Welcome to tax-dodge city, USA Delaware offers corporate anonymity and light-touch regulation that rivals offshore havens
Andrew Clark guardian.co.uk, Friday 10 April 2009 16.58 BST
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It lacks the palm-fringed sandy beaches of the Cayman Islands. Or the craggy Alpine peaks of Liechtenstein. But should the second smallest US state, Delaware, go on a blacklist of globally notorious tax havens?
A wedge-shaped chunk of land 96 miles long sitting halfway between Washington and New York, the state of Delaware is home to 870,000 people, 0.3% of the US population. But more than half of the nation's publicly traded companies are incorporated here, including 60% of the Fortune 500 firms. One anonymous office block serves as the registered address of more than 200,000 corporations.
Delaware's status as a corporate honeypot has attracted the unwelcome attention of Luxembourg's prime minister, Jean-Claude Juncker, who last week declared that if his country was to be picked upon as an alleged tax haven, then Delaware should get the same treatment.
The G20 has "no credibility", said Juncker, if Delaware and several other tax-friendly US states are allowed to pass under the radar: "If there must be a blacklist, then America should have its place on it."
The main drag in Delaware's biggest city, Wilmington, is Market Street ? which bears all the hallmarks of recession. Shops selling wigs, sneakers and discount sportswear vie for trade. Old-style wooden trolleybuses with a neat blue trim trundle up and down with barely any passengers.
But the downtown area is dotted with towering offices of national banks. The city square is overlooked by a gleaming courthouse where many of America's trickiest corporate disputes are heard. Signs of corporate activity are rife ? a blackboard outside a coffee shop, Brew Ha-Ha, asks: "Bored of the boardroom? Hold your next office meeting in our dining area with a cup of Delaware's best."
A single low-rise, yellow-brick building, 1209 Orange Street, is the legally registered office of more than 200,000 companies including Ford, American Airlines, General Motors, Coca-Cola and Kentucky Fried Chicken.
The building, on the edge of a residential area, has a green awning over the door and is opposite a multistorey car park. A few stacks of filing cabinets are visible through the windows but little activity is in evidence. Legally, it serves just as many businesses as any brass- plate corporate host in Bermuda, Jersey or Andorra. Companies are lured here by a friendly tax regime and sophisticated courts. Corporate advisers cheerfully admit that few companies registered in Delaware do much, if any, business in the state.
Jerry Daniel, vice president of government relations at the Corporation Trust Company which runs 1209 Orange Street, says the office is nothing more than a handy mailing address for multinationals which qualifies them to operate under Delaware's business-friendly laws.
"Every company organised here has to have a registered office and a registered agent," says Daniel. "Our role is simply to receive and forward any legal notices served on them."
This phenomenon has come under attack elsewhere. Criticising tax havens during the election campaign, Barack Obama alighted on a single building in the Cayman Islands, Ugland House, which is the registered office for more than 12,000 US companies, alleging: "That's either the biggest building in the world or the biggest tax scam on record."
The lure of Delaware is two-fold. On the fiscal side, the state only imposes a corporate income tax on profits that are earned within the state. Subsidiaries operating elsewhere in the US don't have to pay ? and as Delaware is tiny ? that means little tax liability.
Incentive
But Delaware's legislators prefer to play up the legal advantages. Since the end of the 19th century, Delaware's lawyers have carved out a speciality in business law. A chancery court deals purely in corporate matters and cases are generally heard before a judge, rather than a jury, who is less likely to be swayed by populist outrage. The courts pride themselves in dealing with paperwork swiftly and rigidly demarcate the roles of directors, managers and shareholders. This is not without its conflicts. Hosting companies is highly lucrative for Delaware. The tiny state earns $775m (£528m) in registration taxes annually, accounting for 22% of its entire budget. As a result of this windfall, Delaware residents are among the few in the US who do not pay sales tax in shops and restaurants in the state.
Mark Roe, a professor at Harvard Law School, says Delaware has a huge incentive to make company-friendly laws to lure multinationals which are not necessarily in the interests of either shareholders or the public.
"Delaware understands that the principal actors in deciding where to incorporate are the managers of companies and insiders," says Roe. The risk, he says, is "they come up with law as friendly to insiders as it can be while still being credible".
Crucial corporate issues are decided here. It was a Delaware judge who decided that Conrad Black should lose control of the Daily Telegraph in 2004. The state's court settled a dispute between media moguls Barry Diller and John Malone last year and a possible bankruptcy of General Motors could well be heard in Delaware.
Donations
The state has powerful allies ? vice-president Joe Biden is a former senator for Delaware who used to commute by train daily between Wilmington and Washington. His political coffers received more than $1m in donations from law firms with offices in Delaware between 2002 and 2008, according to the Centre for Responsive Politics.
The state's system of corporate registration is overseen by assistant secretary of state Rick Geisenberger, who bristles at the Luxembourg premier's attack. He points out that most tax havens are distinctive for their secrecy and lack of transparency.
"I don't have a message specifically for Mr Juncker," says Geisenberger, before adding: "There's a difference between incorporation laws and bank secrecy laws. The US has very vibrant laws on reporting suspicious activity and in stamping out money laundering."
He brushes aside criticism of "brass plate" registered offices in Delaware: "Those addresses are not for the companies themselves. They're the registered offices. It's simply a question of if they get sued, that's where they're going to be served with the proceedings."
On the streets of Wilmington, the notion of categorising Delaware alongside Andorra and the Virgin Islands prompts a degree of bemusement. Dennis Dorsey, a health insurance worker who was born and raised in Delaware, says: "I've heard Delaware has a lot of companies registered here. I don't know how it compares to the Cayman Islands but 'tax haven' sounds kind of harsh."
Michael Wellington, an investment manager at a bank in Delaware, describes the place as "tax advantageous" rather than a tax haven.