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Monday, July 28, 2008 - Vol. 10, No. 178
Today's comment is by Bob Bauman JD, former U.S. Congressman, and now Legal Counsel and Senior Writer for The Sovereign Society.
Sky-high gasoline and oil prices, thousands of home mortgage foreclosures daily, U.S. troops dying in two foreign wars. It's all driving Americans to distraction.
Meanwhile, up in the rarefied atmosphere of Capitol Hill, the U.S. Senate is engaged in a phony war on offshore tax havens. Eager Senators are playing to the news media gallery with bombastic and false statements about these so-called billions in lost taxes offshore.
Last week, it was that dynamic duo of the U.S. Senate Finance Committee, Baucus (D-Mont) and Grassley (R-Iowa). These senators are dumping all over the Cayman Islands. They claim any American corporations with a subsidiary company offshore (which is fully legal) should be treated as suspect tax dodgers.
The Baucus/Grassley show was based on a report the two senatorial pals ordered the Government Accountability Office to write.
The senators asked this congressional watchdog agency to investigate a five-story building (Ugland House) in the Caymans that is listed as the business address for corporate subsidiaries of more than 18,500 U.S. companies. That number has nearly doubled in the past four years.
About half of the companies that list their address as the Ugland House are American. The principal tenant of the building is the well-respected international law firm of Maples and Calder, which performs incorporations for global clients.
The So-Called Sinister Building...a Political Straw-Man
Possibly trying to keep a straight face, Senator Baucus said that "this building in the Caymans" is "one of the most likely places shady tax transactions could be sheltered. If American companies are setting up shop at the beach just to avoid their tax obligations, we can't keep our heads in the sand. We must make sure honest American taxpayers are not footing the bill for corporations that aren't paying their fair share." Bravo, Senator! Go get 'em!
But please note the false premise of this Baucus syllogism, (i.e. his deductive scheme of formal argument, consisting of a major and a minor premise and a conclusion).
His false premise is that "if" a U.S. company has an address at this building, then on that ground alone, the company automatically is suspect of tax evasion. That's a ridiculous notion at best. Not to mention a totally false conclusion.
When I was in politics this sort of exercise was called setting up a "straw-man." You define an object on your own terms, then attack it for fun and political profit.
A Bunch of Phony Numbers to Support a Shaky Theory
American corporations form offshore companies so they can take advantage of U.S. tax laws (yes, I said "U.S. tax laws") that allow tax credits and other tax breaks for offshore earnings.
If done properly, American corporations can use these laws to legally avoid the onerous U.S. corporate tax rate of 35%. The U.S. has one of the highest corporate tax rates in the world, so it's no wonder U.S. companies have a tough time competing globally.
By the way, senators, that high tax means lost American jobs and fewer taxes paid by U.S. workers.
U.S. companies also use offshore tax havens like the Cayman Islands to reduce their foreign tax liability. For example, an American company with operations in Japan can create an affiliate in the Cayman Islands. The American company can structure it so that the Cayman affiliate is earning interest, which is tax-deductible in Japan.
Much of this anti-tax haven baloney consists of senators making up higher and higher numbers of how much the IRS loses to offshore tax evasion.
In recent years, Senator Carl Levin has upped the fictitious lost tax number he invented from US$50 billion to US$100 billion.
But at the Finance Committee hearing, Senator Baucus blew the roof off that number. He claimed the Senate must "find legislative solutions to pressure the IRS and better enable them to collect on the nearly US$345 billion annually of legally owed but unpaid taxes," according to Tax News.com.
(Why stop there? Do I hear US$1 trillion senators?)
The Biggest Tax Haven of All: The United States
Several economists and tax experts dispute even the US$100 billion number. They say a surge in the number of companies in the Cayman Islands does not correlate with lost taxes.
By comparison, they point out that America itself is one of the largest tax havens in the world, (for foreigners, but not for Americans). In fact, more than 850,000 companies are registered in the State of Delaware alone, including one Wilmington building where more than 200,000 companies have an address.
(Better rush right up to Wilmington and investigate that spooky building, senators!)
American companies also want to legally defer U.S. taxation of foreign income. Unlike many countries, including the European Union, America taxes income earned both at home and abroad. But if this money is reinvested abroad, the tax is deferred. (Thus the need for offshore subsidiaries.)
The lost tax revenue from the legal deferral of income from American investments abroad totaled US$11.9 billion last year. This number is expected to reach US$12.8 billion by the end of this year, according to estimates from the Office of Management and Budget.
By 2010, that number will reach US$14.6 billion, OMB estimates.
The Ruse that Jack Built
Predictable as clockwork, the Baucus/Grassley dream team called on good old Jack Blum to prove their case. Blum is a lawyer at the Washington D.C. law firm Baker & Hostetler.
But more importantly, he's a paid IRS "consultant" and self-appointed specialist in innuendo. For years, senators have hauled out Jack to repeat his tired spiel for nearly every congressional anti-offshore tax hearing.
Not content with phony attacks on the Cayman Islands, professional witness Blum also went after three other Caribbean island tax havens, the British Virgin Islands (BVI), Nevis, and Belize.
As if it were some sort of crime, Blum intoned: "The BVI has more than 500,000 shell companies." Not content with this implied smear he added: "It is important to understand that the structures are mere pieces of paper with no commercial reality," while insisting that in his narrow, biased opinion, "offshore tax evasion is a massive threat to the U.S. tax system."
No doubt Blum knows better, but tax truth does not match his canned agenda. These "mere pieces of paper" are actually incorporation documents that allow offshore companies to qualify for legal tax breaks worth billions annually. The U.S. Internal Revenue Code authorizes these legal documents so they comply with U.S. tax code. By the way, Congress could change the law that approves these documents if they really wanted to.
What the Lazy "Journalists" Forget to Tell You
Damn, if I don't get tired doing the job of a lazy, and no doubt, biased, "news" media. These journalists just don't seem to care one bit about the truth concerning offshore tax havens.
"Tax havens don't necessarily detract from real investment," a professor at Harvard Business School, Mihir Desai, says.
"It can actually be beneficial to tax mobile capital less than immobile capital. Otherwise the mobile capital will just go elsewhere. I would imagine that the presence of tax havens may well cost tax revenue, but that does not necessarily mean it is bad to have them around," Mr. Desai said: "Tax havens can also facilitate investment by allowing investors to reduce their tax burdens."
But the politicians in Congress in both parties are far more concerned about getting headlines and their own re-election than they are about helping American business or American taxpayers.
Good Old Tom Said It
I leave you to ponder this quote, from the late President and leading agriculturist, Thomas Jefferson of Monticello:
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure."
And there is no place in the world where you'll find more natural manure (or tyrants) than in Washington, D.C. - especially on Capitol Hill.
BOB BAUMAN, Legal Counsel
P.S. As you can see, these senators have been less than honest about the perfectly legal opportunities available to you offshore. These opportunities go far beyond a few tax breaks. You can also gain real asset diversification abroad, by taking advantage of markets stretching from London to Turkey to South Africa, by investing abroad. And you can learn where the super wealthy individuals shield their wealth (while following Uncle Sam's tax rules of course).
This November, my colleagues and I will be in Cancun, Mexico to teach you how at our third annual Offshore Advantage Academy seminar. We're now taking advance registrations for this seminar. But please hurry: We sold out the last two years in a row. And we expect it to sell out this year too. Get all the details here.
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