Tuesday, July 28, 2009

Secrecy havens: new US congressional report (+ French news)

The U.S. Congressional Research Service (CRS) has issued a detailed new report looking at secrecy jurisdictions (also sometimes known as tax havens).

The report, which references our work in several places, is packed with data and useful material. For example, looking at methods of corporate tax avoidance, it mentions:
  • Allocation Allocation of Debt and Earnings Stripping (p8, "borrow more in
    the high-tax jurisdiction and less in the low-tax one." - note also our latest blog)
  • Transfer pricing (p9, "By lowering the price of goods and services sold by parents
    and affiliates in high-tax jurisdictions and raising the price of purchases, income can be shifted")
  • Contract Manufacturing (see p10)
  • Check-the-Box, Hybrid Entities, and Hybrid Instruments ("where an entity
    can be recognized as a corporation by one jurisdiction but not by another - see explanation on p10)
  • Cross Crediting and Sourcing Rules for Foreign Tax Credits (p11, "the use of excess foreign taxes paid in one jurisdiction or on one type of income to offset U.S. tax that would be due on other income. . . . Studies suggest that between cross crediting and deferral, U.S. multinationals typically pay virtually no U.S. tax on foreign source income.")
  • Deferral (U.S. multinationals are not taxed on income earned by foreign subsidiaries until it is repatriated to the U.S. parent as dividends; see more on p7)
That's for corporations. For individuals, the report highlights as examples
  • Tax Provisions Affecting the Treatment of Income by Individuals (p19, related to "U.S. rules that do not impose withholding taxes on many sources of income."
  • Limited Information Reporting Between Jurisdictions (p20) noting in blunt language how worthless TIEAs can be, with an interesting example from the British Virgin Islands.
  • U.S. Collection of Information on U.S. Income and Qualified Intermediariesidentify the true beneficiaries of interest and exempt dividends.") (p20, "Under the QI program the United States itself does not require U.S. financial institutions to
On p13-14 the report provides a striking comparison of U.S. corporate profits as a share of GDP, with France, Germany and Japan all in the 0.2-0.3% range, and Bermuda, the British Virgin Islands and the Cayman Islands all in the 350-450% range.

There is also a long section on magnitudes of the problem on pp 15-19 for corporations, with some additional discussion for individuals. Anecdotally, it includes this:

"The Tax Justice Network has estimated a worldwide revenue loss for all countries of $255 billion from individual tax evasion, basically using a 7.5% return and a 30% tax rate.75 These assumptions would be consistent with a $33 billion loss for the United States using the $1.5 trillion figure."

The report then considers policy options for addressing the problems. As they say in the preamble:

"Outcomes would likely be better if there is international cooperation."

Indeed. The options for tackling include:
  • Repeal Deferral (p22, " to institute true worldwide taxation of foreign source income") as well as Targeted or Partial Elimination of Deferral (p23)
  • Allocation of Deductions and Credits with Respect to Deferred Income/Restrictions on Cross Crediting (p24, "allocate deductions and credits, so as to deny those benefits until income is repatriated."
  • Formula Apportionment. A big one - linked with our new transfer pricing project (p24, "income would be
    allocated to different jurisdictions based on their shares of some combination of sales, assets, and
    employment. . . .Studies have estimated a significant increase in taxes from adopting formula apportionment.")
  • Eliminate Check the Box, Hybrid Entities, and Hybrid Instruments; Foreign Tax Credit Splitting From Income (p25, "rules to require that legal entities be characterized in a consistent manner.")
  • Tighten Earnings Stripping Rules (p26, "dropping the debt to asset share test.")
  • Foreign Tax Credits: Source Royalties as Domestic Income for Purposes of the Foreign Tax Credit Limit, Or Create Separate Basket; Eliminate Title Passage Rule; Restrict Credits for Taxes Producing an Economic Benefit (p26, "sourcing royalties as domestic income for purposes of the credit or putting them into a separate foreign tax credit basket."
  • (Other) Transfer pricing moves as proposed by Mike McIntyre (p27, "making transfer pricing penalties nearly automatic for taxpayers who have not kept contemporaneous records; . . . some type of formula apportionment plan as a default for transfer pricing for non-complying taxpayers.")
  • Codify Economic Substance Doctrine (p27, "Firms that enter into tax savings arrangements that are found not to have economic substance can have their tax benefits disallowed by the courts."
  • Prevent Dividend Repatriation Through Reorganizations (p27),
  • Individual reporting (p27-, mostly through better information sharing and enforcement; shifting from a residence- to a source- basis for passive income)
  • Multilateral Information Sharing or Withholding via International Cooperation - including floating the possibility of joining the EU Savings Tax Directive ("The Tax Justice Network has proposed that the United Nations develop a global tax cooperation standard, set up a panel to determine compliant states, and deny recognition to non-compliant jurisdictions. They have also suggested that the IMF and Word Bank country assessments address tax compliance" which is accurate but doesn't include all our proposals.)
  • Expanding Bilateral Information Exchange p28
  • Unilateral Approaches: Withholding/Refund Approach; Increased Information Reporting Requirements p29
  • Incentives/Sanctions for Tax Havens p29
  • Revise the and Strengthen the Qualified Intermediary (QI)Program p30 several options have been proposed; some feature TJN's own Jack Blum.
  • Placing the Burden of Proof on the Taxpayer p31
  • Treat Shell Corporations as U.S. Firms p31
  • Impose Restrictions on Foreign Trusts (click here for a primer on trusts) p31
  • Treat Dividend Equivalents as Dividends p31
  • Extend the Statute of Limitations p31
  • Greater Resources for the Internal Revenue Service to Focus on Offshore p32
  • Make Civil Cases Public as a Deterrent p32
  • Revise Rules for FBAR (Foreign Bank Account Report) p32
  • Joe Doe Summons p32
  • Strengthening of Penalties p32
  • Address Tax Shelters; Codify Economic Substance Doctrine p33
  • Regulate the Rules Used by States to Permit Incorporation p33
What a lot of very good ideas. The Obama administration has made a start on some of these; see pp 33-40 for an overview of those. And, if that isn't enough, this AP story yesterday, entitled Bill Would Shut Out Countries With Lax Bank Rules, provides this:

"The senior House Democrat in charge of overhauling the nation's banking regulations warned Monday that foreign banks would be denied access to the U.S. system if they become an ''escape hatch'' for risky investments."

So there is some progress, at least, in the United States. There is progress too, it seems, in France: the finance minister, Eric Woerth, has outlined new measures in the 2010 budget. Article in French, rough English translation here:

"At a hearing before the Committee on Finance of the National Assembly, Mr. Woerth spoke of a "heavier taxes on passive income to non-cooperative jurisdictions". The rate of withholding tax on dividends, interest and fees would be increased to 50% if the beneficiary is resident or established in a non-cooperative "

(and take a look at Christian Chavagneux' own list of measures one might take against the secrecy jurisdictions.)


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