A financial legal structure created in the West Indies’ island of Puerto Rico in 2012 has enticed a wave of private bankers to set up shop there, leading some to suggest that the offshore territory of the US could become the world’s “next hot tax haven”, a published report has said.
What is attracting the banks is legislation that has made it possible for them to set up so-called “International Financial Entities”, the report, published yesterday by Bloomberg on its news website, explains.
These IFEs are seen as potentially enabling those who deposit their wealth in them to avoid getting caught out by the Common Reporting Standard, the new, OECD-promoted global automatic information exchange system, to which more than 100 countries have now signed up.
This is because of Puerto Rico’s status as a US territory – and the US, as previously reported, has indicated it has no plans to participate in the CRS because it already has its own global information-gathering system, the Foreign Account Tax Compliance Act (FATCA). (This has led some to argue that the US could end up becoming a “tax haven” for non-Americans keen to stash their money out of sight from their home tax authorities.)
Under FATCA, financial institutions around the world are obliged to report to the US tax authorities on bank and investment accounts held outside of the US by American citizens.
But unlike the CRS, the US is not obliged to do the same, at least not in the same way as the CRS requires participating countries to do. Instead, it operates via a network of some 113 separate bilateral agreements.
However, the Bloomberg report notes, the Puerto Rican IFEs don’t have to comply with these, “because Puerto Rico, like all US territories, is excluded from those deals”.
According to Bloomberg, which cites data compiled by the Puerto Rican financial regulator, there are now some 44 IFEs registered in Puerto Rico, with 18 having opened in the past year.
It also quotes an executive from a local real estate brokerage as saying his company had “probably closed seven deals for international banks” in the past six months alone.
To read the Bloomberg article on Bloomberg’s website, click here.
Both FATCA and the Common Reporting Standard had their origins in the period immediately after the global financial crisis of 2008, when cash-strapped governments around the world were prompted to consider ways of cracking down on tax evasion by their wealthiest citizens.
Although the US wasted no time in introducing its own scheme – FATCA – which was signed into law by President Obama in 2010, the CRS is said by experts familiar with both to be essentially identical, apart from the fact that it isn’t geared to a single specific nation’s tax code but is rather one-size-fits all.
Some experts who have been watching the move towards near full global information transparency, meanwhile, have argued that there can be legitimate reasons people may wish to keep the extent of their wealth hidden, for example, if they happen to live in countries in which personal security is a problem and there could be a danger of kidnapping and/or extortion.