Economy / Caribbean Obama’s Threat to Crack Down On Tax Havens Worries Caribbean 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 (also see “Cloudy Skies: Tourism-Dependent Caribbean Fears Sinking Under U.S. Financial Storm” in the January 2009 issue of The Washington Diplomat). Violent crime in the region 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 Barack Obama attacked those havens in a speech that specifically singled out the Caribbean, announcing a series of measures that, taken together, he believes will bring the U.S. government more than $200 billion in lost taxes over the next decade. As part of his plan to shut down havens, the president argues that the Internal Revenue Service (IRS) 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-Mich.) — 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,” Obama declared. “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 G20 summit in London in 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 is celebrating its 400th anniversary as a British colony — should have had 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.” Meanwhile, Barbados officials say that while although government imposes an effective tax rate of 1.75 percent to 2 percent, the net effect is to generate more income worldwide, not shelter individuals from paying taxes. “We’ve never been a tax haven,” said Wayne Kirton, chief executive officer of Invest Barbados, 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 Washington Diplomat that between 20 percent 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, Kirton warned, 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 says that 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. Next Page

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