Shu Yi Oei: The Offshore Tax Enforcement Dragnet

Shu Yi Oei (Tulane) has posted an important new paper on U.S. offshore tax enforcement, of interest. Here is the abstract:

Taxpayers who hide assets abroad to evade taxes present a serious enforcement challenge for the United States. In response, the U.S. has developed a family of initiatives that punish and rehabilitate non-compliant taxpayers, raise revenues, and require widespread reporting of offshore financial information. Yet, while these initiatives help catch willful tax cheats, they have also adversely affected immigrants, Americans living abroad, and “accidental Americans.”  

This Article critiques the United States’ offshore tax enforcement initiatives, arguing that the U.S. has prioritized two problematic policy commitments in designing enforcement at the expense of competing considerations: First, the U.S. has attempted to equalize enforcement against taxpayers with solely domestic holdings and those with harder-to-detect offshore holdings by imposing harsher reporting requirements and penalties on the latter. But in doing so, it has failed to appropriately distinguish among differently situated taxpayers with offshore holdings. Second, the U.S. has focused on revenue and enforcement, ignoring the significant compliance costs and social harms that its initiatives create.  

The confluence of these two policy commitments risks creating high costs for the wrong taxpayers. While offshore tax enforcement may have been designed to catch high¬-net-worth tax cheats, it may instead impose disproportionate burdens on those immigrants and expatriates who have less ability to complain, comply, or “substitute out” of the law’s grasp. This Article argues that the U.S. should redesign its enforcement approach to minimize these risks and suggests reforms to this end.

The paper provides a thorough review of the panoply of offshore enforcement programs and mechanisms and documents the harms of their dragnet approach, especially on the most vulnerable and least likely targets. A significant contribution to the literature.

Kill Switches in the New US Model Tax Treaty

I posted previously on the new US Model, which was released in February of this year; I've now posted my article, co-written with McGill PhD student Alex Ezenagu, on the "kill switch" provisions in the new model. These provisions are found in the new articles and definitions involving special tax regimes and subsequent law changes, which would allow countries to switch on and off specified treaty benefits if their treaty partners get too aggressive in the ongoing race to the bottom on tax.

Here is the abstract:

The new US model income tax treaty contains an unusual addition: mechanisms for the parties to unilaterally override the negotiated treaty rates in specified circumstances. Previewed last year in proposed form—a first for Treasury—these new mechanisms work as kill-switches, partially terminating the treaty as to one or both treaty partners. The idea is to forestall a more problematic outcome, such as an enduring breach of one of the parties’ expectations, or the opposite, a complete termination of all the treaty terms in the face of such a breach. Yet embedding a kill-switch in a treaty creates distinct legal, procedural, and political pressures in the tax-treaty relationship that implicate treaty negotiation, ratification, interpretation, and dispute resolution. Kill-switches also communicate a defensive tenor in the tax treaty relationships among many countries. This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.

It has long been assumed that tax treaties are uncontroversially technical agreements that no one outside of tax circles cares about or pays attention to--including, it seems, all too many lawmakers tasked with adopting these agreements into law. But with the US Treasury and the EU competition commissioner trading barbs over the fence about what seems right or fair when it comes to global tax competition and coordination, this assumption might be changing. The consensus built up over decades by OECD nations is under stress as the pressure for coherence in the international tax realm increases. Treasury released these provisions in draft from last fall, expressly in order to influence the OECD's work on BEPS. Now that the provisions are in the model, it remains to be seen how they will play out as BEPS, currently at a mid-cycle of norm making, moves from the articulation of principles to the implementation phase. This article doesn't provide answers or predictions about the future but it examines one aspect of the ongoing contestation and tries to situate it in historical and contemporary terms.

Evasion, Avoidance, and Bashing Panama in a World of Aggressive Tax States

I've talked to a few journalists and commented a bit on the Panama Papers (e.g. here at 6:09 and here) but I've refrained from writing much to date because I am uneasy about a couple of central themes in this story: first, the constant confluence of tax evasion and tax avoidance, which are two completely different phenomena that require two very different responses in my view, and second the bashing of Panama as if only bad things can be done there, so anyone who does anything there from anywhere else must be doing a bad thing.

I am uneasy about this bashing because, although I think there are bad guys doing bad things in Panama, I also think there are bad guys doing bad things all over the world and I don't like Panama being singled out; I am also wary of suggesting that in a world of global trade and investment flows, anything and everything done through or with Panama must eternally be tinged with a sense of wrongdoing. This sense seems to imbue the imagination in the campaigns to "shut down the tax havens." What, exactly, does that mean? Does it mean that some countries, because someone decides they are mostly bad actors, must be effectively cut off from the global financial system and no one must be allowed to transact with or in these countries from the outside? What if most of the world are actually bad actors, each scheming to use its tax system to undermine and undercut the others? That's essentially the vision drawn by the OECD in countering BEPS, so we will run into some problems if we take this reasoning to its logical conclusion. But if this is not the idea behind shutting down tax havens, then what is envisioned, exactly?

Tax justice advocates seem to envision an invasive global regulatory regime in which every person in the world will have all of their assets and financial information catalogued and tagged and made public to everyone else, in order to make sure no one can break any tax rules. If this is being done just for tax--that is, if this is what it takes to make the income tax "work," I am not sure that the income tax is worth all of that trouble and everything given up to achieve it. That includes privacy, which appears to itself have become a suspicious word in certain circles, as if only those doing bad things have a desire to keep anything about their lives private. Let us recall Glenn Greenwald's words on why privacy should not come to be seen as a sinister desire. It is possible to break the tax law like it is possible to break any other law. But is requiring everyone to show all of their assets to everyone else in order to prove no laws have been broken a valid response to this enduring problem? I cannot agree with this Orwellian vision of the world. I also do not think this view is sensible if the issue is really driven by tax. If it is, then surely we can find a less invasive way to fund public goods and services.

This brings me to the evasion/avoidance point, which I find being abused just as much by lawmakers and policy advocates as it is by journalists who don't know any better.

Tax evasion is a crime that involves hiding things from a legal authority. Tax avoidance is not a crime that involves hiding: it is achieved in full view of the legal authorities. The former is a very very difficult problem but is not primarily a tax policy problem. Instead it is primarily a global financial system problem that is created, like most global financial system problems, by virtue of the difficulty of regulating behaviours in a world in which technology has moved us far beyond the frontiers of the nation state.

On the other hand, 'aggressive" tax avoidance (loosely speaking; more analysis here)--that is, avoidance not intentionally allowed by rules such as those to defer tax on retirement savings--is a tax policy issue. Taxpayers and their advisers are always going to cook up new schemes to get around inconvenient tax rules. Knowing this, regulators must decide whether and how to react. They may react with any number of tools that create an infinite call and response loop among regulators, taxpayers, administrators, and judges. These include such things as general and specific anti-avoidance rules, uncertain tax position disclosure, and random audit strategies. None of these things has the first thing to say about how to deal with a corrupt government official who steals money from the public fisc and invests it in US and European stocks and bonds through a maze of trusts and companies formed in other jurisdictions. It's just a totally different problem.

I know and understand that bad guys are always lurking around to defeat the tax law, as they are in any regulatory field. I don't have any special insights about how to deal with corruption and criminality. But in my experience with tax, when a government moves to "crack down" on bad guys, the really serious criminals--including government officials themselves--all too often escape while everyone else finds themselves increasingly tracked, surveilled, and treated like criminals even as the resources to cope with fixable tax policy flaws diminish. I don't have any answers for these worries.

Webcourse on Cayman Islands

Andrew Morriss presents a webcourse of interest, starting May 5. The objective:

"explore the rich history of the islands and talk to local experts about the institutional, legal, and regulatory frameworks, predicated on property rights and a rule of law, that led to this mass wealth creation and complete economic transformation in only 20 short years."

Professor Morriss wrote up his research with Tony Freyer on how the Caymans became an offshore financial center, which I posted and discussed briefly here. That paper pushed buttons and I am sure the webcourse will do the same, as the international taxation landscape is undergoing some serious growing pains of late and governments around the world are reconsidering the promises and perils of regulating behavior in a globally integrated economy.

From the NYT: Lessons for International Tax from Oregon's Role as Sales/Use Tax Haven

Today's NYT has an article entitled "Buyers Find Tax Break on Art: Let it Hang Awhile in Oregon." The artful dodge is accomplished via simple arbitrage between a source, an intermediary, and a residence jurisdiction, so the story gives a nice illustration of a phenomenon we see play out on the international stage every day, only we have generally been taught to associate tax avoidance arbitrage with the likes of GE, Google, Apple, etc. Here is the simple pattern:

1. The collector lives in state A (the residence state)--in this example, California. 
2. The collector buys an expensive work of art in state B (the source state), in this case, New York. As the source state, state B could extract a tax purely on the occurrence of the sale, but chooses not to, rather basing its sales tax on place of use. 
3. State A generally imposes use taxes on items purchased from outside the state and brought into the state (this is to treat external sales the same as internal ones, which would be subject to sales taxes). But there is an exception: if an item is "used" in another state first, it is not subject to the use tax when it finally makes its way to state A.
4. To avoid the use tax, the collector can't keep the item in state B because then state B's sales tax will apply.
5. In comes state C, with no sales or use tax, in this case, Oregon. State C is a safe haven. Collector parks the asset in state C long enough to satisfy the residence state's exemption. 
6. Hey presto, neither sales nor use tax. 

Nothing illegal has occurred, as the NYT is very quick to point out. But it is also clear that this is a story for a reason, and the reason suggested by the headline is this outcome produces unfairness. 

After all, these are rich people dodging around helpless tax states with the help of sophisticated tax planners. This seems worth examining further given the parallels to corporate social responsibility and international tax planning à la Caterpillar as we have seen recently in the news, and in light of the actions of some states to try to curb international tax planning ... and please do not let it escape notice that this list includes Oregon. 

Let's identify a few problems and a few solutions in the overall tax regime created by the conflicting rules in the three independent states as suggested above. The problems seem to be:

1. residents of state A will likely object that it is not fair for state A to tax sales occurring in the state and not sales occurring outside the state (violates horizontal equity).
2. some residents of state A will likely object that it is not smart to tax sales occurring in the state and not sales occurring outside the state (people will react accordingly and the sales tax base will disappear). 
3. on the other hand, some residents of state A will argue it is smart to do this because it means more people will buy nice things and ultimately bring them into the state C, causing other spillover benefits in the long run. (If so we should question why state A has a use tax at all.)
4. state A cannot control either state B or state C but unless strict capital or other regulatory controls are applied against state A's population, state A's rules necessarily interact with B and C.
5. residents of state B might object that it is not fair for state B to tax sales only if the assets purchased stay in the state and not if they leave the state (violates horizontal equity)
6. on the other hand residents of state B will likely view it as smart for state B to tax sales only if the assets purchased stay in the state and not if they leave the state, because then more sales will occur in state B and with those sales come jobs and other spillover benefits.
7. state C just doesn't tax these things and so would seem to be neutral, acting without fault in the arbitrage.
8. state C residents likely view this neutrality as smart because the state benefits by facilitating the arbitrage between states A and B, and it can be expected to defend this benefit.
9. but what is smart for either states B or C or both creates an unqualifiedly unfair situation in state A.

So much for the problems. Are there solutions?  Again the illustration is enlightening.

1. A, B, and C could get together and demand a federal regulation to stop the arbitrage amongst the states. They could, but they won't (cooperation fails).
2. State A could threaten states B and C to stop facilitating the arbitrage or else (coercion). But what, exactly, does state A want? Does it want to force state B to tax on the basis of source? Does it want state C to tax as the conduit? Either of those would produce fairness in that the individuals would pay tax somewhere, but in neither case would it be state A collecting the tax. Also, depending on state C's political, economic, and social power relative to state A, the strategy could yield results, or not; certainly if harsh tactics are used, state A will be resented by its neighbors, and for what? No revenue, but a globally fairer system that neither B nor C wanted.
3. State A could change its own law to repeal the first use rule, which would eliminate the benefit of the arbitrage. No more icing on the cake per the collector routing through Oregon. (when people say tax planning is icing on the cake as the person did in this article, I picture a tiny cake with a tower of icing. So much icing that by the time you eat it all, there isn't any room for cake. But I digress.)

Now does it not seem that state A has the most power to fix the situation if it chooses to change its own law to nullify the arbitrage? Is this not what Oregon and other states are doing vis à vis the foreign earnings of state-registered companies?

This is what I am talking about when I say that tax avoidance is as much a supply side as a demand side problem. We can blame states B and C all day long for facilitating tax avoidance. But State A often holds the power to solve the problem itself. If state A does not do that, then we should be looking at why state A does not do that rather than why state B or state C stand by and allow or encourage and benefit from the arbitrage. Are democratic decisions being made to ignore the fairness problem in order to achieve a solution some people in state A consider to be smart, and if they are doing so, who are those people who think this is smart and have the people in state A who do not think it is so smart been allowed access to lawmaking in the same manner and capacity of those who do think it is smart?

Note that in this case there is no discussion about the problem of information asymmetry--that is, we are not looking at state B or C hiding the fact of the sale from state A. That is a different problem which state A might not be able to solve on its own (actually I believe it could but that is another story). But in terms of legal tax avoidance, I think this story is a wonderful illustration of the argument I often make, for example here and here, about who we should be looking to when facilitating legal tax avoidance becomes the central defining characteristic of a tax regime created by the interaction of multiple jurisdictions.

Thanks, New York Times, for inadvertently covering international tax policy in a fun story with pictures and even a graphic.

Avoidance, Evasion, and Taxpayer Morality

In light of the current sacrificing of Caterpillar on the altar of political posturing by lawmakers who are ultimately responsible for designing a global system that ensures US multinationals a world of tax-favorable opportunities, my latest SSRN post, Avoidance, Evasion and Taxpayer Morality appears à propos. It explores the difficult terrain we traverse when, confronted with the parade of household names apparently paying little or no taxes anywhere, we start talking about ethics and morality instead of law. Abstract:

In popular discourse, tax evasion by wealthy individuals is conflated with tax avoidance by multinational corporations to tell a single story about tax dodging and its negative impact on society. But conflating avoidance and evasion muddies the tax policy waters in important ways by turning legal obligations into moral ones. This Essay, prepared in connection with the Washington University School of Law colloquium on “Conceptualizing a New Institutional Framework for International Taxation,” makes the case for caution in using morality as a stop-gap measure to avoid drawing a regulated line between tax evasion and tax avoidance, while still meting out punishment within the undefined space between these two poles. It acknowledges the political gains derived from the rhetoric of morality but argues that the alternate view — that taxpayer behavior must ultimately be managed by law rather than social sanction — has the best chance of driving tax policy toward greater coherence in the long run because it makes the best case for more transparency in both lawmaking and the consequences of legislative decisions.

As always I welcome comments.

Alain Deneault--Paradis fiscaux: La Filière Canadienne/Tax Havens: The Canadian Connection

Alain Deneault, auteur de Noir Canada: Pillage, corruption et criminalité en Afrique, lance son nouveau livre, Paradis fiscaux : La filière Canadienne [Montreal Book Launch]:

* La première séance sur les liens historiques entre le Canada et les paradis fiscaux, à l'Upop.

 Date : Mercredi, 5 mars 2014, 17h
Location: Salle des Boiseries, UQAM Pavillon Judith-Jasmin - Salle des Boiseries
405, rue Sainte-Catherine Est Salle J-2805

Revue de Presse


Voici une vidéo de Deneault, où il discute du livre:

J'ai lu le livre et j'aimerais fournir le commentaire suivant:

C’est avec enthousiasme et plaisir que je recommande le livre d’Alain Deneault, Paradis fiscaux : La filière canadienne. Cet ouvrage aborde une question importante et très actuelle, celle de la concurrence que se livrent les États sur le plan de la fiscalité pour séduire le capital et privilégier certaines industries. Ce faisant, ils imposent au reste de la société des coûts dont on ne mesure pas l’ampleur. 
Deneault dépeint habilement le portrait de ce régime mondial en mettant l'accent sur les acteurs canadiens qui ont facilité sa mise en place. En tant que professeure et chercheuse dans le domaine du droit fiscal, je considère que ce livre est une ressource indispensable; il offre une riche mise en contexte culturelle, sociale et historique dont on a grandement besoin pour comprendre comment la concurrence fiscale est devenue le phénomène mondial qu’on connaît aujourd’hui.

I read the book and was happy to provide the following comment:

I am happy to enthusiastically recommend Tax Havens: The Canadian Connection, by Alain Deneault. The book deals with the timely and important topic of how governments engage in tax competition in order to lure in capital and privilege certain industries, at an unmeasured cost to the rest of the society. Deneault deftly weaves a narrative about tax competition by focusing in on the unique roles Canadian players have had in enabling and facilitating this global landscape. As a tax law professor and scholar, I view this work as an indispensable resource, providing a rich cultural, social, and historical context that is surely needed for understanding how tax competition developed into the global phenomenon it is today.  

Morriss and Freyer: Creating Cayman as an Offshore Financial Center

Andrew Morriss and Tony Freyer recently posted an article, "Creating Cayman as an Offshore Financial Center: Structure and Strategy Since 1960," in which they trace the development of the fiscal regime that made the Caymans the tax haven everyone loves to hate. The authors document the regime's roots in intense and purposeful transnational collaboration between British and Cayman government officials and private sector professionals. Like Morriss' previous work with Craig Boise on the Netherlands Antilles, this is a well-researched account of the political, institutional, social, and cultural factors at work in tax competition, and a must-read for everyone working on international tax policy issues.  From the abstract:

The Cayman Islands are one of the world's leading offshore financial centers (OFCs). Their development from a barter economy in 1960 to a leading OFC for the location of hedge funds, captive insurance companies, yacht registrations, special purpose vehicles, and international banking today was the result of a collaborative policy making process that involved local leaders, expatriate professionals, and British officials. Over several decades, Cayman created a political system that enabled it to successfully compete in world financial markets for transactions, participate in major international efforts to control financial crimes, and avoid the political, economic, racial, and social problems that plague many of its Caribbean neighbors. Using archival sources, participant interviews, and a wide range of other materials, this Article describes how the collaborative policy making process developed over time and discusses the implications of Cayman's success for financial reform efforts today.

There is so much in the paper it is difficult to extract effectively but he conclusion sums things up well:

Understanding how constitutional structure shaped the history of the Cayman financial center offers a response to critics’ preoccupation with actual or imagined abuses. OFC critics generally ignore the role of the United States and European nations in tax avoidance policies used by multinational corporations and wealthy individuals and those nations’ own roles as tax havens. ...  

The Cayman global competitive advantage thus did not originate in corrupt practices; it grew instead, from a history of social and constitutional stability sustaining collaborative policymaking among elected officials, legal professionals, and UK and Cayman civil service authorities like CIMA. 

... There is no question that the UK, the EU, and the United States have the power to [eliminate Cayman's tax policy autonomy] if they chose to do so. But if international relations are more than the exertion of brute force, there are important issues that need to be addressed in the development of international financial law with respect to OFCs. This requires broadly inclusive international consultations, not narrow efforts at defining best practices through rich nations’ clubs like the OECD or unilateral, asymmetric measures like the United States’ efforts through FATCA to force other countries to comply with U.S. regulatory measures. 

Canadian Tax Foundation conference: "Abusive Tax Planning"--May 1 in Montreal

The Canadian Tax Foundation will hold a lunchtime conference on May 1st in Montreal on The Fight Against Abusive Tax Planning at the Federal Level and the New Quebec Rules with respect to Non-Resident Trusts, with updates by the CRA and Revenu Québec. The event will be held from 12 to 2pm at the Center Sheraton, Salons 4 & 5, 1201 René-Levesque Blvd. West, Montréal. From an email alert: 

Mr. Dan Rivet, (Manager / GAAR and Inter-provincial Tax Avoidance Section at the CRA) will discuss the various types of abusive tax planning schemes that are currently being audited by the CRA and the success that the CRA has had in its fight against abusive tax planning both at the domestic and the international levels. 

Mrs. Agathe Simard (Director General – Direction principale de la lutte contre les PFA at Revenu Québec) will be discussing the new Québec measures that require the filing of tax returns by all non-resident trusts who hold immovable property in Québec.

En français, I expect--you can check out the program at the link above and register online.

Canada Revenue seeks source data on tax evasion from the ICIJ to bring "appropriate action"; What role due process?

Tax authorities are embarrassed by the ICIJ leak and they want the source data before anything more embarrassing hits the front page news and/or to show they really are serious about cracking down on offshore tax evasion.  As a result I am not surprised to see the Canada Revenue Agency attempt to prise the data from the CBC:

...It is my understanding that a leak of large amounts of data potentially exposing cases of offshore aggressive tax avoidance and possibly tax evasion is the catalyst for these stories. I also understand that your organization may be in possession of some or all of this data. 

You will know that the Canada Revenue Agency has already been in touch with your organization to underscore the importance of this information to our continuing efforts on behalf of Canadians to combat offshore aggressive tax avoidance and evasion. 

I would expect that both the CBC and you, as its president and CEO, have an interest in ensuring that appropriate action is taken if individuals are not respecting their tax obligations. Taking action against individuals who are not respecting their tax obligations is in the best interest of the public and law abiding Canadians. The provision of the data that your organization has in its possession would allow the CRA to pursue cases where this is occurring without in any way infringing on your journalistic mandate. 

I again respectfully request that you provide to the Canada Revenue Agency all of the data the CBC received through its collaboration with the International Consortium of Investigative Journalists so that the Agency may review and take action according to its mandate. I understand that the CBC is reluctant to provide this data, citing concerns with journalistic independence and protecting sources. I can assure you that the Canada Revenue Agency has not asked for the source of the information and will treat any information you provide with strict confidentiality in the same manner it treats all taxpayer information it receives. 

I sincerely hope that you will respond positively to this request and agree to provide this information so that the CRA can carry out its responsibilities.

Lots of loaded language there but it's clear the CRA can't compel the CBC to hand over the data, and is appealing to the CBC's sense of responsibility to society to make sure that tax cheats are brought to justice.  Notice the CRA doesn't confine itself to the data that implicates Canadian taxpayers--they want "all the data." I wonder why they don't offer the temptation of the newly-authorized whistleblower rewards. But is it not the case that the CBC, and the ICIJ, have obtained this information illegally? And if so, what are the ramifications for bringing criminal action in Canada?

The ICIJ received a hard drive in the mail containing millions of lines of personal financial data on individuals and companies that presumably were entitled to confidentiality under existing national laws--laws presumably similar to those that currently protect Canadians' financial data from being given out to unrelated third parties. Recall the CRA's “Declaration of Taxpayer Rights," which states that every Canadian:

“can expect [the CRA] to protect and manage the confidentiality of your personal and financial information ... Only employees who need your information to administer programs and legislation have access to your information. We also take other steps to protect your information and make sure it is kept confidential. For example, we follow government-wide and internal policies on the security of information and privacy.”  

The Declaration is simply an agency statement and lacks the force of law, but many of the rights it details, including the right to privacy and confidentiality, are “legislated” rights, that is, they are contained in the Charter, the Act, other statutes, or the common law.  Legislated rights do have the force of law so Canadians have mechanisms to seek redress in cases of breach of confidentiality or privacy by the CRA. Presumably, other countries have similar confidentiality rules and taxpayers have rights in those countries, too. Have these not been (and are they not being) violated by the sender of the hard drive, the ICIJ, the CBC, and the other journalists?  Of course, the CRA would be entitled to data on Canadian taxpayers from the taxpayers themselves and from relevant third parties under domestic law, but this is the major sticking point of the international tax system today: barring automatic information exchange from other governments, it is hard for the CRA to find money hidden offshore without resorting to extra-legal means of obtaining information.

So if we think the people exposed in the ICIJ leak have violated Canadian law, we must also recall that they have due process rights under that law. Would prosecution of Canadians using such illegally-obtained information pass internal due process requirements? I think the answer is probably yes, and I wonder if Canada might diverge from the US in the ability to use ill-gotten evidence in a criminal prosecution.

The reason I think that Canada could use the data as evidence in a criminal prosecution is that even though every Canadian "has the right to be secure against unreasonable search or seizure," and even though this Charter protection has been interpreted to require law enforcement authorities to seek prior judicial authorization for a proposed search and seizure if the target has a reasonable expectation of privacy with respect to the information sought, the case of Schreiber v. Canada says that the rights and freedoms enumerated in the Charter are guaranteed only against interference from actions taken by the federal or provincial governments of Canada.  Following the Schreiber decision, it seems that even tax information obtained illegally would be admissible against Canadians, so long as it wasn't the Canadian government that was responsible for the illegal action that exposed the behavior.  

In the United States, the result might be different. The cases of United States v. Wolf (1984) and U.S. v. Phillips (1979) suggest that information requested from another government by the IRS would be inadmissible as evidence against a U.S. citizen if it was seized by the foreign government in contravention of U.S. law (even if the seizure was allowed under foreign law).  Turning that around, I am not sure what happens if the IRS tries to use information that a private citizen produces in contravention of foreign law, but perhaps the cases suggest that if the information is produced in a manner that also violates US law, it could not be used as evidence in a criminal prosecution. If anyone reading this could shed more light on the subject, I'd be grateful for the insight.

Relatedly, I've been wondering what happens to the ICIJ, the CBC, etc. themselves, if they expose names and financial information about anyone that turns out not to be engaged in anything illegal? Maybe this seems improbable but it bears recalling that it is not illegal to own an account in another jurisdiction, including in the Cook Islands. What is illegal is failing to fulfill disclosure obligations under the laws of any jurisdiction that claims sovereign rights over you. That kind of information is perhaps not on the hard drive, so mistakes could be made in exposing people to public scrutiny who are not engaged in anything illegal. Thus the CRA makes the leap from data on a hard drive to evidence that Canadians are shirking their tax obligations, but it's certainly possible that not all the data points in that direction. That may be why the ICIJ has not made the source data public as Assange did--perhaps there is some sense that disclosure of all the data on the drive might not necessarily be "in the best interest of the public and law abiding" population, of Canada or otherwise.

In any event this story continues to unfold and as usual raises more questions than I can readily answer. I will be very interested to see how things proceed in terms of the CBC or the ICIJ releasing the source data to any tax authorities.

France ups the ante for EU tax evasion

Cahuzac's denials and ultimate admission about hiding money offshore while serving as the anti-evasion officer-in-chief is very embarrassing for France, and so it should be no surprise to see the rhetoric heat up as new allegations surface about his attempts to move the money around in an ultimately futile attempt at subterfuge. From AFP:

J'ai dit quoi?

France said Sunday [ed: France is a country and cannot speak. It is not so difficult to write "French leaders said", and it is ever so much less distracting.]  it was looking to tighten Europe-wide measures against tax evasion as it scrambles to contain a fraud scandal that has rocked President Francois Hollande's government.

...Finance Minister Pierre Moscovici announced that France would seek to reinforce the exchange of banking information throughout Europe, based on a US ruling in place since 2010 that seeks to fight offshore tax evasion.

Well, the "rule" may have been in place but let us recall that it is not in fact yet in force...three years later, we're still working out the kinks over here, and there are many, many kinks.

More:

"I propose that there be an automatic exchange of information, a European FATCA," Moscovici said on Europe 1 radio.

Hollande's government has been shaken by the scandal, which erupted Tuesday after Cahuzac -- once in charge of tackling tax evasion -- admitted to investigators that he had a foreign account containing some 600,000 euros ($770,000). 

...Critics have been quick to round on Hollande and his ministers, accusing them of either trying to cover up the scandal or of mismanagement for having believed Cahuzac's denials.

...Hollande has tried to contain the fall-out from the scandal, saying he was unaware of the account and announcing Wednesday that a new law would be submitted within weeks that will establish greater control over ministers' wealth. 

The law would also ban any elected representative found guilty of tax fraud or corruption from holding any form of public office.

Query whether there would be enough people left to run the world if every country made this same pledge.

Germany rejects Swiss Rubik deal...again

Also from Tax Analysts [again, gated]:

The upper house of the German parliament (Bundesrat) has again voted to reject the agreement with Switzerland aimed at taxing the undeclared assets of German taxpayers. 

This was the Rubik deal: basically, Switzerland won't share any information on individual accounts but will collect withholding taxes and pay them over. Here's a short explanation with a horrid graphic. I haven't discussed the deals much here, but it's had lots of play over on TJN [shorter and more to the point here]--it's a pretty wacky deal, really. I mean, how do you keep anyone honest in terms of withholding and paying over the "right amount" of tax if you can't pry any info from them?  From Tax Analysts:

The agreement was similar to one reached between Switzerland and the United Kingdom. It called for a one-time charge on all undeclared assets held in Switzerland as well as an ongoing withholding tax on income earned in undeclared accounts. The agreement also would have allowed German tax authorities to make a limited number of information requests that would not require the level of detail expected for standard treaty requests. 

Social Democratic Party lawmakers have long objected to the agreement, saying it was too lenient and that tax evaders should not be allowed to remain anonymous.

I take it that the deal was little more than an end run around the European Savings Directive. Certainly with Switzerland talking FATCA with the US it's hard to imagine any country in Europe settling for Rubik's weak tea.

Obama admin taking the high road on FATCA reciprocity?

I have predicted that real FATCA reciprocity would not fly in the US once people began to understand what the details entailed, but I would like to be wrong about that, and I have argued that the best course forward for FATCA is real reciprocity coupled with adherence to residence-based taxation. Here's a sign from the Chicago Tribune that I could get at least one of my wishes:

Foreigners' accounts in U.S. banks eyed in tax crackdown

The Obama administration may soon ask Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments, as part of a crackdown on tax evasion, sources said on Monday. 

In a move facing resistance from some in the U.S. banking industry, two tax industry sources said the administration was considering asking Congress in an upcoming White House budget proposal for the authority to require more disclosure from U.S. banks. 

...At the heart of FATCA is a law requiring more disclosure by non-U.S. banks of information about Americans' accounts to the Internal Revenue Service, with the goal of exposing Americans' efforts to dodge U.S. taxes through secret offshore accounts. 

As Treasury has implemented FATCA, some countries - possibly including France, Germany and China - were said to be driving a hard bargain. They have been saying that if their banks have to tell the IRS about Americans' secret accounts, then U.S. banks should have to reciprocate by disclosing more information about the U.S. accounts of French, German and Chinese nationals. 

...China has been publicly dismissive of FATCA, but it is talking with U.S. officials behind the scenes, sources said.

...France and Germany "have been asking for something more like full reciprocity," said Jonathan Jackel, a lawyer with the law firm of Burt Staples & Maner LLP in Washington, D.C. 

The story says that "The IRS this year started disclosing to some foreign governments information about bank interest payments earned by their citizens with U.S. bank accounts."--but I am not sure that that is true, given that the only country currently on the list for automatic info sharing on portfolio interest is Canada-and Canada was already on that list anyway.


The story quotes Itai Grinberg, who has to be the foremost expert on the legislation and really ought to be listened to on the underlying principles:

"The United States should be moving toward full reciprocity," said Georgetown Law School Professor Itai Grinberg, a former Treasury official, adding it would be "deeply hypocritical" of the United States to ask for U.S. taxpayer information "without offering some kind of reciprocity."

Progress, perhaps. But this is America, so here comes a lawsuit:

The Texas Bankers Association is considering a lawsuit against the government to stop accountholder information sharing with Mexico, said Eric Sandberg, the group's president.

Why, what s the problem?  Well, you see, it's financial privacy.

"We are concerned with Latin American countries like Mexico," said Fran Mordi, senior tax counsel at the American Bankers Association. "In the past, U.S. banks didn't report interest payments to non-resident aliens ... IRS is now saying you have to report that."

Translate how you will. I think it's a clear illustration of the state at war with itself over how to gain the maximum advantage from a combination of cooperation and competition with other states on taxation. Information sharing is going to benefit the US more in terms of dollars in the economy if it is one-way street that catches US shirkers but doesn't prevent taking advantage of other countries' ignorance about the location of their own taxpayers' resources. I think the mercenary state will prevail in the end--cooperate in principle, defect in practice--but I am very much hoping to be wrong.

International tax as revealed in SEC filings

I've written before about how opaque international taxation is because most of the law is worked out in ways that are not made visible to the public, namely through non-judicial review of transfer pricing and related disputes among nations.  I've argued for both corporate tax disclosure and publication of competent authority agreements as a remedy to much of this opacity. Tax Analysts' Transfer Pricing Roundup [gated] offers a fascinating window onto this world:

Transfer Pricing Roundup summarizes significant tax disputes that publicly listed firms have disclosed to regulatory authorities. The regular monitoring of these disclosures sheds light on the friction points within the U.S. system of transfer pricing enforcement. Many of the disputes profiled here involve adjustments resulting from controversial cost-sharing arrangements.

Some of the highlights:

• Accenture PLC, a global management consulting, technology services, and outsourcing company, reported its unrecognized tax benefits could decrease by $637k or increase by $208k depending on how things go with some settlements, lapses of statutes of limitations [read: if they were going to catch us with our fingers in a cooky jar, it's about to be too late] and other adjustments relating mostly to transfer pricing matters 
• Amazon is disputing transfer pricing adjustments in the US that would result in additional tax of $1.5 billion, and in France to the tune of $250 million. 
• Amazon also recorded reserves for tax contingencies of $336M for 2012 and $266M for 2011, to cover transfer pricing, state income tax, and research and development credit positions.
• Cooper Cos. Inc., a medical device company, has $29.5M in "unrecognized tax benefit," $5M of which relate to transfer pricing and other issues "that could significantly change in the next 12 months because of expiring statutes [see above] in unnamed jurisdictions." 
• Dell continues an ongoing battle with the IRS over transfer pricing adjustments dating back to 2004-2006. Dell reports that "An unfavorable outcome in this matter could have a material effect on the company's operations, financial position, and cash flows."
• Microsoft is also involved in a protracted battle with the IRS over transfer pricing involving 2004 to 2006, which could have a "significant impact" on the company's financial statements if it is not resolved in Microsoft's favor. Microsoft does not expect resolution any time soon: must be some thorny issue to work out there. Microsoft's tax contingencies and liabilities are huge: $7.7B and $7.6B as of December 31, 2012, and June 30, 2012, respectively.

Much, much more at the link. Most of these are pharma and software companies--i.e., lots of IP that has been moved offshore and is busy stripping income out of high-tax countries with variations on the dutch sandwich, which looks a little something like this:

Now with Less Fiber!

My feeling is that it is a real shame that most or all of these cases will get settled and eventually quietly erased from balance sheets with little or no explanation and therefore no advancement in the development of international tax law whatsoever, despite all of the resources that will have been sunk into the cause by the private sector and government alike. What a shame.

How a tax haven is born

Can $1.1 billion buy you a country?  Some investors want to try it, by buying Belle Island, currently a Detroit park, and turning it into a tax haven.  Here's the plan:

Looks like Manhattan. The idea:

The 982-acre island would then be developed into a U.S. commonwealth or city-state of 35,000 people with its own laws, customs and currency.

Come on now. There is a whole city there, it's called Detroit, it's full of buildings and infrastructure that are underused, just waiting for investment.  You don't want to invest in that, though, because that would entail accountability to others and-gasp--paying taxes (well, maybe--after incentives and subsidies, maybe not). It's so much easier to make profits if you don't have to pay taxes or observe other regulatory standards such as those protecting worker's rights, the environment, etc. What you want is a regulatory haven that is conveniently located to your clients, that isn't tainted with the tax haven moniker, and that won't be caught up in any global anti-tax evasion net.  Offshore, but in your own backyard, and not treated like the rest of offshore (otherwise what is the point).  A US commonwealth or city-state just about does the trick...ingenious!

Have any doubts that this is about building a tax haven?  Just read to the end of the article:

Here's the scenario for the Commonwealth of Belle Isle that Lockwood and others want to see: Private investors buy the island from a near-bankrupt Detroit for $1 billion. It then would secede from Michigan to become a semi-independent commonwealth like Puerto Rico and the Northern Mariana Islands. 

Under the plan, it would become an economic and social laboratory where government is limited in scope and taxation is far different than the current U.S. system. 

There is no personal or corporate income tax. Much of the tax base would be provided by a different property tax — one based on the value of the land and not the value of the property. 

It would take $300,000 to become a "Belle Islander," though 20 percent of citizenships would be open for striving immigrants, starving artists and up-and-coming entrepreneurs who don't meet the financial requirement. 

I called the Honduras charter city little more than a glorified gated community; this is clearly the same. An economic and social laboratory?  Hardly--add it to a long list of contenders.  The story says "City officials are likely to reject the plan." Too bad, because it would be fun to watch the US open its own tax haven even as it tries to shut down all the others.

Manx tax strategy

Interesting: Isle of Man announces it will keep its 0/10 corporate tax rate and pretty much the rest of its tax system as is, but wil cooperate with the US on FATCA and the EU on its codes of conduct, and might join the mutual administrative assistance in tax matters agreement, and even "consider working with other countries and multilateral organisations on the development of co-operation systems similar to FATCA." I think that last one is in regards to the UK, but it could be broader in scope.

At the same time, the Isle of Man will

"maintain competitive  personal income tax rates  as one of the features making the Island an attractive place to live and work; and

maintain a competitive business tax system in the Isle of Man to support economic development;"

among other aspirations. I think they are in a tough spot, with the US and the UK focused on chasing individual tax cheats and corporate tax avoiders (respectively, perhaps) through their banks. By way of background, the tax strategy says:

The Isle of Man‟s taxation policies have played an important part in our economic success. 

...The key principles of fiscal sovereignty, economic stability and adherence to international standards which underpinned the original taxation strategy remain just as relevant today. 

I'm not sure what anyone means by fiscal sovereignty anymore. Then again, I never really did think it was a real thing.

FATCA will/will not work: discuss

TJN ran two stories recently on FATCA's impact on tax competition. Which is right?

Story #1 says Austria and Luxembourg "may be forced to abandon banking secrecy because, in agreeing to implement FATCA with the US:

"EU member states could impose [automatic information exchange] on these two recalcitrant jurisdictions by invoking the 'most favoured nation' clause, explains Pascal Saint-Amans of the OECD."

 EU Directive 2011/16/EU contains a most favoured nation clause: if a Member State provides wider cooperation to a third country than that provided for under the directive it may not refuse such wider cooperation to another Member State that requests it on its own behalf."

So if these countries provide automatic information exchange to the U.S., then they are not allowed to refuse it to other E.U. member states.

TJN says thanks to FATCA, "the all-important amendments to the EU Savings Tax Directive are therefore likely to be passed this year, and Swiss efforts to torpedo this transparency initiative will have failed." Conclusion: FATCA will turn into its ultimately goal, a global tracing system under which no one can hide behind bank secrecy to evade their taxes, what some like to call GATCA.

Story #2 says Hong Kong is set to grab all the tax haven business:

Hong Kong just became an even better place for company directors who value secrecy. The Chinese territory, already ranked fourth in a list of 71 "secrecy jurisdictions" by the Tax Justice Network, has proposed new laws making it harder to identify the directors of non-public companies.

TJN says in response: "Tax havens. As we have said - this is where real power in the world increasingly lies. And the race to the bottom on secrecy continues apace."

If FATCA will shut Austria and Luxembourg as tax havens, why not Hong Kong?

The IGAs don't, I think, really explain things: in the absence of IGAs, FATCA is supposed to apply directly to all foreign financial institutions.  So it is the IGAs that would change the scene on the EU directive.  These agreements, let's be fair, really don't have a single thing to do with the FATCA statute from a legal perspective.  In other words, no one in the world needs FATCA to order into an agreement on automatic information exchange, countries could have (and in some cases have already--US, Canada) agreed on automatic info exchange years, decades, and even a century ago (which in fact they also did, see some of US early agreements).  FATCA is just a very big stick that is forcing Luxembourg and Austria to so agree, thus apparently opening themselves up to similar agreements throughout the EU.  Score one for dreams of multilateralism, but only among rich countries.

But Hong Kong, poised to take over, shows why FATCA can't get us to GATCA, i.e., there will be no worldwide information exchange, and the world is still safe for tax cheats. The reason for this lies in s S. 1471(f), which reads:

Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is—

(1) any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality of any one or more of the foregoing...

(3) any foreign central bank of issue...

Translation seems to be: no big stick on payments that go to state-owned financial institutions.  That, I take it, describes China's entire financial system, including Hong Kong and Singapore.  Tell me if I am wrong about this, because I truly want to know.  If I am right, then FATCA moves tax havens around on the board but doesn't actually end the gravy train for tax cheats.

If that in turn is true, then the application of onerous compliance and filing issues on americans living in high tax countries to try to hunt down tax cheats who will not even be there seems particularly troublesome.

Cost to poor countries of illicit Cash flow: $859B

TJN posts this report from Global Financial Integrity, showing that

Crime, corruption, and tax evasion cost the developing world $858.8 billion in 2010

... the biggest exporters of illicit financial flows over the decade are:

• China,  $274 billion average ($2.74 trillion cumulative)
• Mexico, $47.6 billion avg. ($476 billion cum.)
• Malaysia, $28.5 billion avg. ($285 billion cum.)
• Saudi Arabia, $21.0 billion avg.  ($210 billion cum.)
• Russia, $15.2 billion avg. ($152 billion cum.)

Table 2 of the report's appendix has a complete list. This demonstrates why information gathering and exchange has got to be global and, contrary to how it's going right now, should probably start with the world's wealthiest countries imposing their gathering, reporting, and sharing regime on their own financial institutions vis a vis the rest of the world, rather than working to protect their own bases first and foremost.  This is a time for leadership by example.

Fortune 500 holding trillions offshore

Taxprof links to a Citizens for Tax Justice report (pdf) that says Fortune 500 corporations are holding at least $1.6 trillion in profits offshore.  290 of the 500 collectively self-reported the figure (via SEC filings), as at the end of 2011. Interesting: half of the $1.6T is reported by just 20 companies (7% of the self reporting, .4% of the fortune 500--the corporate 1%?).  The report includes a list of each of the 290 and the amount they reported as offshore.

It looks like notorious tax dodger GE tops the list here, with $102B waiting for a holiday to repatriate (recall that GE's global head of tax Will Morris, is also head of the tax committee of the business and industry advisory council at the OECD, winner of an "external engagement award" for his service to HMRC, and a long time and vociferous opponent of corporate tax transparency efforts through the OECD and related fora, for a discussion, see here).

Next in line comes a familiar cast of characters, all on that ever-growing tax dodger ledger:

• Pfizer (63B) 
• Microsoft (60B) (and check out Microsofttaxdodge.com)
• Apple (54B) 
• Exxon (47B)
• Merck (44B)
• Johnson & Johnson (a family company that doesn't like to pay taxes in its very own family's back yard, let alone around the world, 42B)

But really, every big American company you can think of appears on this list.  Starbucks can be forgiven for being a bit touchy on the tax dodging radar, since its offshore holdings of less than a billion look positively benign compared to the companies occupying the top of the list.  No wonder that multinationals fear increased corporate tax disclosure, because you never know where the media will train its spotlight for naming and shaming.

Canada's tax evasion problem in need of resources & leadership

Senator Percy Downe has issued a call to the Harper government to put some money and some effort into curbing Canadians hiding their assets overseas to escape taxation:

Sen. Percy Downe said the vacancy [at the head of the CRA] gives Prime Minister Stephen Harper the opportunity to elevate the job to the “importance it deserves” — to provide the resources to crack down on Canadians who stash money in havens to avoid paying taxes. 

...“It’s either a resource problem or a leadership problem and this is an opportunity for the prime minister to identify it as a problem and correct it,” said Downe. “I don’t want to see someone parked there to manage the status quo …. It’s time to shake up the status quo.” 

Former CRA commissioner Michel Dorais said it's a question of resources:

“CRA is a big collection machine and the money collected is directly proportional to the money invested. The determination of where to put the effort is a combination of ministerial direction, priorities of its clients, direction from the board of management and management decisions of the CEO/commissioner. If one of those three components is weak, the whole thing can breakdown rapidly.”

But the Senator says it is a question of will, not resources, becuase more resources put in will yield more revenues out.  The story quotes a "former CRA executive" who said “wherever you look you’ll find money.” Info on offshore accounts not being fully pursued by the CRA is a case in point:

In 2007, the government was given a list of 106 Canadians with secret accounts worth more than $100 million in a bank in Liechtenstein. They were among a longer list of clients taken from the bank by a former employee and later acquired by the German government, which shared the information with countries whose citizens were on the list. 

By April, Downe said CRA had assessed only $16.5 million owing in back taxes, interest and penalties on the money hidden in Liechtenstein. Of that, they collected only about $5 million and “not one penny has been assessed in fines.” 

“By its own admission, since CRA received this information five and a half years ago, not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada has stood before a judge,” said Downe.

More at the link.