NCPA - National Center for Policy Analysis


April 4, 2007

Hong Kong and Singapore have enjoyed rapid growth and now rank among the world's wealthiest jurisdictions -- thanks, in part, to their low tax rates and open markets.  But no good deed goes unpunished.  Today, both thriving jurisdictions face possible economic sanctions courtesy of the U.S. Congress, says Daniel J. Mitchell, a senior fellow at the Cato Institute.

Two proposals attacking low-tax jurisdictions are currently making the rounds in Washington:

  • Michigan Senator Carl Levin's "Stop Tax Haven Abuse Act" would change U.S. tax laws to deter Americans from investing in 34 low-tax jurisdictions.
  • Inclusion on the list is based on Levin's claim that a jurisdiction has been described as a "secrecy jurisdiction" by the U.S. Internal Revenue Service in court filings against allegedly tax-dodging third parties.
  • In Asia, Singapore and Hong Kong would be among the jurisdictions effectively blacklisted; even worse, the bill authorizes sweeping financial sanctions for jurisdictions that do not changes their tax and/or privacy laws to facilitate the extraterritorial enforcement of U.S. tax law.

The other bill:

  • North Dakota Senator Byron Dorgan's bill creates a blacklist of 40 nations and territories, though the bill does not explain how nations got on his blacklist or how they could get off the list.
  • The legislation would require American companies to act as if income earned in those jurisdictions were U.S.-source income, a change that would dramatically boost their tax burdens.
  • Hong Kong and Singapore aren't currently on Senator Dorgan's list, though that could change as the bill wends its way through the legislative process.

If enacted:

  • These bills would inflict higher tax rates and economic uncertainty on Asia's most vibrant financial centers, discouraging American investors, entrepreneurs and companies.
  • Equally worrisome, other nations might use the U.S. action as an excuse to impose similar blacklists.

Source: Daniel J. Mitchell, "Taking Aim at Low Taxes," Wall Street Journal, April 4, 2007.

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