The 2016 U.S. presidential campaign has been anything but ordinary. Barring any last minute surprises, it is set to feature the two most disliked major party nominees in the nation’s history. It is also a critical time for the offshore community, as low-tax jurisdictions and financial centers face serious challenges from multiple directions. Where the United States ultimately sits on a number of international tax questions will greatly influence the outcome of these fights. Unfortunately, neither of the two major presidential candidates is likely to provide any significant relief once in office.
In recent years, the offshore community has been besieged by global tax collectors. The United States kicked things off with the Foreign Account Tax Compliance Act (FATCA) and its requirement that the entire world foot the costs for tracking down a comparatively small amount of revenue lost to tax evasion. Inspired by FATCA, the OECD again moved its goal posts for low-tax jurisdictions, with a new Common Reporting Standard (CRS) featuring the automatic and indiscriminate exchanges of tax information. And the recently completed BEPS recommendations aim to do to corporations what FATCA and the CRS are doing to individuals – eliminate privacy and competition, with the ultimate goal of significantly raising tax rates.
Just as the U.S.-passed FATCA set the tone for the international efforts that followed, the disposition of the next U.S. president will go a long way toward determining the direction of international tax efforts in coming years. The rhetoric and issues which dominate the campaign could also reverberate throughout the offshore world, providing reason for industry practitioners to consider both the nature and likely outcomes from the current U.S. contest.
Unless something unexpected and highly unusual occurs, the campaign is all but certain to feature political insider Hillary Clinton on the Democratic ticket versus outsider businessman Donald Trump on the Republican side. Clinton is a fairly typical Democratic pol who supports higher taxes and bigger government, whereas Trump’s erratic statements make his views harder to pin down.
Will Clinton’s connections influence policy?
Should she win, Hillary Clinton’s policies are unlikely to differ strongly from those of outgoing President Barack Obama. She served as a member of his administration as secretary of state, and has not distanced herself from his policies during the campaign. Like Obama, she seeks to increase taxes and spending, and sees tax competition and the free flow of capital across borders as an obstacle to that goal.
Moreover, the OECD’s anti-tax competition project began when Bill Clinton was president. And many of the people involved in that effort, such as former Treasury Secretary Larry Summers, are still close to the Clinton political machine.
So it’s not surprising that, when seizing the recent furor over the Panama Papers, Clinton pledged to “go after some of these schemes … routing income through the Bahamas or the Cayman Islands or wherever.” And she has relentlessly criticized companies that have merged with overseas partners to, at least in part, escape America’s punitive worldwide tax system.
However, her own financial history raises the question of how seriously she really believes her anti-tax competition rhetoric, or whether she was simply reacting to the tougher-than-expected primary fight she faced from a more left-wing Bernie Sanders. While she was in the Senate, her husband and ex-president Bill Clinton was a partner in investment fund Yucaipa Global Partnership, which is registered in the Cayman Islands. Her son-in-law’s hedge fund, Eaglevale Partners, also incorporated entities in Cayman. So her personal experience may produce a less dogmatic approach than her party and rhetoric suggest.
On the other hand, Clinton’s election would be unlikely to produce much turnover among the bureaucrats and appointees at the Treasury Department who have had such a heavy hand in the current administration’s aggressive approach to international tax issues.
Donald Trump the wild card
Donald Trump’s views are harder to interpret. He has run a populist campaign, embracing nontraditional Republican positions like trade protectionism and class-warfare-style calls to hike taxes on the wealthy. He has also chastised companies as unpatriotic for moving overseas and threatened them with special tariffs.
On the other hand, he’s proposed a very large tax cut that generally reflects consensus Republican thinking (lower tax rates, less double taxation, some reduction in preferences). Moreover, he has acknowledged the responsibility of the punitive U.S. corporate tax code in promoting corporate flight.
There are indications that Trump’s public rhetoric differs from what he tells party leaders in private. As he works to consolidate support among key Republican officials and the donors who have thus far looked askance at his brusque campaign style, there’s a chance he migrates toward more traditional Republican views.
But the only safe conclusion is that no one has any clear idea what Trump believes or will say next. His populist tendencies, however, provide cause for significant concern on international tax issues where demagoguery and misinformation are easier political sells than the value of capital mobility, cross-border investment, and jurisdictional competition.
Election-projection models have for the most part consistently predicted a Democratic win in 2016. These models are based on overall economic conditions, approval ratings for the incumbent party, and election polling data, among numerous other factors. Prediction markets have also fairly consistently favored a Democrat to win by about two to one. Absent significant developments in the investigation into Clinton’s private email server during her time as secretary of state, a Clinton presidency, and all that a third Democratic term entails, is the most likely result come November.
Although the prediction markets consistently undervalued whether Trump would gain the Republican nomination, so in this year’s election season in particular, it is best to take everything with a grain of salt.
In any event, what may matter most for the offshore community is what could happen in Congress. Republicans currently control both chambers but face a tough Senate landscape where they have more than twice as many seats up for grabs as do the Democrats. Control of the Senate might very well be decided by one or two seats.
The large Republican majority in the House, where incumbents have become harder to unseat in recent elections, is less likely to be threatened. The major unknown is the impact of Trump at the top of the ticket. A collapse of his campaign, or even just its continued inability to raise significant funds and establish a nationwide campaign apparatus, could leave down-ballot Republicans twisting in the wind.
A Republican loss of either chamber would be a blow to the recent growth in opposition to the OECD and the global movement to eliminate tax competition. BEPS and the ongoing efforts of EU states to squeeze multinationals have come under increasing scrutiny in Congress, but a change in party control would provide a serious setback to the growing movement opposed to current international trends.
And even if the Democrats only win the Senate, that presumably increases the possibility that the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters would be ratified. This pact would greatly expand the powers of governments to collect and share information, and some of the world’s most corrupt and venal regimes are part of the agreement. Moreover, approval of the Protocol might give the U.S. Treasury Department leeway to impose collection requirements on financial institutions, thus undermining America’s status as the world’s biggest tax haven.
In other words, the 2016 election will be very important for international finance, even though the presidential election may not make much difference.