Caribbean Islands

IN MAY 2002, Stanley Works Inc., a Connecticutbased tool-making company, reincorporated in Bermuda, joining the recent list of U.S. firms (Fruit of the Loom, Ingersoll-Rand, and Tyco) “relocating” to escape taxes. The issue was prominently featured in the news and sparked a supposed outcry from politicians who claimed such moves were unpatriotic. Importantly, the issues of tax avoidance, tax evasion, as well as the concerns regarding offshore havens, date back generations. The Caribbean has been the focus in much of this history.

In 1937, President Franklin D. Roosevelt received a report on tax evasion from Treasury Secretary Henry Morgenthau, Jr. Roosevelt forwarded the document to Congress with this message: “Efforts at avoidance and evasion of tax liability [are] so widespread and so amazing both in their boldness and their ingenuity that further action without delay seems imperative.” In response, the 75th Congress created the Joint Committee on Tax Evasion and Avoidance. Morgenthau's report to Roosevelt listed the major and unprecedented devices used to beat the income tax.

Number one was the creation of “foreign personal holding corporations in the Bahamas, Panama, Newfoundland, and other places where taxes are low and corporation laws lax.” Morgenthau pointed out the difficulty of gathering information on Bahamian companies (owned by Americans) that are “organized through foreign lawyers, with dummy incorporators and dummy directors, so that the names of the real parties in interest do not appear.” In testimony before the Congressional Joint Committee, Morgenthau castigated the many “ingenious lawyers and accountants” who were very well paid to construct immoral methods for their clients to avoid taxes.

In 1961, the Internal Revenue Service's Audit Division prepared a pamphlet for internal use prompted by many signs that schemes for the evasion of taxes were multiplying. These depended largely on the use of controlled foreign corporations, partnerships, or trusts. It was becoming clear that money was being funneled at an increasing pace to offshore countries and newly formed companies in order to avoid domestic taxes. The pamphlet's first example dealt with currency moving through Panama and the Netherlands Antilles. Another illustration featured the Bahamas. In this case, the culprit was quaintly described as “Mr. X, the cunning taxpayer.” The Internal Revenue Service (IRS) calculated he owed about $10 million in taxes and penalties. Interest in this was so new, however, that the IRS felt the need to provide 15 “clues” for agents to alert them to these plots. “Keep watch,” agents were informed, for signs such as a license to operate in a foreign country; a domestic corporation borrowing from a foreign corporation; the liquidation of foreign corporations; and the transfer of assets to a foreign corporation.

Thirty years after the first Congressional hearing on tax evasion through the use of off-shore companies, an attorney told IRS Special Agents attempting to untangle his enterprise:

Ten years later, the U.S. Senate's Permanent Subcommittee on Investigations (PSI) concluded “that the use of so-called ‘secret’ offshore facilities has become so pervasive that it challenges basic assumptions regarding the ability of federal and state authorities to enforce the laws.” Furthermore, according to the PSI, some Caribbean nations were so corrupted that they essentially offered themselves as crime havens.

...