The biter bit! The US started the let’s-stop-international-tax-evasion ball running with FATCA. Basically this was the USA bullying the rest of the world, but in a very one-sided way. “Help us to stop Americans evade US tax but don’t ask us to help you stop your own residents evading your own taxes”.
FATCA has managed to scare a lot of people who have no relationship with the US into registering with the IRS. It has also made it very difficult for Americans to obtain banking facilities in Europe (and I suspect elsewhere in the world) as banks take the view, not unreasonably, that if they do not deal with Americans, they will have no need to worry about FATCA. Whether either of these outcomes was in the mind of Congress when it enacted FATCA seems improbable.
But FATCA was the impetus for an International effort to combat offshore tax evasion which has resulted in the OECD developing the Common Reporting Standard (CRS). Virtually all of the developed countries in the world have signed up to CRS, the most notable exceptions being the USA and Russia. So have all of the major tax havens. There are now over 90 signatory countries.
Now the Obama administration say that they would like to sign up to CRS. But they have two major problems before they can do so. The first is that Congress has made clear that it is not going to pass any more of Obama’s legislation, so it is hard to see how this can happen during Mr Obama’s presidency. The second is that CRS undermines banking confidentiality as it requires a country’s domestic banks to give its tax authority specified information in relation to accounts held by residents of other CRS assenting countries, and in the USA bank regulation is split between the Federal and State Government and most States do not take kindly to the Federal government seeking to interfere in their affairs.
Furthermore, banking confidentiality is good for Delaware. And it’s not just Delaware. Nevada claims to have stricter confidentiality rules than Delaware! Florida and Wyoming are also putting out the welcome sign for all that money fleeing from Switzerland and the other tax havens that have signed up to CRS. So why should those States want to help President Obama bring in laws to facilitate the US joining CRS? It’s not simply a case of passing a Federal law either. CRS requires legislation to force banks and other financial intermediaries to give the requisite information to the IRS so that they can pass it to other tax authorities. That may require State legislation or, at best, Federal legislation that impinges on the rights of individual States.
And it’s a myth to think that money is sitting in tax havens solely because people are trying to evade overseas tax. Of course there is some such money but over the last couple of years most of the major countries, like the US itself and the UK, have been enticing evaders to come clean, so there is probably not too much such money left hidden. The other main reason people use tax havens is that they want secrecy, which is the flip side of confidentiality. Who are these people? They are mostly goodies. They include people living in countries with oppressive political regimes who have smuggled out their wealth and disclosure of such wealth could put the lives of themselves or their families at risk. They include people in countries where people think that their tax authorities leak like a sieve and are scared that if their overseas wealth is disclosed, the fact of their affluence will be leaked to potential burglars. They include people in countries that don’t have an income tax to evade, but who are very rich and feel entitled to secrecy. They also include reactionaries who want to keep all governments out of their lives as far as possible. Why would Delaware or Nevada or where-ever want to deny any of these people the ability to pay fees to US trust providers in order to give them the secrecy that they crave?
President Obama’s problem is that crooks also crave secrecy. He does not want the USA to become the place of choice for criminals to launder money. Probably nor does he want the USA to become the world pariah because it refuses to join International efforts to solve International problems. He certainly does not want too many headlines like Bloomberg Businessweek’s “The World’s Favourite New Tax Haven is the United States”. But unless he finds a way to join CRS soon, it is hard to see how he can prevent any of such things.