(MoneyWatch) Starting in January, Americans will no longer be able to use the Cayman Islands and
Costa Rica as tropical tax havens.
New agreements with the countries, announced by the Treasury Department last week, are designed to enforce the Foreign Account Tax Compliance Act, or
FATCA. The 2010 law is aimed at curbing people's ability to avoid
taxes by parking their money overseas. Since its passage, the U.S. government has signed agreements with 12 other nations and says it is close to
signing agreements with 16 more.
Although specifics may vary slightly, essentially the pacts require foreign financial institutions to provide annual reports to the Internal Revenue Service on American citizens with more than $50,000 on account with the companies. Estimates of U.S. tax revenue lost through offshore tax-haven schemes by individuals range from tens of billions of dollars to hundreds of billions.
The Organization for Economic Development and Co-operation officially designated Costa Rica as a tax haven in a recent study. The Cayman Islands, population 53,000, has no income tax and is one of the world’s most popular locations for companies to incorporate and the legal home to many investment funds. A study by the Tax Justice Network, an independent organization launched by the British government, listed the Caymans as the fourth-largest destination for secret accounts, with $1.2 trillion in hidden assets.
While many companies and funds based in the Caymans do not use the loose financial regulations to dodge taxes, the nation’s reputation as a haven is so great it wound up embarrassing Mitt Romney when he was running for the GOP presidential nomination. When Romney released his 2010 income tax forms and an estimated 2011 form, they showed the use of the Caymans, Bermuda and Switzerland as destinations that appeared to help lower his tax rate on $13 million in income to 14.1 percent. The Romney campaign strenuously denied the charges, with the former Massachusetts governor saying, "There was no tax savings at all."
The agreement with Costa Rica is reciprocal, allowing the Costa Rican government to get tax information about its citizens’ assets in the U.S. This is also part of 11 other FATCA agreements and has upset some U.S. banks. Earlier this year, the Texas Bankers Association and Florida Bankers Association sued to stop the IRS from sending certain bank account information to foreign governments. That case is still pending.
If places like the Caymans and Costa are coming under pressure for their tax rules, the U.S. is also a prime destination for sheltering money. The Tax Justice Network says America, with an estimated $1.2 trillion sheltered from disclosure, is the fifth-most popular nation for hiding money. It moved to No. 5 after the Caymans, which had been No. 4, was dropped from the list thanks to its agreement with the U.S. government.