A select few cash-strapped states in the U.S. whose revenue flows have been severely harmed by the protracted slowdown in U.S. economic growth over the past eight years are of the mistaken view that somehow their revenues are lying idle in low-tax offshore jurisdictions such as St. Kitts and Nevis. The contention is fatally-flawed.
These states have sought to expand their income tax base beyond the domestic “water’s-edge” by pejoratively labeling these off-shore jurisdictions as “tax havens”. The most recent of these States is Illinois. The proposed House Bill 3419 stipulates that no business registered in the State of Illinois would be eligible for a contract with a State agency, if the business is considered to be an “expatriate corporation”. Of special concern to St. Kitts and Nevis is the provision that identifies an “expatriate corporation” as a business that moves its tax domicile abroad and re-incorporates itself in a tax haven jurisdiction. The proposed bill includes St. Kitts and Nevis among a list of 38 countries that are deemed to be “tax havens.”
The designation of St. Kitts and Nevis as a tax haven is factually incorrect. The bill defines a tax haven as a jurisdiction where there is low or no taxation. Upon reflection, this definition is neither necessary nor sufficient for assigning the pejorative tax haven designation. There are states within the U.S. which engage in vigorous and healthy competition based on tax rates. The United States also competes with other countries on the basis of tax rates to attract investments. Tax competition is the right of sovereign governments.
By contrast, a tax haven is a jurisdiction where taxes are hidden. That is not the case for St. Kitts and Nevis. Under the UNITY government, there is full cooperation between the government of St. Kitts and Nevis and the USA to ensure that taxes due are disclosed to the U.S. Internal Revenue Service (IRS). Deliberate steps have been taken to ensure that St. Kitts and Nevis is compliant with the most recent international standards regarding tax transparency and exchange of information set forth by the Global Forum on Transparency and Exchange of Information for tax purposes initiated by the Organization for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF). The United States of America has full representation and participation in these international monitoring bodies.
In its November 2016 peer review assessment of St. Kitts and Nevis’ compliance, the OECD’s Global Forum rated St. Kitts and Nevis highly as being “largely compliant”. Indeed, there are a number of areas where St. Kitts and Nevis is “fully compliant” and the U.S.A. and a selected number of dominant players, in attracting global foreign direct investments, are not. This is significant as it means that St. Kitts and Nevis is viewed by the international community through the agency of the Global Forum as playing its part in the international financial system in a mature and responsible manner.
In addition, as of July 31st, 2015, St. Kitts and Nevis had already concluded 37 Tax Information Exchange Agreements (TIEA’s) with other countries and was at the time in advanced negotiations with 7 other countries to conclude similar agreements.
Then, of course, there is the September 2015 agreement in which St. Kitts and Nevis agreed to the provisions set forth in the U.S. Foreign Account Tax Compliance Act (FATCA). Under the terms of the agreement, financial institutions in the Federation of St. Kitts and Nevis are required to report on U.S. persons’ income from financial assets to the Government of St. Kitts and Nevis. The Government of St. Kitts and Nevis is obliged to absorb the un-reimbursed cost of serving as an effective tax collector for the US, which submits the required information to the IRS.
There is no information regarding the tax liabilities of U.S. companies or persons domiciled in the Federation of St. Kitts and Nevis that is not readily available to the U.S. Government and the IRS. The binding legal agreements that are firmly in place between the U.S. and St. Kitts and Nevis expressly forbid the hiding of taxes due to the U.S. Government.
Indeed, a review of World Bank data suggests that the statistical probability of identifying the loss of Illinois State Revenues is expected to be highest for the countries that have the greatest propensity for attracting foreign direct investment. By virtue of relative size of net inflows-to-GDP as well as absolute dollar value of net inflows of foreign direct investment the four dominant global players are, in rank order, Ireland, Hong Kong, Switzerland and the Netherlands.
In 2015, each of these countries had net inflows of foreign direct investment that were in excess of (US) $100 billion and a relative share of net inflows-to-GDP that was in excess of 10 percent, demonstrating their heavy dependence on the flow of foreign capital from abroad. By contrast, St. Kitts and Nevis would hardly be deemed a dominant player that would rise to the level of concern for the State of Illinois. Net inflows of foreign direct investment amounted to (U.S) $78.2 million, compared to $203.5 billion dollars for Ireland. Indeed, while the top-10 dominant countries amassed net inflows of foreign direct investment in the amount of (US)$1,481.6 billion for a 70.1 percent share of the 169 countries reporting to the World Bank; the relative contribution of St. Kitts and Nevis was an insignificant 0.004 percent.
This suggests that the solution to the repatriation of tax dollars leaving the State of Illinois is entirely unconnected to St Kitts and Nevis and may be found elsewhere, particularly among those countries that have the highest absolute volume of net inflows of foreign direct investment and which also have the relatively highest percentage shares of their overall economy, as measured by GDP, linked to their net inflows of foreign direct investment.
The seemingly arbitrary blacklisting of St. Kitts and Nevis by the State of Illinois as a tax haven is deeply troubling. The proposed bill comes on the heels of one of the most devastating policy actions to which St. Kitts and Nevis has ever been subjected. It relates to the de-risking practices of a number of U.S. correspondent banks. These measures have increased the cost of bank wire services and, in a number of instances, resulted in a termination of access to correspondent banking services, adversely affecting our ability to engage in international trade in goods and services.
St. Kitts and Nevis has a widely-dispersed diaspora of financial supporters in both the U.S. and Canada. Restrictions on access to correspondent banking services disrupt the flow of personal remittances to family members who depend on this source of funds for gaining access to health care services, food, housing, school fees and for meeting a host of other basic human needs.
Although de-risking is partly intended to reduce the vulnerability of the formal financial sector to abuse from money launderers and terrorist financiers, many have argued that the practice in fact has the opposite effect by fostering the development of an underground economy that is beyond the reach of oversight regulators.
Labeling our country pejoratively as a tax haven only serves to exacerbate the existential threats to our economy posed by this recent phenomenon of de-risking. The Federation of St. Kitts and Nevis presents no financial risk to the State of Illinois that would adversely affect the flow of tax to the State.