A Caribbean tax haven. The underground economy. The drug trade. A shift in the balance of world financial power from the City, London's financial district, to Wall Street. A dispute between the US State Department and the Treasury. Foreign policy ''blackmail.'' Giant multinational corporations. Billions of dollars.
All these are involved in a complex tax battle that could reach a climax after Congress returns to Washington Jan. 23.
At issue is a law requiring United States corporations, banks, or other business institutions to withhold 30 percent of the interest or dividends paid on long-term investments of foreigners. Three bills now before Congress would either fully or partially repeal that law.
Also at stake is a tax treaty between the United States and the Netherlands Antilles that permits American companies to sell bonds to foreigners through subsidiaries in that tropical tax haven and not withhold that 30 percent for Uncle Sam.
Just before Christmas, the Treasury said it hoped to conclude lengthy negotiations for a revised treaty with the Netherlands Antilles this month. One basic Treasury aim is to obtain access to information that would weaken the Antilles as a haven for tax evaders.
Within the last few years, the legitimate sale to foreigners of some $32 billion in bonds by US corporations through their affiliates in the former Dutch colony have helped make foreign capital markets, primarily the so-called Eurobond market, more important than New York. That's never happened before in the post-World War II years.
But in 1982, some $43.7 billion of bonds were sold in the domestic public bond market; $69.7 billion were sold in the Eurobond and foreign currency bond markets. That means the foreign markets accounted for 61 percent of sales in the world's principal capital markets.
(A Eurobond issue is one underwritten by an international syndicate of financial institutions and sold principally in countries other than the country of the currency in which the issue is denominated. A foreign bond issue is one underwritten by a syndicate composed of institutions from one country and sold principally in that country, and denominated in the currency of that country.)
Two years earlier, the US market accounted for 53 percent of total sales of $ 81.1 billion in the somewhat smaller world capital market.
Wall Street hopes to recapture some of that lost business.
''It would help bring a resurgence of New York as the situs of the world capital market, as it was before the Interest Equalization Tax (IET) was imposed in the early 1960s,'' said Joseph Guttentag, a lawyer with the Washington law firm of Arnold and Porter, working for the Securities Industry Association (SIA). The IET was imposed by President Kennedy to discourage foreign borrowing in New York and strengthen the US dollar on foreign exchange markets. It in effect gave birth to the Eurobond market.
John C. Evans, an advisory director of the investment banking firm of Morgan Stanley & Co., held that repeal of the withholding tax would ''shift the center (of the world long-term capital market) back to New York.'' At present, thousands of employees of investment banking firms in London are involved in the organizing of bond syndicates, the sale of new issues, or the trading of old issues. Some of these jobs would move to the US, he held.
What started this whole ruckus over 30 percent withholding on interest or dividends foreign owners of US bonds and stocks was the concern of the Internal Revenue Service (IRS) with the loss of tax revenue through the Netherlands Antilles. These islands just offshore from Venezuela have become the largest tax haven in the world. The Antilles are used to avoid taxes legally, as with major US corporations and some others, or to evade taxes illegally by drug runners, the mafia, or others.
No one knows exactly the amount of revenue lost through this haven. The IRS reportedly guessed at hearings last spring that it could be as much $700 million to $800 million. Others have speculated on $1 billion or more. As one congressional aide noted, the amount is ''huge.''
The US could close that tax haven by winding up the tax treaty with the Netherlands Antilles. But then American corporations would lose the sizable interest-rate savings they obtain by selling Eurobonds through financial subsidiaries there. These savings, according to one Wall Street estimate, amount to as much as $100 million.
So the Treasury has for three years been trying to negotiate a new treaty that would retain that advantage for US companies, but reduce the losses from illegal tax evasion.
The bills before Congress give the Treasury considerable leverage in the negotiations as they would, in effect, wipe out the Antilles haven. Undoubtedly some of that illegal money would flee to other havens, such as the Cayman Islands or the Bahamas.
Of course, the Netherlands Antilles hopes Congress will not act. Though the government of the islands levies only nominal taxes on the tax haven business, the volume is so great that it produces 25 to 30 percent of islands' total tax revenues. Moreover, the investment activities provide some 17 percent of foreign exchange earnings and 6 or 7 percent of employment, noted Harold Henriquez, minister plenipotentiary in Washington for the islands. The largest of the islands, Curacao, already has 20 percent unemployment.
Revocation of the treaty, he said, ''would devastate the economy of a friendly country exactly at the time the administration's goal is to stabilize the area.''
According to various sources, the Antilles' Washington representatives argue that such economic damage could turn its citizens to communism, a la Cuba. Congressional staffers regard this as ''diplomatic blackmail.''
The State Department is concerned with the economic position of the Netherlands Antilles - if it loses the treaty.
Arnold and Porter's Mr. Guttentag maintains that if the US wants to maintain the Antilles economy, it should do so through foreign aid. ''It is unfortunate that our tax policies are dictated by foreign policy considerations,'' he said.
The SIA became especially concerned when the tax-free status of some Eurobond issues was challenged by the IRS.
If the IRS challenge were pursued and upheld, it would kill the US portion of their Eurobond business and, in effect, force those American companies that have issued some $43 billion in such bonds to pay the withholding tax themselves or prepay them.
If US corporate access to the Eurobond market were closed, said John B. Adams , managing director of Merrill Lynch Capital Markets, it would ''put more pressure on domestic markets and raise interest rates'' - a market already suffering from the heavy demands of the federal government for financing its massive deficit.
So the SIA has been backing bills that would abolish withholding of taxes on investments in the US by foreigners. These bills, at the moment, also have the backing of the Treasury.
The Treasury has a special interest in that it too under this legislation could borrow long-term in the Eurobond markets.
At the moment, foreigners (or Americans who illegally do not disclose their citizenship) can borrow only short-term Treasury bills and not have taxes withheld.
World's biggest tax havens (Income from US sources paid to recipients in major tax haven or tax treaty countries)
Total paid Exempt from US
withholding Netherlands Antilles $1.4 billion $1.1 billion Netherlands $1.3 billion $291.7 million Switzerland $1.2 billion $182.4 million Bermuda $51.7 million $9.2 million Bahamas $39.5 million $1.3 million British Virgin Islands $24.4 million $3.6 million Cayman Islands $24.3 million $17.4 million Antigua $4.5 million $4.4 million Source: Internal Revenue Service