The Caribbean has just eighteen congressional working days from Sunday September 20 to try to have the US Congress or the District of Colombia address an act naming seventeen Caribbean nations as ‘tax havens’. If passed without amendment, it could have the effect of reputationally damaging the countries concerned with unpredictable trade, financial, and economic consequences.
The background is a little complicated.
Under the terms of the US Constitution the District of Columbia, which of course includes that nation’s capital, is able to govern its local affairs, but has to submit its legislation for the agreement of Congress. This provision, which has its origins in events in Washington in 1788, grants the US legislature exclusive jurisdiction over the District in ‘all cases whatsoever’ in order to provide for the maintenance and safety of the capital.
This means that in practice, any Act passed by the Federal District has to be sent to Congress for oversight by Committees of both houses. In the case of budgetary bills, there is a period of thirty working days during which ‘active approval’ is required.
This August, the District’s 2015 Budget Support Act was approved by the Mayor of Washington, Muriel Bowser, and sent to Congress for consideration.
Unlike previous bills which set out criteria that defined a tax haven without identifying specific jurisdictions, the present bill names some 39 nations and territories of which seventeen are in the Caribbean.
The effect is to describe the named countries as having: no effective tax, or a nominal tax on relevant income; laws and practices that prevent the exchange of tax information with other governments; lack transparency; and among other characteristics, have created a tax regime that is favourable for tax avoidance.
The 2015 Act then goes on to include among the countries it lists: Anguilla; Antigua and Barbuda; Aruba; the Bahamas; Barbados; Belize; the British Virgin Islands; the Cayman Islands; Dominica; Grenada; Montserrat; the islands formerly constituting the Netherlands Antilles; St Kitts and Nevis; St Lucia; St Vincent and the Grenadines; the Turks and Caicos Islands; and the US Virgin Islands.
The purpose of the District of Columbia in doing so is to highlight international jurisdictions they consider to be used by local businesses and individuals trying to avoid paying tax locally. Although the numbers are probably quite small, the approach raises important matters of principle.
The list has its origin in similar legislation already in place in Oregon and Montana based on erroneous lists, but the fundamental difference in the case of the District of Columbia is that its legislation would be approved by Congress.
According to the international accounting firm Deloitte, other states including Kentucky, Maine, Massachusetts and New Hampshire are also currently considering similar ‘tax haven’ proposals and in an online overview for their clients tellingly suggest: ‘taxpayers with current international operations and those considering international expansion should monitor the status of the above-referenced legislative proposals and others that may arise, as these proposals could potentially impact the tax base and apportionment factors of a water’s-edge filing group.’
This firms advice is of course shorthand for suggesting that many US corporations and others operating in US states that have passed such legislation should consider avoiding the named jurisdictions in the Caribbean or elsewhere as they are ‘tax havens’.
This is happening despite the fact that the named states in CARICOM have worked hard to comply with the requirements of the Global Forum on international tax matters, as well as with the Organisation for Co-operation in Economic Development (OECD) and the Financial Action Task Force (FATF), so that no CARICOM member state can any longer be legally defined as a ‘tax haven’. Moreover, many Caribbean states now have in place Tax Information Exchange Agreements with the United States, and co-operate with the US Internal Revenue Service through the US Foreign Account Tax Compliance Act, better known as FATCA.
As Antigua’s Prime Minister, Gaston Browne, recently observed, US government agencies now have all the information they could possibly need to satisfy themselves that CARICOM jurisdictions are not ‘tax havens’. Referring to the District of Columbia which he said was “ill-informed”, he added: “It is as harmful to our jurisdictions as it is unjust. It will scare away US investors and it continues a pattern of smearing the reputations of our financial services industry.”
More recently, the country’s Ambassador to the United States, Sir Ronald Sanders, has been making representations to Congress, and has observed that the Act could cause US investors to stay away from his country. The Ambassador had also been hoping to meet with the Chief Financial Officer of the District of Columbia, but it seems that this public official is not prepared to address in person key questions: why there was no prior contact with the US Treasury or the Federal authorities; why Antigua or the other countries named are included in the act when they can no longer legally be defined as tax havens; or to discuss amending the act.
Speaking earlier this month on the subject, Prime Minister Browne said that he would propose to colleague Heads of Government in CARICOM and the wider region that they collectively raise the matter with President Obama. The development, he said, amounted to “another unjustified assault on our financial services industry that will harm our economies.”
That said, it remains far from clear what CARICOM nations are doing collectively to have this erroneous designation removed from the District of Columbia’s legislation or addressed by members of the Congressional committees concerned.
While there appear to be some thought being given to a discussion on the issues involved at a forthcoming meeting of CARICOM’s Foreign Ministers, this may be too little too late as the time left for consideration of the District of Colombia’s legislation by Congress is rapidly closing.
Worryingly for the financial services sector in the region, the likelihood of such legislation becoming more widespread, despite enhanced levels of co-operation between Caribbean jurisdictions and OECD nations, may also relate to wider international reaction against what is known as tax inversion. This is the practice whereby large companies relocate their legal domicile to a lower-tax nation, or corporate haven, while retaining usually their material operations in its higher-tax country of origin.
In the case of the District of Columbia and Congress, rapid concerted public action is now required of the Caribbean if it is to avoid having financial services, a important pillar of the regional economy, further damaged.