{"id":16320,"date":"2016-04-12T13:32:24","date_gmt":"2016-04-12T18:32:24","guid":{"rendered":"http:\/\/panamaadvisoryinternationalgroup.com\/blog\/?p=16320"},"modified":"2016-04-12T13:32:24","modified_gmt":"2016-04-12T18:32:24","slug":"panama-papers-could-cast-shadow-on-delaware","status":"publish","type":"post","link":"https:\/\/panamaadvisoryinternationalgroup.com\/blog\/panama-papers-could-cast-shadow-on-delaware\/","title":{"rendered":"Panama Papers could cast shadow on Delaware"},"content":{"rendered":"

\"PP\"<\/a><\/p>\n

OK, now it gets interesting and here is the story on how the US is one of the world’s largest tax havens.<\/p>\n

The release of the so-called Panama Papers threw back the veil on how the world’s ultra-rich hide their wealth in secret offshore shell companies, and critics say Delaware’s incorporation law also allows faceless corporations to\u00a0legally hide assets.<\/p>\n

Delaware is America’s\u00a0incorporation leader,\u00a0home to more companies than people, with about 1.18 million legal entities incorporated here \u2013\u2013 a number that’s\u00a0grown by more than a third since 2008. The First State aggressively\u00a0markets its\u00a0business-friendly culture, making it simple to create a corporation or an LLC, and touts its more than one\u00a0century of Chancery Court case law giving companies confidence about\u00a0how business disputes will be resolved.<\/p>\n

Disclosures from the Panama law firm that created shell companies for the ultra-rich\u00a0have already brought down\u00a0the prime minister of Iceland, prompted calls for British Prime Minister David Cameron to resign and\u00a0implicated hundreds more of the world’s most powerful people who used the firm to hide cash.<\/p>\n

President Barack\u00a0Obama has\u00a0lent his voice to worldwide cries for reform, but Delaware leaders\u00a0say a federal crackdown on shady financial dealings could benefit\u00a0the First State because it has the potential to\u00a0fortify Delaware’s brand worldwide.\u00a0But any reform must be consistently implemented nationwide, say Senators\u00a0Tom Carper and Chris Coons, because if left to state discretion a Delaware competitor could allow more lenient rules, leaving the door open for criminal enterprise.<\/p>\n

Delaware gets\u00a025\u00a0percent of its annual budget from incorporation taxes and fees, and state officials say they will fight\u00a0any changes that threaten the state\u2019s dominance over the franchise game.<\/p>\n

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The International Consortium of Investigative Journalists secured files from the Mossack Fonseca\u00a0law firm in Panama\u00a0revealing the hidden cash. While all states allow companies to incorporate anonymously,\u00a0national media reports, watchdog groups and representatives of other states say\u00a0Delaware\u2019s system essentially mirrors Panama’s in terms of secrecy.<\/p>\n

There are dark marks on Delaware’s system.<\/p>\n

Among exposed cases are disgraced lobbyist\u00a0Jack Abramoff and his colleagues, who\u00a0set up a company in a Delaware beach house and used the firm to\u00a0launder money pilfered from clients, and notorious Russian arms dealer\u00a0Viktor Bout, who\u00a0used at least two Delaware shell companies to move money into legal channels.<\/p>\n

But Secretary of State Jeff Bullock said Delaware’s $1 billion in franchise revenue is legitimate and hard-earned, and defends its\u00a0incorporation system as America’s gold standard.<\/p>\n

\u201cYou can go on the Internet and copy our law. What you can’t copy is our reputation,\u201d said\u00a0Bullock.\u00a0\u201cThink of it like a brand. Our long-term interest is in making sure that the kind of activities that have been revealed in the Panama Papers stop.\u201d<\/p>\n

The Panama Papers dumped\u00a011.5 million leaked confidential documents detailing more than 214,000 offshore companies listed by service provider Mossack Fonseca. Documents disclosed amount to\u00a0the most substantial evidence ever how the wealthy and powerful worldwide are hiding their money to avoid paying taxes.<\/p>\n

Relatively few Americans are\u00a0entangled in the scandal. But the revelations made so far are only the tip of the iceberg \u2014 the handful of media outlets that have been given access to the data\u00a0still are combing through documents, and reports on them are likely to continue for some time.<\/p>\n

From leak to publication, it was more than a year of research and reading to release journalists’\u00a0findings from the Panama Papers.<\/p>\n

Delaware doesn’t track specifically\u00a0the number of holding companies registered here. A list of the businesses incorporated in the state would be a massive document, and the\u00a0deputy publisher at Tax Analysts,\u00a0David Brunori, said digging into it to find which companies are shams would be a marathon undertaking.<\/p>\n

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“There’s no way. It would take you 20 years,” Brunori said.<\/p>\n

As the spotlight\u00a0pans across the globe, several U.S. states are inevitably mentioned as enablers of shadow finances, and chief among them is Delaware. The machinery of incorporation is the First State\u2019s bread and butter.<\/p>\n

\u201cIf what you\u2019re talking about is the ability to form a corporation in a filing cabinet within 24 hours, Delaware is the place,”\u00a0said Scott Dyreng, a tax and business professor at Duke University. “If I wanted to form a Delaware corporation or a Delaware LLC and I really wanted to I could have it done by the end of the week, no problem, because there\u2019s an entire industry set up to do that. It\u2019s what drives Delaware.\u201d<\/p>\n

A record-breaking 178,000 new corporations were approved last year, five percent more than the previous year’s record. That’s an average of about 487\u00a0companies a day.<\/p>\n

Mossack Fonseca, by comparison, creates about 20,000 shell companies a year, one of its partners told the Associated Press.<\/p>\n

More than half of U.S. companies listed on major stock exchanges are incorporated in Delaware, including about two-thirds of all\u00a0Fortune 500 companies. About 86 percent of companies that had Initial Public Offerings for stocks last year chose Delaware as their corporate home.<\/p>\n

About 95 percent of companies incorporated in Delaware actually are located elsewhere.<\/p>\n

How much the Panama Papers will change such practices \u2013 or should \u2013 is an open question.<\/p>\n

\u201cThere is no doubt that the problem of global tax avoidance generally is a huge problem,\u201d President Obama said this week. \u201cThe problem is that a lot of this stuff is legal, not illegal.\u201d<\/p>\n

Whether that same sentiment will take root across the board is iffy.<\/p>\n

\u201cThere may be this giant outcry from the whole world that says we have to tell the world who the owners of these businesses are, but America is so well known for our privacy in general that it\u2019s not clear to me people are going to be okay with that,\u201d Dyreng said.<\/p>\n

Delaware has wrestled with the conflicts of its incorporation machine for a long time,\u00a0and its practices would survive scrutiny, said attorney Ellisa Opstbaum Habbart, a founding member of the Delaware Counsel Group which represents the state\u2019s corporations nationally and internationally.<\/p>\n

\u201cIf someone puts a spotlight on us, we can prove how much we\u2019ve done,\u201d Habbart said. \u201cWe don\u2019t need to do anything else.\u201d<\/p>\n

Added Bullock: “We\u2019re the big kid on the playground, so we get a lot of attention. To some extent we should get attention because we\u2019re the industry leader. But I think we have to separate the facts from the fiction when you hear things like \u2018Delaware is a tax haven.’ \u201d<\/p>\n

Bullock argues Delaware has earned such an outsized share of incorporations for a different reason than Panama or the Cayman Islands: It provides the professional efficiency and legal consistency that businesses crave.<\/p>\n

\u00a0<\/strong><\/p>\n

Delaware makes it easy<\/span><\/h2>\n

Delaware’s process for incorporation takes seven steps, according to a guide posted on the Division of Corporations’ website.<\/p>\n

The founder has to pick a type of corporation.\u00a0Unless the\u00a0business is physically located in Delaware, the founder\u00a0must hire a registered agent, who will handle the entity’s Delaware responsibilities on behalf of those who created it.<\/p>\n

Mossack Fonseca, the company the Panama Papers leak came from, is a registered agent in Panama.<\/p>\n

Bullock says a major difference\u00a0between Delaware and Panama is the community of registered agents, many of which have long histories and strong reputations here.\u00a0Corporate Services Company, for example, is one of the oldest and largest legal-service businesses in the country, with 1,000 employees in northern Delaware and another 1,000 in\u00a026 satellite offices in the U.S., Europe and Asia.<\/p>\n

\u201cCSC has long been committed to working only with legitimate entities operating within all laws and regulations, and we have procedures and policies to proactively ensure full compliance,\u201d Ian McConnel, the firm\u2019s director of governmental affairs, said in a statement to The News Journal.\u00a0\u201cAs we have done in the past, we stand ready to work with both state and federal policymakers, as well as our customers and industry peers, to ensure best practices in the industry.\u201d<\/p>\n

McConnel was chief deputy to Beau Biden when Biden\u00a0was Delaware\u2019s attorney general.<\/p>\n

After obtaining a registered agent in Delaware, the business creator must reserve a name, fill out and submit a certificate of incorporation and formation forms and, in some cases, get certified copies of those forms. The filing fee is $50 plus taxes.<\/p>\n

Once the business is created, it must file an annual report with the state and pay an annual franchise tax. The minimum franchise tax is $175 and the maximum is $180,000.<\/p>\n

Experts like Charles Elson, director of the\u00a0John L. Weinberg Center for Corporate Governance at the University of Delaware,\u00a0say the state’s incorporation system is faster, easier and has a better reputation for customer service than other states.<\/p>\n

“Our law is not designed to promote shell companies. Yes, some people may use it to evade some taxes, but that is not our business model,” Elson said. “Delaware is not set up to rig the game. We have a well respected corporate code and court system.”<\/p>\n

Many experts balk at the idea that Delaware is a tax haven, a place where taxes are levied at zero-to-low rates with a degree of secrecy offered to investors. Incorporating in Delaware makes avoiding some state taxes possible, but experts say the rules still require the same level of federal oversight as in other states.<\/p>\n

“When someone says Delaware is a tax haven, I think they’re misinformed. Delaware is part of the United States, and the tax system is enforced,” said Lawrence Hamermesh,\u00a0director of the Widener Institute of Delaware Corporate and Business Law.<\/p>\n

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