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Is the U.S. a tax haven or hell? Both

By Kay Bell · Bankrate.com
Thursday, January 28, 2016
Posted: 10 am ET

The United States is the worst place in the world for business. The United States is the best place in the world for business.

Both statements apparently are true because a tax haven, like beauty, is in the business eye of the beholder.

U.S.-based corporations have for years complained that the Internal Revenue Code puts them at a global disadvantage. In recent months, more American companies have done more than just grumble.

South Dakota is home to not only Mount Rushmore National Memorial, but also a growing number of accounts held by foreigners attracted by the state's low taxes and confidentiality rules. DEA / G. SIOEN/De Agostini/Getty Images

South Dakota is home to not only Mount Rushmore National Memorial, but also a growing number of accounts held by foreigners attracted by the state's low taxes and confidentiality rules. DEA / G. SIOEN/De Agostini/Getty Images

Businesses have turned to inversions, in which a company is purchased by a foreign corporation. Then the non-U.S. business, which sometimes is smaller, becomes the corporate headquarters, at least on paper and for tax purposes.

Legal, but unfair

President Barack Obama has said corporate inversions, while totally legal under the U.S. tax code, are a way for businesses to game the system.

The Treasury Department has stepped up efforts to reduce the tax benefits of inversions.

And it looks like the practice, which some lawmakers say is costing the U.S. Treasury billions of dollars, finally could be the impetus to achieving long awaited tax reform, at least on the corporate side.

Until then, though, the tax maneuver will continue, with Johnson Controls becoming the latest in a long line of corporate inversions.

The Wisconsin-based technology company soon will be an Irish company. On Jan. 25, Johnson announced that it has agreed to combine with Tyco International Ltd. and move its headquarters from Milwaukee to Cork, Ireland. It's estimated that the new corporate entity will save at least $150 million a year in taxes.

U.S. as tax haven for others

But wait. There's another side to this tax story.

Last year, the Financial Secrecy Index, or FSI, found that the traditional stereotype of tropical island tax havens is wrong. The world's most important providers of financial secrecy, according to the FSI analysis done by the London-based Tax Justice Network, are some of the world's biggest and wealthiest countries, including the United States.

The United States ranked 3rd, behind Switzerland and Hong Kong, in helping shelter some of the trillions hidden from worldwide tax collectors. That ranking for U.S. financial secrecy services at both the federal and state levels is 3 places higher than in 2013, when the last FSI was released.

Since that analysis, it seems the United States has climbed even higher. America reportedly is the world's favorite new tax haven.

Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world's rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming and South Dakota, according to Bloomberg News.

Global account shopping

As with inversions, there is nothing illegal about U.S. banks encouraging foreigners to put money in their institutions by promising confidentiality. And in some cases, wealthy individuals look for confidential accounts in the United States and globally for non-tax reasons.

Still, there's no argument that lots of rich taxpayers and large companies are shopping around for tax-friendly places to park their assets.

Do you think the United States and other nations should be tougher on financial accounts held by nonresidents? As for U.S. businesses, should there be a law restricting paper organizational moves made purely for tax purposes?

Keep up with the wide world of taxes by subscribing to Bankrate's free Weekly Tax newsletter. And follow me on Twitter: @taxtweet.

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