Tax Analysts Blog

Offshore Evasion Bill Fails to Deliver Knockout Punch

Posted on Nov 9, 2009

Instead of just huffing and puffing, Congress may be getting serious about deterring offshore tax evasion. Building on years of groundwork by Senator Carl Levin, House Ways and Means Committee Chairman Charles Rangel (who himself has been caught evading taxes in an offshore jurisdiction) and Senate Finance Committee Chairman Max Baucus introduced the Foreign Tax Compliant Act (FATCA) on October 27. The congressional Joint Committee on Taxation estimates the bill would raise $8.5 billion over 10 years. Congress may enact the bill this year to pay for extension of expiring provisions.

The bill makes numerous changes to the existing complex web of withholding taxes and information reporting rules that apply to foreign financial institutions and their customers. The centerpiece of the proposal is new deal for foreign banks: either supply more information on U.S. customers or subject all your customers to more U.S. withholding taxes on their U.S. investments. It is expected most big foreign financial institutions will comply with the new requirements. This would solve two problems for the IRS. First, it would give the agency previously unavailable information on holdings of foreign securities by U.S. investors. Secondly, it would make crystal clear a provision of current law deceitful UBS bankers chose to ignore -- namely, that foreign banks that want reduced withholding for their customers cannot allow U.S. investors to hide from the IRS by setting up tax haven shell corporations.

Under the bill it would still possible for U.S. investors to avoid detection by investing in non-US securities through a foreign financial institution that chooses not to comply with the expanded reporting requirements. The Joint Committee on Taxation pointed out that the Obama Administration (p.48) proposal to require that U.S. financial institutions report transfers of funds to offshore accounts could close this remaining loophole. In 2004 Congress -- with an eye on clamping down on terrorist financing and money laundering -- commissioned a study and found that such a system would be feasible and helpful to law enforcement. Baucus's own staff floated the proposal earlier this year. But it is not part of FATCA.

As the Joint Committee (p. 206) explains, banks don't want to report on transfers:

    Representatives of the financial services sector, however, have suggested that this proposal will do nothing more than generate a massive volume of information reports that capture routine, legitimate business transactions of U.S. persons making payments to, or receiving payments from, offshore accounts as payment for goods and services including the reporting of information on transactions relating to income already being reported by U.S. businesses as well as payments for goods and services to foreign persons who are not subject to U.S. taxes.

    They have also asserted that the reporting requirements under the Administration’s proposal would be even more challenging to meet than the one studied by FinCEN [cited above]. In general, the proposal studied by FinCEN would have required the identification of all wire transfers to or from a foreign financial account. This proposal, however, would require the more complex task of identifying a defined subject of a larger universe of cross-border transactions, storing and collating information from those transactions, and reporting the results, along with additional information, to the IRS.
Australia and Canada already have a system in place for banks to supply information on cross-border transfers to tax authorities. You might think the banking system that got hundreds of billions of dollars from Uncle Sam would be a little more grateful and help the goverment collect some money it desperately needs.

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