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Obama's Threat to Crack Down On Tax Havens Worries Caribbean
The Washington Diplomat / July 2009

By Larry Luxner

BRIDGETOWN, Barbados These days, the Caribbean hasn't been very lucky.

Despite white-sand beaches, sparkling blue waters and deep discounts on hotels, nearly every island has seen tourism revenues drop sharply, a consequence of the global economic crisis.

Violent crime is on the upswing, as is the H1N1 "swine flu" virus, which in June claimed its first Caribbean victim a pregnant 17-year-old girl in the Dominican Republic.

And now, the region faces a new threat, this one in the form of Washington's efforts to regulate, some say destroy, one of the Caribbean's most lucrative industries: financial services.

The region has already been targeted by the Organization for Economic Cooperation and Development (OECD), which periodically blacklists countries and territories it says are tax havens set up specifically to help companies and wealthy individuals avoid paying taxes.

In early May, President Obama attacked those havens in a speech that specifically singled out the Caribbean. He said the Internal Revenue Service shouldn't reward U.S. companies that operate overseas with a roughly 2 percent tax rate on foreign profits.

In addition, a bill introduced by Sen. Carl Levin (D-Michigan) the Stop Tax Haven Abuse Act creates an unprecedented blacklist of 34 offshore secrecy jurisdictions including the most popular ones for offshore investment funds.

"For years, we've talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America. That's what our budget will finally do," said Obama. "On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claim it as their headquarters. As I've said before, either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is."

Immediately following the G-20 summit in London last April, the OECD released a list of countries on a "white list," which gives credit to 41 jurisdictions that "have substantially implemented the internationally agreed tax standard." It also issued a "gray list" of 29 countries from Andorra to Vanuatu that have committed to the internationally agreed tax standard but haven't yet substantially implemented it.

Barbados and the U.S. Virgin Islands were the only two Caribbean jurisdictions initially on the OECD white list. But Bermuda was added in early June after it signed a tax information exchange agreement with the Netherlands, its 12th such agreement with a foreign country.

Bermuda's graduation to OECD's top status came as no surprise to local authorities who say their wealthy little island which this month celebrates its 400th anniversary as a British colony should have been a clean bill of health from the very beginning.

"Bermuda wholeheartedly endorsed the OECD's objective and is especially pleased to note that we are now included in the revised white list," said Paula Cox, Bermuda's deputy premier, visiting Washington recently. "We will now continue to build upon our long-standing position of transparency and cooperation which has, through the years, differentiated Bermuda from other jurisdictions."

Barbados officials say that while their government imposes an effective tax rate of 1.75 to 2 percent, the net effect is to generate more income worldwide.

"We've never been a tax haven," said Wayne Kirton, CEO of InvestBarbados, a government agency that aims to lure foreign investment to the English-speaking island. "It helps that a reputable, respectful international company looking to set up business in an IFC [international financial center] like ourselves would not want to go where there's a cloud hanging over their heads. You don't want to have the image of trying to hide something."

Kirton, interviewed in Bridgetown, told the Diplomat that between 20 and 30 percent of the Barbadian economy is today dedicated to the international financial sector.

"In the early 1990s, the IMF and World Bank advised Barbados to de-emphasize manufacturing and agriculture, and concentrate instead on tourism and international finance," he said. "And that's what we did."

But the White House proposal, warned Kirton, threatens to make legitimate IFCs like Barbados less attractive to potential investors.

"Before, if you make an investment through an IFC, the income you then derive from that investment, if it's passive interest, would be taxed worldwide. But they never tax active income because it's going back into the business," he explained.

"Now, what the Obama administration is saying is, 'no, we're going to tax you on 100 percent of active income.' I sympathize with his problem, but you don't live in America alone. You live in the world. If you want your country to prosper, you have to put it on a level playing field. And they're de-leveling it."

The president said some of the nation's top Fortune 500 companies tell the IRS they're paying taxes abroad, tell foreign governments they're paying taxes elsewhere and end up paying taxes nowhere.

"Closing this single loophole will save taxpayers tens of billions of dollars money that can be spent on reinvesting in America," Obama said, estimating total savings at $210 billion over the next decade. "And it will restore fairness to our tax code by helping ensure that all our citizens and companies are paying what they should."

John Beale, who represents Barbados as ambassador in Washington, said there's nothing wrong with the IRS going after people attempting to avoid taxes, but to say all offshore financial centers are bad is simply unfair.

"The financial meltdown is a result of nothing more than greed and deplorable credit decisions, and we in the Caribbean have suffered the repercussions," he said. "You don't want individuals setting up dummy corporations. But to pay off the huge U.S. deficit in such a way that it would harm us is not ethical. Even people in the Treasury don't agree with a lot of these proposals."

Beale, noting that 60 percent of the corporate tax collected annually in Barbados comes from offshore companies, says ;what the OECD does has no bearing on what Washington may or may not do. And if Obama does crack down on Caribbean financial centers, he says, it will only drive business to China.

La Celia Prince, ambassador of St. Vincent and the Grenadines, won't even use the term 'tax haven' because it offends her so much.

"In the days when people started investing overseas, the terms 'tax havens' and 'offshore centers' arose," she told the Diplomat. "But they've been given a very negative connotation. They're basically bad words, so we've sought to move away from that."

Prince conceded that in the 1990s, when St. Vincent an Eastern Caribbean banana-exporting nation of 120,000 inhabitants first came under international scrutiny, there were legitimate concerns.

"Our financial services industry actually downsized tremendously, because many licenses were revoked, banks were closed and operations ceased," Prince explained. "Legislation was revised to make it more difficult for people to use those facilities for money-laundering. It's now much more transparent, and throughout the years, we've been trying to grow this sector."

The problem, she said, is that Washington's targets keep shifting, and small, vulnerable economies will likely end up paying the price.

"When Levin's bill first emerged on the Hill, they were talking about offshore secrecy jurisdictions. This is an inaccurate characterisation by the legislation, given the fact that our legislation regulating the international financial services industry prescribes a most transparent framework. Our financial safety and soundness are assured by appropriate governing legislation," said Prince.

"Now the Obama administration is basically looking to put its hands on all taxable dollars. We believe every country has a sovereign right to implement its own policies necessary to collect taxes. Yet we see some measure of scapegoating here."

The ambassador said that it's not Washington's job to "unilaterally determine that these countries are tax havens."

"Even a little dent hurts us, because we're small and our countries are vulnerable," she added. "We absorb disproportionally any negative impact on the economy."

Prince has been working on this issue since last year, lobbying lawmakers and bringing it to the attention of St. Vincent's allies in the 15-member Caricom bloc. She said that two New York Democrats in the House, Eliot Engel and Gregory Meeks, are "on our side" in the continuing battle to protect Caribbean interests on Capitol Hill.

But Ronald Sanders, a veteran diplomat from Antigua and Barbuda, said the fight may extend beyond Washington. He suggested that Caribbean countries band together and take their grievances straight to the Geneva-based World Trade Organization should the Stop Tax Haven Abuse legislation prevail.

"Such action will be viewed in the Caribbean as discriminatory and unfair. Offshore jurisdictions service legitimate demands of individuals and corporate entities in developed countries that wish to take advantage of better fiscal and legal structures in the offshore centers of their choice," he said, warning that Washington's actions may displace offshore business jurisdictions with more political muscle, such as Hong Kong and Singapore

"U.S. corporations should resist attempts to restrain their trade, and affected Caribbean jurisdictions should test any such restraint by collectively filing formal complaints at the WTO," he said. "The issue is not about regulation but about global free trade."

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