This article sheds light on two aspects about the low tax rate in Delaware. First, it attracts different sort of legal corporations because he state helps companies legitimately reduce their United States taxes and obscure profits in other countries. Second, Delaware requires the least amount of information to invest a company. Lack of transparency provides illegal business opportunities to establish shell companies and launder money.
However, the article adds more heat than light on the subject of Delaware’s role among the 50 states and in the world in terms of a forum to incorporate. Yes, Delaware has more business entities that use it as their corporate registered address than it has citizens, but it is a state with less than one million residents, and slightly less than one million entities use Delaware as their state of incorporation.
Almost every state in the USA permits the formation of a corporation without revealing the owners or management and without any minimum capitalization. It is ridiculously easy to form a business corporation in the United States and that is one of the reasons entrepreneurs favor the USA. Any state feeling cheated by Delaware’s corporate tax laws can raise tax rates on foreign corporations doing business in their states and can use the tax laws to capture taxes on some other revenues generated within the state.
The article devotes substantial space to the option that Delaware allows for passive income to be received by a Delaware entity, such as royalties on patents, and if a list of prerequisites are satisfied, that income will not be taxed in Delaware. The article does not mention, and perhaps the author is not aware of, the dwindling percentage of revenue that Delaware receives from those specialized holding companies. Compared to the majority of the income that Delaware receives from corporate franchise taxes charged to companies that do not receive passive income. In addition, the article does not include the growing number of states that are closing the so-called loophole that allows a small percentage of Delaware companies to use this Delaware benefit.
The article names many criminals, convicted, accused, or suspected, which suggests that the secrecy and anonymity barriers to pursuing justice are not insurmountable. How does prosecution in Delaware compare to other tax havens? Delaware obviously saves corporations money but that is less disturbing than if it were protecting dictators, human traffickers, arms dealers, etc. Also, the numbers scattered through the piece are hard to compare. For example, other states lost $9 billion dollars annually in taxes while Worldcom alone saved $20 B? Not impossible but it if true, then Worldcom accounted for a big fraction of the tax loss/shift and its’ demise will nearly fix the problem.
So, the article seems to focus on the tax advantages of forming a Delaware entity, but the reality remains that the tax benefit is only used by, and available to, a small and declining percentage of all Delaware entities. In addition, it gives a biased opinion about Delaware laws about loopholes for illegal businesses.