes. But as part of the 2016 budget, D.C. officials took the definition a step further — they outright designated 39 countries and international jurisdictions as tax havens.

That list includes Andorra, Bahrain, Cyprus, Guernsey-Sark-Alderney (a small island in the English Channel controlled by the British Crown, in case you didn’t know), Liechtenstein, Malta, Monaco, Vanuatu and others — along with 15 Caribbean nations, the majority small islands.

Both Oregon and Montana have produced lists of their own. But why did D.C.?

“Linking a specific set of jurisdictions to the definition tax havens in the District’s Official Code improves the Office of Tax and Revenue’s ability to enforce the requirements of combined reporting requirements,” explained an analysis from the D.C. CFO, which estimated that the change could bring in an additional $3.7 million in 2017, and slightly less in the years that follow.

That’s in D.C. alone. A January report from Oregon’s Department of Revenue estimated that the state could take in an additional $42 million in revenue from 2015-17 due to its own list.

And according to a report from the Public Interest Research Groups published last year, states could recover up to $1 billion in tax revenue that is currently being spirited off to foreign tax havens.

Caribbean criticisms

But what amounts to a few million dollars a year for D.C. has been taken as a significant insult — and threat — by the countries on the list, especially those in the Caribbean.

In late September, Eugene Newry, the ambassador of the Bahamas to the U.S., wrote a letter to Mayor Muriel Bowser and members of Congress protesting its inclusion on the list. The Bahamas was included, he wrote, on “seemingly arbitrary and spurious grounds.”

“The Bahamas has an exemplary history of functional cooperation through tax information exchange with the United States since 2003,” he wrote in the letter.

Gaston Browne, the prime minister of Antigua and Barbuda, chose a much bigger stage for his own criticism of the new list: the United Nations.

“My country deplores the ‘tax haven’ list, produced by individual states and a District within the United States of America, that has wrongfully and inappropriately labelled many Caribbean and Pacific countries,” he said during his Oct. 1 speech at the 70th session of the General Assembly.

“It cannot be right that our small country’s reputation should be wrongfully tarnished by powerful countries, despite all that we have done, at great cost to our limited resources in order to comply with international standards,” he argued.

Browne said that such a designation — which has also been imposed by the European Commission — means that U.S. and European financial institutions could stop doing business with the named countries. “The consequences would be disastrous,” he said in his speech.

The Caribbean officials have asked Congress to intervene, citing the city’s status as a federal district under congressional control. They have also said that if Congress does nothing, they would consider the city’s tax haven list as an expression that the federal government agrees.

It wasn’t just the Caribbean countries that were upset, though. According to one D.C. Council staffer, officials from Monaco and Luxembourg let them know they are unhappy with the list.

D.C. to drop list — for now

Of course, some say that the countries doth protest too much. In a letter to Ambassador Newry, the UK-based Tax Justice Network argues that the Bahamas — along with other countries on D.C.’s list — is in fact a tax haven.

And the law creating the list allows the Council the chance to add and remove countries every two years. Oregon and Montana do the same; this year, Oregon added Guatemala and Trinidad and Tobago, and removed Monaco.

But an emergency measure to be voted on on Tuesday would simply scrap the list altogether, at least for the time being.

“I don’t intend for this list to go away,” says Council Chair Phil Mendelson. “We want to step back and take a careful look at it.”

Mendelson says that some of the countries — European and Caribbean — expressed their disagreements with his office over whether or not they are tax havens. He says that while the list was included in the first draft of the 2016 budget in May and approved in June, he wants to better understand what would make a country qualify as a tax haven.

“I thought it was worth taking another look at it,” he says.

By Martin Austermuhle