Wednesday, November 05, 2008

Obama and the Stop Tax Haven Abuse Act

TJN is a non-partisan organisation but we are greatly cheered by this morning's news from the United States. Congratulations to Barack Obama. Here's a reminder of one of Obama's existing projects: the February 2007 Stop Tax Haven Abuse Act. It is co-sponsored by Obama, his fellow Democrat Carl Levin, and the Republican Norm Coleman: as befits an initiative of this kind, it has bilateral support. TJN knows and likes some of the people who have been involved in creating the bill; it is a fine piece of work.

(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."

One solution?

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.


Anonymous Anonymous said...

Working as a lawyer in the offshore finance industry myself, I see absolutely no problem with a greater degree of transparency to our operations. Most of us do not want "dodgy" money anyway. But TJN has to accept that tax competition is just not eradicable, and stop banging on about this. Incidentally, I have not had even one US client for many years, since the US tax system is so heavily geared against the use of offshore centres already, such as difficult CFC legislation, transfer pricing etc. The only elements that strike me as a real threat are the proposed restrictions on use of the US financial systems and the restriction on the registration of IP. This borders on economic protectionism, something which Gordon is concerned about. It is clearly aimed at stifling tax competition. Interesting to see that the most prolific IP holding jurisdiction, Ireland, is not on the list of 34 "dodgy" jurisdictions. Perhaps because Obama is part Irish???

12:41 pm  
Anonymous Anonymous said...

what load of crap. leave the offshore jurisdictions alone

5:18 pm  
Anonymous Anonymous said...

I'm always suspicious of people who (like anonymous above) simply state that a problem is insurmountable therefore "stop banging on about it".

If some of our greatest achievers had 'no can do' attitudes like this then we might not have had the aeroplane, landing on the moon, a black US president or any other number of previously 'unthinkable' achievements.

I'm very hopeful for Obama and the more I read about stances he's taken in the past and stances he hopes to take in the future, the more hopeful I am. Of course, rhetoric can often not match action and can lead to disappointment - I mean look what a sad sell out Tony Blair became. Good that TJN will continue to monitor this.

I'm not sure therefore why some people feel that tax competition is unavoidable. With the right global action can come the right results and of course this would required US leadership. It might be difficult but not impossible and is certainly more possible now that a real man is occupying the whitehouse.

Even if tax competition were a good thing, which I think it isn't, even then the likes of anonymous should admit that the conditions that allow tax competition also allow the laundering of proceeds from drugs, criminal gangs and facilitate international terrorism and undermine global good governance.

It seems to me that those who argue for the status quo, or those who say there are limits to how much the system can change can only be arguing this because they personally have something to gain. e.g. 'working as a lawyer in the offshore finance industry'.

Here's hoping that this legislation gets passed ASAP and best of luck to Obama.

5:16 am  
Blogger CorporateCog said...

TJN is a pathetic joke. Why is the US the only country besides Libya that taxes the world wide income of it's expats? Why is it a violation of your right to privacy to have the FBI listen in on a conversation to a known terrorist, but not a violation of this right when the IRS assumes the guilt of every citizen and requires complete reporting of every financial transaction? Perhaps if you had experienced bank secrecy first hand in Switzerland, you would realize how valuable financial privacy is. The IRS has long since destroyed this fundemental privacy in the US, and it is already a monster far bigger than the FBI. Wake up America, the taxman has already taken your right to privacy, and is going to keep reaching deeper into your pockets. Face it, if abortion is a "right to privacy", what about personal finance?

2:13 am  
Anonymous Anonymous said...

From the first comment, "Interesting to see that the most prolific IP holding jurisdiction, Ireland, is not on the list of 34 "dodgy" jurisdictions."

The greatest tax dodger using Ireland is Microsoft which is a very big Obama supporter. If you watched MSNBC this year, you saw how big a supporter they were and we all know the "MS" in MSNBC stands for Microsoft. The channel was funded by Gates with a 205 million dollar check to NBC in 1996.

It's disgusting to see this bill already so tainted.

11:12 pm  
Anonymous Anonymous said...

If you had a decent and fair tax system at home, tax evasion would not be an issue.
Before attacking overseas jurisdictions, familiarize yourself with their tax laws.
Clean up the mess at home before venturing overseas.

1:46 am  
Anonymous Anonymous said...

so funny... they didn't speak about the state of Delaware....

11:52 am  
Anonymous Brian Dooley, CPA, MBT said...

You must be kidding me. Congress does not want to stop tax havens, they just want the US to be the only tax haven. Check out Forbes for Sept 2009 and Tax Analysts (another non profit group) to see what other countries are saying.
Mexico has filed a complaint against the US>

6:37 pm  
Blogger bathmate said...

I liked it.

12:47 pm  

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