Wishful Thinking in Willemstad

Graybeards in the offshore industry will remember that in the 1970s and early 1980s, the Netherlands Antilles (NA) was a leading offshore center, primarily due to its tax treaty with the US.

Under the terms of this treaty, interest payments and dividends from the US to the NA were subject to much lower US withholding rates than would have otherwise applied. Many companies established subsidiaries in Willemstad, the NA's capital, to take advantage of this treaty. But in the 1980s, the US began to eliminate tax treaties with countries it labeled "tax havens," and in 1987, the U.S. Treasury declined to renew the NA treaty. 

Not surprisingly, the NA economy went into a tailspin following the U.S. Treasury's action. And ever since, the NA government has been pining for a new tax treaty. But instead of a tax treaty, the United States instead tried to persuade the NA and other small offshore centers to sign another type of agreement called a tax information exchange agreement or TIEA.

However, a TIEA is much different than a tax treaty. It exists only to enforce U.S. tax laws and doesn't provide any tax relief on sky-high U.S. withholding rates. All TIEAs essentially give the IRS the right to conduct offshore "fishing expeditions" into U.S. persons or companies who have financial interests in the other country. 

The treaties may also give the right for the other country to obtain information on financial interests held by its residents in the United States. However, in most cases this information is of no use, because most countries that have signed TIEAs don't impose taxes on income outside their territorial jurisdiction.

Naturally, most offshore centers don't want to sign such one-sided agreements. But historically, the United States has threatened recalcitrant jurisdictions with various countermeasures, including placing them on tax and money laundering blacklists, and advising U.S. banks that transactions with these countries will be subject to investigation. It's basically, sign on the dotted line—or else.

However, a new and "enlightened" U.S. Treasury is now taking a new approach, as exemplified by its successful campaign, culminating last week, to persuade the NA to ratify a TIEA. This time, instead of beating up on the NA, the U.S. Treasury dangled a carrot—the possibility of a shiny new tax treaty that would once again provide for reduced withholding rates on interest and dividends paid to NA companies.

The NA's State Secretary of Finance, Alex Rosaria, says that he will soon begin discussions with the US about a new tax treaty. “I am very optimistic that we can agree to begin negotiations with the USA,” he declared last week.

Pardon me for being skeptical, but I don't think there's a snowball's chance in hell that the US will ever sign a tax treaty with the NA. The US now has what it wants—the ability to conduct offshore fishing expeditions into NA financial institutions—and has near-zero incentive to do anything more. The US has a longstanding policy of not concluding tax treaties with low-tax jurisdictions, and there's no reason to think it's going to change this policy anytime soon.

Politics being politics, that hasn't stopped NA politicians like Rosaria from claiming a new tax treaty is in the works. We'll see—but I'm not holding my breath.