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FATCA made law



Tax Notes Today reports this morning that the Senate is poised to pass the Foreign Account Tax Compliance Act of 2009 (FATCA) as part of the larger bill now called Hiring Incentives to Restore Employment (HIRE) Act.

Tax Notes reports the key provisions of the FATCA subtitle would:

  • • impose a 30 percent tax withholding on payments either to foreign banks and trusts that fail to identify U.S. accounts and their owners and assets to the IRS, or to foreign corporations that do not supply the name, address, and tax identification number of any U.S. individual with at least 10 percent ownership in the firm (effective for payments made after December 31, 2012, with certain exceptions for grandfathered agreements);
  • • extend bearer-bond tax penalties to any such bonds marketed to offshore investors, and prevent the U.S. government from issuing bearer bonds (effective two years after the date of enactment);
  • • impose penalties as high as $50,000 on U.S. taxpayers who own at least $50,000 in offshore accounts or assets but fail to report the accounts on their annual income tax return (effective for tax years beginning after the date of enactment);
  • • levy a 40 percent penalty on the amount of any understatement attributed to undisclosed foreign assets (effective for tax years after the date of enactment);
  • • extend to six years the statute of limitations for "substantial" omissions -- exceeding $5,000 and 25 percent of reported income -- derived from offshore assets (effective for returns filed after the date of enactment, or for any return filed on or before that date if the section 6501 assessment period for that return has not expired as of the date of enactment);
  • • require shareholders in passive foreign investment companies to file annual returns (effective upon enactment);
  • • mandate that financial firms file electronic returns with respect to withholding taxes, even if they file fewer than 250 returns annually (effective for returns due after the date of enactment);
  • • codify Treasury regulations that treat foreign trusts as having U.S. beneficiaries if any current, future, or contingent beneficiary is a U.S. person;
  • • allow the Treasury Department to presume that a foreign trust has U.S. beneficiaries if a U.S. person directly or indirectly transfers property to the trust (effective for transfers of property after the date of enactment);
  • • establish a $10,000 minimum failure-to-file penalty for certain foreign-trust-related information returns (effective for notices and returns due after December 31, 2009); and
  • • subject dividend equivalent payments included in notional principal contracts and paid to overseas corporations to the same 30 percent withholding tax levied on dividends paid to foreign investors (effective for payments made on or after 180 days after enactment)

Foreign Account Tax Compliance Act of 2009

BAUCUS, RANGEL, KERRY, NEAL IMPROVE PLAN TO TACKLE OFFSHORE TAX ABUSE THROUGH INCREASED TRANSPARENCY, ENHANCED REPORTING AND STRONGER PENALTIES

Senate-House Proposal Detects, Deters, Discourages Overseas Tax Evasion

Washington, D.C. – Senate Finance Committee Chairman Max Baucus (D‐Mont.), House Ways and Means Committee Chairman Charles Rangel (D‐NY), senior Senate Finance Committee member John Kerry (D‐MA) and Ways and Means Select Revenue Subcommittee Chairman Richard Neal (D‐MA) today unveiled a comprehensive proposal to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter and discourage offshore tax abuses. Based on proposals included in President Obama’s 2010 Budget, on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.

Senator Baucus and Congressman Rangel consulted extensively with the Department of the Treasury, the Internal Revenue Service (IRS), the Joint Committee on Taxation (JCT) and industry stakeholders to ensure the proposal accurately represents industry practices and will be able to meet current IRS compliance and enforcement needs.

“Last March, I circulated a preliminary draft of offshore compliance legislation to obtain stakeholder input to make the proposal even stronger, more durable and more likely to become law. The proposal offered today is the culmination of that effort and represents the best ideas from both the House and the Senate on how to strengthen IRS resources to root out tax cheats once and for all,” said Baucus. “These tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law‐abiding taxpayers pay the price. Not only is this practice fundamentally unfair, this is money that could be used in any number of other important areas, such as reducing our fiscal deficits.”

“This bill offers foreign banks a simple choice – if you wish to access our capital markets, you have to report on

U.S. account holders,” said Ways and Means Committee Chairman Rangel. “I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past.”

“When I first came to the Senate, I investigated the murky and opaque network that allows people to hide assets abroad and evade U.S. tax laws. Decades later, we still have work to do, but this long overdue legislation is a step forward,” said Sen. Kerry. “It will prevent another UBS and strengthen taxpayer compliance. The Treasury Department’s efforts to improve how we share tax information with other countries and the compliance provisions in this bill will help crackdown on the bad actors who try to hide funds offshore instead of playing by the rules.”

“This bill is a continuation of my efforts to reduce tax evasion by American citizens and bring more transparency to international banking. Last March, I held a hearing in the Subcommittee on Select Revenue Measures addressing the nexus between bank secrecy and tax avoidance. With billions of dollars in U.S. tax revenue being lost each year due to uncooperative foreign financial institutions, it is clear the issue is reaching its tipping point. The demand for standards on bank secrecy has even gone international, with British Prime Minister Gordon Brown calling for the beginning of the end of tax havens. As a longtime critic of U.S. individuals and companies engaging in unlawful foreign tax avoidance, I believe this bill provides the Treasury Department with the tools it needs to crack down on those Americans hiding assets overseas,” said Ways and Means Select Revenue Subcommittee Chairman Neal.

Important measures in the proposal include:

The bill requires 30% withholding on payments to foreign financial institutions and other entities unless they acknowledge the accounts’ existence to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts.

Individuals and entities would be required to report offshore accounts with values of $50,000 or more on their tax returns. The statute of limitations will be extended to six years when offshore accounts are unreported or misreported.

Advisors who help set up offshore accounts would be required to disclose their activities or pay a penalty. The proposal would also require electronic filing of information reports about withholding on transfers to foreign accounts to enable the IRS to better match reports to tax returns.

The bill strengthens rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to U.S. beneficiaries and reporting requirements on U.S. transfers to foreign trusts.

The legislation clarifies that U.S. dividend payments received by foreign persons are treated as dividends even when couched as another type of distribution in an effort to avoid U.S. taxes.

A Joint Committee on Taxation (JCT) technical explanation of the Foreign Account Tax Compliance Act of 2009 from is available on their website here: http://jct.gov/.

A full summary of the legislation follows:

FOREIGN ACCOUNT TAX COMPLIANCE ACT OF 2009

OCTOBER 27, 2009

Summary: Recent events have highlighted the growing use of foreign financial institutions, foreign trusts, and foreign corporations by U.S. individuals to evade U.S. tax. In order to prevent this tax evasion, the Foreign Account Tax Compliance Act of 2009 would provide the U.S. Treasury Department with significant new tools to find and prosecute U.S. individuals that hide assets overseas from the Internal Revenue Service.

Based on proposals included in President Obama’s 2010 Budget, on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.

The Foreign Account Tax Compliance Act of 2009 has been developed in close consultation with the U.S. Department of the Treasury, and is the legislative product of numerous hearings conducted in the Senate Permanent Select Committee on Investigations, the Select Revenue Measures Subcommittee of the House Ways and Means Committee, and the Senate Finance Committee.

I. Increased Disclosure of Beneficial Owners

The proposals in this section of the bill have been estimated to raise $3.1 billion over ten years.

Reporting on certain foreign bank accounts. As a tax enforcement tool, the United States requires U.S. financial institutions to file annual information returns disclosing and reporting on the activities of bank accounts held by

U.S. individuals. Many U.S. individuals looking to evade their tax obligations in the United States have sought to hide income and assets from the Internal Revenue Service (“IRS”) by opening secret foreign bank accounts with foreign financial institutions. Some foreign financial institutions have voluntarily agreed to provide information on the U.S. assets of U.S. accountholders as part of the “Qualified Intermediary” program since 2000. However, many of the foreign financial institutions that hold U.S. accounts are outside the reach of U.S. law. As a result, the ability of the United States to require foreign financial institutions to disclose and report on U.S. accountholders is significantly limited. Although these foreign financial institutions are outside the direct reach of U.S. law, many of them have substantial investments in U.S. financial assets or hold substantial U.S. financial assets for the account of others.

The bill would impose a thirty percent (30%) withholding tax on income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution’s affiliates) and to annually report on the account balance, gross receipts and gross withdrawals/payments from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners. These disclosure and reporting requirements would be in addition to any requirements imposed under the Qualified Intermediary program. It is expected that foreign financial institutions would comply with these disclosure and reporting requirements in order to avoid paying this withholding tax.

Reporting on owners of foreign corporations and foreign trusts. Under present law, withholding agents are not required to look‐through a foreign corporation to determine whether such corporation is owned by a U.S. individual. This aspect of present law has allowed U.S. individuals to evade their tax obligations in the United States by setting up foreign shell corporations and investing overseas through these shell corporations. The bill would require foreign corporations to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign corporation (i.e., owns more than ten percent (10%) of the foreign corporation’s stock (by vote or value)). Withholding agents would report this information to the U.S. Treasury Department. The bill would exempt publicly‐held and certain other foreign corporations from these reporting requirements and would provide the Treasury Department with the regulatory authority to exclude other recipients that pose a low risk of tax evasion. Any withholding agent making a withholdable payment to a foreign corporation that does not comply with these disclosure and reporting requirements would be required to withhold tax at a rate of thirty percent (30%). Similar rules would also apply to foreign trusts.

Extending bearer bond tax sanction to bearer bonds designed for foreign markets. Bearer bonds (i.e., bonds that do not have an official record of ownership) allow individuals seeking to evade taxes with the ability to invest anonymously. Recognizing the potential for U.S. individuals to take advantage of bearer bonds to avoid U.S. taxes, President Reagan and Congress took a number of steps in 1982 to eliminate bearer bonds in the United States. First, they prevented the United States government from issuing bearer bonds that would be marketed to U.S. investors. Second, they imposed sanctions on issuers of bearer bonds that could be purchased by U.S. investors. Under these sanctions, the issuer of such a bearer bond is not allowed to claim any interest deductions on the bond, the earnings and profits of a corporation are generally not reduced by the amount of any interest on the bond, and interest on the bond will not qualify for any applicable tax exemption (e.g., tax‐exempt municipal bonds). Furthermore, certain issuers of such bearer bonds are also subject to an excise tax equal to one percent (1%) of the principal amount of the bearer bond multiplied by the term of the bond. If the issuer of the bearer bond is not subject to the excise tax, then the holder of the bearer bond would be subject to additional sanctions that apply when the bearer bond is sold, exchanged, lost or becomes worthless: (1) the loss of capital gains treatment and (2) the denial of loss deductions. Because the United States is asking other countries to eliminate opportunities for U.S. investors to purchase bearer bonds issued outside the United States, the bill would extend these sanctions to bearer bonds that are marketed to foreign investors and would prevent the United States government from issuing any bearer bonds.

II. Foreign Financial Asset Reporting

The proposals in this section of the bill have been estimated to raise $0.9 billion over ten years.

Disclosure of information with respect to foreign financial assets. The bill would require any individual that holds more than $50,000 (in the aggregate) in (1) a depository or custodial account maintained by a foreign financial institution or (2) any foreign stock, interest in a foreign entity, or financial instrument with a foreign counterparty not held in a custodial account of a financial institution (collectively, “reportable foreign assets”) to report information about these accounts and/or assets to the U.S. Treasury Department with the individual’s annual tax return. Failures to comply with this requirement would be subject to a penalty of $10,000, and higher penalties (up to $50,000) could apply if the failure is not remedied within 90 days following notification from the Treasury Department.

Penalties for underpayments attributable to undisclosed foreign financial assets. The bill would impose a penalty equal to forty percent (40%) of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

Modification of statute of limitations for significant underreporting of income in connection with foreign assets.

Under present law, additional Federal tax liabilities in the form of tax, interest, and penalties must be assessed by the Internal Revenue Service within three years after the date a return is filed. If an assessment is not made within the required time period, the additional liabilities generally cannot be assessed or collected at any future time. This three‐year statute of limitations is extended to six years where there is a substantial omission of items from a tax return. This additional time gives the Internal Revenue Service an opportunity to identify the omission and determine the taxpayer’s correct tax liability. In particular, it is often difficult for the Internal Revenue Service to identify omissions that arise in connection with foreign assets. However, the extended six‐year statute of limitations only applies where the omission is in excess of twenty‐five percent (25%) of the gross income stated on the tax return. The bill would extend the six‐year statute of limitations for omissions that exceed $5,000 and are attributable to one or more reportable foreign assets. The bill would also clarify that the statute of limitations does not begin to run until the taxpayer files the information return disclosing the taxpayer’s reportable foreign assets.

III. Other Disclosure Provisions

The proposals in this section of the bill have been estimated to raise $1 billion over ten years.

Disclosure of assistance in acquiring or forming a foreign entity. The bill would require any person who derives gross income in excess of $100,000 for providing any material aid, assistance, or advice to U.S. individuals acquiring certain direct or indirect interests in a foreign entity to file an information return setting forth the identity of the foreign entity and the identity of the U.S. individual. Failures to comply with this requirement would be subject to a penalty equal to the greater of $10,000 or fifty percent (50%) of the gross income derived by such person with respect to aiding, assisting or advising on such transaction.

Passive foreign investment company reporting. Under present law, a shareholder of a passive foreign investment company (a “PFIC”) is not required to file an information return with the Internal Revenue Service unless the shareholder recognizes gain on the sale of PFIC stock, receives a distribution from a PFIC, or the PFIC has filed a qualified electing fund (“QEF”) election. The bill would require each person who is a shareholder of a passive foreign investment company to file an annual report containing such information as the Secretary may require.

E‐Filing of Certain Financial Institution Returns. Under present law, the Treasury Department cannot require any person to file an electronic return unless such person is required to file at least 250 returns during the calendar year. The bill would provide an exception to this rule for financial institutions with respect to returns relating to withholding taxes. Under the bill, the Treasury Department may require financial institutions to file an electronic return even if such person would file fewer than 250 returns during the calendar year.

IV. Provisions Related to Foreign Trusts

The proposals in this section of the bill have been estimated to raise $1.1 billion over ten years.

Clarifications with respect to foreign trusts. Under present law, a U.S. person is treated as the owner of the property transferred to a foreign trust if the trust has a U.S. beneficiary. Under current Treasury regulations, a foreign trust is treated as having a U.S. beneficiary if any current, future or contingent beneficiary of the trust is a

U.S. person. Notwithstanding this requirement, some taxpayers have taken positions that are contrary to this regulation. In order to enhance compliance with this regulation, the bill would codify this regulation into the statute. The bill would also clarify that a foreign trust will be treated as having a U.S. beneficiary if (1) any person has discretion to determine the beneficiaries of the trust unless the terms of the trust specifically identify the class of beneficiaries and none of those beneficiaries are U.S. persons or (2) any written, oral or other agreement could result in a beneficiary of the trust being a U.S. person. As a final clarification, the bill would clarify that the use of any trust property will be treated as a payment from the trust in the amount of the fair market value of such use.

Presumption with respect to transfers to foreign trusts. The bill would provide that any U.S. person who directly or indirectly transfers property to a foreign trust (other than a trust established for deferred compensation or a charitable trust) shall be presumed as having a U.S. beneficiary unless such person can demonstrate to the satisfaction of the IRS that such trust has complied with all reporting requirements and has submitted any additional information as the Secretary of the Treasury may require with respect to such transfer.

Minimum penalty with respect to failure to report on certain foreign trusts. Under present law, a taxpayer that fails to file an information return with respect to certain transactions involving foreign trusts (e.g., the creation of a foreign trust, the transfer of money or property to a foreign trust, or the death of a U.S. owner of a foreign trust) is subject to a penalty of thirty‐five percent (35%) of the amount required to be disclosed on such return. If the IRS uncovers the existence of an undisclosed foreign trust but is unable to determine the amount required to be disclosed on such return, it is unable to impose a penalty under present law. The bill would strengthen this penalty by imposing a minimum penalty of $10,000 on any such failure to file. Notwithstanding this minimum penalty, in no event would the penalties imposed on taxpayers for failing to file an information return with respect to a foreign trust exceed the amount required to be disclosed on such return.

V. Dividend Equivalent Payments

The proposal in this section of the bill has been estimated to raise $1.6 billion over ten years.

Treatment of dividend equivalent payments received by foreign corporations in the same manner as dividends.

Under present law, dividend payments made to foreign investors are subject to withholding tax at a rate of thirty percent (30%) unless otherwise reduced by an applicable tax treaty. In order to avoid this withholding tax, foreign investors have entered into derivative transactions that provide them with dividend equivalent payments that are not subject to withholding. The bill would require withholding on any dividend equivalent payments that are included in notional principal contracts (e.g., total return swap agreements) and would authorize the Treasury Department to develop rules that would require withholding on dividend equivalent payments that are included in other financial arrangements.

INTERACTION AMONG PROVISIONS IN THE BILL

Interaction among the various proposals in the bill has been estimated to raise an additional $0.8 billion over 10 years.

Media accounts of legislation

"Tax experts on Thursday raised concerns that pending U.S. legislation to ramp up disclosure of offshore accounts could scare away foreign capital.

Swiss financial giant Credit Suisse’s U.S. tax director told lawmakers that the magnitude of proposed reporting and compliance requirements could hurt foreign investment in the United States.

“Rightly or wrongly, there are significant fears in the international banking community,” Tom Prevost from Credit Suisse said, while also praising the general intent of the bill in testimony at a House Ways and Means subcommittee hearing.

Under legislation introduced last week by the Senate Finance Committee and House Ways and Means Committee, foreign banks would be forced to disclose information about American customers, or face a 30 percent tax on their income from U.S. financial assets.

The bill aims to raise about $8.5 billion over a decade by collecting taxes on previously secret accounts.

The so-called Foreign Account Tax Compliance Act of 2009 comes as the United States escalates a crackdown on individuals who hide income offshore and the banks that help them. By one estimate, the United States loses $100 billion to offshore tax evasion annually.

A central plank in the U.S. effort was its lawsuit against UBS AG, which agreed to pay $780 million to settle a criminal lawsuit and consented to eventually turning over 4,450 names of U.S. account holders.

Dirk Suringa, a partner with law firm Covington and Burling and a former Treasury Department tax official, echoed Prevost’s concerns that the proposed legislation could hamper the inflow of mobile capital to the United States.

He also said the bill could lead foreign governments to impose a reciprocal withholding tax on U.S. financial firms that do not report account information to foreign countries.

“A few instances of reciprocal legislation would not be cause for concern, but a significant proliferation could impose an undue burden on foreign commerce,” Suringa said.

U.S. tax officials generally praised the legislation.

The chief counsel for the Internal Revenue Service, William Wilkins, said the bill would provide needed tools to catch more tax evaders.

“Recent experience has provided a wake up call for the United States, and tax administrations worldwide, on the problem of taxpayers hiding assets and income in offshore financial institutions,” Wilkins said.

Wilkins and Stephen Shay, the Treasury Department’s deputy assistant secretary for international tax affairs, said the government could generally be ready to comply with the bill, which would apply to payments made after December 31, 2010.

Richard Neal, chairman of the House Ways and Means Subcommittee on Select Revenue Measures, said on Thursday that the legislation could be passed by the end of the year.

US hedge-fund assets offshore may be exempted from reporting rule

U.S. investors wouldn’t have to report large holdings in offshore hedge funds and private-equity firms this year under a proposed revision of Treasury Department disclosure rules designed to detect offshore tax evasion and money laundering.

The Financial Crimes Enforcement Network, a Treasury agency, proposed regulations yesterday effectively sparing fund investors from a June 30 deadline to report offshore accounts that exceed more than $10,000. Failure to file the Report of Foreign Bank and Financial Accounts, or FBAR, when required can result in penalties that exceed the value of the account.

The FinCEN regulations would reverse, for now, an Internal Revenue Service announcement last June that investments in offshore hedge funds and private-equity firms have to be disclosed. The IRS previously delayed the filing requirement for those investors, pending the promulgation of the FinCEN regulations.

“This is a very strong indicator of not having a filing requirement,” said Seth Entin, a tax lawyer at the Miami-based firm Greenberg Traurig LLP. “It takes off a very large burden for people who haven’t been doing this over the years and are worried about their exposure.”

FinCEN said that it is studying the issue and that pending legislation aimed at broader regulation of private pools of capital may influence a later decision.

“Treasury remains concerned about the use of, for example, hedge funds to evade taxes and FinCEN will continue to study this issue,” the proposed rules say.

Cash-Surrender Values

The proposed regulations say investments in offshore mutual funds and life-insurance policies featuring cash-surrender values are subject to the reporting requirements. Both types of investments are more liquid than assets in hedge funds and private-equity firms, which require longer financial commitments, giving rise to concern that they can be more easily used to launder funds and evade taxes, the proposed rules said.

U.S. citizens with foreign holdings have rushed to meet FBAR filing requirements in the wake of the IRS prosecution of customers who hid bank accounts at UBS AG.

Failure to file an FBAR can trigger annual penalties of 50 percent of an account’s value that can accumulate to exceed the original holdings. The IRS offered to reduce those penalties for Americans who voluntarily disclosed offshore holdings.

FinCEN is seeking written comments on the proposed regulations.

Offshore jurisdictions and tax havens

Source: Plans for the Third G20 Summit: Pittsburgh 2009 G20 Research Group, August 18, 2009, Page 14,

Offshore Jurisdictions and Tax Havens

"The OECD has removed the British Virgin Islands and the Cayman Islands from its grey list of countries that had not implemented international standards for tax disclosure. Both islands have now signed 12 agreements to exchange tax information. As a result, both are now categorized as having “substantially implemented the internationally agreed tax standard.”

The UK and France have said alleged tax havens should face a March 2010 deadline to put their laws in order and sign tax accords. The tax havens issue is expected to be high on the agenda at the Pittsburgh Summit. The OECD has said that six countries have now moved off its grey list since April, when the G20 threatened to impose sanctions.33 (August 14, 2009, Dow Jones International News)

The British Virgin Islands (BVI) has said it will sign a data-sharing pact with New Zealand, putting it onto the global white list of countries committed to catching tax dodgers. Countries that had not signed at least 12 bilateral tax information exchange agreements (TIEAs) in line with OECD standards were put on a grey list. Sherri Ortiz, executive director of BVI’s International Finance Centre, said it was a “bittersweet” moment. The island has pushed for several years to sign enough bilateral deals after its first agreement, with the U.S. in 2002. “At that time, tax information exchange agreements were not heard about and not encouraged as people saw them as something that opened up a Pandora’s Box and hampered your client relationship,” Ortiz said. The tiny country of 25,000 people has some 450,000 foreign companies registered there, helping to make the wider Caribbean region the world’s fourth largest banking centre.

Ortiz said the G20 pledge in April made countries more willing to sign bilateral deals and BVI expect to seal a few more in coming months.34 (August 11, 2009, Reuters News) Some feel that the offshore sector is reinventing itself in the face of the regulatory backlash against secrecy. Most Swiss banks are restructuring their business models to adjust to the post-secrecy reality. “Some people are predicting the end of offshore banking, but this is very premature,” says Jeremy Jensen, lead wealth management partner for the Emea region at PricewaterhouseCoopers. “The era of absolute banking secrecy has gone. We are now moving into a period of ‘compliant confidentiality.’”

The regulatory backlash against the current financial crisis may still be in its early stages, but banks must find new ways of operating to satisfy both increasingly demanding clients, who have witnessed the wholesale destruction of their wealth, and increasingly intrusive regulators, which have unwittingly overseen it. “High net worth individuals want oversight and a degree of transparency over their holdings which they never had in the past,” said Jensen. “This will require a level of systems and automation that most private banks simply do not have.”

Although it is unclear how requests for information from foreign governments to Swiss banks will work in the future, business models must also incorporate the cost of frequent information searches, correspondence with outside bodies and compliance with local and regional regulations and customer mandates.

Following the G20’s grey list of tax havens, Switzerland has agreed to sign new agreements on the exchange of tax information, aiming to reach a target of 12 treaties required to become a “model” OECD member. The new rules of engagement are yet to be set in stone. The new practicalities will require Switzerland to comply with requests from other countries’ authorities requesting information about foreign assets held in Switzerland or income generated there. “This is no longer about money laundering and terror,” says Ray Soudah, founder of Millennium Associates, a Swiss banking consultancy. “It is about normal citizens, whose states want income tax.”

The new regulatory environment will free Switzerland up to concentrate on allocating assets and managing client portfolios, rather than simply trading on an unfair, tax and secrecy-led advantage to entice money looking for a clandestine home. “This is good news for the country’s banking system. We may have to kick some clients out, but one way or another, our banks will be regulated,” said Soudah.

With confidentiality and secrecy becoming largely irrelevant, the quality of investment service and advice will now be the key differentiator when it comes to attracting and keeping clients. Credit Suisse, along with other Swiss banks, plans to move away from luring rich foreigners to book their assets into a Swiss hub. The new approach is to put large numbers of advisors close to the pools of clients and to handle assets in a way that must be “transparent and regulated in that given market,” says Paul Sarosy, head of product and sales management at Credit Suisse Private Banking.

Moving away from tax-led solutions, Swiss banks are adopting thematic investment focuses to attract increasingly socially aware wealthy families. These banks have pioneered funds investing in water, energy and “socially responsible” investing. When it comes to reinventing themselves, Swiss banks have no lack of ideas, but the transformation will be a gradual one. “The Swiss will move as fast as they need to but as slowly as they can,” said one private banking consultant. “We will still be having this conversation in 20 years’ time. They will respond and their business will continue to flourish. But there’s a lot for them to work through right now.”35 (August 10, 2009, Financial Times)

Removed from an OECD blacklist of financial centres in April, Monaco is still working to shed its image as an international tax haven. It remains on the G20 grey list, but hopes to leave that too by the end of the year. The principality plans to launch a major public relations campaign next year, promoting a new, financially transparent image. Monaco was placed in the middle of a three-tier list categorizing tax havens and financial centres by their degree of cooperation with international authorities.36 (July 24, 2009, Agence France Presse)

Italian finance minister Giulio Tremonti introduced a measure in July allowing Italians to repatriate funds held abroad, outside the reach of tax authorities, after calling on world leaders to adopt new rules against evasion. The “tax shield,” introduced as an amendment to a bill aimed at helping consumers and companies weather the economic crisis, is the third time since 2001 that Europe’s most-indebted country has offered amnesty to tax evaders for a fee. Italians who return undeclared funds held abroad will pay a 5% tax and be exempt from prosecution, according to a copy of the legislation.37 (July 16, 2009, Toronto Star)

France is fast becoming one of the leading exponents of a crackdown on offshore centres and banking secrecy, as officials attempt to track down tax dodgers to help pay for a worryingly high government deficit. But it might need to take a tougher line on Monaco if it is to be taken seriously. At a June meeting with UK prime minister Gordon Brown, French president Nicolas Sarkozy said that as “tax havens have shifted from the black list to the grey list, now fiscal co-operation conventions must be signed… they need to exit the grey list.”

Sarkozy and Brown are calling for sanctions to be imposed on the world’s non-compliant tax havens as of next March. As part of the crackdown, in June French authorities made it compulsory for local banks to publish information about their activities in offshore centres in their annual reports. Anticipating a tougher line from Paris, in June Swiss bank Credit Suisse sent a letter to French clients holding French stocks or bonds seeking authorization to pass on information to the Autorité des Marchés Financiers, the financial markets regulator.

Non-French nationals holding French securities were also contacted. France signed a TIEA with Switzerland, allowing the French authorities to investigate offshore bank accounts held in Switzerland by French citizens suspected of tax evasion. But France may also be taking a tougher stance in order to track down tax receipts as the country’s budget deficit balloons. The public deficit will likely hit between 7% and 7.5% of GDP for 2009, twice as high as 2008. For the French crackdown to be taken more seriously, it will likely need to tougher measures against Monaco, which effectively enjoys many privileges because of its links with its big neighbour. Monaco-based wealth managers handle at least $130 billion (€93 billion) in offshore money, but until April 2009 Monaco was one of only three countries still on the OECD list of uncooperative tax havens.38 (July 13, 2009, Financial News)

Switzerland and Poland have agreed on a double taxation treaty, the ninth such deal Switzerland has struck since March.39 (July 1, 2009, Reuters News)

Switzerland should have renegotiated more than enough double taxation treaties by the autumn to be removed from the OECD grey list, said Swiss finance minister Hans-Rudolf Merz. “We have made faster progress than planned. I am proud of this, particularly as we could get all the parameters the government wanted to include into the eight signed agreements … The next threat that I can see is less likely to come from the OECD than from the EU. There are strong trends to replace the taxation of savings income with automatic exchanges of information. That would be the end of bank secrecy.” However, there was no danger in the short term as Switzerland is negotiating with the EU on a taxation of savings income agreement and had recently approached the EU. “These negotiations are not problematic,” said Merz. “But in the long term we will have to arm ourselves.”40 (June 29, 2009, Reuters News)

The Japanese government has reached basic agreements to conclude separate tax treaties with Bermuda and Switzerland.41 (June 26, 2009, Jiji Press English News Service) Switzerland faces economic sanctions if it delays opening up its secretive banks to international scrutiny. The threat was to be made by finance ministers meeting to discuss how to broaden the crackdown on tax havens that are draining exchequers of tens of billions of dollars each year. The meeting of finance ministers in Berlin was to report on progress on complying with new international demands on tax transparency following the G20 London Summit in April.

Failure to comply will be greeted with “hostility,” warned one official. Switzerland was invited to attend the meeting. The Swiss were rushing to sign bilateral information-sharing agreements with 12 countries by the end of 2009. By mid June it had agreed to six but needs 12 treaties to remove itself from the OECD grey list. Switzerland reached a double tax agreement with the United States recently. However, its leading bank, UBS, still faces a potentially damaging court trial in August for its part in a tax evasion scandal allegedly involving up to 52,000 U.S. account holders. It has also suffered a huge outflow of money from its private banks in recent months as the wealthy grow nervous that the end of Swiss bank secrecy is coming closer.

Jeffrey Owens, director of the OECD Centre for Tax Policy and Administration, said that meeting participants would stipulate what signs of progress they expected from countries on the list, and also suggested that the patience of world powers with tax havens such as Liechtenstein, the Caymans and Switzerland was running out. “Political tolerance for non-compliance is headed rapidly towards zero,” he said. Owens added, however, that there had been a great deal of progress over the last six months. But campaigners argue that the weight of evidence required by tax investigators to force officials to hand over details of accounts on suspected tax evaders is so onerous that current treaties are ineffective.

There is pressure on the OECD to force countries to sign more treaties and to introduce automatic information-sharing agreements. Stephen Timms, the financial secretary to the UK Treasury, was to use the Berlin meeting to call for the introduction of a radical new measure to force global firms to reveal exactly the profits they make and the tax they pay in each jurisdiction they operate in. Known as country-by-country reporting, the proposal is likely to gain strong support from the French and Germans as a way of ensuring countries economies can weather the financial crisis that has destroyed tax revenues.

The IMF also recently said that “tax distortions are likely to have encouraged excessive leveraging and other financial market problems evident in the crisis.” Private equity firms, in particular, have used tax incentives on debt to finance corporate raids that are now unwinding.42 (June 22, 2009, Dow Jones International News)

Switzerland and the U.S. have reached agreement on a double taxation treaty. Switzerland aims to secure 12 new bilateral tax deals by the end of 2009, which could allow it to be removed from the OECD grey list of states that need to improve tax cooperation and avoid possible sanctions from G20 members.43 (June 19, 2009, Reuters News)

Britain is against the idea put forward by France of including Hong Kong on a tax haven blacklist. “I don’t think we have seen Hong Kong needing to be covered by blacklisting,” said Adair Turner, FSA chair. “Obviously, it is important we have common standards of not only the regulatory quality, about which there is no doubt at all in relation to Hong Kong, but also agreements on how we deal with tax.” At the G20 London Summit in April, Sarkozy called for Hong Kong and Macao to be added to the tax haven blacklist. Hong Kong chief Executive Donald Tsang responded to the idea by saying: “We have a very simple tax system. We have a low tax rate. We have a very transparent and very competent and well-respected banking and financial services system. Indeed, our tax rate is low, but that does not mean that we harbor irregularities in our system.” Turner agreed there was no problem as far as Britain was concerned. “We certainly don’t believe in Hong Kong being on any of the blacklists.” Turner suggested the steady improvement over time of financial standards and the assurance that all parts of the world should meet those standards was “a priority seen at the G20.”44 (June 18, 2009, China Daily)

The UK is backing calls to force multinational corporations to reveal precisely how much tax they pay in each jurisdiction they operate in. The move is being hailed as a significant breakthrough in ending tax secrecy. Stephen Timms, financial secretary to the UK Treasury, planned to tell G20 ministers in Berlin to introduce country-by-country reporting. At present, companies do not need to reveal what tax or profits they make in many countries. The Berlin meeting will be an “exchange of information” to build on the G20 London Summit. Timms said: “I want to make sure we address the concerns in developing countries.” He made the promise for the Berlin meeting as he signed an agreement with William McKeeva Bush, the head of government business for the Cayman Islands, to enable the Treasury to demand information from the tax haven. Other agreements will be signed shortly, possibly in Berlin. Liechtenstein is thought to be likely to sign up, and Timms said the “big prize” would be Switzerland. The agreement with the Cayman Islands is one of 113 double-taxation agreements that the UK has in force. The new one allows for an exchange of information about tax between the Cayman Islands and the UK. Timms said it included “unprecedented” provisions for exchanging information. An upcoming code of practice for banks is expected to crack down on the use of tax havens by major banking groups. Timms said the code — originally slated for the budget — would be published “shortly.”45 (June 16, 2009, The Guardian)

The UK and the Netherlands have been told to open talks with their dependent territories to encourage them to crack down on income tax fraud. Territories including the Cayman Islands, Gibraltar, Aruba and the Dutch Antilles are all still on an OECD grey list. A revision to the EU’s Savings Tax Directive is to extend its provisions and EU Taxation Commissioner László Kovács said the move, along with anti-fraud and administrative cooperation agreements, would send a strong signal to the international community that the EU is moving on the conclusions of the G20 meeting of 2 April.46 (June 11, 2009, Europolitics)

Luxembourg signed a new tax cooperation agreement with France that reduces the scope of its banking secrecy, one of over a dozen such deals it intends to reach this year to avoid being branded a tax haven. Luxembourg must sign at least 12 such agreements to be removed from the OECD’s grey list. Luxembourg signed agreements with the U.S., Bahrain and the Netherlands in May. “We welcome this signature with the enthusiasm that goes with implementing the G20’s decisions,” said French finance minister Christine Lagarde.47 (June 3, 2009, Reuters News)

The standard for making the white list of tax havens is to have 12 signed TIEAs. Many countries are currently working toward this number, but have said that there is no clear deadline for when countries were supposed to have met them by.48 (May 27, 2009, Royal Gazette [Bermuda])

Switzerland will attend a high-level meeting on tax havens in Berlin on June 23 after host Germany agreed to extend an invitation. Germany has been one of the main supporters of a global campaign against tax cheats and managed to gather support for the naming and shaming of Switzerland and other offshore financial centres at the G20 meeting in April. Swiss attendance in Berlin had been in doubt given tension between the two countries, but Swiss finance ministry representative Delphine Jaccard said that Switzerland had been invited and would send a representative. The Berlin meeting is a follow-up meeting to a Franco-German initiative in Paris in October at which the two countries, which suspect many citizens hide their money in Switzerland and other offshore centres, endorsed the idea of drafting a black list of tax havens. Switzerland, where private banks manage around $2 trillion of foreign wealth, needs to offer more tax cooperation to avoid G20 sanctions. It has vowed to adopt international standards for tax transparency and cooperation in 12 new treaties it needs to sign by year-end.49 (May 25, 2009, Reuters News)

Luxembourg and Liechtenstein, criticized for failing to implement international tax standards, entered into talks on a bilateral treaty in an effort to show their willingness to cooperate. The double-taxation treaty would conform to standards set by the OECD. Luxembourg treasurer Luc Frieden said the agreement should be completed later this year. “I’m convinced that our goal to conclude 15 double-tax treaties in line with OECD standards by the end of the year is absolutely realistic.”50 (May 22, 2009, Bloomberg News)

In May Italy had still not decided whether to adopt a new amnesty encouraging people to declare funds held in foreign tax havens, Italian prime minister Silvio Berlusconi said. Bank sources estimate that Italians have about €600 billion ($795 billion) in foreign tax havens. Berlusconi said the tax haven amnesty idea originated in the G20 but has still not taken on any substance.51 (May 13, 2009, Reuters News)

The move by the U.S. to crack down on the use of tax havens is likely to embolden other countries to take action; Britain has already announced changes as part of the G20 initiatives. Wealthy individuals who use bank accounts in tax havens to hide income will also be targeted through new laws requiring disclosure of such accounts. Under the G20 initiatives, jurisdictions that do not provide information about their banking systems will be sanctioned. There are also plans for withholding taxes on accounts at institutions that do not share information. “It’s really hitting most Fortune 100 companies that depend to a great deal on growth in foreign markets for growing their total earnings,” said Drew Lyn, a principal at PricewaterhouseCooper’s Washington office.52 (May 6, 2009, The Sunday Morning Herald)

Switzerland revealed that is was formally calling the OECD to explain why some of the G20 economies were not included on a list that formed the basis for an international crackdown on tax havens. In a letter to OECD secretary general Angel Gurria, president and finance minister Hans-Rudolf Merz reiterated Swiss complaints about the “non-transparent, arbitrary and exclusive” way the OECD drew up the list. He also called on the OECD to ensure that tax information exchange agreements countries sign, to fall into line with OECD standards, are effective. Merz asked Gurria to reveal what criteria was used in assessing all the countries and whether the OECD would “take into account the quality and timeliness of the exchanged information.” “The key issue is how such cooperation is implemented and monitored,” Merz said in the letter. “There must be a level playing field for all jurisdictions concerned.” Copies of the letter were also sent to British finance minister Alistair Darling and FSB chair Mario Draghi.53 (April 29, 2009,Agence France Presse)

While many countries have conceded to requests from the G20 and OECD to lighten up on bank secrecy; others, such as Panama, are refusing to do so. Panama is declaring itself as one of the few places where money can still be safely stowed away. At the G20 summit, the leaders threatened to take action against countries that would not cooperate. The OECD has been asked to investigate and report to the G20 finance ministers when they meet in Scotland in November.54 (April 13, 2009, The Times)

British overseas tax havens have been put under renewed pressure by prime minister Gordon Brown to end their culture of secrecy within six months or face sanctions. The prime minister has written to all British crown dependencies and overseas territories giving them a September deadline to sign up to agreements to share tax information with the authorities.

Seven British territories were named and shamed by the OECD when it published a list to coincide with the G20 summit of havens that had either not agreed to or not yet implemented its international tax standards. Anguilla, Bermuda, BVI, the Cayman Islands, Gibraltar, Montserrat and Turks and Caicos were all placed on the OECD’s grey list for failing to deliver on promises to be more transparent, despite signing up to do so, in some cases several years ago.

The prime minister has also written today to the British crown dependencies of Jersey, Guernsey and Isle of Man telling them he expects rapid further progress to end tax and banking secrecy. All three are on the OECD’s white list of jurisdictions that have already implemented a number of bilateral agreements to share tax information with other authorities, but they are still used by companies engaged in tax avoidance.

TIEAs can require tax inspectors to jump through a series of highly technical hoops in order to obtain information. Brown has told the dependencies that he expects them to move beyond meeting the OECD’s minimum standards on co-operation to a spirit of full transparency. He also ratcheted up the pressure on tax havens in a special meeting earlier this week with Michael Foot, a former inspector of banks for the Central Bank of the Bahamas, who has been charged with a treasury review of offshore financial centres.

Foot’s preliminary report on regulation of tax havens is expected before the budget. Some countries on the OECD grey list such as Switzerland, Luxembourg, and Belgium, reacted angrily to their classification last week and accused the British and Americans of hypocrisy because so many offshore financial centres came under their control.55 (April 10, 2009, Guardian Unlimited)

Switzerland has frozen a financial contribution to the OECD in protest at being included on the organization’s tax havens list without being consulted. “Switzerland used its veto rights” to withhold $179,315 earmarked for cooperation between the OECD and the G20 countries. “The amount is relatively modest but its a symbolic and strong gesture, a protest.” G20 leaders are using the OECD’s listing of compliance with its international tax exchange standard as a basis for a crackdown on secretive offshore havens.

Switzerland was classified on a ‘grey’ list of about 40 countries which have pledged to comply but have not yet substantially implemented the standard. The Swiss government eased banking secrecy on March 14 under international pressure. The Swiss were ready to unfreeze the contribution “if the OECD pledges to inform Switzerland beforehand when it gives documents to the G20.”56 (April 8, 2009, Agence France Presse)

The four countries named on the OECD’s blacklist of non-cooperative tax havens (Malaysia, the Philippines, Uruguay and Costa Rica) have pledged to share the fiscal information demanded by the G20, the OECD said. “They have now officially informed the OECD that they commit to cooperate in the fight against tax abuse, that this year they will propose legislation to remove the impediments to the implementation of the standard and will incorporate the standard in their existing laws and treaties.”

EU Commissioner for Taxation and Custom Union Laszlo Kovacs said pledges by tax havens are only a start. “Commitments are the first step; we’re more interested in the implementation.” “We need a level playing field and are looking forward to quick implementation of the standard.” The G20 has been applying pressure, with threats of sanctions, on tax havens to share information in the fight against fiscal crimes such as tax evasion and money laundering. The G20 asked the OECD to set up and maintain the blacklist.

The OECD grey list includes an additional 38 territories as those that “have committed to the internationally agreed tax standard, but have not yet substantially implemented” the measures. Malaysia, the Philippines, Uruguay and Costa Rica now join that list. The graylist includes: Belgium, Brunei, Chile, the Dutch Antilles, Gibraltar, Liechtenstein, Luxembourg, Monaco, Singapore, Switzerland and Caribbean island nations including the Bahamas, Bermuda and the Cayman Islands. 57 (April 8, 2009, The Wall Street Journal Asia)

Global estimates of secretly held, illicit monies

Over the last two years offshore banking has come under increased scrutiny worldwide by the media, lawmakers, and the general population. Despite this attention, there are few sources which estimate private, non-resident deposits into offshore financial centers. In light of this lack of data, this paper develops a proxy measure which uses data from the Bank of International Settlements, the International Monetary Fund, and the central banks of offshore financial centers to estimate non-resident deposits in secrecy jurisdictions held by individuals and corporations. In the context of this paper, the term “secrecy jurisdiction” comprises a broader array of countries than the traditional definition of an offshore financial center.

The paper finds that these deposits have been increasing markedly since meaningful data collection efforts began in the early 1990s, with current totals standing just under US$10 trillion. Even when adjusted for inflation, this expansion has dramatically outstripped the growth rate of recorded world wealth. The three jurisdictions holding the largest amount of non-resident deposits are the United States, the United Kingdom, and the Cayman Islands, each of which holds over US$1.5 trillion in private, foreign deposits.

Absorption of illicit financial flows from developing countries: 2002-2006

A recent study by Kar and Cartwright-Smith (2008) found that over the period 2002 to 2006, illicit financial flows from developing countries increased from US$372 to US$859 billion. The purpose of this paper is to link these outflows with major points of absorption consisting of offshore financial centers and developed country banks. While offshore centers have recently attracted media attention regarding their lack of transparency, the paper finds that large data gaps exist for banks as well.

These gaps make it difficult to analyze the absorption of illicit funds, defined as the change in private sector deposits of developing countries in banks and offshore centers. The paper argues that both need to greatly improve the transparency of their operations. Regular reporting of detailed deposit data by sector, maturity, and country of residence of deposit holder would close many of the data gaps identified in this paper and allow for a more robust analysis of the absorption of illicit flows from developing countries.

Given data limitations, certain assumptions had to be made regarding the behavior of illicit flows and investments. These assumptions were formulated as control variables for a simple model of absorption. Several simulations of illicit outflows against absorption (defined as the non-bank private sector deposits of developing countries) were carried out using different settings of the control variables. The paper finds that while offshore centers have been absorbing an increasing share of illicit flows from developing countries over the five-year period of this study, international banks have played a pivotal role in facilitating that absorption.

Depending upon whether one uses the narrower Bank for International Settlements or broader International Monetary Fund definition (a control variable), offshore centers hold an estimated 24 or 44 percent of total absorption respectively, while banks hold the balance. As total absorption consists of both licit and illicit funds, the paper presents a simple algebraic analysis to estimate the portion of such deposits in banks and offshore centers. Furthermore, the analysis shows that the polar extreme (all illicit or all licit) in such holdings by either group is not tenable given the overall volume of illicit flows and absorption.

Global Forum on Transparency & Exchange of Information

The Assistant Treasurer, Nick Sherry, said today Australia's two-year term as Chair of the Global Forum on Transparency and Exchange of Information has begun with a major step in the fight against international tax evasion.

"An international peer review process is now underway where each member of the Global Forum will have its tax information sharing laws, regulations and administrative arrangements and processes audited by the other members," the Assistant Treasurer said.

"As Chair of the Global Forum Australia, we welcome the peer reviews and we've stepped up to our leading role by opening our books in the first round of the review process."

"We think leading by example is best way forward as we work internationally to build a global tax information exchange system that adds to international economic integrity."

"This international peer review process will eventually involve 96 jurisdictions, including over 90 member states of the Global Forum, over the next four years."

In addition, three key documents have also been agreed by the Global Forum to guide the international peer review process.

Peer Review Terms of Reference, Conduct Methodology and Assessment Criteria have been agreed and are now publicly available at www.oecd.org.

"These key documents explain how Global Forum member states will be rated and what's expected of them as part of the review process," the Assistant Treasurer said.

"The peer review process will indentify those countries which have not implemented the agreed standards on tax transparency and exchange of information."

"Countries that don't meet these standards will be provided with guidance on changes required."

"The first phase of the process will review the laws and regulations on transparency and the exchange of information in the member countries."

"The second phase will assess how the members of the Global Forum are putting the standards into practice."

"The membership of the Global Forum has grown rapidly in recent years as emerging financial hubs have joined in developing strategies for dealing with off-shore tax evasion."

"The increase in the number of countries willing to confront tax evasion sends a clear message that the tide has turned against those who don't pay their fair share of tax."

OECD work on tax havens

178 delegates from over 70 jurisdictions and international organisations met on 1-2 September in Mexico to discuss progress made in implementing the international standards of transparency and exchange of information for tax purposes, as reflected in the Model Tax Information Exchange Agreement and Article 26 of the OECD and UN Model Tax Conventions, and how to respond to international calls to strengthen the work of the Global Forum. (Attached is a list of jurisdictions present in Mexico).

In the context of the need of governments to protect their tax bases from non compliance with their tax laws, the main objectives for the meeting were to:

  • Agree on restructuring the OECD Global Forum to expand its membership and ensure its members participate on an equal footing;
  • Agree on how to establish an in-depth peer review process to monitor and review progress made towards full and effective exchange of information; and
  • Identify mechanisms to speed-up the negotiation and conclusion of agreements to exchange information and to enable developing countries to benefit from the new more cooperative tax environment.


The global economic crisis and recent tax evasion scandals have spurred calls for fairness and transparency of the tax system. Removing practices that facilitate tax evasion is part of a broader drive to clean up one of the more controversial sides of a globalised economy. The OECD advocates exchange of information between tax authorities on request in cases of specific tax inquiries to better equip tax authorities to tackle tax evasion.


OECD progress report on tax havens

Germany may buy secret tax data

"Chancellor Angela Merkel takes a break from tax cheats to launch the country's carnival season in Berlin. Photo: AFP

German Chancellor Angela Merkel has indicated her government might pay 2.5 million euros ($A3.94 million) for data - stolen from Swiss banks - which could unmask thousands of German tax cheats.

German newspapers have reported that an informant has offered a compact disc with the financial details of more than 1500 Germans who are believed to be evading tax by using the Swiss banks.

The German Government reportedly paid 5 million euros in 2007 for similar information sold by a whistleblower from Liechtenstein, enthralling the public for about a fortnight as negotiations were revealed and the man was given a new identity after the deal. Within two years, the government had recouped its outlay hunting down unpaid taxes and putting an extra 180 million euros into services and retiring debt.

Dr Merkel said she did not believe it to be wrong, at least in principle, for the government to pay for information once again. If this data is relevant, it must be our objective to acquire it, she said in Berlin.

Finance Minister Wolfgang Schauble said nothing had changed since the so-called Liechtenstein affair.

According to Bloomberg, Germany's leading financial newspaper, Handelsblatt, has estimated that the data on money held by German nationals in Swiss accounts could potentially yield up to 200 million euros in lost tax revenue to the German government.

The news, which emerged at a press conference in Berlin two days ago, came only hours after the Australian Crime Commission confirmed that it was finalising its case of alleged criminal tax evasion against Paul Hogan and John Cornell.

The Queensland Supreme Court heard two weeks ago that Australian authorities had not brought to justice a Swiss and a Jersey-based accountant who are believed to have masterminded a tax avoidance scheme that involved using ATMs to withdraw cash from secret offshore accounts.

In Germany, most newspapers and commentators supported the government decision, arguing that the era of financial and bank secrecy in Switzerland and other European tax havens is over. A poll published in Stern showed that a majority of Germans, 57 per cent, said they favoured the use of such information on tax violations even if it was illegally obtained.

But the German decision to negotiate with the whistleblower has been greeted with icy disdain by Switzerland, which warned that such a move would be seen as illegal. Swiss Finance Minister Hans-Rudolf Merz said buying stolen information was a crime while Social Democratic member of the Swiss Parliament Mario Fehr described Germany as a receiver of stolen goods if it bought the data.

The Swiss finance industry was unimpressed and Der Spiegel quoted Thomas Sutter, of the Swiss Bankers Association, urging Germany to give up the idea. It is our hope that Germany will not purchase this data, and will instead arrest the criminals who have committed a crime in Switzerland, and then return the data to Switzerland.

The Swiss Government was expected to discuss the developments overnight.

HM Treasury's progress report April, 2009

(From page 13)

Mutual dependence

2.2 There is no agreed definition of what constitutes an offshore financial centre, but most definitions tend to focus on centres which provide financial services primarily to non-residents.

There is also no agreement on who may gain or lose from the existence of offshore centres.

2.3 What is clear is that, at least for the larger centres covered by this Review, business flows both ways between them and the UK. Some also see significant business flows to and from other jurisdictions, particularly the United States. Defining these business flows will provide evidence to analyse the impact on the City of London should the viability of any of this business in future be called into question.

2.4 The close relationship the centres have with the UK also gives the UK Government a direct interest in understanding each centre’s ability to remain viable, both economically and in terms of complying with international regulatory standards, during the current global economic downturn.

Financial supervision and transparency

2.11 The financial centres are subject to an assessment process by the IMF which was launched in 2001 following a report by a working group of the Financial Stability Forum (now re- established as the Financial Stability Board) into jurisdictions it considered to be offshore financial centres. The programme assessed the centres against the international standards set by the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors; and the anti-money laundering standards published by the FATF.

2.12 The initial phase of the assessment programme, which was completed in 2005, concluded that the offshore financial centres’ compliance levels with the four main international standards against which they were assessed were broadly comparable to those of other jurisdictions, and in some cases were better. The IMF noted that compliance levels were generally stronger in the banking sector than in the securities and insurance sectors.

2.13 The results of the second phase assessments of Gibraltar and Bermuda were published in 2007 and 2008 respectively and second stage assessments of a number of the other financial centres covered by the Review are underway. The G20 agreed on 2 April 2009 that the IMF and FSB in cooperation with international standard-setters would provide an assessment of adherence to international prudential regulatory and supervisory standards.

2.14 Whilst the IMF and FATF evaluations have shown a positive trend in compliance with international standards, the financial centres recognise that there is no room for complacency.

Indeed, each sees maintaining regulatory standards as an important aspect of a competitive business model.

2.15 However, international standards do not stand still. The G20 is implementing a series of measures to strengthen financial supervision, including a renewed focus on the ability and

2.5 Understanding the nature and degree of these mutual dependencies will provide an overarching theme for the Review.

Tax treaties and transfer pricing

Source: Transfer Pricing and Treaties in a Changing World OECD Conference Centre, Paris, 21-22 September 2009

More than 600 participants from all over the globe will gather in Paris for what is expected to be the transfer pricing event of the year.

Some of the world’s leading specialists will share their expertise on cutting-edge transfer pricing and treaty developments that affect governments and multinational enterprises in a changing world.

The conference programme will also offer ample opportunities to exchange views with representatives from more than 100 governments and from the business community, universities and international organisations.

  • Adjustments and corresponding adjustments: The role of Articles 7, 9 and 25 of the Model Tax Convention
  • Information powers and transfer pricing: Documentation requirements, exchange of information and burden of proof issues
  • Deductibility of interest in related party situations
  • Transfer pricing in a downturn economy
  • Attribution of profits to Permanent Establishments: designing a modern Article 7
  • Transfer pricing and customs
  • Treaty and transfer pricing aspects of intangibles characterization
  • Recent developments in the areas of transfer pricing and treaties


Australian tax office to target offshore dealings

THE Australian Taxation Office has sent "please explain" letters to some of Australia's top corporates in a major crackdown on international transactions with related companies.

About 150 large companies, as well as foreign banks, are being targeted initially as part of a four-year initiative the tax office hopes will reap millions in revenue.

About 10 questionnaires have recently been sent and a further 140 are due to be issued.

The tax office has hired 40 staff to work on the transfer pricing compliance initiative -- with another 60 specialists to be recruited to work on the taskforce.

The action, aimed at ensuring Australia does not lose out on tax revenue, has already alarmed experts, who say the move will cause more uncertainty for foreign investors, at a time when Australia is trying to promote investment and pitch itself as a financial services hub.

It also comes only two weeks after the furore created by the ATO's move against the private equity sector with a surprise $678 million claim on TPG over the sale of Myer.

In its latest assault, the tax office is targeting large Australian companies with subsidiaries overseas, as well as multinationals who have a large subsidiary in Australia.

Those being targeted have greater than $250m in revenue.

The tax office is concerned with four key areas of activity and has identified companies who have reported low profits or a loss in the past year; those who have undertaken business restructuring and shifted assets offshore; those who have transferred intangible property, such as royalty streams, offshore; and those involved in debt financing and funding with their intra-group companies overseas.

Last year, international related-party dealings totalled $258 billion, according to a recent speech by tax commissioner Michael D'Ascenzo.

The companies the tax office wants to question are being sent extensive questionnaires.

A number of those will lead to formal audits.

But the tax office's probe will create further stress for multinationals who have already been hit by the global financial crisis, said Pete Callega, a partner at PricewaterhouseCoopers.

"This is the most significant investment by the ATO in the area of transfer pricing enforcement in the last decade," Mr Callega said.

"The specific focus on intragroup funding is a concern generally for foreign direct investment in Australia and the tax office's enquiries are creating great uncertainty with respect to the use of debt to fund investment."

Clayton Utz tax partner Niv Tadmore said problems could arise for multinationals if the ATO takes a view that is not consistent with the view taken by another country's tax authority -- and the company might end up being over-taxed because, at present, there are no binding processes between tax authorities.

Dr Tadmore also said the issue of interest deductability on cross-border loans has created uncertainty and difficulty for companies wanting to structure their global affairs.

The Australian Taxation Office is due to issue a separate ruling on that in coming weeks.

TPG skips Australia with a $678 million tax bill

"IN failing miserably to ring-fence the $1.58 billion profit that Texas Pacific Group generated from the Myer float, the Australian Taxation Office inadvertently triggered alarm at the Reserve Bank over the liquidity of the Australian payments system.

A swath of major NAB accounts were frozen under orders issued by the Supreme Court of Victoria on Wednesday night after the ATO sought to prevent TPG from moving its Myer profits into one of two offshore companies in tax havens.

It is understood officials at the RBA contacted the trading bank on Thursday afternoon expressing concern over the systemic impact of a court-enforced suspension of several major NAB interbank trading accounts.

The frozen accounts included a Deutsche Bank settlements account whose daily trading statement would normally run to something near 65 pages, two big Myer family accounts and a Computershare settlement account.

Each was effectively suspended under Supreme Court orders, restricting access to accounts that in the past seven days had held more than $10 million of funds generated by the TPG-led, private equity consortium's $2.3bn IPO of the Myer department stores.

Those orders were withdrawn late on Thursday after it became apparent that the specific account identified by the ATO retained just $45 of TPG's Myer money.

Mind you, at least one adviser close to the TPG transaction pondered yesterday whether the balance of the Myer funds was ever held in the account nominated by the ATO -- "My Piece of Myer" account 083-001 16-074-7031.

The ATO applied for the court orders after issuing tax assessments totalling $678m against the two TPG-controlled entities that it regards as the taxable entities for the Myer sale profits. One of them is a Cayman Islands registered company, the other is in Luxembourg.

The ATO says the TPG entities owe the commonwealth $452,236,874.70 in income tax and a further $226m in penalties automatically generated by assessments issued under the anti-avoidance tax provisions.

Which is to say, the ATO seems to have accused TPG of tax avoidance.

Mind you, given the ATO was unable to keep TPG's Myer funds in Australia, it remains uncertain whether the assessment will become the test case on tax management through offshore holding companies that the commission might have planned for. Nonetheless, that the ATO is chasing TPG under Australian general anti-avoidance provisions is a serious embarrassment for one of the world's leading private equity firms and will raise obvious questions about its status as an acceptable

For its part TPG has been left stunned by the ATO's action.

It says it has not received notice from the ATO of any assessment or the attempt to prevent it from accessing its NAB accounts.

It remains very confident it has behaved unambiguously within the law and insists it has met fully its obligations to the commonwealth. That said, the private equity firm apparently regards the $1.58bn that decamped from the ATO's bailiwick some time ahead of the Supreme Court application as a post-tax profit.

That is, TPG reckons it has paid what was necessary and that is the end of the matter.

TPG & Ors would prefer that we view the ATO's action as a product of growing frustration within the taxation bureaucracy at the failure of the taxation laws to stem the leakage of potentially taxable income out of Australia through offshore structuring.

The ATO has highlighted its focus on private equity and its tax management in each of its past two annual statements on compliance and, more recently, it has started reviewing a range of cross-border structured finance deals conducted over the past year or so by three of the big four major banks. But I suspect that the urgency of the ATO's approach to the Supreme Court last Wednesday says it was very serious indeed about getting hold of a share of TPG's booty.

Within 90 minutes of issuing the TPG assessments and dispatching them, rather oddly, by registered mail to addresses in the Caymans and Luxembourg, the Deputy Commissioner of Taxation was before Justice David Habersberger seeking to restrain the access of TPG Newbridge Myer, and three of its subsidiaries resident in tax havens, to the $1.58bn held in the NAB account.

Speed was the key to success, the court was told by the ATO's barrister Terry Murphy SC. "From the commissioner's experience when dealing with structures such as these, one of the effects is that once funds are remitted offshore, then there is nothing in Australia which can be used to satisfy the judgment of a debt," Murphy said.

The point here is that each private equity deal is conducted through vehicles specifically created to meet the needs of a particular transaction. The two entities targeted by the ATO held no other assets in Australia but the cash in the NAB account. With that cash gone, there really is nothing for the ATO to chase.

Effectively, the ATO was working on the basis that the only likelihood it had of successfully pursuing TPG for its assessed tax bill was to keep the money in Australia. It failed.

Which leaves us where? Well, by November 19 NAB must return to the Supreme Court with the names of the bank accounts that the "My Piece of Myer" funds were sent to. It has to provide details of the institutions the money was sent to, the account numbers and the owners of those accounts for each and every transfer out of "My Piece".

So, at the very least, the ATO will know where the TPG funds landed. But, if we are to be guided from the representations made to the Supreme Court, that is likely to be the end of that.


"THERE is little love lost between business and the Tax Office at the best of times, but when commissioner Michael D'Ascenzo lobbed a grenade at the international investors who had made a $1.5 billion profit selling their Myer Holdings shares to the public, the shrapnel flew around the world.

Not only had the ATO challenged the right of buy-out specialist Texas Pacific Group's clients to keep almost $680 million from the Myer float, but its targeting of the first and largest of an expected avalanche of Australian IPOs as the sharemarket rebounds from the global financial crisis sent an ominous message to the financial wizards.

Suddenly, the phrase tax haven seems to be an oxymoron, and fund managers and investors are wondering whether Australia - always a small percentage of the billions they invest - is worth bothering about.

Perhaps, however, they should not have been surprised. Australia has been in the vanguard of a global push to break open the world's tax havens, and the ATO's behaviour is a very public reinforcement of its credentials as a member of that club.

What happened last week in Australia was just one small part of a global movement, a new era of increasingly low tolerance for the so-called tax havens. The world's developed countries have finally grown tired of watching their tax dollars winging overseas to lands of castles and mountains, and sunny, palm-fringed islands. What this will mean for the likes of TPG and other private equity operators, for whom tax havens are ubiquitous and indispensable, is unclear.

The use of tax havens is not only an essential tool of private equity companies, hedge funds and the like. It is also widespread among Australia's biggest corporate names, according to the University of Sydney's David Chaikin, whose book on tax havens and tax evasion will be published next month.

Dr Chaikin says most major Australian companies doing business internationally would have dealings with one or more tax havens. He says companies do it for a whole series of reasons - for convenience, for the expertise of particular jurisdictions, and some of them would do it for tax reasons as well".

This week, the offshore entities of Australian operations like the Future Fund and Commonwealth Bank were highlighted by the media against the background of the Myer story. CBA, for instance, attracted attention for a Maltese subsidiary, but its annual report also lists an entity in the Cayman Islands, one in Luxembourg and one in Bermuda.

A glance through the records of several other big Australian companies confirms that such entities are not rare. Although BHP Billiton's "list of significant subsidiaries" in its latest annual report reveals no operations in tax havens, a filing to the US Securities and Exchange Commission in June contains the complete list of BHP subsidiaries, significant or otherwise.

Among the 420 BHP entities scattered around the globe are a handful domiciled in Guernsey, Jersey, the Cayman Islands, Bermuda and the British Virgin Islands. And Macquarie Group's list of investments in subsidiaries includes several in the Caymans and one in Jersey.

But, as the ATO points out, having an account or company in a tax haven is not against the law, nor any evidence of wrongdoing. "Most transactions between Australia and tax havens are lawful international dealings … and not attempts to evade or avoid tax payable in Australia," Mr D'Ascenzo said in an ATO release earlier this year.

"Tax havens seek to attract international trade and investment [with] financial, legal and tax systems that may be beneficial to some activities.

Indeed, the different sectors of the financial world all have their favoured havens, where the attraction is not so much the tax arrangements but the expertise, says Jason Sharman, of the Centre for Governance and Public Policy at Griffith University. For hedge funds, it's the Cayman Islands, where 80 per cent are domiciled. For insurance, it's Bermuda and Guernsey, and for banking, Bermuda is the haven of choice.

And some mining groups use tax haven holding companies so they can easily dispose of assets they own in countries where bureaucracy or corruption make such sales either costly or drawn out.

Not all tax havens are just beaches and palm trees and a couple of people in a small building, Dr Sharman says. If you look at places like Jersey or the Caymans or Bermuda, there are thousands of finance professionals there … a lot of the work isn't necessarily tax driven. For some sorts of financial services, the best in the world is not in New York or London, it's in the Caymans or in Guernsey.

ATO figures show $16 billion was sent directly from Australia to tax-secrecy jurisdictions in 2007-08, while $29 billion flowed back in. The figures include business, foreign exchange dealings and travel, the ATO says, as well as abusive use.

But there are many transactions not captured by those figures. If, for example, money left Australia for a legitimate tax jurisdiction, and proceeded to a tax haven from there, it would not be recorded in that figure - TPG's transfer of

$1.5 billion out of Melbourne to the Netherlands, Luxembourg and then the Cayman Islands would probably not be recorded in those figures.

[The available figures] would not capture the full extent of our relationship with tax havens," Dr Chaikin says. "We don't know what those numbers are - nobody knows that, and most other countries would have a similar problem."

A major international push to solve this problem is under way, and the number of jurisdictions that can truly be dubbed tax havens is shrinking. Cowed by threats of retaliation from OECD countries - especially the US - tax havens are signing information-sharing agreements that give the likes of Australia, the US and many others some access to their tightly guarded records.

At the G20 meeting in April, leaders agreed to apply sanctions to tax havens that failed to co-operate with the OECD.

And most are cooperating. As Dr Chaikin describes it, they are signing them at lightning speed - the list of agreements signed grows longer every week, with 15 completed in October alone.

Australia has signed five agreements since January, and nine in total, with tax havens including Bermuda, the Cook Islands and the Netherlands Antilles. Thirty are expected to be locked in by mid-next year.

A tax haven that signs enough agreements is elevated off the OECD's "grey list" and is, as far as the OECD is concerned, no longer officially a tax haven - Jersey, Guernsey, Luxembourg, Lichtenstein, Barbados, Bermuda and Cyprus are among those that have made the cut.

Just 20 jurisdictions remain on the grey list of countries that have promised to reform, but are yet to sign enough deals. At present, no countries are on the OECD's blacklist of unco-operative tax havens, after the last three, Andorra, Liechtenstein and Monaco, were elevated in May.

The crackdown comes after years of tax haven ambivalence by the US and Britain, and Dr Sharman suggests they have become convenient scapegoats for politicians in the wake of the global financial crisis.

He has been to 20 so-called tax havens in the Indian Ocean, the Caribbean and Europe, and says many turn to financial services because there's not much of an alternative.

If the options are growing sugar cane or tourism, which is very fickle, then what do you do? Most of these tax havens don't have many options. The Cayman Islands is three flat rocks.

He notes, however, that Australia has been consistently hostile to tax havens for decades. The high-profile Operation Wickenby, the ATO-led multi-agency crackdown on abusive tax haven arrangements is but the latest example.

It is hoped that the new deals with tax havens will feed Wickenby more valuable leads on tax fraud, but it remains to be seen if this proves to be the case. The interesting question now that they have entered into these agreements is how is it going to work out in practice? Dr Chaikin asks. It's a testing time. No one knows yet.

Dr Sharman, for one, is sceptical. Australia can't just go to the jurisdiction and say 'please give us all the bank information on what Australians have bank accounts with you'. To have a request you have to have a specific name and specific reason for wanting the information.

It may be, however, that the agreements serve as a deterrent, as may this week's move on TPG, which is being seen as the ATO widening its ambitions - trying to limit what it considers leakage' of tax revenue through structures set up purely to defeat the taxing capacity of the ATO.

In the case of TPG, BusinessDay believes it was the presence of noted tax haven Luxembourg in the chain of fund transfers that caught its eye.

When Myer floated, a $1.5 billion share of the proceeds was transferred out of Melbourne to the Netherlands, a country with which Australia has a tax treaty.

But the ATO believes TPG had no intention of paying tax in Australia or the Netherlands. The funds were shifted to Luxembourg, where TPG could argue that the money had come as a dividend from an overseas subsidiary - a tax-free windfall under European tax laws.

And what was that offshore subsidiary? The ultimate holding company of TPG's Myer shares - which was located in the Cayman Islands."

A small window into transactions for tax avoidance


"Commonwealth Bank has settled a potentially explosive court action brought by two former high-profile traders, days before the NSW Supreme Court was to begin hearing the case.

Former treasury and markets boss Marten Touw and his expert trader, Vincent Hua, launched breach-of-contract proceedings against the bank after they were summoned to chief executive Ralph Norris's office in August 2007 and summarily dismissed.

In their claims for a total of $33.4 million, they alleged Commonwealth's board and senior management approved transactions in which tens of millions of dollars in profits were wound through offshore structures designed to reduce tax.

The bank retaliated by accusing the pair of inflating trading profits and misuse of their expense accounts.

With the hearing to start on Monday, The Australian has learned that the matter has been settled on confidential terms.

Contacted yesterday, Mr Touw and Mr Hua confirmed the resolution.

"It has been settled amicably to the satisfaction of both parties," Mr Touw said, refusing to comment further.

Settlement of the bitterly fought case is the latest in a series of U-turns by the bank.

In June, Mr Norris acknowledged "shortcomings" in how Commonwealth lent money to customers involved with the collapsed Storm Financial, despite saying in February that the situation Storm got itself into was "their responsibility".

Before that, late last year, Mr Norris blamed Merrill Lynch for the belated disclosure of a blowout in the bank's bad debts that led to cancellation of a $1.65 billion institutional placement.

Commonwealth was forced to repeat the exercise the next day with a UBS-underwritten placement at $26 a share, $1 lower than the aborted Merrill raising.

Earlier this month, Mr Norris denied responsibility for the debacle, but agreed Commonwealth would pay the maximum fine of $100,000 under an infringement notice issued by the Australian Securities & Investments Commission.

He initially adopted a hardline position on the case brought by Mr Touw and Mr Hua.

At the bank's annual meeting in November 2007, he said there were "issues of substance" relating to the departure of the duo.

Two days later, the bank upped the ante by filing a cross-claim.

Mr Touw, whose 2006 remuneration of $7.1m outstripped Mr Norris's nine-month pay of $4.1m, claimed $14.24m in his breach of contract case, including $12.11m in cash bonuses and the rest in shares.

Mr Hua said he was owed $19.2m, of which $16.65m was cash bonuses.

In its cross-claim, Commonwealth said $70.7m worth of profits from three transactions (Carbon, Perls III and Concordia) were transferred from the bank's capital management book to its asset and liability management portfolio.

"In the absence of these profit transfers ... the plaintiff would not have been awarded a short-term incentive in respect to those amounts," the bank said.

Mr Hua rejected that, arguing the deals raised capital for the bank that went through other countries on a "tax-advantaged basis".

In his statement of claim he said the $45m Concordia deal in early 2006 was a "cross-border tax arbitrage" between Commonwealth and an unnamed US bank.

"Each of the transactions were approved by the board, executive committee, chief executive officer, chief financial officer (and) head of tax," he said.

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