Google, Apple, Coco-Cola, Bank of America, Ford, General Electric, JP Morgan Chase, Wal-Mart, American Airlines and at least 285,000 others will tell you that this is their legal address.
In fact, more than 50% of all U.S. publicly traded companies and 63% of the Fortune 500 is incorporated in Delaware. Last year 133,297 businesses set up here.
A Company per Person
With a population of 907,135, the estimated 897,934 number of businesses in Delaware means that in that state there is almost one corporate entity per person.
The Blue Hen state is a domestic tax haven and for near three hundred years its mainstay has been the business of attracting companies from neighbouring areas like New York and New Jersey with its business-friendly corporate legislation; most notably its franchise taxes.
Delaware is an attractive ‘onshore’ tax haven for a number of reasons; here are the top three:
1. Ease of Incorporation
It takes less than 60 minutes to set up a company and such is the state’s business facilitation that the office of the Secretary of State stays open until mid-night, Monday to Friday and 10:30pm on Thursdays. That most companies are ‘shell’ entities with no assets, no employees and no-real business activity in the state accounts for Delaware’s enviable track record and also explains why almost 300,000 companies lay claim the same address.
2. The Delaware ‘Loop-hole’
This well-worn arrangement allows companies to lower the taxes they pay in the states where the business entities actually conduct substantive activity or where they are head-quartered by shifting royalties and similar remuneration to holding companies in Delaware.
According to Richard Geisenberger, the State’s Chief Deputy Secretary of State and its principal business advocate, “Delaware is a great place to do business and reduce a tax bill.”
His is not an empty boast!
In 2011 the state collected roughly $800million in taxes and fees from its largely ‘absentee’ corporate residents. Moreover, since 1992 it has deprived other states of an estimated $9.5billion in revenue.
These two testimonies from its service-providers are instructive:
“Delaware is the state that requires the least amount of information,” says David Finzer, the chief executive of Capital Conservator, a registration agent that sets up accounts in Delaware and elsewhere for non-United States citizens. “Basically, it requires none. Delaware has the most secret companies in the world and the easiest to form.”
Mr. Finzer, an American based in Novi Sad, Serbia, advertises his services online. “Tax-Free Havens for Non-U.S. Citizens,” his site, says. It continues: “More than 50 percent of the major corporations in the world are incorporated in Delaware. Why? Because it provides the anonymity that most offshore jurisdictions do not offer.”
For years U.S Senator Carl Levin has tried -unsuccessfully – to pilot legislation that would require states to collect information on the ‘beneficial ownership’ of company incorporated within their borders.
Even with promises that the law would exempt public companies, hedge funds and other large corporations, along with ‘mom-and-pop’ businesses where ownership is clear; and that the federal government would pick up the tab for putting the law into effect; Senator Levin’s bill is still to make it pass the first hurdle.
So How did the US Fare in the OECD Peer Review Process?
Are you referring to the two-stage assessment to determine whether a country’s legal and administrative means to ensure transparency and exchange of tax information according to the globally accepted standard based on the availability of bank, ownership and identification information on all entities – including corporate bodies?
As you might expect the U.S passed both phases of its assessment even though according to the OECD Report dated July 1, 2011:
“certain cases do arise where information may not exist or is not obtainable by the U.S Federal authourities’ – and this deficiency should be addressed; overall the cases where these issue arise in practice are small compared to with the totality of U.S information exchange programme.” http://eoi-tax.org/jurisdictions/US#peerreview
A Final Word.
The ‘Delaware’ business model for international business and financial services which covets secrecy; and promotes the absence of businesses of ‘substance’ is precisely the kind that we have been told is now outlawed by the international community.
As a result non-US based financial centres have been forced to quickly re-order their legal and regulatory regimes to pass muster with the OECD Global Forum or face the collective sanction of the world’s richest economies.
Not so for home-grown tax havens –as long as they remain save in the bosom of the Home of the Brave.
Postscript: For the full report on Delaware which informs this blog post please seehttp://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html?pagewanted=4&_r=2
For another excellent account of Delaware as a Domestic Tax Haven read this.