Taking aim at low taxes

Hong Kong and Singapore have enjoyed rapid growth and now rank among the world's wealthiest jurisdictions – thanks, in part, to their low tax rates and open markets. But no good deed goes unpunished. Today, both thriving jurisdictions face possible economic sanctions courtesy of the U.S. Congress, says Daniel J. Mitchell, a senior fellow at the Cato Institute.

Two proposals attacking low-tax jurisdictions are currently making the rounds in Washington:

Michigan Senator Carl Levin's "Stop Tax Haven Abuse Act" would change U.S. tax laws to deter Americans from investing in 34 low-tax jurisdictions.

Inclusion on the list is based on Levin's claim that a jurisdiction has been described as a "secrecy jurisdiction" by the U.S. Internal Revenue Service in court filings against allegedly tax-dodging third parties.

In Asia, Singapore and Hong Kong would be among the jurisdictions effectively blacklisted; even worse, the bill authorises sweeping financial sanctions for jurisdictions that do not change their tax and/or privacy laws to facilitate the extraterritorial enforcement of U.S. tax law.

The other bill:

North Dakota Senator Byron Dorgan's bill creates a blacklist of 40 nations and territories, though the bill does not explain how nations got on his blacklist or how they could get off the list.

The legislation would require American companies to act as if income earned in those jurisdictions were U.S.-source income, a change that would dramatically boost their tax burdens.

Hong Kong and Singapore aren't currently on Senator Dorgan's list, though that could change as the bill wends its way through the legislative process.

If enacted:

These bills would inflict higher tax rates and economic uncertainty on Asia's most vibrant financial centres, discouraging American investors, entrepreneurs and companies.

Equally worrisome, other nations might use the U.S. action as an excuse to impose similar blacklists.

Source: Daniel J. Mitchell, Taking Aim at Low Taxes, Wall Street Journal, April 4, 2007.

For text: http://online.wsj.com/article/SB117563923218558860.html

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

FMF Policy Bulletin/ 11 April 2007
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