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Monday, August 22, 2011

Wild West of taxation


Recently the role of the offshore companies in the state economics became a subject for broad public debates. It all started with the search of an actual owner of the Domodedovo airport after the terrible act of terror. Yet, the problem is much wider.

For the first time offshore became the word of the day for the federal media in April of 2009 due to the tense social situation in the Svetlogorye village of Primorsky Krai and the Lermontov ore-dressing factory, owned by Moscow-based Russky Wolfram Ltd. Desperate laborers of the factory have announced a hunger strike, demanding to pay the debts in the amount of 2.7 million rubles. The plant, abandoned by the anonymous owner, has nearly caused the social explosion. The ore-dressing factory is the only enterprise of the settlement and 300 workers, who made up exactly the half of the able-bodied population, were literally starving. Thus, the hunger strike was quite formal in fact. Neither Vladimir Putin, nor Primorye governor Sergey Darkin, who tried to settle the conflict between the workers and the factory owners failed to do as much as to identify the latter one. According to the documents, it belonged to Mrs. Annabelle Jean-Louis — CEO of the Granit Capital Management, which was incorporated at the faraway Seychellois. Yet discussing the salary debt with her seemed to be completely pointless. It came to a point when Putin has personally ordered FSB to find a true owner of Russian Wolfram. “This man is in the hiding, running about Moscow” — Putin told the top brass. As long as there was no information about Russian Wolfram and its owners since then, we may assume that this mysterious man is still running about Moscow or some other city.
Public conscience usually associates the word “offshore” with various exotic countries like the Cayman Islands, Panama or the said Seychellois. Quite often, however those very “tax havens” hide under the flag of respectable countries like the United States of America.
State of Delaware is 6.500 square kilometers and 780.000 citizens at the north-western coast of the USA. Yet, it is exactly the place, where 60% of the Fortune 500 companies — frankly speaking, the largest corporations in the world — are registered. A single office building in the Delaware capital (Wilmington) “hosts” more than 200 thousand companies. Unfortunately for the corporate El Dorado, Luxemburg Prime Minister Jean-Claude Juncker got interested with it. Respectable politician had enough of reproaches from his Euro-Union and American colleagues, accusing his small country of participation in money-laundering, and making him violate the banking privacy principle in order to reveal the information about Germany, American, Swedish and other “runaway” capitals. Juncker’s interest for Delaware was caused by the decision of G20 leaders to deal with the offshore zones. “If a black-list of the offshore jurisdictions is to be created, America has to take its place there” — Luxemburg Prime Minister said.
Main street of Wilmington is the Market Street. It personifies all the signs of economic recession. Wigs, trainers and discounted sporting clothes drearily await the accidental shoppers at the shop counters. Old-fashioned wooden trolleys drive across it. Yet, right beside it, in the centre of the city the bank buildings sprout by leaps and bounds. Court building towers over the city square, where the refined business conversations are heard. Corporate life is in blossom in Wilmington. Multistory office centre at 1209 Orange Street hosts more than 200 thousand companies, including Ford, American Airlines, General Motors, Coca-Cola, KFC and many other famous brands.Yet, what we won’t see at the Babylon tower of our days are the crowds of office clerks. There are none at all — only the cards with the company names at the purchased card file boxes just like at Bermuda Islands, Jersey or Andorra. Excessive investment attraction of Delaware has a simple explanation — friendly taxation and the flexible legal system. Not a single company, incorporated in Delaware, makes business at its territory. Jerry Daniel, Deputy Head of the lobby department in Corporation Trus Company, which administers this building, explains to those taking the interest that office is merely a post address for corporations: „We’re merely receiving and re-sending mail, addressed for the companies here”.
However, the „tax havens” came under threat. During his first election capaign Barack Obama has named a quite specific address — Ugland House at the Cayman Islands. „Merely” 12 thousand American companies are incorporated there. „This is either the biggest office building in the world, ot the largest tax fraud in the history” — said the current President of the United States. It’s hard to believe that a brilliant corporate lawyer Obama has no clue about Delaware.
Delaware authorities are skillfully using American legal system for the state benefit. By the end of the 19th century local lawyers have already been famous for their experience in the business legislation. Professional judges, rather than jury arbitrate all the cases at arbitration tribunal here. This is important for business because judges won’t listen to populist arguments and emotions. Local court is also known for an ability to arbitrate cases of the contradicting interests of board members or of managers and shareholders quickly and without red-taping. There are litigations even in haven, especially if it is a tax one. Hospitality of the state authorities is not a charity, but rather a splendid way of making business. Registry fees and taxes, which the companies incorporated there pay, bring $775 million annually, making 22% of all the state budget incomes.
Mark Roe, Harvard School of Law Professor believes that an entire legal system of Delaware is subjected to the budget interests, i.e. the creation of amicable conditions for international corporation. Public and shareholders’ interests are considered second-rate there. That’s why the most scandalous disputes of the “management subjects” are arbitrated here. It was this court that deprived Conrad Black, the owner of Daily Telegraph, of his favorite brainchild in 2004; the same court that reviewed the issue of General Motors bankruptcy, which was unwilling to fall into Russian hands.
Delaware has mighty champions. For quite a time U.S. Vice President Joe Biden represented this state in the Senate. Since 2002 to 2008 Delaware law companies donated more than a million dollars to Biden’s election budget. Rick Heisenberg is responsible for the corporate registration at the state administration. He believes that Luxemburg Prime Minister confuses registration of the offshore companies with the banking privacy. According to him, U.S. laws efficiently hinder the money-laundering and allow exposing the suspicious bargains.
In fact, there are several offshore zones at the U.S. territory. These are the states of Maine, Wyoming, Delaware, Nevada and some other states, allowing not to pay VAT and income tax in case if there’s no business activity at the state territory, restraining the taxes with a limited budget fee. These fees make up from $800 to $1500. All these territories allow having formal directors like the mentioned Annabelle Jean-Louis. Usually, these people “manage” hundreds of companies and it’s almost impossible to find out the names of true owners. It is impossible to imagine that American President has no clue about the existence of the offshore centers within his own authority. Yet, it is only some distant Cayman Islands that cause his indignation. 
For justice’ sake we have to denote that the USA is not a monopolist in this dubious business at all. Even respectable London doesn’t disdain to use the incomes from such services. Companies with the legal address in the capital of Great Britain have all the benefits of the offshore location in case they produce no economic activity at the territory of the UK. We haven’t even mentioned the various Virgin Islands, an entire archipelago of islands at the English Channel, Gibraltar etc. As Evgeny Fedorov, Economic Policy and Entrepreneurship Committee Chair of the Russian State Duma, recently stated, up to 90% of Russian enterprises belong to offshore companies, incorporated Lord knows where. This is a quite significant threat for national security. Apart from “minor incidents” and cases like Russky Wolfram, at one wonderful morning Russia, aided by its Western “partners”, might fetch itself stripped of all its strategic assets. While Moscow and Washington are balancing at the edge of reset of political relations, our fraudsters have long ago came to an agreement with their Wild West counterparts and they aren’t going to reset anything without the state interference.       

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