Tax Haven: Ways & Means subcommittee examines anti-tax haven proposal

Anti-tax haven legislation recently introduced in the House and Senate drew generally positive comments from government and private-sector witnesses testifying at a November 5 hearing of the House Ways and Means Select Revenue Measures Subcommittee.

The Foreign Account Tax Compliance Act of 2009, which was introduced by Ways and Means Committee Chairman Charles Rangel, D-N.Y., and Senate Finance Committee Chairman Max Baucus, D-Mont., October 27, is aimed at preventing the use of offshore financial institutions, foreign trusts, and foreign corporations to evade U.S. tax obligations.

As expected, Treasury Deputy Assistant Secretary for International Tax Affairs Stephen E. Shay and IRS Chief Counsel Bill Wilkins praised the legislation as a much-needed tool for curbing tax evasion. For their part, Tom Prevost of Credit Suisse and Dirk Suringa of Covington & Burling LLP both said they agree with the legislation's conceptual framework and the need for the legislation and that they look forward to working with the committee to address what they see as technical issues.


Taxwriters' questions

Several subcommittee members pressed Shay and Wilkins in an attempt to find out whether this legislation is even necessary. Rep. John Linder, R-Ga., asked how much in U.S. funds is deposited offshore and how much of that is there legitimately.

Neither Shay nor Wilkins could provide a figure for the amount of offshore deposits. Addressing the second question, Shay said "we'll be able to answer that better with this legislation." Rep. Earl Blumenauer, D-Ore., also expressed interest in these issues.

Rep. John Yarmuth, D-Ky., asked whether the Service's recently concluded voluntary disclosure initiative targeting taxpayers with unreported income from hidden offshore accounts "provided clues as to what the IRS didn't know that it didn't know." Wilkins indicated that the IRS is still studying the data and has not reached a conclusion.

Rep. Allyson Schwartz, D-Pa., asked how aggressively the IRS is moving to reach agreements with other financial institutions before Congress creates additional tools. Shay assured the subcommittee that the number of information exchange agreements has increased greatly. He also rejected the notion that this legislation might create new tax havens, saying that there is ongoing monitoring of other potential havens but that there are few potential haven jurisdictions left.

Subcommittee Chairman Richard Neal, D-Mass., asked the witnesses for input on how to eliminate duplicative reporting.

Prevost had addressed this in detail in his prepared remarks, and he emphasized the need to make special provisions for tiered foreign financial institutions. Referring to those prepared remarks, Prevost asserted that in situations where there are tiered foreign financial institutions, "the bill appears to require multiple layers of information reporting for the same information." Redundancies would also occur, he said, in the case of foreign investment partnerships that are already required to file Schedules K-1.


Doggett weighs in

Taxwriter Lloyd Doggett, D-Texas, who is not a member of the subcommittee but attended the hearing at Neal's invitation, was concerned that the legislation doesn't target offshore corporate tax abuse, which he believes is more substantial than the abuse by individual taxpayers. He said we need a comprehensive plan that targets both at the same time. (Doggett has been a sponsor of legislation to combat offshore tax evasion.)


Other issues

Other issues that witnesses addressed in their testimony included:
- Balance – Shay emphasized that the government is aware of the need to balance bridging the information gap with respect for taxpayers – that is, giving the government the information required for compliance while creating a withholding scheme that is not unjust or too onerous. He later added that we want rules that work as much as possible with existing financial institution requirements.
- Unilateral vs. multilateral compliance – The witnesses mostly agreed that a multilateral approach to compliance by the world's leading economies would be preferable to a unilateral approach, but Shay testified that a multilateral agreement would take a long time to create. Suringa addressed this pointedly, asserting that a unilateral approach might give rise to "unintended consequences," such as having foreign financial institutions divest from the U.S. or having foreign governments adopt "conflicting, unilateral measures."
- Effective date – Prevost expressed concern over the effective date for the proposed reporting regime (for payments made on or after January 1, 2011), believing that it would not give foreign financial institutions sufficient time to develop the automated systems that would be required to "handle the transaction volume without errors." He noted that this date coincides with the effective date for cost basis reporting, but pointed out that firms were given more than three years to prepare for that.
- Bearer bonds & equity swaps – Prevost testified that the proposal to require issuers to issue bonds in registered form could shut U.S. issuers out of certain debt markets. Subcommittee member Pat Tiberi, R-Ohio, was concerned that this would make it harder for certain U.S. corporations to raise capital overseas, putting them at a disadvantage. Both Prevost and Suringa agreed that this would be the case and that the matter needs to be addressed.


Outlook

Neal, who hopes to wrap up a bill by the end of the year, expressed confidence the government is close to winning a battle against offshore tax compliance. In a reference to boxer Joe Louis – who, after saying that Billy Conn could "run, but he can't hide," failed to knock out Conn until the thirteenth round – Neal said, "I believe we're entering the thirteenth round."