Little time left to act n US tax bill

TheCaribbean has just eighteen congressional working days from Sunday September 20to try to have the US Congress or the District of Colombia address an act namingseventeen Caribbean nations as ‘tax havens’. If passed without amendment itcould have the effect of reputationally damaging thecountries concerned with unpredictable trade, financial, and economicconsequences.

The background is a little complicated.

Under the terms of the USConstitution the District of Columbia, which of course includes thatnation’s capital, is able to govern its local affairs, but hasto submit its legislation for the agreement of Congress. This provision, which has its origins inevents in Washington in 1788, grants the US legislature exclusive jurisdiction over theDistrict in ‘all cases whatsoever’ in order to provide for the maintenance andsafety of the capital.

This means that in practice any Actpassed by the Federal District has to be sent to Congress for oversight by Committeesof both houses. In the case of budgetary bills there is a period of thirtyworking days during which ‘active approval’ is required.

This August, the District’s 2015 BudgetSupport Act was approved by the Mayor of Washington, Muriel Bowser, and sentto Congress for consideration.

Unlike previous bills which set out criteria that defineda tax haven without identifying specific jurisdictions, the present bill namessome 39 nations and territories of which seventeen are in the Caribbean.

The effect is to describe the named countries ashaving: no effectivetax, or a nominal tax on relevant income; laws and practices that prevent theexchange of tax information with other governments; lack transparency; andamong other characteristics, have created a tax regime that is favourable fortax avoidance.

The 2015Act then goes on to include among the countries it lists: Anguilla;Antigua and Barbuda; Aruba; the Bahamas; Barbados; Belize; the British VirginIslands; the Cayman Islands; Dominica; Grenada; Montserrat; the islandsformerly constituting the Netherlands Antilles; St Kitts and Nevis; St Lucia;St Vincent and the Grenadines; the Turks and Caicos Islands; and the US VirginIslands.

The purpose of the District of Columbia in doing so isto highlight international jurisdictions they consider to be used by localbusinesses and individuals trying to avoid paying tax locally. Although thenumbers are probably quite small, the approach raises important matters ofprinciple.

The listhas its origin in similar legislation already in place in Oregon and Montana basedon erroneous lists, but the fundamental difference in the case of the Districtof Columbia is that its legislation would be approved by Congress.

Accordingto the international accounting firm Deloitte, other states including Kentucky,Maine, Massachusetts and New Hampshire are also currently considering similar ‘taxhaven’ proposals and in an online overview for their clients tellingly suggest:‘taxpayers with current international operations and those consideringinternational expansion should monitor the status of the above-referencedlegislative proposals and others that may arise, as these proposals couldpotentially impact the tax base and apportionment factors of a water’s-edgefiling group’.

This firmsadvice is of course shorthand for suggesting that many US corporations andothers operating in US states that have passed such legislation should consideravoiding the named jurisdictions in the Caribbean or elsewhere as they are ‘taxhavens’.

This is happeningdespite the fact that the named states in Caricom have worked hard to complywith the requirements of the Global Forum on international tax matters, as wellas with the Organisation for Co-operation in Economic Development (OECD) andthe Financial Action Task Force, so that no Caricom member state can any longerbe legally defined as a ‘tax haven’. Moreover,many Caribbean states now have in place Tax Information Exchange Agreementswith the United States, and co-operate with the US Internal Revenue Servicethrough the US Foreign Account Tax Compliance Act, better known as FATCA.

As Antigua’s Prime Minister, Gaston Browne recently observed, US governmentagencies now have all the information they could possibly need to satisfy themselvesthat Caricom jurisdictions are not ‘tax havens’. Referring to the District of Columbia whichhe said was “ill-informed”, he added: “It is as harmful to ourjurisdictions as it is unjust. It will scare away US investors andit continues a pattern of smearing the reputations of our financial servicesindustry”.

Morerecently, the country’s Ambassador to the United States, Sir Ronald Sanders,has been making representations to Congress, and has observed that the Actcould cause US investors to stay away from his country. The Ambassador had alsobeen hoping to meetwith the Chief Financial Officer of the District of Columbia, but it seems thatthis public official is not prepared to address in person key questions: whythere was no prior contact with the US Treasury or the Federal authorities; whyAntigua or the other countries named are included in the act when they can nolonger legally be defined as tax havens; or to discuss amending the act.

Speakingearlier this month on the subject, Prime Minister Browne said that he wouldpropose to colleague Heads of Government in Caricom and the wider region, thatthey collectively raise the matter with President Obama. The development, hesaid, amounted to ‘another unjustified assault on our financial servicesindustry that will harm our economies’.

Thatsaid, it remains far from clear what Caricom nations are doing collectively tohave this erroneous designation removed from the District of Columbia’slegislation or addressed by members of the Congressional committees concerned.

While thereappear to be some thought being given to a discussion on the issues involved ata forthcoming meeting of Caricom’s Foreign Ministers, this may be too littletoo late as the time left for consideration of the District of Colombia’s legislationby Congress is rapidly closing.

Worryinglyfor the financial services sector in the region, the likelihood of suchlegislation becoming more widespread, despite enhanced levels of co-operationbetween Caribbean jurisdictions and OECD nations, may also relate to widerinternational reaction against what is known as tax inversion. This is thepractice whereby large companies relocate theirlegal domicile to a lower-tax nation, or corporate haven, while retaining usually theirmaterial operations in its higher-tax country of origin.

In the case of the District of Columbia and Congress, rapid concerted publicaction is now required of the Caribbean if it is to avoid having financialservices, a important pillar of the regional economy, further damaged.

DavidJessop is a consultant to the Caribbean Council and can be contacted at

david.jessop@caribbean-council.org

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