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.
Muted Response
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.