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Imagine that you were the finance minister of a small Caribbean island in the early 1980s. We’ll call the island “Amstrandia.”  Amstrandia doesn’t really exist, but it’s representative of more than a dozen Caribbean islands and Central American countries. It’s a U.K. colony (now called an “overseas territory”), which is almost completely dependent on outside financial aid. To cut support costs, the U.K. convinced Amstrandia to become a tax haven in the 1970s. But the 900-pound gorilla next door, the U.S., didn’t like that idea. Uncle Sam thought that the U.S. investors who flocked to Amstrandia to take advantage of its zero tax status and strict bank secrecy laws weren’t paying their fair share of U.S. taxes. You soon learned that the U.K. Foreign Office, despite having encouraged Amstrandia to become a tax haven, had no intention of defending its haven status. The U.S. Treasury Department decided to force Amstrandia and more than a dozen other jurisdictions into ratifying treaties that required them to disclose U.S. interests in banks, mutual funds, IBCs, and asset protection trusts. In return, the Treasury Department would permit U.S. corporations the negligible benefit of deducting the costs of conventions in these jurisdictions from their taxable income. Sign on the Dotted Line—or Else... The conversation between the Treasury Department treaty negotiator and the leaders of jurisdictions like Amstrandia might have gone something like this:  “We want Amstrandia to sign a Tax Information Exchange Agreement (TIEA) that gives the IRS the right to obtain information on U.S. persons who have financial interests in Amstrandia. After all, we have the right to know, because U.S. taxpayers have stashed away billions of dollars in Amstrandian banks, mutual funds, IBCs, and asset protection trusts. Oh, yes, and the treaty will give the right to the Amstrandian Revenue Service to obtain information about Amstrandians investing in the U.S.” The Prime Minister reminds the Treasury official that Amstrandia doesn’t have an income tax, and that therefore, there’s no Amstrandian Revenue Service. “We thought you might say that,” said the official. “We’re prepared to allow U.S. businesses that hold conventions on your island to take a tax deduction for the money they spend here. Think of the opportunity that could bring to this island.” “That’s very nice,” the Prime Minister replied. “But there are no hotels big enough to host a convention, and the airfield isn’t long enough for anything larger than a commuter plane. There’s no room to build a longer runway.” - Article Continued Below -

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“One thing that we could use, though,” he added, “is an actual tax treaty; the kind that the U.S. has with more than 50 nations. Our citizens and businesses investing in the U.S. would then get the benefits typically provided in tax treaties, such as reduced withholding taxes, not being discriminated against by the U.S. Treasury and the ability to avoid double taxation.”

Call the World Bank if You Need Help
At that, the Treasury official stood up. “It’s been a pleasure, Mr. Prime Minister. But I have a flight to catch. As for developing Amstrandia’s infrastructure for tourism, I’m sure the World Bank or the IMF might be able to help with some additional loans, if you don’t mind complying with their austerity measures, such as doubling gasoline taxes. But, a tax treaty won’t be possible. We don’t negotiate tax treaties with tax havens.”

“Our demands for a TIEA are non-negotiable. If you’re not willing to sign the treaty, we’ll place Amstrandia on tax and money laundering blacklists, and advise U.S. banks that transactions with Amstrandian financial interests should be handled with extra scrutiny. You wouldn’t want that, would you?”

Of course, the Prime Minister wouldn’t want that. So, he signed the TIEA and after presenting the TIEA to Amstrandia’s executive council, the treaty was duly ratified.

Naturally, the process didn’t always go the way it did in my fictional example. Some offshore jurisdictions willingly signed TIEAs with the U.S. Others didn’t sign TIEAs until the early 2000s, when George W. Bush’s administration placed renewed pressure on offshore jurisdictions to ratify them.

If you read the press releases from the offshore jurisdictions that signed TIEAs, you’ll come away believing that they may be invoked only in the event of probable cause of tax fraud by a particular taxpayer. But that’s not what most of the treaties actually say. Instead, most TIEAs state that any information “foreseeably relevant or material to United States federal tax administration and enforcement with respect to the person identified” for investigation must be turned over to the IRS. 

Not “probable cause” of a criminal or even civil tax offense. Not even “reasonable suspicion.” Merely “foreseeably relevant.” U.S. courts have interpreted this authority as permitting TIEA information requests “even if the United States has no tax interest and no claim for U.S. taxes are potentially due and owing.” In other words, fishing expeditions into offshore accounts are explicitly permitted. The potential for abuse is obvious. 

Nations That Have Already Given In
TIEAs are now in effect with Antigua & Barbuda, Aruba, the Bahamas, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Costa Rica, Dominica, Dominican Republic, Grenada, Guernsey, Guyana, Honduras, the Isle of Man, Jersey, the Marshall Islands, Mexico, Peru, St. Lucia, and Trinidad & Tobago. In a handful of these countries, including Mexico and Barbados, ordinary tax treaties are in effect, but in most jurisdictions “encouraged” to sign TIEAs, information flows only one way—to the U.S.

TIEAs have had, from the Treasury Department’s perspective, their desired effect. U.S. investment in Caribbean havens has decreased substantially. And with disinvestment has come a resurgence of influence by narcotics traffickers and other criminal elements in the region. The U.S. policy of deliberately stifling investment has led several Caribbean governments to the brink of financial collapse. Surely, this is not in the long-term interests of the U.S., although the Treasury Department acts as though it is.

Now that you know about TIEAs, you’ll understand why The Sovereign Society generally recommends jurisdictions that haven’t signed such agreements, e.g., Austria, Liechtenstein and Panama. (Switzerland has consented to a TIEA-like addition to the U.S.-Swiss tax treaty, but its terms are far more restrictive than typical TIEAs.) While pressure continues on these countries, and others, such as the United Arab Emirates, to ratify TIEAs, these jurisdictions have the diplomatic and financial clout to avoid being intimidated by the U.S.

Let’s hope their determination continues.
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