The Nov. 8 presidential election in the United States could cause the temperature to soar in the Caribbean and wherever international banks and businesses flourish, drawing American dollars.
Members of the financial community in the Cayman Islands, the Bahamas, Panama and many other jurisdictions all want to know: Will the next U.S. president risk alienating the nation’s biggest corporations and wealthiest citizens by clamping down on their use of overseas banks and shell corporations?
Beyond that is a second question: If the next president successfully flips off the switch on the longtime practice of avoiding taxation by moving assets to offshore financial enterprises, what will that mean to the economies of places where offshore financial services thrive?
‘Tax fairness’ a hot issue for U.S. voters
The next chief executive will most likely have to quickly address the issue of federal taxation. Tax fairness is a promise U.S. voters – especially middle-income citizens – have been hearing about for months from a long list of candidates, those defeated and the three still standing.
Polls have emphasized that enacting laws to keep rich people and corporations from avoiding U.S. taxes by transferring investments to offshore financial institutions has become a big concern to voters. The candidates, in one way or another, have promised to clamp down on what are widely viewed in the U.S. as “tax cheats.”
A March 3 report from Citizens for Tax Justice, a Washington-based nonprofit, found that scores of America’s largest corporations are avoiding almost $700 billion in federal income taxes by holding abroad $2.4 trillion of what CTJ calls “permanently reinvested” foreign profits.
The organization also said 27 companies revealed that their investments were likely in offshore jurisdictions where they pay no more than a 10 percent tax rate on profits, far less than the 35 percent the U.S. could charge if those profits were reported as part of American tax returns.
If all $2.4 trillion of the U.S. corporations’ offshore assets were reported in American filings, according to CTJ, the companies would owe the IRS $695 billion in federal income tax.
If all of these overseas investments had been repatriated in 2015, the nation could have increased its tax revenue from almost $2.7 trillion to nearly $3.4 trillion – a 26 percent jump – providing corporations paid the on-the-books tax rate.
As a consequence, what stateside voters have been hearing from the hustings these days is this: Ordinary Americans get burned when big companies and wealthy individuals move their profits offshore. Candidates vow to stop this practice and make everybody pay a fair share so the nation can flourish.
Presumptive Republican presidential nominee Donald Trump has received some of his greatest applause for demanding that corporations repatriate their profits to America, where he promises to tax their gains much more modestly than at their current rates.
His scheme of more tax revenue (though at lower rates) from corporations that no longer need to seek relief through offshore accounts gives him the chance to promise middle-class taxpayers that they will not have to carry such a burden any longer for financing America. A Trump presidency will reduce rates for most Americans but especially for corporations, he says, promising to drop the current corporate rate from 35 percent to 15 percent.
For years, the Republican Party has taken the position that reducing tax rates on corporations and high earners would yield more tax revenue – in large part because the lower rates would encourage more investment in-country instead of abroad.
That has become one of Trump’s arguments too. He also posits a top marginal rate for individual taxpayers of 25 percent. Today, the top rates are, for a single taxpayer, 39.6 percent for income in excess of 406,751; married couples filing jointly pay that rate for income over $457,801.
Plus, despite the hue and cry about the tax advantages hedge fund managers enjoy, Trump’s plan calls for a rise in their rate on carried interest by a mere 1.2 percent – to 25 percent from the 23.8 percent now on the books.
The candidate’s tax plan also would allow hedge fund managers to structure their investment firms as small businesses so that partners in smaller enterprises would have a lower tax rate of 14 percent.
All of these proposals could reduce demand on offshore banking, as would the candidate’s suggestion to create a special repatriation rate of 10 percent on U.S. companies’ foreign profits. Such changes in the tax code, Trump says, will help bring more jobs and capital investment back to the United States from the Cayman Islands, Switzerland and many other jurisdictions.
Economists have found Trump’s future scenarios short on details, though.
“There’s not a whole lot you can hang onto there,” a CNBC commentator said this spring. “Little you can wrap your calculator around.”
The Tax Foundation, for instance, figures that Trump’s tax cuts might trim $12 trillion from what taxpayers owe the government, but such cuts would balloon the federal debt by more than $10 billion. Trump says he is less bothered by debt than most other Republicans.
Trump also has received deafening cheers at campaign events for promising to take the hardest line ever against American corporations that merge with overseas companies in lower tax jurisdictions, then move their headquarters abroad. He claims punishing measures, including government trade restrictions will stop such inversions.
Democratic Party presidential frontrunner Hillary Clinton’s plans base enforcement of anti-inversion measures on quite different means. When U.S. companies paint themselves as foreign enterprises in order not to pay U.S. taxes in this way, she would enact an exit tax that Citizens for Tax Justice and other nonpartisan groups have agreed could stop inversions “in their tracks.”
Clinton has published specific rules for such corporate efforts at evading income tax, including permitting inversions only when a smaller U.S. company merges with a foreign-owned outfit that would control a majority of the new enterprise’s holdings.
Clinton said flatly this year that she would move against offshore tax “schemes” in the Caribbean that she says are responsible for the loss of billions of dollars in U.S. tax revenue. She has focused on hedge funds that she says “misclassify income,” making earned gains look like capital gains, which the U.S. taxes at much lower rates.
A principal tool would be a surcharge on whatever income drawn from wherever in the world, based on a corporation’s or individual’s adjusted gross income. That, she has said, “would give us a chance to try to get around and end some of these abuses that area taking place in the tax system.”
High-earning taxpayers would get hit with a 4 percent surcharge on income in excess of $5 million a year, regardless of whether their income derives from capital gains or earnings.
Media reports quickly pointed out that focusing on the practices of tax-sheltered funds could negatively affect the Cayman Islands hedge fund of her own son-in-law, Marc Mezvinsky, husband of the Clintons’ daughter Chelsea.
Meanwhile, the conservative magazine National Review accuses Clinton of hypocrisy, in part because her husband, former President Bill Clinton, solicited millions in donations to the nonprofit Clinton Foundation from corporations that have substantial tax-protected offshore holdings.
Trump, too, draws criticism for perceived hypocrisy since, as CBS Money Watch has reported, “he owns millions of dollars in stock in the same companies that have been most aggressive with legal but controversial tax strategies” employed in offshore jurisdictions.
Democratic challenger Sen. Bernie Sanders has been more voluble about ending U.S. corporations’ use of offshore “tax havens” than Clinton. His plan actually looks a lot more like Trump’s. Sanders would tax corporations’ profits wherever they come from and in the year they are earned. That maneuver, accountants say, would stop companies from shifting profits offshore.
“We cannot continue to allow our nation’s wealthiest corporations to avoid paying their fair share of taxes. These companies stash tens of billions of dollars in overseas tax havens while at the same time receiving billions in subsidies,” Sanders’ policy statements say.
He uses copious examples of tax-sheltered investments in the Cayman Islands and Bermuda in his policy statements. Most of the criticism of Sanders’s proposals focuses on perceived gaps between what taxing policies would generate and what his many social programs might cost.
A Cayman Islands perspective
When economic, legal and banking leaders in the Cayman Islands weigh in on the U.S. candidates’ promises, they seize on one common thread: Politicians promise much during a campaign but usually deliver far less once in office. Populist positions, including the promise to make the rich pay more, often fade soon after elections.
Paul Byles, CEO and partner of First Regents Bank & Trust, strongly suggested Americans’ passion against offshore banking will cool over time.
“Every election cycle we [the Cayman Islands] become part of the U.S. and U.K. political campaign messages. It certainly doesn’t help in terms of the persistent negative perception of offshore centers,” he said. “In the end, the impact is usually short-term and quickly disappears as policymakers in those countries tackle the real domestic issues they face.”
Byles called it “dishonest” for politicians to conjure up a story “that ‘tax havens’ are a material source of their various domestic policy challenges.”
Anthony Travers, senior partner at law firm Travers Thorp Allberger, said, “The difficulty in predicting specific U.S. legislative change from the comments of any of the candidates in the current U.S. presidential race is that they are all based on fundamental mischaracterizations of the relationship between the Cayman Islands and the United States.”
U.S. laws and international agreements already demand a high degree of transparency in criminal investigations, he pointed out. “The IRS and U.S. law enforcement have access to all information in the Cayman islands pursuant to the relevant treaties and has had for over a decade.
“It has become politically expedient,” Travers said, “for politicians to blame domestic deficits on offshore ‘tax scams.’”
And in large measure, local leaders say, U.S. politicians have been creating a crisis and then patting themselves on the back for their solutions.
Gordon Barlow, former manager of the Cayman Islands Chamber of Commerce and a blogger, shares many U.S. commentators’ skepticism that any of the candidates will enforce what they so fervently espouse on the campaign trail.
There is general agreement in Cayman’s financial circles that Cayman and other low-tax jurisdictions face little economic risk from the public posturing of the U.S. candidates over offshore banking’s effects on U.S. taxation.
The threat? “Marginal and statistically irrelevant,” Travers said.
Byles said, “I believe that the threat of breach of privacy may discourage some investors and clients, but I don’t foresee any material repatriation of assets.”
In Barlow’s view, “The difference between tax-avoidance and tax-evasion is the price of a good lawyer. Rich people can afford the best lawyers, and the lawyer-politicians who pass the laws always leave loopholes.”
He added, “There will always be tax havens.”