Treasure Islands - Nicholas Shaxson [72]
At first, they settled for a compromise. American corporations could cook up a version of what was known as a “Dutch Sandwich”—set up an offshore finance subsidiary in the Netherlands Antilles, then use it to issue tax-free Eurobonds and send the proceeds up to the American parent. The United States could argue that it did not have to tax this income from the Antilles, under the rules of its tax treaty with this former Dutch colony via its postcolonial relationship with the Netherlands.
The U.S. Internal Revenue Service could easily have decided that the Dutch Sandwich was a sham and taxed the income. But it looked the other way. “These were Eurobonds, bearer bonds, which were virtually impossible to tax,” explained Michael J. McIntyre, a top U.S. expert on international tax, who was one of very few people in the United States to have opposed this at the time. “You British people were quite happy about (the tax-free, secretive Eurobond markets). And we wanted in. We wanted to attract the hot money too.”
David Rosenbloom, who was in charge of these matters at the U.S. Treasury during the years 1978–80, also remembers how questionable these officially tolerated offshore antics were. “People were very nervous. Those companies wanted access to the Eurodollar market, and they really wanted security,” he said. “The Antilles structures were kind of phoney—these were paper entities; they weren’t doing anything real. They existed in some notaire’s desk drawer down in Curaçao.”21
In response to the Antilles structures, the Carter administration commissioned a major survey of secrecy jurisdictions that was published in January 1981, the month Reagan came to power.
The Gordon report, as it was called, was probably the first really serious challenge to the havens in history. It condemned tax havenry as a situation that “attracts criminals and is abusive to other countries” and called on America to lead the world to crack down. Published a week before the Reagan inauguration, it quickly sank out of view. Yet the report was an acknowledgment that there was a big problem, and in this, it was new. “I can’t remember any overarching ‘Let’s go after the havens’ thing prior to the Gordon report,” said Rosenbloom.
While the Bahamas and Switzerland were certainly on the radar screen, he said, the Netherlands Antilles was the big one.
Eventually, the United States told the Netherlands Antilles it wanted to renegotiate the treaty.
“A whole bunch of rulings came down that scared the bejesus out of everybody,” said Rosenbloom. “These were the days when people were actually afraid of our tax authorities.”
But there was another hitch: Having tacitly encouraged the Antilles loophole, the United States was not in a great position to object. “From the point of view of U.S. tax policy these things were utterly objectionable, but the U.S. government had its hands completely dirty,” Rosenbloom continued. “The government was in a bad position to start getting all self-righteous about this.
“The Antilles could have gotten a decent treaty that would have let them carry on doing business in some form. I was prepared to compromise. I didn’t think we had the gumption to do this.”
Yet the Dutch Antilles overplayed its hand. “They were holding out,” Rosenbloom said. “They thought they could push the United States around in treaty negotiations. They wanted more of this and more of that, and this benefit and that benefit . . . they just held tough on all sorts of positions that we couldn’t accept.”
American corporations grew skittish. And out of the commotion, a new approach was hatched: From 1984, the United States would bypass the Antilles irritant entirely and waive the 30 percent withholding tax under a new loophole.22 American companies would no longer set up fictional entities in Curaçao but simply issue