Lahti, Lahti & O'Neill, P.C. Blog

Wednesday, April 6, 2016

The United States is The New Tax Haven

By Michael T. Lahti

Tax Analysts reported that Nevada and Wyoming are among the 21 jurisdictions identified as offshore tax havens in the so-called Panama Papers exposé that's based on 11.5 million files leaked from the internal database of Mossack Fonseca & Co. in Panama, the fourth largest offshore law firm in the world.

Specifically, Nevada was listed as the eighth most popular tax haven used by the firm for incorporating entities, ranking above Hong Kong and the United Kingdom, according to initial charts released by the International Consortium of Investigative Journalists (ICIJ).

Rhode Island Senator Sheldon Whitehouse, sponsor of the Incorporation Transparency and Law Enforcement Assistance Act of 2016, responded to the news by saying his legislation would help curb the incorporation of shell companies in U.S. states.  "The recent leaks from Panama show both the scope and the scale of the corporate secrecy problem," Whitehouse told Tax Analysts. "The United States should follow the lead of our European allies and ensure law enforcement has access to the real owners of nameless corporations."

The origin of the Panama Papers is an anonymous source who leaked 40 years of the firm's internal records to the German newspaper Süddeutsche Zeitung, which shared the files with the ICIJ and more than 100 media partners.

The article reported that Mossack Fonseca acted as a registered agent -- mostly on instruction from intermediaries like accountants, lawyers, banks, and trusts -- to incorporate companies in offshore jurisdictions for a yearly fee.  Mossack Fonseca is defending its conduct, saying it complies with anti-money-laundering laws, carries out due diligence on all of its clients, and can't be blamed for the failings of intermediaries.

The article hinted there would be a federal response.  Since 2007, proposals have been introduced in Congress that would direct states to collect beneficial ownership information. The most recent such measure is the Incorporation Transparency and Law Enforcement Assistance Act of 2016.  The bill would direct Treasury to issue regulations requiring corporations and limited liability companies formed in a state that does not already require basic disclosure to file with Treasury information about their beneficial ownership.

The minimum disclosure requirements for the states include identifying beneficial owners by name, current address, and passport or state-issued driver's license, and identifying any affiliated legal entity that will exercise control over the incorporated entity.

The article reported that nearly 2 million corporations and limited liability companies are formed under state laws each year but very few states obtain meaningful information about the beneficial owners.  "A person forming a corporation or limited liability company within the United States typically provides less information to the State of incorporation than is needed to obtain a bank account or driver's license and typically does not name a single beneficial owner." 

Many states have automated procedures allowing a person to form a new entity within 24 hours of filing an online application, without review of the application by a state official, the bill says, adding that in contrast, all 28 countries of the European Union require formation agents to identify the beneficial owners of the corporations formed by those agents.


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