U.S. Congressional blowhards are using a recent report from the Government Accountability Office to push for even harsher sanctions against low-tax jurisdictions, and the U.S. companies that use them.
In doing so, they're ignoring the report's recommendations, along with comments from high-level Treasury officials in the report that actually defend the role of low-tax jurisdictions in the world economy. But for the likes of Sen. Carl Levin (D-Mich.) and Rep. Byron Dorgan (D-N.D.), what the report actually says isn't important. It's that the conclusion of the report—minus its context—makes for an attractive newsbyte the mainstream media is only too happy to uncritically lap up.
The GAO report—commissioned last year by Messrs. Levin and Dorgan—concludes that 83 of America's 100 largest corporations have subsidiaries in low-tax jurisdictions. Upon release of the report, Sen. Levin stated, "We need to put an end to the use of offshore secrecy jurisdictions as tax havens," Levin said. Naturally, Rep. Dorgan agrees: "I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that."
Dorgan and Levin assert, without any proof, that the U.S. Treasury loses $100 billion annually in tax revenue as a result of U.S. companies shipping their income offshore. And backed up by the supposed conclusions of the GAO report, along with President Obama's promise to "shut down tax havens," legislation greatly increasing the tax burden on U.S. companies with offshore subsidiaries is almost certain to pass in 2009.
It's a shame neither of these gentlemen actually read the GAO report, or if they did, shamelessly ignored it.
First, as the report quite properly points out:
"Since subsidiaries may be established in listed jurisdictions for a variety of non-tax business reasons, the existence of a subsidiary in a jurisdiction listed as a tax haven or financial privacy jurisdiction does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden."
Moreover, none other than a Deputy Assistant Secretary of the Treasury cautioned that "the list of jurisdictions in our report could be regarded as a blacklist and may be used as the basis for the imposition of sanctions or other negative measures." That list includes such "tax havens" as Montserrat (virtually depopulated by a series of volcanic eruptions culminating in 1997) and Nauru (which shut down most of its offshore financial sector in 2003). It also includes the U.S. Virgin Islands, which I suspect might just be exempted from any financial sanctions that might be coming.
In my next post, I'll describe some of the non-tax reasons why a U.S. corporation might want to incorporate offshore. I'll also discuss why it's a bad idea to force them to pay tax on profits from their foreign subsidiaries.
Copyright © 2009 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society.)
