Obama and the Stop Tax Haven Abuse Act
(The press release is here; the floor statement by Senator Levin is here; and the legislation itself is here. Note that though this legislation has been introduced, it is not yet law.)
"This is a basic issue of fairness and integrity," Obama said when the bill was introduced. "We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren’t disadvantaged." Levin added that:
"In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill."
Levin assessed that offshore tax abuses cost the US taxpayer $100 billion per year (that's just for the United States). But he also noted how extraordinarly, shockingly, lax, the system has been.
Take this, for example, on lawyers who assist tax dodgers:
"under Section 6701 of the tax code, these aiders and abettors face a maximum penalty of only $1,000, or $10,000 if the offender is a corporation. This penalty, too, is a joke. When law firms are getting $50,000 for each of these cookie-cutter opinion letters, it provides no deterrent whatsoever. A $1,000 fine is like a jaywalking ticket for robbing a bank.
Now everyone's waking up to the fact that it's not just damage to our tax systems that is the problem: the damage is far greater than that. The new financial crisis now allows us to see how tax havens have offered banks what Richard Murphy calls the "get out of regulation free" card. This blog looks at the Act in a little more detail, to give a flavour of what it's about.
The Stop Tax Haven Abuse Act has many parts, but Carl Levin's statement helps illustrate some of its core principles quite neatly. Here's one part:
"The business model followed in all offshore secrecy jurisdictions is for compliant trustees, corporate administrators, and financial institutions to provide a veneer of independence while ensuring that their U.S. clients retain complete and unfettered control over “their” offshore assets. That’s the standard operating procedure offshore. Offshore service providers pretend to own or control the offshore trusts, corporations, and accounts they help establish, but what they really do is whatever their clients tell them to do. In truth, the independence of offshore entities is a legal fiction."
Section 101: "strip the veneer of independence from the U.S. person involved with offshore entities, transactions, and accounts, unless that U.S. person presents clear and convincing evidence to the contrary. . . . These presumptions would put the burden of producing evidence on the taxpayer who chose to do business (offshore) and who has access to the information, rather than on the federal government which has little or no practical ability to get the information."
Section 102 would expand legislation currently used only against money laundering (which is a relatively small part of the problem) and extend its authority to counter specific foreign tax administration threats. How might it do this?
"Treasury could, for example, in consultation with the IRS, Secretary of State, and the Attorney General, require U.S. financial institutions that have correspondent accounts for a designated foreign bank to produce information on all of that foreign bank’s customers. Alternatively, Treasury could prohibit U.S. financial institutions from opening accounts for a designated foreign bank, thereby cutting off that foreign bank’s access to the U.S. financial system.
. . . (or) . . . it would allow Treasury to instruct U.S. financial institutions not to authorize or accept credit card transactions involving the designated foreign jurisdiction or financial institution"
It's astonishing that this is not done already. About time too. We hope the new Congress will get onto this one, fast. Section 103 of the bill, recognising that tax havens routinely slow law enforcement down, would give the Internal Revenue Service (IRS) more time to complete their audits.
Section 104 creates new disclosure requirements for third parties: banks or brokers opening accounts for US taxpayers, or U.S. financial institutions that directly or indirectly open foreign bank accounts or establish foreign corporations or other entities for U.S. customers, must report those actions to the IRS. Existing U.S. law requires taxpayers to do so: Section 104 would require the intermediaries to do so too - just as TJN has always wanted. Other parts of the bill would stiffen the penalties against third parties who aid and abet tax evasion; and would stop people or companies being allowed to take out patents on abusive tax trickery they designed. (Astonishing that you can, literally, be given a licence to create this abuse.)
Another part of the Act, Section 105, addresses the game of smoke and mirrors that are played by the users, creators and beneficiaries of trusts. (We will discuss trusts in more detail on this blog soon.) In short, the section would "make it impossible to pretend that this type of foreign trust has no U.S. beneficiaries." Another section, 106, takes aim at legal opinions that tax dodgers use to try and immunise themselves against penalties", and a further section, 204, aims at greatly streamlining the process of "John Doe summons" where the IRS knows something bad is likely to be going on but can't (because of the veil of offshore secrecy) work out who exactly is behind it. Currently, it's very awkward to get these cases going; the new act would make it much easier.
And then there are hedge funds. Take a look at this, also from Levin's speech. It's quite astonishing that it's been allowed.
"Currently, unregistered investment companies, such as hedge funds and private equity funds, are the only class of financial institutions under the Bank Secrecy Act that transmit substantial offshore funds into the United States, yet are not required by law to have anti-money laundering programs, including Know Your Customer, due diligence procedures. There is no reason why this growing sector of our financial services industry should continue to serve as a gateway into the U.S. financial system for monies of unknown origin. The Treasury Department proposed anti-money laundering regulations for these groups in 2002, but has not yet finalized them. . . "
The bill would require final regulations to be put in place within 180 days, and also bring agents who form companies into the net, so that "for the first time, those engaged in the business of forming corporations and other entities, both offshore and in the 50 States, would be responsible for knowing the identity of the person for whom they are forming the entity."
There is still more. Other provisions would break down the Chinese walls between the IRS and other enforcement agencies such as the Securities and Exchanges Commission, bank regulators, and the Public Company Accounting Oversight Board, to allow the exchange of information relating to tax evasion cases. (Why, we might ask, are these walls there in the first place?) It would codify and strengthen the doctrine of economic substance, which judges transactions on whether they have a real business purpose apart from avoiding taxes.
And let's not forget this: the bill contains a list of "suspect" jurisdictions where skulduggery is already well known:
Anguilla - Antigua and Barbuda - Aruba - Bahamas - Barbados - Belize - Bermuda - British Virgin Islands - Cayman Islands - Cook Islands - Costa Rica - Cyprus - Dominica - Gibraltar - Grenada - Guernsey/Sark/Alderney - Hong Kong - Isle of Man - Jersey - Latvia - Lichtenstein - Luxembourg - Malta - Nauru - Netherlands - Antilles - Panama - Samoa - St. Kitts and Nevis - St. Lucia - St. Vincent and the Grenadines - Singapore - Switzerland - Turks and Caicos - Vanuatu
This is by no means the end of the story, though it is a good start.
Today's blogger doesn't know how or whether the bill in its current or related form is likely to be introduced. It would now seem sensible, in light of the secrecy jurisdictions' role in creating the financial crisis, to look at regulation too: that will take a lot more work. We like Obama's involvement in this Act, which is tremendous. But there are various provisos.
First, one country cannot do it alone. It has to be a co-operative effort, or capital will just flee to the places which allow and even encourage tax haven abuse (of course we won't - OK we will - mention Britain, whose Prime Minister Gordon Brown will be, in the accurate words of Richard Murphy, "the biggest supporter of tax havens in the world" after the departure of George W. Bush.) Accountancy Age magazine put it like this:
"Sarkozy wants to launch attacks on the havens, the Germans want to target Switzerland in particular, and seemingly only one major country Britain, led by Gordon Brown, a politician who in opposition made his name pledging to crack down on tax avoidance is standing in the way."
Second, we are curious about Obama's selection of Joe Biden as vice-president. We don't know enough about Biden's intentions or role, but it does worry us that he hails from America's own secrecy jurisdiction, Delaware.
Obama clearly will have a lot on his plate, and that's an understatement. We hope he will pay attention to this truly vast issue as he has promised. We will be watching, and holding him to his word.