What Makes Delaware an Onshore Tax Haven

When you think of a tax haven, you probably imagine the far off tropical islands of Bermuda or Grand Cayman, but the reality is that there is a major tax haven even closer to home in the state of Delaware. A new report from the Institute on Taxation and Economic Policy (ITEP) explains how one of our nation’s smallest states is one of the world’s biggest havens for tax avoidance and evasion.

What makes Delaware a tax haven? First, Delaware is one of the easiest places in the world to set up an anonymous shell corporation. In fact, setting up a company in Delaware requires less information than signing up for some library cards. This means that it is difficult for law enforcement to trace the activities of the anonymous shell corporations to the people who actually own and control them. This is what makes Delaware corporations an ideal vehicle not only tax evasion, but also for illicit activities like drug trafficking, terrorism finance and defrauding the government.

In addition, the state does not require companies to pay any tax on income relating to intangible assets held by companies based in the state. Companies take advantage of accounting gimmicks to shift their intangible income from other states into Delaware in order to take advantage of the zero tax rate on income earned from intangible assets. For example, Toys R Us has avoided millions in taxes by transferring its trademarks and trade names (including “Geoffrey the Giraffe”) into Delaware and charging its subsidiaries in other states for use of its trademarks.

Taken together, these two features help explain why there are 1.1 million companies registered in a state that has a population of only 935,000 people. While many in the media have highlighted the 19,000 companies listing the Ugland House in the Cayman Islands as their address, this pales in comparison to the 285,000 companies that are listed at the modest CT Corporation building in Wilmington, Delaware.

Barring action from the Delaware legislature , the good news is that individual states and the federal government can easily close down this onshore tax haven. To stop anonymous shell corporations, Congress could pass legislation, such as the Incorporation Transparency and Law Enforcement Act, mandating that states require the name and address of each owner of a company at the time of incorporation and after any change in ownership. This would lift the veil on individuals seeking to hide behind their anonymous shell corporations. And states can adopt “combined reporting,” which requires companies to report the income and expenses of all out-of-state subsidiaries for the purpose of determining corporate income tax.

Ending Delaware’s tax haven status would send a clear signal to other nations that the U.S. is a credible actor and thus bolster our efforts to combat offshore tax avoidance and evasion internationally. In addition, by putting an end to anonymous shell corporations, the United States could play a leadership role in promoting this critical policy throughout the rest of the world.

Read ITEP’s full report “Delaware: An Onshore Tax Haven”