KATHRYN PHILLIPS, LAZARO SANDOVAL, HENRI SAINT-SURIN

FOREIGN BANKING & TAX HAVENS

OVERVIEW

Foreign Banking

Depositors place securities/funds in financial/banking

institutions located overseas

Depositors do this to…•Take advantage of lower or no taxes•Achieve greater privacy •Protect assets against local financial or political instability•Take advantage of less regulation and easier access•Take advantage of higher rates of return offered by some foreign banks

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OVERVIEW

Tax HavenA country or territory that has lower

or no taxes and provides a safe place for deposits in order to attract

capital

Tax havens create tax competition among

governments in order to maintain or attract depositors via the

altering of banking/fiscal policies and rules.

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TAX HAVEN DEBATE

For•Avoidance of excessive tax burden•Greater security and lower risk•Privacy•Tax competition encourages pro-growth tax policies

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TAX HAVEN DEBATE

Against•Lack of transparency •Tax avoidance and loss of tax revenue•In some instances, it perpetuates illegal activity i.e. money laundering

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LAWS AND REGULATIONS AFFECTING FOREIGN BANKING & TAXES

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THE HIRE ACT (THE HIRING INCENTIVES TO RESTORE EMPLOYMENT ACT)

Law was passed to provide payroll tax breaks for businesses to hire unemployed workers, but includes a number of anti-evasion provisions relating to international compliance

•Key Provisions:• Reporting on Foreign Accounts: must report on tax return

if the amount in the account is $50,000 or more

• Statute of Limitations of Cross-Border transaction: extended from 3 to 6 years where more than $5,000 in income is omitted

• Penalties: The 20% penalty that applies would be increased to 40% for transactions involving foreign accounts where the taxpayer failed to disclose reportable information

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PUBLIC LAW 111-226 “THE ACT”

This law was put in effect to counter the issue of having foreign taxes paid abroad to be credited against U.S. tax on foreign earnings

•Key Provisions• Preventing Splitting Foreign Tax Credits from

Income: firms would no longer be able to recognize and take credits for foreign taxes paid without reporting the income that gave rise to the foreign taxes

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P.L. 111-226- CONTINUED

• Key Provisions

• Denial of Foreign Tax credits for Covered Asset Acquisitions: prevent firms from obtaining credits for excess taxes

• Repeal of 80/20 Rules: dividends and interest paid by a domestic corporation are generally U.S. source income and subject to gross basis withholding if paid to a foreign person. But interest and dividends paid by a firm with at least 80% of its gross income foreign source are not subject to withholding.

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BANK SECRECY ACT CURRENCY AND FOREIGN TRANSACTIONS

REPORTING ACT

• Anti-Money Laundering Law passed by Congress in 1970• Requires financial institutions in the United

States to assist U.S. government agencies to detect and prevent money laundering• Financial Institutions must file reports of cash

purchases of negotiable instruments over $10,000 and report suspicious activity that might signify tax evasion or money laundering

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FATCA (FOREIGN ACCOUNT TAX COMPLIANCE ACT)

Requires foreign banks to find all American Account holders and disclose their

balances and other relevant information to

the IRS

If foreign banks fail to report to the IRS, it

would be subject to a 30% withholding tax on

income from US financial assets

Account holders would be subject to a 40%

penalty on understatements of

income in an undisclosed foreign financial asset

American Citizens Abroad, an organization

based in Geneva representing the interest

of Americans living abroad has launched a

campaign to repeal FATCA

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LEGISLATIVE PROPOSALS

• The Stop Tax Haven Abuse Act• Authorize special measures to stop offshore abuse by

allowing Treasury to take specified steps against foreign jurisdictions or financial institutions that impede U.S. tax enforcement.

• Will Strengthen FATCA & detection of offshore activities and establish rebuttable presumptions to combat offshore secrecy

• The American Jobs and Closing Loopholes Act• Source Rules on Guarantees: The treatment of guarantee

fees for interest and payment for services are unclear. When payments for services are sourced to the country where the service is performed, it allows U.S. subsidiaries of foreign firms to make deductible payments that reduce U.S. income with paying the withholding tax as they would with interest. This act will prevent firms from doing this

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CRITICISMS OF ENACTED LEGISLATION

• Many argue that the cost of compliance for these laws may exceed the revenue that is expected to come from it• Laws targeting international institutions such as

FATCA will significantly discourage foreign investment in the U.S and negatively impact U.S. businesses operating in global markets• Compliance is sometimes so expensive for non-

U.S. banks that they are refusing to serve American investors

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CRITICISMS OF ENACTED LEGISLATION – CONTINUED

• World renowned tax havens like Switzerland and the Caymans are not always willing to comply with American laws because it would moderate their legitimacy as a tax haven• These laws create many biases, such as the

targeting of Americans living abroad as opposed to Americans living at home. It tries to address the problems of tax evasion but does not do enough to combat tax avoidance, which is not illegal but costs money

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OPPOSITION TO FATCA

• Banks argue that the measure imposes steep compliance costs and unrealistic deadlines• Creates significant hassle and paperwork for U.S.

citizens living abroad – extra tax forms and very high penalties• Expatriates complain that most of the information they

are now required to report is already covered in the Foreign Bank and Financial Accounts form, known as FBAR

• The United States is alone among industrialized countries in taxing on the basis of nationality, rather than residence

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OPPOSITION TO FATCA

• To avoid withholding, foreign banks must enter into an agreement with the IRS to:• Identify U.S. accounts;• Report certain information to the IRS regarding U.S.

accounts; and• Withhold a 30% tax on certain payments to non-participating

foreign financial institutions and account holders unwilling to provide the required information.

• Many Americans are finding it difficult to open legitimate new accounts abroad and facing closure of old ones based on their nationality

• Some foreign banks have decided to refuse accounts to Americans rather than deal with this new law

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POLICY PROPOSAL

• Created unintended problems and threatens investment• Placed extensive obligations on foreign financial

institutions• These institutions are now reluctant to accept American

depositors • Example: Compliance costs are estimated between $150

million to $200 million for every medium sized bank.

We need to reform the policy in order to:1. Curtail tax avoidance and ensure “tax justice”2. Allow for the free movement of capital and

investment

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POSSIBLE POLICY ALTERNATIVES TO FATCA

• Make broad changes to International Tax Rules • Eliminate deferral for specified tax havens or

countries with tax rates below U.S. rates• Expand multilateral and bilateral information

sharing • i.e. European Union Directive, expanding treaties to tax

havens, OCED bilateral Tax Information Exchange Agreement

• Sanctions on non-cooperative tax havens, ideally through a multi-lateral approach.

• Strengthen Report of Foreign Banks and Financial Accounts (FBAR) rules, resulting in more information exchange and allowing DOJ to pursue more tax haven cases. 19

OUR PROPOSAL

A number of proposals have already introduced in the U.S. Congress. These proposals can be modified and reintroduced to address tax havens without overburdening American depositors and foreign financial intuitions.

1. Reintroduce the major provisions of the “Stop Tax Haven Abuse Act” introduced by Sen. Carl Levin

• Close Credit Default Swap loophole• Prevent U.S. companies from claiming overseas status and close

foreign subsidiary deposits loophole• Strengthen anti-money laundering programs and encourage

greater information sharing between regulators, law enforcement and the IRS

• Allow treasury to take specified steps against foreign jurisdictions that impede U.S. tax enforcement., i.e. sanctions.

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OUR PROPOSAL

2. Implement Senate Finance Committee recommendation outlined in their March 12, 2010 proposal.

• Require FBAR report to filled with tax report• Double fines and penalties on payments attributable to offshore

transactions• Require entities transferring funds offshore to report to the IRS the

amount and destination. Publicly traded companies are excluded

3. Burden of proof should be placed more heavily on U.S. depositors and corporations. For foreign financial institutions to comply with U.S. requirements this necessitates non-compliance with their own domestic laws.

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