Commentary: Tax havens: The need for action – Part 2
By the very criteria set in the United States by the Multistate Tax Commission (MTC), several states in the US are “tax havens”. But, they have not been named in the legislation passed by the legislatures of Oregon, Montana and others.
Among the MTC criteria for determining a tax haven is that a jurisdiction “during the tax year in question, has no or nominal effective tax on the relevant income”. On that basis, there are nine states in the US that are tax havens. They are: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, where there is no personal income tax, and New Hampshire and Tennessee, which also have no taxes on wages; only interest income and dividends are taxed.
There has been no labelling of these US states, although small jurisdictions in the Caribbean and Pacific have been openly branded as tax havens because they have no or low tax for their international financial services sector. This underscores a double standard and unfairness that small countries are forced to endure to their detriment in the international economy.
Interestingly, while individual US states and the District of Columbia have adopted “tax haven” criteria in laws that harm Caribbean and Pacific countries, at least two Republicans, hopeful of being elected US president, have made it clear that, if elected, they would streamline the US tax code and lower tax rates. Senators Ted Cruz of Texas and Rand Paul of Kentucky both said they would scrap the current tax code and replace it with a uniform tax on consumption.
An intriguing idea was floated by Senator Cruz. He proposed abolishing the Internal Revenue Service altogether. It will be interesting to see if he returns to it, and how much traction it gets.
No country tries to dictate to the US federal government or to any of its 50 constituent states the level of taxation they set. Setting taxes is their right, as it is the right of every competent jurisdiction as I have pointed out before in previous columns. Therefore, jurisdictions everywhere in the world have an equal right to object when any other jurisdiction tries to force them into setting taxes that are not in their interest.
The problem for small jurisdictions is that they have few options for objections to such coercion and even fewer for resisting it. But, the worst decision would be not to object and not to resist. No wrong anywhere in the world and at any time in history has been corrected by inaction. However difficult it may be to do so, wrongs have to be confronted at many levels and through every possible avenue.
At the root of the problem that small Caribbean and Pacific countries face in countering the false and harmful label of “tax havens” that has been applied to them, is that none of them have diplomatic or any other relations directly with the individual states of the US that have so branded them. Further, they have no tax agreements of any kind with the individual US states. Both their diplomatic relations and tax agreements are quite properly with the federal government of the US, represented in this instance, by the US Department of State and the Department of the Treasury.
When Caribbean and Pacific jurisdictions signed tax information exchange agreements (TIEAs) – and in some cases double taxation agreements – with the US, they did so in good faith and with the understanding that the US federal government acted on behalf of all its constituent parts.
In this regard, the jurisdictions that have been wrongly and harmfully labelled as tax havens are entitled to expect the US federal government to act in defence and in preservation of legally binding treaties that it signed on behalf of the US as a nation state. The preposterous alternative – really beyond contemplation – is that the US federal government does not act in international matters for its individual states.
In this regard, the US State and Treasury Departments should be telling the individual state governments that Caribbean and Pacific countries have signed TIEAs with the US and that no request for tax information has ever been denied. They should also be telling them that the Global Forum of the Organisation of Economic Cooperation and Development (OECD) have found Caribbean and Pacific countries no less compliant in tax requirements than the US as whole and more compliant than several states of the US.
And, as for the level of taxation applied by countries, the US federal government should also advise individual states of the US that, just as they fought tooth and nail to maintain authority over their own levels of tax to the point where the nine states named earlier have no personal income tax, so it is the right of other jurisdictions to set their own tax rates at whatever pitch they regard as competitive.
Caribbean and Pacific states should make this case at all levels – in direct discussion with the US federal government, in the media in their own countries and in the US, and in international and multilateral bodies such as the United Nations, the Organisation of American States and the Global Forum of the OECD. To correct the wrong, action is required.
There is a further point to consider in this tax competition debate. Those in the US and the European Union countries who are complaining about low and no tax jurisdictions want the benefits of globalisation and completely free entry into the markets of other states, but they refuse to address the consequences of their outdated tax policies and practices that belong only in a protectionist world.
There is need for change in this imposed order in the world’s long term interest. Protectionism should not be undesirable and unpalatable except when it suits the powerful.
