Kenneth Rubinstein discusses Senator Carl Levin’s proposed “Stop Tax Haven Abuse Act”, the implications of the legislation, and what offshore jurisdictions should do about it.
I’m Not That Kind of Country
Kenneth Rubinstein, Esq.
On March 2, 2009 America declared war on 34 countries around the world. Some of these countries are well-known European jurisdictions with hundreds of years of sovereign history, like Switzerland and Luxembourg. Some are world-famous Asian financial centers, like Hong Kong and Singapore. A few are tiny island specks in the Pacific ocean, like Nauru and Vanuatu. In between are lots of sun-drenched Caribbean island nations, like Bermuda and Aruba, best known as vacation spots for honeymooners, snorkelers and Jimmy Buffett fans.
This war is an economic war, declared in Congress by Senator Carl Levin when he introduced the “Stop Tax Haven Abuse Act” of 2009, a new and improved version of the same legislation, introduced in 2007 by Senators Levin and Obama in the Senate and by Congressman Rahm Emanuel and 48 others in the House of Representatives.
The opening shot was actually fired by the U.S. against Switzerland several months earlier, when the U.S. accused Switzerland’s largest bank, UBS, of soliciting and conspiring to commit U.S. tax fraud. The U.S. sued UBS for the disclosure of 52,000 Swiss accounts with alleged U.S. beneficial owners. Although skirmishes are still ongoing, the outcome of this first battle is clear: Switzerland will surrender.
The weapons in this war are obviously not bombs or bullets. They are amendments to our tax code and statements on the floor of Congress. The objectives: to prevent the outflow of dollars from the U.S. and increase U.S. tax revenues. The tactics: intimidation – of U.S. taxpayers, foreign banks and sovereign governments.
Senator Levin has unilaterally declared each of these 34 countries a “secret tax haven” and any American who does business with them a “tax cheat.” Using these two unsubstantiated and over-broad premises as its foundation, the Stop Tax Haven Abuse Act (S.506) creates a statutory presumption that any U.S. taxpayer who transfers or receives money (or assets) to or from any of the 34 “listed countries” or who causes a company, trust or other entity to be formed in a listed country has committed tax fraud. The burden would fall upon the taxpayer to rebut this presumption by presenting “clear and convincing” evidence to the IRS in an administrative tax proceeding (where the IRS is prosecutor, judge and jury).
The effect of these provisions is clear; U.S. taxpayers will be totally intimidated against moving their money or, indeed, doing business in (or with) any listed country. Never mind that our banks are failing, our markets are crashing and our money may soon not be worth the paper it’s printed on; keep your money here or face the IRS.
If any U.S. taxpayers withstand this intimidation, the Bill puts the onus of reporting them on foreign banks and U.S. correspondent banks. The IRS may require U.S. banks that provide correspondent banking services to foreign banks to produce information on all customers of those foreign banks. In addition, the Treasury Department may prohibit U.S. banks from providing correspondent banking services to foreign banks and from authorizing or accepting
credit card transactions involving any foreign jurisdiction or foreign bank. The effect would be to completely cut off foreign banks from the U.S. banking system.
Other, more esoteric provisions of the Bill are designed to decimate the offshore hedge fund industry, penalize foreign corporations that utilize U.S. managers, and facilitate IRS “fishing expeditions” overseas. These provisions merit separate discussion beyond the scope of this article.
When the allies (UK and EU) join the war (based on the pronouncements of Gordon Brown and other European leaders, there is no doubt that they will), the consequence of the provisions directed against foreign and U.S. correspondent banks may well be to cut off foreign banks from the world-wide banking system, effectively shutting them down.
The consequences of the Bill, by cutting off the flow of foreign capital to the listed countries and excommunicating their banks from the world-wide banking system, will be catastrophic. Economies will be destroyed. Many small democracies will become impoverished. Sugar cane and bananas will not sustain the small Caribbean island nations. We will create dozens of Cubas, and Mr. Chavez will welcome them with open arms.
Messrs. Levin, Obama and Emanuel conveniently ignore the fact that the U.S. is actually the world’s biggest tax haven. Our banks offer secrecy to millions of foreign account holders and our tax code exempts foreigners from almost all tax on U.S. investment income. Perhaps the Bill should be more aptly named “The Do As I Say, Not As I Do”Act. Our desperate need for revenue to pay for stimulus plans, TARPS and bailouts does not justify this sort of hypocrisy.
The Bill’s sponsors also overlook the fact that virtually every one of the 34 “secret tax havens” has signed a Mutual Legal Assistance Treaty (“MLAT”) in which it has agreed to assist the U.S. in the investigation and prosecution of serious crimes, including tax fraud. Some have even entered into Tax Information Exchange (“TIE”) Agreements directly with the U.S. Treasury Deparatment, requiring cooperation in civil audits of U.S. taxpayers. If any of these countries have violated their MLAT or refused to honor their TIE Agreement, our government should certainly go after them, as we have done in the UBS matter. But, if they haven’t, calling them “secret tax havens” and threatening them with economic destruction is not very different from the tactics of another Senator named McCarthy.
So, what’s a small financial center to do when it is forced onto its back by a heavily-muscled USA? Probably not much, except protest that it’s not that kind of country. Foreign jurisdictions need to clarify their commitments to the letter as well as the spirit of their MLATS and TIEs with the U.S. Those countries that do not yet have TIEs with the U.S. might consider offering to sign them in return for removal from the “secret tax haven” list.
Offshore financial centers must deflect the US attack by clarifying their positions on secrecy, tax fraud and tax evasion. They must define their constituency for offshore services as:
1. Individuals and entities seeking to protect their assets from potential civil claimants; and
2. Individuals and entities seeking to engage in tax compliant financial planning.
Confidentiality laws must be amended to eliminate ambiguity. Countries need to declare that every person is entitled to financial privacy and confidentiality from every other person; but not from government inquiry when there is a bona fide suspicion that the person has committed a serious crime.
The definition of “serious crime” should be clarified to include the violation of income tax laws in an individual’s home country. This would go far toward eliminating current ambiguities between tax “fraud” and tax “evasion.” Such clear and unequivocal pronouncements should do much to deflate the thrust of Senator Levin’s proposed Bill.
The battlefield might thereby be narrowed to the definition of “bona fide suspicion” of serious crime.
It is evident from the current lawsuit brought by the US against UBS (which is actually a proxy for Switzerland) that this is what the IRS really wants – the ability to extract wholesale financial information from foreign countries. It does this by engaging in “fishing expeditions”; the service of “John Doe” summonses upon a foreign country seeking financial information about masses of unnamed persons, even when there is no “bona fide suspicion” about anyone in particular. In the UBS case, the US government, on behalf of the IRS, served a “John Doe” summons on UBS seeking information on 52,000 unnamed individuals who may have Swiss accounts. The fear of being swept up in such an amorphous net and the subsequent inevitable audit where, again, the IRS serves as prosecutor, judge and jury, would certainly intimidate even innocent people from transferring assets offshore.
The chances are that even countries who loudly declare their banks’ doors closed to criminals and “tax cheats” may nonetheless remain on Senator Levin’s “secret tax haven” list unless they also declare their acquiescence to US fishing expeditions a/k/a/ “John Doe” summonses.
So, how do you fight an 800 pound gorilla? You don’t; at least not alone. No single country can withstand the combined pressure of the US, UK and EU and their threat of economic extinction. The only defense available to the offshore financial community is unification. If offshore centers coalesce into a cohesive group with a common goal, common strategy and common voice, together they might achieve sufficient critical mass to stand up to the gorilla and avoid total defeat.
In the late 1990s, the OECD’s infamous campaign against “ring-fencing,” the alleged unfair tax competition from no-tax/low-tax countries was thwarted when the offshore centers of the Caribbean basin organized just such a united front. The resurrection of this organization and its expansion to include as many of the listed countries as possible may give the offshore financial community the needed leverage to reach some reasonable compromise with the US. Such compromise might include assurances that financial center doors will indeed be closed to criminal assets, including the proceeds of tax evasion, together with a mechanism for policing continued compliance with such assurances. Perhaps such compromise may even require limited recognition of “John Doe” summonses when they apply to a clearly defined, discreet group and the US can prove to a financial center’s court that there is probable cause to believe that the group, or at least most of its members, has committed a serious crime.
Such compromise may be hard to accept, but without such compromise, the war will not end well for the offshore financial community. As the philosopher Sancho Panza once said, “Whether the stone hits the pitcher or the pitcher hits the stone, it will not be good for the pitcher.”