Privacy; a Necessity, not a Luxury

There is an interesting article named "Privacy; a Necessity not a Luxury" posted by Corbett & Kish at its blog.

"The year was 1917 and the location was Latvia. A poor and mostly agrarian country in Northern Europe’s Baltic region bordered to the north by Estonia and to the south by Lithuania. My grandparents were children at the time. As the saying goes, “timing is everything,” and theirs could not have been much worse. The Bolshevik Revolution began in October that year starting in Petrograd (now St. Petersburg). It was quickly followed by another civil war - later to be coined the Russian Revolution - and spread throughout the various countries doomed to become possessions of the Soviet Union. It would be bloody and last until 1922. My great-grandfather became a casualty when a local preacher turned him in as a dissident and he was shot. Having personally witnessed this event, my grandfather would flee to the United States, leaving behind a world and relatives he would never see again. He met a woman, also of Latvian heritage, and together they started a new life.

Vladimir Lenin got his wish and rose to prominence, becoming Russia’s most powerful figure. Although Lenin’s post-revolutionary Soviet Union would forge much advancement – most notably education and industrial development - the cost would be enormous. The State was to become godlike. Human rights and the individual spirit were quashed. Citizens feared to even whisper dissent for Siberia, or worse would be a likely sentence. The seeds of the KGB had been sown, and privacy was altogether nonexistent.

History teaches us many lessons if we are only willing to pay attention. Perhaps none as profound and recurring as the importance of protecting an individual’s right to privacy which equates to civil liberties. It is impossible to live in peace and obtain true prosperity without privacy. The tragic events of 9/11/01 changed the landscape of human rights in the United States and throughout the world. If the truth be told, however, personal privacy was under attack long before that day. And while the right to privacy is not completely lost, it should give one pause that history is full of examples wherein these privileges become reduced under the guise of “national security”.

In recent years the same holds true; the inception of the Patriot Act in 2001 gave law enforcement agencies more authority to search the phone, email and financial records of some citizens while wiretaps and searches of suspected homes and businesses were made more accessible. International security measures that have inhibited the civil liberties of citizens include hidden cameras & microphones in public transportation areas like taxis and subway stations as well as roving taps, illegal search & seizures and more.

As recently as 2006, USA Today reported that The National Security Agency has been secretly collecting the phone call records of tens of millions of Americans, using data provided by AT&T, Verizon and BellSouth. The database is currently the largest ever collected, and, while it focuses mostly on international calls, either those ending or originating outside the U.S., it does keep track of domestically placed calls as well.The struggle to preserve essential human rights is a theme most recently tapped by Hollywood. In 2009, it is paying tribute to those individuals who stood against tyranny with films such as Tom Cruise’s “Valkyrie” or Daniel Craig’s “Defiance”.

While it remains to be seen the acclaim these films receive, the mere fact that Hollywood producers have allotted their production dollars to bring these true stories to the big screen further affirms the emotional connection we feel towards human rights and those who guard them.

In no way are we promoting civil disobedience, nor are we attempting to draw a parallel between western society and tyrannical governments of long ago. Yet we do feel it is essential for individual citizens to take common sense steps to protect themselves from the prying eyes of individuals seeking monetary gain or the potential of a government becoming dysfunctional and over-stepping its bounds. The economic events of 2008 and collapse of some of the world’s largest banks re-emphasizes this need. Anyone of substantial wealth should be taking measures to diversify and protect their privacy. It is really not that difficult to find a safe haven from these turbulent times. One of our favorite strategies is to utilize Switzerland and have our clients “take matters into their own hands” through owning their own financial facility. This allows for effective planning and extensive control. There are, however, other locations and other strategies that can be implemented. The key is to be proactive.

The lessons to be learned from the past are not ivy tower philosophy or vague political rhetoric but real-world and relevant to current events. We live - as the ancient Chinese saying goes – in interesting times.

International Bank Secrecy and Tax Evasion

Very interesting article appearing in November 26, 2008 in International Tax Blog (http://intltax.typepad.com/intltax_blog/2008/11/foreign-bank-secrecy-tax-evasion.html) :

"Foreign Bank Secrecy & Tax Evasion

On July 17, 2008, in conjunction with a hearing regarding Tax Haven Banks and U.S. Tax Compliance, the Permanent Subcommittee on Investigations of the U.S. Senate released a report (the “Subcommittee Report”) that reads like a spy novel. The Subcommittee Report reviews the “global tax scandal” related to LGT Bank in Liechtenstein, and the “international tax scandal” related to UBS AG in Switzerland.

The LGT scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT. The UBS AG scandal broke when the U.S. arrested a private banker formerly employed by UBS AG on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.

LGT Bank in Liechtenstein
LGT Bank in Liechtenstein is owned and controlled by the royal family in Liechtenstein.

According to the Subcommittee Report:
LGT employed practices that could facilitate, and in some instances have resulted in, tax evasion by U.S. clients. These LGT practices have included maintaining U.S. client accounts which are not disclosed to U.S. tax authorities; advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts. It was also not unusual for LGT to assign its U.S. clients code words that they or LGT could invoke to confirm their respective identities. LGT also advised clients on how to structure their investments to avoid disclosure to the IRS . . . .

For many of its U.S. clients, LGT helped establish one or more Liechtenstein foundations. Under U.S. tax law, the IRS generally views Liechtenstein foundations as foreign trusts. U.S. persons with an interest in a foreign trust, including a Liechtenstein foundation, are required to disclose the existence of the trust to the IRS by filing Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner). Financial penalties for failing to file these forms can be confiscatory.

The foundations provided strong secrecy protections and yet gave substantial control over the foundations to their beneficial owners. In one case, a U.S. citizen pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong. In fact, the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation which was, in turn, wholly owned by the U.S. citizen’s Liechtenstein foundation.

The foundations often would not name the grantor or his/her family members as beneficiaries. Instead, the foundation instruments would include a complex mechanism providing for the naming of beneficiaries. Despite these mechanisms, internal LGT documents were clear as to the the true beneficiaries of the foundation.

At times, LGT would set up for the foundation what LGT has sometimes referred to as a “transfer corporation” to help disguise asset flows into and out of a foundation’s accounts. This transfer corporation acts as a pass-through entity that breaks the direct link between the foundation and other persons with whom it is exchanging funds, making it harder to trace those funds.

A strategy employed by LGT to enhance secrecy and client anonymity was to limit the ability of outside parties to trace client communications back to Liechtenstein. To achieve this objective, LGT not only instituted a policy of retaining client mail at the bank in Liechtenstein, or sending mail to locations outside of a client’s home jurisdiction, but also undertook efforts to minimize the ability of outside parties to trace telephone calls back to the bank and even the country itself. One LGT document, for example, providing information on how to contact a client, instructed that calls should be made only from public phone booths outside of Liechtenstein.

The Subcommittee Report stated:
These LGT accounts together portray a bank whose personnel too often viewed LGT’s role as, not just a guardian of client assets or trusted financial advisor, but also a willing partner to clients wishing to hide their assets from tax authorities, creditors, and courts. In that context, bank secrecy laws have served as a cloak not only for client misconduct, but also for bank personnel colluding with clients to evade taxes, dodge creditors, and defy court orders.

UBS AG
UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the world’s largest private banks catering to wealthy individuals. From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients. These UBS practices included maintaining for an estimated 19,000 U.S. clients “undeclared” accounts in Switzerland with billions of dollars in assets that have not been disclosed to U.S. tax authorities, and assisting U.S. clients in structuring their accounts to avoid U.S. tax reporting requirements.
UBS assured its U.S. clients with undeclared accounts that U.S. authorities would not learn about them, because the bank is not required to disclose them; UBS procedures, practices and services protect against disclosure; and the account information is further shielded by Swiss bank secrecy laws. In November 2002, for example, senior officials in the UBS private banking operations in Switzerland sent a letter to U.S. clients about their Swiss accounts which states in part:
“[W]e should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator … [I]t must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. . . .

The Subcommittee Report indicated that UBS also provided training to its client advisors on how to detect -- and avoid – surveillance by U.S. customs agents and law enforcement officers. A UBS training document provides a series of scenarios designed to train its personnel. An excerpt from one of the scenarios is as follows:

After passing immigration desk during your trip to USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately you stored only very short remarks of the different meetings and no names.
As you spend around one week in the same hotel, the longer you stay there, the more you get the feeling of being observed. Sometimes you even doubt if all of the hotel employees are working for the hotel. A lot of client meetings are held in the suite of your hotel.
One morning you are intercepted by an FBI-agent. He looks for some information about one of your clients and explains to you, that your client is involved in illegal activities.

Question 1: What would you do in such a situation?

Question 2: What are the signs indicating that something is going on?

The document does not indicate UBS’ preferred responses to these questions.
The Subcommittee Report is 110 pages long and has many more details of the practices and procedures of LGT and UBS. UBS is currently under investigation by the SEC, IRS, and Department of Justice."

Schwidetzky: Musings on a German Tax Conference

Walter D. Schwidetzky shares his interesting "Musings on a German Tax Conference" on http://taxprof.typepad.com/:

"I have recently returned from a German tax conference on the value added tax (19% in Germany). Some musings:

A big issue for the value added tax in Europe is people gaming the system. As there is not a uniform value added tax in Europe, people will often buy a product in a country with a lower value added tax and then bring it into the country where they live. With higher end items like cars, this has mostly been stopped, but for other items it is a common problem, especially for people living near borders.
German maximum income tax rates are high by US standards, in the low 40%’s for income above around 60,000 Euros (around $81,000 depending on exchange rates). Germans may, however, effectively deduct payments for medical insurance and mandatory pension contributions. As a consequence, the net effective rate of income tax in the US and Germany, especially for middle class families, may not be that different once medical insurance and pension contributions are taken into account. Most Germans do not think their tax rates are too high, at least judging by the comments of people at the conference (who are mostly high earners). However, Germany significantly lowered its income tax rates in 2000, and its economy has done significantly better since then, providing some possible evidence of a move from the right side of the Laffer curve to more in the middle. While Germany’s unemployment rate has come down as a result of the recent boom in exports, it remains stubbornly high, around 8%, 15% in the former East Germany. At the same time, Germany has a shortage of skilled workers. I have been told that most of Germany’s unemployed have few skills and often a limited capacity to develop them. I should add that many Germans feel that the reunification has created many of Germany’s economic problems, which have been tough to solve. The unemployment rate in the former West Germany is comparable to that of the U.S.

Most Americans have a somewhat romanticized view of universal health care. While few Germans would support moving away from universal health care, most would agree that their system is badly in need of repair. There is a bewildering array of some 300 health insurance companies, mostly private, though some at least have a state association. A minimum amount of health insurance is required. Most who can afford it buy upgraded private insurance to get better care and better service. If you have the standard insurance, and you want to see a doctor, you don’t make an appointment; you just show up and wait until the doctor sees you. Might be an hour, might be half of a day. An American friend of mine gave birth to her third child in Germany. Initially she was put in a room with 7 other women, which freaked her out as she was used to US standards. She and her husband paid extra for a semi-private room. (A digression: When she and her husband asked for a circumcision, the doctor responded: ”Half or whole?” Not a question they wanted to answer incorrectly…). Many young German hospital doctors by the hour make the same as the janitorial staff. As a consequence, large numbers of young doctors are leaving Germany for better paying jobs in the US, Switzerland, and England. I would rather be sick with good insurance in the US than in Germany, but if I was poor, I would rather be sick in Germany where at least I would get treatment.

Most Germans probably also have a greater sense of social obligation to those less fortunate than most Americans. Most Germans trust their government more than most Americans trust theirs. Governmental paternalism is much more accepted in Germany than the US. The reach of this would surprise many Americans, however. For example, free speech is not allowed nearly to the same extent in Germany as it is in the US. Also, Moslem women who want to teach school are not allowed to wear head scarves (which has the effect of preventing many from entering the teaching profession). Germans commonly feel that the scarf subjugates women and also feel that teachers’ religious views should not be obvious to students. These considerations trump religious freedom issues. The Church of Scientology is at risk of being outlawed in Germany, something that could not happen in the US. (I might add that there is some hypocrisy here. In Bavaria it is common to see crosses on the walls in courts and schools.) Last I checked, if you change abodes in Germany, you are required to register with the police. Name changes are generally not allowed.

Many of my liberal colleagues probably would prefer the German system to the US system. Having lived in Germany and experienced German paternalism first hand, I am more hesitant, but I don’t doubt the US and Germany could learn from each other. As Prof. Ted Seto pointed out in a recent posting on TaxProf, the US needs to pay more attention to how other countries do things. There is plenty we could learn."

Constitutional Restraints on Corporate Tax Integration

Walter Hellerstein (University of Georgia School of Law), Georg Kofler (NYU School of Law) and Ruth Mason (University of Connecticut School of Law) published the report Tax Law Review, Forthcoming. Available at SSRN:http://ssrn.com/abstract=1101560

Here is the Abstract:

States that conclude that double taxation of corporate profits unacceptably distorts the choice of business form, the debt and equity capitalization of companies, and the character and timing of profits distributions may adopt integrated corporate tax regimes, but states almost always limit such re gimes to domestic dividends¿those paid by a corporation taxable in the state to a shareholder also taxable in the state. In contrast, states generally deny double tax relief to cross-border dividends. Failure to extend relief to cross-border dividends distorts locational investment decisions.

Although restricting double tax relief to domestic dividends does not violate international tax nondiscrimination rules, more stringent nondiscrimination rules govern state taxation in the European Union and the United States. Member states of those common markets may not constitutionally prefer domestic commerce over cross-border commerce, and that constitutional constraint limits EU and U.S. states' ability to confine double tax relief to domestic dividends. This symposium paper establishes the basic framework for taxation of cross-border dividends, closely analyzes and compares constitutional challenges to states' failure to extend double tax relief to cross-border dividends in Europe and the United States, and identifies the principal policy considerations emerging from the nascent cross-border dividend jurisprudence in the European Court of Justice.

International Tax-Shelter Plot Thickens; Mogul Sues UBS

International Tax-Shelter Plot Thickens; Mogul Sues UBS
Posted by Dan Slater on September 17, 2008

"Back in May, the Feds unsealed an indictment against a former UBS banker, Bradley Birkenfeld, for allegedly helping one of the world’s richest men, Igor Olenicoff, evade taxes on $200 million held in Swiss and Liechtenstein bank accounts. When Birkenfeld pleaded guilty, a month later, he explained that he participated the alleged scheme to help Olenicoff evade taxes. “I was employed by UBS,” said Birkenfeld, “I was incentivized to do this business.”

Yesterday, the UBS-Olenicoff plot thickened, when Olenicoff, a billionaire property developer, sued UBS and nearly a dozen current and former executives of the bank in federal court in Santa Ana, Calif. Here’s the NYT report.

The suit reportedly accuses UBS, a small Swiss firm, and two private firms based in Liechtenstein and their employees of luring Olenicoff into becoming a client and a participant in a deceptive investment scheme intended to cheat the IRS of millions in taxes. The suit also contends that Birkenfeld, the former UBS banker, received a large settlement from UBS after complaining that it had encouraged its private bankers to violate U.S. tax laws.

The suit claims that UBS turned over Olenicoff’s name to the IRS, a move that would have been surprising for a Swiss bank that follows a centuries-old tradition of banking secrecy. Olenicoff is accusing the defendants of fraud and breach of fiduciary duty, among other things.
UBS said it had not seen the complaint and thus could not comment upon it.
In December, notes the Times, Olenicoff pleaded guilty to criminal charges of tax evasion and lying on his tax returns, all in connection with his offshore private banking accounts. He agreed to pay $52 million in back taxes.

US Tax Holidays

Posted by Nanette Byrnes, from Business Week. (http://www.businessweek.com/careers/managementiq/archives/2008/08/tax_holidays.html )

It’s August, so you may be on vacation. But for an awful lot of corporations operating in the US, every day is a tax holiday. So says a report out today by the US General Accounting Office highlighting the number of US- and Foreign-controlled companies that have claimed zero tax liability in recent years.

The GAO’s study was ordered up by Senator Carl Levin, Democrat from Michigan and chairman of the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Government Affairs. Its conclusions focus on the fact that large foreign corporations are more likely to avoid taxes than US companies.

Like most of these studies, the GAO’s report looks at taxes as accounted for on the corporate income statement, not the cash taxes actually paid. (By that measure, 42 of the companies in the S&P500 had an actual tax rate of less than 10% over the past 5 years, another 58 paid less than 16%, and neither group paid anything like the statutory corporate tax rate of 35%).

According to the GAO, in recent years the gap in the number of US and foreign companies enjoying a tax free year has significantly narrowed. Though the authors didn’t go into exactly how both groups are sidestepping the tax man, they did indicate that transfer pricing looks to be a culprit. Transfer pricing is how much one part of a company charges another for something.

In a 2003 story on corporate taxes, we dug up and example of how this worked for hotel chain Hyatt.:
In one U.S. tax court case that is still pending, the IRS accused hotelier Hyatt International of paying too little for the Hyatt brand and other services provided by its U.S. parent. The IRS alleges that from 1976 to 1988, various Hyatt companies underreported income by $100 million because of those lowball fees. In an October, 1999, ruling on some aspects of the case, U.S. Tax Court Judge Joel Gerber ruled that the $10,000 one-time fee International had paid for each hotel bearing the Hyatt name was far too low. Hyatt declined to comment because the broad case is ongoing.

Tax economist Martin Sullivan, thinks half of the sharp drop in the foreign tax rates of U.S. multinationals — from 49.6% in 1983 to 22.2% in 1999 – is the result of similar shifting of income from foreign countries with a higher tax rate to those with lower rates.
Beyond shedding some light on the impact of transfer pricing, the report also shows:
• Fewer large foreign-controlled companies are paying no taxes today than in the past. That figure has declined since its 2001 peak of more than 50%.

• More US companies (large and small) reported zero tax liability in 2005 (the most recent year included) than foreign-controlled companies.

• 72% of foreign-controlled companies reported no tax liability some time between 1998 and 2005, while 55% of US-controlled companies did so.

• The biggest tax breaks come from deductions for salary and wages, and from a category called “other” that includes travel expenses, legal fees, and insurance, as well as dividends paid on stock owned by employee stock ownership plans.

The New Global Hunt for Tax Cheats

The New Global Hunt for Tax Cheats
Article published by by Keith Epstein and Mark Scott in Business Week (http://www.businessweek.com/globalbiz/content/may2008/gb20080523_754004_page_2.htm).

By forming multinational investigative teams, the IRS and other tax collectors are cracking down on evaders and giving new meaning to globalization

Government authorities from Australia to the U.S. are hunting big game together. Their prey? Wealthy tax evaders—as well as the asset managers, banks, and accountants who help prosperous people conceal cash in offshore bank accounts. For decades, globalization has afforded an edge to tax cheats. Now it's working for the tax cops, too.

Buoyed by new multinational investigative teams, agreements with banks to open once-secret records, tougher penalties for cheats and third parties, and a thirst for billions of dollars in recoverable revenue, the new globe-spanning tax man has got the world's mega-rich worried they could run afoul of the mounting crackdown.

With so much money at stake, it's no wonder the U.S. Internal Revenue Service, Germany's Bundesministerium der Finanzen, Britain's Her Majesty's Revenue & Customs, and other international colleagues are eager to nab wealthy tax evaders. Almost $6 trillion is estimated to be hidden from tax authorities across the globe—Germany's central bank suggests $775 billion in German assets alone have been secreted out of the country. In the U.S., the IRS reckons $295 billion of potential tax revenue goes uncollected—much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments.

A Collaborative Effort
To close this "tax gap," U.S. investigators and their comrades overseas are cooperating as never before. Since the September 11 terrorist attacks, tracking money movements has become a priority. In response, law enforcement and banks have started to share more information about possible tax evaders. Governments also realize they have a lot to gain from stiffer penalties that return more money to underfilled coffers.

"There's a lot of offshore tax evasion, so governments are trying to find tools to combat that," says Grace Perez-Navarro, deputy director of tax policy and administration at the Paris-based Organisation for Economic Co-operation & Development (OECD). "Governments realized there was greater value in working multilaterally."

Cross-border collaboration has become a buzzword in global law enforcement circles. Under an OECD-negotiated treaty, 19 countries, including states as diverse as the U.S., Italy, and Azerbaijan now can prosecute tax evaders within their jurisdictions on behalf of other signatory countries. The European Union passed a similar law in 2000, while Brazil, India, and South Africa began cooperating with each other to identify suspect transactions in 2006. Their targets typically conceal assets in the roughly 40 nations generally seen as tax havens, which are analyzed routinely by international organizations such as the OECD and the International Monetary Fund.

The IRS Joins Forces
These days, an investigator following a lead need not even cross a border for help from his international colleagues: He or she merely has to walk down the hallway. Since 2004 tax shelter sleuths from five countries—the U.S., Britain, Australia, Japan, and Canada—have shared work space, tactics, and information in a joint office at IRS headquarters in Washington. The success of the operation led to its expansion last year, including the opening of a London-based outpost at Her Majesty's Revenue & Customs.

The physical setup of this so-called Joint International Tax Shelter Information Centre reflects the sensitivity of the work. Each member of the unit—which is physically separated from the rest of the IRS—has a separate, closed office, allowing for confidential communication with counterparts back home, as well as discreet one-on-one conversations with local colleagues and the IRS. "The office space is configured in a manner that reflects the critical need to protect the privacy of taxpayer information," according to an IRS spokesman.

The IRS argues that such cooperation is essential in a world of globalized money flows. "Cross-border migration of capital and people has made this a more integrated world, and the IRS is working closely with other national tax administrators to ensure that we have a global view of our work," says the top tax official in the U.S., IRS Commissioner Douglas Shulman. This close work with other tax authorities, he adds, has allowed the IRS and its equivalents in other nations to achieve "a new level of cooperation in identifying, developing, and sharing leads on abusive tax transactions and schemes."

Such cooperation will only increase as governments clamp down on tax evasion, says Daniel Feingold, senior partner at Britain-based global tax consultancy Strategic Tax Planning. "There's a definite push for this sort of thing," he says.

Squeezing Tax Havens
All of this has put the squeeze on tax havens such as Liechtenstein and Andorra that have long-held traditions and laws supporting no-questions-asked banking for wealthy clients. "The number of countries safe for this activity is dwindling," says Beverly Hills-based tax lawyer Edward Robbins Jr., a former assistant U.S. attorney who oversaw tax prosecutions in California. "There aren't that many left, frankly."

For decades, banks in places such as Switzerland have flourished by offering seemingly ideal havens from the tax man. Switzerland's code of silence, for instance, goes back at least 200 years. And during World War II, Nazis and Jews alike made use of Swiss bankers' discretion. Since then so have corporations and non-governmental organizations—as well as drug traffickers and corrupt dictators.

Yet even this Alpine paradise has conceded to mounting international pressure (BusinessWeek.com, 5/21/08). Most major Swiss banks have signed up with the U.S. to be "qualified intermediaries." The system gives the IRS access to any account containing U.S. securities and requires the filing of tax and other forms with the U.S. that identify clients and balances—not exactly the image of tight-lipped discretion portrayed in movies such as The Spanish Prisoner and The Bourne Identity. Even the Swiss government admits to a disconnect between tradition and current reality. "Swiss banking secrecy is in no way absolute," cautions the Swiss embassy's Web site.

Often under pressure, other tax havens have followed suit. Agreements with traditional ports-of-call for evaders like Malta and Bermuda have aided the IRS and its international counterparts. Now tax collectors don't even have to pick their way through complicated avoidance schemes: They can make a case against alleged tax cheats simply by catching missing or falsified paperwork.

Elaborate Web
Here's how it works. For years, a bank client with any kind of interest in an overseas account valued at more than $10,000 has had to file a special form with the IRS disclosing that fact. But to avoid taxation, he might not file the form, or might underreport the value of the account on his tax return. More deviously, he might conceal transactions in an elaborate web of trusts and holding companies. Now, thanks to more international sharing of data, the IRS may find out about the account anyway—from the bank itself.

The recent high-profile indictment of former UBS (UBS) banker Brad Birkenfeld shows just how tough the authorities are getting. Birkenfeld's wealthy client, Igor Olenicoff, has pleaded guilty to filing false tax returns and agreed to pay $52 million in back taxes. Both Olenicoff and Birkenfeld, who was born in Boston and lives in Switzerland, are believed to be cooperating in a continuing investigation that began with the discovery of $200 million allegedly concealed in European tax havens on behalf of Olenicoff, a Russian émigré-turned-California real estate developer.

As a result of that probe, the extended arm of U.S. law may reach not just other clients of Birkenfeld (and those of an alleged collaborator in Liechtenstein named Mario Staggl, who specializes in the intricacies of tax havens and trusts) but also other employees of UBS. "This is not an isolated incident," says David Schwedel, a Florida entrepreneur who is now an investment partner of Birkenfeld's. "He won't be the last banker called in for questioning. There will be a lot of bankers called into this. They're going after others at UBS and any U.S. individuals involved with the bank."

Alerted About the Risks
Kevin Packman, a Miami lawyer who represents taxpayers running afoul of the IRS, says he's amazed that even sophisticated CPAs with major corporate and individual clients seem unaware of the international push against money held offshore. Tax lawyers around the world tell of clients—often expatriates—who are becoming increasingly worried about being ensnared in the tightening net, thanks to publicity surrounding tax avoidance test cases in Europe and the U.S.

One lawyer tells of trying to alert a client in Argentina about the risks of failing to disclose information to authorities in the client's home country. Even so, the client persisted in wanting to keep income under wraps. But tax lawyers and wealth managers from Basel to Boston say the risks of doing so are rising. "It's obvious that there's a growing intolerance of tax avoidance in the Western world," says Ted Wilson, a senior consultant at Scorpio Partnership, a London-based strategic consultancy to those who advise wealthy clients.

Of course, when the cat is in Zurich or Malta, the mice will find other havens. Asset managers, tax lawyers, and investigators tell BusinessWeek that wealthy evaders are taking a closer look at new frontiers for concealment. One such nation is the Republic of Vanuatu, a tiny, tax-free South Pacific archipelago 1,000 miles from Australia. Local officials even promote their tax haven status to potential clients. "Attractions for the foreign investor" include "extensive secrecy protections," according to a Vanuatu business and taxation guide.

Wealthy individuals looking to evade taxes likely will always find ways to circumvent the law. Yet as enforcement finds new ways to share information, the number of prosecutions is expected to rise. That has put pressure on well-known tax havens, such as Liechtenstein, either to shape up or face the full brunt of global tax authorities. In fact, there are signs things are already changing. Says Strategic Tax Planning's Feingold: These days, "among experienced practitioners, no one would ever use Liechtenstein."

Epstein is a correspondent in BusinessWeek's Washington bureau. Scott is a reporter in BusinessWeek's London bureau .

Transparency and Trust, by Freedman

Judith Freedman (from Oxford University) has posted Financial and Tax Accounting: Transparency and Truth, in Tax and Corporate Governance (Springer, 2008), on SSRN. Here is the abstract:

In the USA there have been calls for greater conformity between the rules producing tax accounts and those used for financial reporting purposes. A number of benefits are claimed for this so-called 'book-tax conformity', including reduced compliance costs and better opportunities for monitoring. In Europe, the debate around use of the financial accounts for tax purposes has arisen from a different conceptual starting point as well as differences in surrounding circumstances. Linkage between tax and financial accounts is common in Europe, although it takes varying forms. This does not result in complete book-tax conformity, however, and recent developments in accounting may be increasing divergence rather than reducing it. Despite the strong arguments in favour of conformity, there are also good reasons for some divergences, meaning that the most likely outcome in any system, whatever the starting point, is partial convergence. The problem with a hybrid outcome of this kind is that, at the point of divergence, there can be conceptual confusion and difficulties in integrating and managing two conceptually very different rule systems. Clarity of the relationship between the rules and improved accounting disclosure requirements might be more important than convergence, and might be achieved with less distortion to either tax or financial accounting. The current UK position is used to illustrate these points.

Harnessing the Costs of International Tax Arbitrage

Professor Adam H. Rosenzweig (from Washington University) has postes Harnessing the Costs of International Tax Arbitrage, 26 Va. Tax Rev. 555 (2007). Here is the abstract:

The issue of international tax arbitrage has proven a difficult and intractable one. Rather than try to minimize costs of the arbitrage or prevent “abuse” of the laws of a particular regime, the United States should also consider affirmatively bearing some of the costs of the international tax arbitrage transaction to further the policy of international vertical equity and shift the incentives in the worldwide regime that led to the rise of the arbitrage in the first place.

Harnessing the costs of international tax arbitrage transactions will not always be the appropriate response to each particular arbitrage transaction. Depending on the circumstances, the traditional responses may be sufficient, a fundamental change to the underlying United States domestic tax law may be appropriate or a worldwide consensus on harmonization in a particular area may arise. Harnessing the costs of the international tax arbitrage should be considered, however, when such responses prove inadequate. At a minimum, in adopting such an approach the United States would provide some level of subsidy for investment in developing countries at little to no cost to the current international tax regime. At best, however, harnessing the costs of international tax arbitrage could place of the issue of international tax arbitrage back on the international scene, restart stalled international tax discussions and potentially move towards a greater worldwide consensus, not only on the international tax arbitrage itself but on the larger issue of the role of international vertical equity in the worldwide tax regime. In a second-best world, United States unilateral action in harnessing the costs of international tax arbitrage may be the first step towards a first-best solution.

IBM under the wire tax break

Big Blue’s Under-the-Wire Tax Break
Posted by Peter Lattman, from http://blogs.wsj.com/

It looks like IBM’s tax lawyers are earning their keep. Just two days after they used a complex corporate tax loophole to save an estimated $1.6 billion, the IRS moved to close the loophole down. Here are stories from the WSJ and NYT.

On May 29, IBM said it had structured a $12.5 billion stock repurchase to take advantage of overseas earnings without making them subject to stiff U.S. corporate tax rates. Because they’re designed to make an end around IRS section 367(B) covering U.S. taxes on repatriated earnings, tax lawyers call these deals “Killer B” transactions.

Two days later, the IRS announced plans to issue regulations making companies pay U.S. taxes when they buy back their stock, even if the shares are purchased by an international subsidiary. It said the planned ban on the practice would take effect that day.

Stewart Lipeles, a tax attorney with Baker & McKenzie, told the WSJ it looked like the IRS rushed out a notice after it caught wind of IBM’s “Killer B.” The IRS won’t say.

LLCs are up, Corporations are down

Are Corporations Going the Way of the Edsel?
Posted by Peter Lattman, from http://blogs.wsj.com/law.

LLC’s are way up and corporations are down, according to the latest data from the International Association of Commercial Administrators, which collects state-by-state filings.
Limited Liability Companies are popular because, like corporations, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like those in partnerships, providing management flexibility and the benefit of pass-through taxation. Here’s the IRS site on LLCs.

Thanks to Larry Ribstein at Ideoblog, here’s the IACA report, which shows that filings for LLCs are up in almost every state, while filings for corporations are down in most states. Of the 35 states with filing data for the past four years, 32 reported increases in LLC filings and 21 reported decreases in corporation filings.

As Ribstein puts it, “the corporate form is hanging on — it’s what most practitioners know. But it’s looking less and less like the future of business associations.”

David R. Francis has published an article entitled "Secretly, tiny nations hold much wealth" in CS Monitor:

"Although they have only 1 percent of the world's inhabitants, they hold a quarter of United States stocks and nearly a third of all the globe's assets.
They're tax havens: 70 mostly tiny nations that offer no-tax or low-tax status to the wealthy so they can stash their money. Usually, the process is so secret that it draws little attention. But the sums - and lost tax revenues - are growing so large that the havens are getting new and unaccustomed scrutiny.

For example: When London's Tax Justice Network (TJN) reported a month ago that rich individuals worldwide had stashed $11.5 trillion of their assets in tax havens, it caused a fuss in Europe. "Super-rich hide trillions offshore," blazed a British newspaper headline.


Although that report received little notice outside Europe, there are rumblings of concern in the United States. That's not surprising. Nations lose an estimated $255 billion in tax revenues a year because of the havens, according to TJN. The US alone probably loses $60 billion a year, a tax expert estimates.

The loss hits not only prosperous industrial countries, but also developing nations. As a result, dozens of church groups and other nongovernmental organizations concerned with world poverty are joining tax reformers in what will probably become a major political battle. They aim to stem the outflow of money from poor nations into tax havens - an outpouring that may exceed today's global foreign aid of some $60 billion a year.

"If we are serious about reducing poverty, one of the first things we need to tackle is an international financial system run by the rich, for the rich, at the expense of the poor," states David Woodward, director of the New Economics Foundation, a London think tank.

Corrupt officials in poor nations, illegally, and multinational corporations, mostly legally, siphon huge amounts of money into bank accounts and shell companies in 70 tax havens, such as the Cayman Islands, Bermuda, and Jersey.

"It's going to be the next major issue," forecasts Lucy Komisar, a New York journalist writing a book on offshore banking. She compares the drive against tax havens with the civil rights movement of the 1960s, in which she participated, and the feminist and environmental movements of more recent decades.

Ms. Komisar helped organize a meeting on Capitol Hill April 7 to get an American branch of the TJN going. Representatives of several members of Congress, the AFL-CIO and a few other unions, several prominent tax research groups, and the United Church of Christ attended. About a dozen well-known activist groups were also present, including Public Citizen, Greenpeace, and the National Council of La Raza.

By cracking down on capital flight and corruption in developing countries, "we wouldn't have so much poverty in the world," says Robert McIntyre, executive director of Citizens for Tax Justice. He offered at that meeting to find funding for the TJN group in the US and recruit a paid director.

Not everyone sees it this way. The Center for Freedom and Prosperity in Washington, for example, sees tax havens as "an escape hatch for overburdened taxpayers." It relishes "tax competition" between nations. The center also argues that bank secrecy in countries like Switzerland can protect the money of those who face persecution by repressive regimes.

The tax-haven numbers in the TJN report were calculated by a British research firm from conservative sources - such as Merrill Lynch's "World Wealth Report" and the Boston Consulting Group's "Global Wealth Report." The trillions of dollars reported don't include money parked in tax havens by companies - probably also a massive sum.

There are about 3 million shell companies (set up largely to duck taxes) in offshore tax havens, Komisar reckons. These tiny tax havens hold 31 percent of total world assets and 26 percent of the stock of US multinationals.

"As our economies have globalized, our tax systems remain nationally based and measures that should have been put in place decades ago to improve international tax cooperation have not been put in place," says John Christensen, international coordinator in London of TJN. "So the tax burden has been shifted from those who can afford it to middle- and low-income households, and from businesses to working people and consumers."

In the late 1990s, industrial-nation negotiators reached an agreement to pressure tax-haven countries to stop facilitating money laundering, drug dealing, and tax evasion. The deal was championed by the Clinton administration. But it was squashed by the new Bush administration, keen for tax cuts.

Then came 9/11 and a recognition that terrorists and drug dealers use the same international finance channels as tax dodgers. So the Bush administration "has become less strident in its support for bank secrecy and other nondisclosure policies," notes Mr. McIntyre.

Now, a pioneer opponent of tax evasion through tax havens, Sen. Carl Levin (D) of Michigan, has joined with Sen. Norm Coleman (R) of Minnesota to sponsor the Tax Shelter and Tax Haven Reform Act. It would enable the Treasury secretary to designate a tax haven as "uncooperative" with Internal Revenue Service investigations. Though not a panacea, the bill, soon to be reintroduced in the current Congress, would give tax investigators a weapon: Income from such designated tax havens would lose some tax advantages.