In an ironic twist, US lawmakers who have criticised offshore jurisdictions for draining the US government of tax revenue are facing growing criticism of a “tax haven” within the world’s largest economy – the small state of Delaware.

Known as the “First State”, Delaware has become a target for many critics of tax havens, including a number of other US states that believe they are losing millions in tax revenues as a result of Delaware’s business-friendly laws, according to Withers, the international law firm.

Media reports say that several States are trying to recover lost tax revenues from Delaware, a move that may give legitimacy to complaints from offshore financial centres like the Cayman Islands that have noted that several US States have lower “know your client” requirements than offshore jurisdictions.

“Much attention has been focused on Ugland House in the Cayman Islands, but as [US] states suffer from declining tax revenues they are joining in the criticism of Delaware.  For years, Delaware has been a friendly business environment and now boasts more than 850,000 business entities in an area a third the size of Wales,” said Jay Krause, partner in the London office of Withers.

“Some European nations have complained for years that because Delaware does not collect information on the beneficial owners of corporations and limited liability companies, non-US individuals investing in certain US assets can avoid tax back in Europe. States like Delaware are going to face increased scrutiny as the international community seeks to shut down so-called tax havens,” he said.

Democrat Senator Carl Levin, who has sponsored the Stop Tax Haven Abuse Act, has also introduced legislation, entitled the Incorporation Transparency and Law Enforcement Assistance Act, which would force states to obtain information on the beneficial owners of corporations formed under the state’s laws.

At the G20 summit in London earlier this year, countries including the US vowed to step up pressure on tax havens, threatening possible sanctions against regimes that did not co-operate in rooting out tax evaders. Countries such as Switzerland – one of the world’s most important offshore centres – have accused G20 nations of hypocrisy.