Chevron Corp. used a shell company in a tax haven to escape hundreds of millions of dollars in Australian taxes, according to a 2015 court ruling. The subsidiary, which allowed Chevron to eliminate Australian taxes on $1.7 billion in profit earned there, wasn’t secreted away on a remote tropical island -- it was set up in the very mundane locale where corporate secrecy was born: Delaware.
For more than a century, Delaware has lured companies to file incorporation papers there by offering a specialized court system, laws that allow for avoiding other states’ taxes and a registration system that requires little public disclosure. Today, two-thirds of the Fortune 500 companies and 60 percent of U.S. hedge funds are registered there. That success has become a template for tax havens from Singapore to the Cayman Islands to Panama -- where a recent leak of millions of documents has revealed the questionable uses of many shell companies and put financial secrecy in headlines globally.
Delaware still stands out for its emphasis on privacy, which garnered for it the label of world’s most secretive jurisdiction twice over the past decade -- once by the Tax Justice Network and another by National Geographic magazine. While most businesses registered there are legitimate, critics say the secrecy provides cover for some shell companies owned by miscreants, from corrupt dictators to money launderers, drug dealers, tax cheats and arms merchants. Yet the business of registering businesses is important to Delaware’s economy and state revenue, and residents and leaders are quick to defend it.
The leak of the so-called Panama Papers, which exposed secretive companies’ roles in evading taxes, hiding corruption and financing organized crime, “brings into vivid focus the need to address money laundering and other criminal activities by people misusing U.S. legal entities,” said Delaware Secretary of State Jeffrey Bullock, in a statement. But Bullock suggested that the most effective way to instill more transparency is through federal legislation.
While stories about the documents’ contents have brought calls for more regulation and transparency in Europe, the Caribbean and Central America, the U.S. response has been muted. The federal government has for years refused to sign on to international standards for disclosing income, and Delaware officials are thus far resisting calls to amend state law to require more transparency.
“Who’s going to pressure them -- some Swedish journalist?” said Sheldon D. Pollack, a University of Delaware law professor. “It is a huge source of income for the state, and a major part of its economy, so if anything, it might go the other way, and offer companies more privacy, to compete with other states like Wyoming and Nevada.”
Other tax havens have tried to mimic its success -- Oregon has been called “Delaware of the West” and Luxembourg dubbed “the Delaware of Europe” -- but no place else has come close to matching Delaware. The state now has more business entities (about 1.1 million) than residents (about 935,000). One well-documented icon in this Mecca of corporate anonymity is a squat brick office building at Wilmington’s 1209 Orange Street. It’s the corporate home of more than 285,000 companies, including Alphabet Inc., Ford Motor Co. and Wal-Mart Stores Inc. -- even if their operations are headquartered in Mountain View, California; Dearborn, Michigan; and Bentonville, Arkansas.
New York-headquartered Bloomberg LP, the parent of Bloomberg News, is a limited partnership organized under Delaware law.
Delaware offers legitimate companies benefits that include an easy and inexpensive registration process and laws that are more favorable to corporate mergers than other states’, said Douglas Cumming, a business professor at York University in Toronto. “The state has made it clear that it is very pro-business,” said Cumming, who has studied the business advantages that Delaware offers hedge funds.
In 2015, Delaware registered more than 480 companies a day, providing steady business for in-state lawyers, accountants, and registration companies. Two firms, Corporation Trust Company and Corporation Service Company, act as the registered agent for two-thirds of the businesses. Both said through spokesmen that they comply with all state and federal laws.
Companies’ registration fees provide more than $1 billion in annual state revenue. Would-be reformers in Delaware tread carefully -- despite the state having registered shell companies controlled by such notorious figures as Viktor Bout, the Russian “Merchant of Death” who authorities believe provided arms to the Taliban, and Luka Bojovic, whom officials linked to the assassination of Serbia’s prime minister. It’s also home to a shell company controlled by a tequila distillery that the Mexican government is investigating for possible ties to cartel leader “El Chapo.”
“We can reform our laws to provide sufficient privacy for businesses without continuing to have secrecy that puts the national security at risk,” said Christine Whitehead, a member Delaware Citizens for Open Government, which has pushed the state to require more transparency.
In neighboring Pennsylvania, governors and lawmakers rail against losing an estimated $500 million a year in revenue to Delaware’s system, but they’ve had little success stemming that tide. Companies can cut their home-state taxes with the “Delaware Loophole” -- forming a passive investment corporation in the state and transferring their intellectual property there, where payments of royalties or interest incur no state tax.
When the U.S. government pushes other countries toward stricter disclosure requirements, foreign leaders frequently cite Delaware as an example of American hypocrisy and an obstacle to improvements. Austrian finance minister Maria Fekter, for instance, rebuffed calls to end bank secrecy in 2013, saying nothing had been done to stop “money laundering in all the islands … or the U.S. in Delaware.”
Delaware surfaced last year in an Australian tax case that revealed Chevron had used one of its 200 Delaware subsidiaries to take out a $2.5 billion loan at an initial interest rate of 1.2 percent and then lent the proceeds to Chevron Australia Holdings Pty Ltd. at 9 percent. The intracompany transactions transformed Chevron’s $1.7 billion Australian profit into interest payments and cut its potential Australian tax bill from $258 million to zero.
Chevron officials said the loans were legal and the company has paid all required taxes. In testimony to the Australian Senate last year, senior Chevron officials also pointed out that the profit was still subject to federal tax in the U.S. Company filings show that Chevron frequently reduces its U.S. tax bill by using hundreds of millions of dollars’ worth of write-offs, business credits and prior losses -- which are legal and widely used tax strategies. During most of the years at issue in the Australian case, the company’s effective U.S. federal tax rate was lower than Australia’s 30 percent rate, according to calculations compiled by the advocacy group Citizens for Tax Justice.
An Australian court has ordered Chevron to pay back taxes, interest and penalties of more than $300 million. Chevron spokesman Bradley Haynes said the company cannot discuss the case in detail because it’s appealing that decision.
Congressional hearings about the perils of shell companies over the past decade have spurred Delaware officials to make a few changes -- most notably a requirement that every business registered there list the name and telephone number of at least one contact person, usually a lawyer.
“It’s pointless,” said Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a non-profit that advocates for greater transparency. “The bottom line is the state still has no idea who owns or controls the company. There’s not an officer, director or shareholder. Just a lawyer and they protect the identity because of lawyer-client confidentiality.”
No state requires companies to list beneficial ownership. Delaware has shown little inclination to be the first -- a move that would almost certainly drive businesses to seek more private filings in Wyoming, Nevada or other states. Instead, Governor Jack Markell and other leaders have expressed support for a proposal from President Barack Obama’s administration that would apply to all states: Require every U.S. business entity to obtain a tax ID number that the Treasury Department could share with law enforcement agencies.
Such proposals have been blocked in Congress, where they’re opposed by the Chamber of Commerce and other business groups as well as the National Association of Secretaries of State. There’s little indication that’ll change, said J. Richard Harvey, a former top tax official at the IRS and Treasury Department who now teaches law at Villanova University.
“I would not hold my breath waiting unless the Panama Papers and U.S. corporations can be directly linked to terrorist financing,” Harvey said. If a strong link to terrorism were established, he said, “U.S. policy could change and change quickly.”