Some twenty-first century tax havens have cowboys and ranches instead of palm-tree lined tropical beaches.
Over the past few years, several states have enacted legislation aimed at thwarting tax plans that make use of so-called “tax havens,” jurisdictions that offer favorable tax treatment and heightened secrecy laws. At the same time, states such as Nevada and Wyoming have become known as tax havens themselves, recent news coverage of the Panama Papers scandal reveals.
The illegal hacking into a Panama-based law firm’s files caused the release of more than 11 million documents relating to the financial activities of “offshore” corporations. Early victims of the scandal include the Prime Minister of Iceland who resigned and David Cameron, who has faced intense media scrutiny. The story has also highlighted the role that Nevada and Wyoming have played in facilitating potentially dubious transactions.
U.S. States as Tax Havens
What is it about Nevada and Wyoming’s tax laws that make them the Wild West of corporate taxation? First of all, neither state has an individual or corporate income tax. With some states imposing 2016 corporate tax rates as high as 9.8% (Minnesota) or 9.99% (Pennsylvania) or even 12% (Iowa), avoiding state income taxes altogether can be extremely attractive to companies.
Secondly, Nevada and Wyoming tax corporations minimally and their taxes affect a small number of corporations. Some claim that it’s easy to have a company in either of these states that have no U.S. tax liability whatsoever, suggesting that the company can decide whether to file with the government at all.
Nevada: “Delaware of the West”
Over 1,000 Nevada business entities have been linked to Mossack Fonseca, the Panamanian law firm that was the source of the Panama Papers. Mossack Fonseca’s website answers the question “Why incorporate in Nevada?” with a list of the favorable tax rules that the state offers, one of them being that Nevada is the only state to reject all information sharing agreements with the I.R.S. The website stresses the fact that, officially, “there is no exchange of information between the State of Nevada and any other State or Federal agency,” suggesting that a country can’t tax you if it can’t find you and the state of Nevada will help entity owners keep it that way.
The Nevada Secretary of State website answers the question “Why incorporate in Nevada?” with a description of how Nevada’s court system is modeled after the Delaware’s, boasts business-friendly corporate laws on the books, and then has a long list of tax benefits for Nevada corporations. In fact, Nevada has a new gross receipts tax called the Commerce Tax, beginning July 1, 2015, but it only applies to businesses with $4 million in gross revenues. It also has a Modified Business Tax on gross wages paid by qualifying employers.
Wyoming: “Cayman Islands of the American Prairie”
Mossack Fonseca has registered 24 LLC’s in Wyoming. A closer look at Wyoming’s tax law (or lack thereof) in combination with corporate law promising anonymity to business owners make it easy to see why Wyoming has become a tax haven. Combined with a low cost of incorporation, a Wyoming entity is one of the cheapest to create and maintain in the country.
Mossack Fonseca’s website states that “Wyoming does not have the following state taxes: income tax, franchise tax, inventory tax, inheritance tax, unitary tax, gift tax and chain store tax.” While the state imposes mineral and excise taxes as well as a property tax on corporations, most companies find themselves not subject to any Wyoming state tax.
States like Nevada and Wyoming- with no income taxes, favorable corporate laws and a lack of reporting requirements will continue to attract those seeking out places to hide money from taxation. Nevada is the second most popular commercial filing jurisdiction in the United States, according to the Nevada Secretary of State, and it remains to be seen whether the Panama Papers will change that.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think that states should do more to avoid becoming international tax havens?
For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.
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