United States: The Stop Tax Haven Abuse Bill

Last Updated: September 29 2011
Article by Baker & Partners

On 17 February 2007, American Senator Carl Levin introduced a Bill titled the 'Stop Tax Haven Abuse Act'. It contains provisions aimed at combating what Levin described as the $100 billion per year drain on the treasury from offshore tax abuse. It has not yet been enacted, however the recent report by the Senate Committee on Homeland Security and Governmental affairs, chaired by Levin, contained a renewed call for the it to be passed by Congress. Indeed, when Levin introduced it he did so with the stated support of two other senators; Coleman and (current presidential candidate) Obama who on 22nd September in a speech in Wisconsin said "we lose $100Bn every year because corporations get to set up mailboxes offshore so that they can avoid paying a dime of taxes in America. Imagine if you got to do that......I will shut down those offshore tax havens and corporate loopholes as President, because you shouldn't have to pay higher taxes because some big corporation cut corners to avoid paying theirs" If Obama makes it to the White House in November the Bill will have very high-level support indeed. That factor, combined with Levin's record of campaigning against offshore jurisdictions, suggests it is more than a mere possibility that the Bill will, whether in its present form or with amendments, be enshrined in law.

The Bill is not only bullish in its aim, which is to prevent tax evasion, but also its prime target; "offshore secrecy jurisdictions". As well as providing a statutory framework to determine what an 'offshore secrecy jurisdiction' is, it includes a list of 34 countries which will, upon enactment, be automatically considered such. Amongst those receiving the automatic tag, i.e. without any specific determination by the Secretary for the Treasury, are Jersey, Guernsey, Sark, Alderney and the Isle of Man.

An offshore secrecy jurisdiction is one, which, in the judgment of the Secretary, has 'corporate, business, bank, or tax secrecy rules and practices which... unreasonably restrict the ability of the United States to obtain information relevant to enforcement'. Where it is judged that a jurisdiction falling into that description has an effective information exchange practice with the United States, it can escape inclusion. The Bill provides for annual assessments as to whether countries do fall within the definition.

The 'rules and practices' referred to are those that inhibit access of law enforcement and tax administration authorities to information on beneficial ownership or 'other financial information'; the latter appears to be a strikingly broad description. The existence of a treaty on tax information exchange or another agreement will be considered a sufficiently 'effective information exchange practice' where it provides for 'prompt, obligatory and automatic exchange of information forseeably relevant to the treaty and such information is adequate to prevent tax evasion in the United States'. Another quite broad definition; How soon will the exchange have to be to be considered prompt? Can there not be rational disagreement as to information that is, or is not, forseeably relevant to any particular treaty? Insofar as information is not adequate to prevent tax evasion in the United States, can such deficiency be fairly said to rest with the jurisdiction providing the information?

The Secretary can take into account whether or not the country has been identified as uncooperative by an intergovernmental group or organization of which the US is a member. This is clearly a sound basis upon which to make a determination, though some of the countries on the list, such as Jersey, have not been identified as uncooperative by any respected international organisation (quite the contrary).

The Bill is split into four sections. The first, and main, section is titled 'deterring the use of tax havens for tax evasion'. It creates a rebuttable presumption (for internal revenue code and securities law purposes) that a US person who - formed, transferred assets to, was beneficiary of or received money or property - from an entity in an offshore secrecy jurisdiction exercised control over that entity. There is a rebuttable presumption that any amount or thing of value received from an offshore secrecy jurisdiction represents that person's income and is thereby taxable.

Such presumptions will no doubt act as a deterrent to those who would want to use a jurisdiction listed, even when such desire is entirely legitimate. The presumptions are rebuttable but only by what is termed as 'clear and convincing evidence, including detailed documentary, testimonial, and transactional evidence establishing that either no control was exercised over a relevant entity or the amount or thing of value does not represent that individuals income'. Given the inconvenience and time, not to mention expense, that would be incurred in rebutting a presumption in line with that definition it is likely that many individuals would simply choose to have nothing at all to do with jurisdictions from which presumptions arise. The Bill effectively creates a blacklist, inclusion on which would undoubtedly impact upon the ability of a listed jurisdiction to compete in the global financial market.

More time is given, up to six years of a tax return having been filed, to allow investigations to be carried out where offshore secrecy jurisdictions are involved. The extended time limit combined with the heavy evidential burden of rebutting a presumption is an onerous duty to bear for any individual; finding detailed documentary, testimonial and transactional evidence some six years after a particular transaction may be incredibly time consuming if not completely fruitless.

Whereas the usual rule is that any foreign account holding $10,000 or more has to be reported to the IRS, the Bill creates a presumption that an account in an offshore secrecy jurisdiction does contain sufficient funds to trigger the reporting requirement. It is not simply the individual upon whom added burdens are placed. Any financial institution opening a bank or other financial account, or forming or acquiring an entity in an offshore secrecy jurisdiction on behalf (or for the behalf) of a US person is required to file a return with the US authorities identifying the name and address of that person, the account details (including the name and number of the account and the amount of the initial deposit) and the details of the financial entity.

Importantly, the Bill states that the opinion of a tax advisor or the good faith of the tax payer cannot be used as an excuse for underpayment if the underpayment is attributable to a transaction 'any part of which' involves an entity or financial account in an offshore secrecy jurisdiction. This means that any individual who does choose to utilise the services of a jurisdiction on the list, in spite of the presumptions that follow from that choice and the seemingly heavy burden in rebutting them, is faced with the added hurdle that he or she will not be able to rely, to any great extent, on professional advice received.

The final measure of note in the first section is the ability of the Treasury to apply the same 'special measures' to countries that impede tax enforcement as it does to jurisdictions considered to be a 'money laundering concern'. This is a sensible provision. The special measures include the ability to prevent foreign banks issuing credit cards that can be used in the United States.

The second section is titled 'other measures to combat tax haven and tax shelter abuses'. It includes provision to strengthen summons in cases involving offshore secrecy jurisdictions. It creates a presumption that there is a reasonable basis for believing that any person or group or class of persons who have financial accounts in, or transactions related to, offshore secrecy jurisdictions, may have failed to comply with internal revenue laws. The penalty for every breach of US Security law is increased to $1 million.

The final two sections strengthen existing law. The third section is titled 'combating tax shelter promoters'. It increases the penalties for promoting abusive tax shelters and knowing, aiding or abetting a taxpayer to understate his or her tax liability. The fourth section, 'requiring economic substance' invalidates transaction with no meaningful economic substance or business purpose and increases penalties for tax avoidance attributable to transactions lacking 'economic substance', a concept developed by US Courts that examines a transaction to consider whether it is consistent with its form, tenable and makes economic sense.

In July 2007, Guernsey sent a delegation to the US in protest at its proposed inclusion on the blacklist pointing out that it had, in fact, entered into a tax information sharing agreement with the US. Barbados has pointed out that it has a 24 year old taxation treaty with the US. Guernsey and Barbados are not alone in feeling that their inclusion is without merit.

The coalition for tax competition, admittedly not an impartial observer, has pointed out that the Bill, if enacted would actually harm the US insofar as it would place its citizens at a competitive disadvantage with foreign nationals (including those operating within the US) and in any event is anti-competitive and in breach of the US's trade obligations pursuant to the WTO.

Senator Levin has identified the need for legislation to combat tax evasion. Few would disagree, in light of some of his findings, that the existing law needs to be strengthened. This Bill may well help to reduce the incidence of tax evasion. Unfortunately, it goes too far. It is anti-competitive and will prevent legitimate individuals utilising the services of legitimate financial services. The main problem is that it combines the creation of an incredibly draconian regime whilst blacklisting countries to which that regime applies on little more than a whim; the definition of an offshore secrecy jurisdiction is astonishingly wide. The automatic listing of 34 countries, made with no clear justification or reasoning, only serves to highlight the potential arbitrariness.

There appears to be a misconceived conception that the Crown Dependencies and other so called 'offshore jurisdictions' habitually engage in unlawful activity; the tag is applied without any compelling evidence and at, times, indiscriminately. Respected political commentator Nick Cohen writing in the Observer recently (24.02.08) appeared, in all seriousness, to compare Jersey to Liechtenstein. One would have thought that the US legislature would require cogent evidence, rather than an outdated stereotype, before passing the Bill and blacklisting countries who provide perfectly legitimate financial services to US citizens.


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