Foreign Banking & Tax havens

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					FOREIGN BANKING &
   TAX HAVENS
KATHRYN PHILLIPS, LAZARO SANDOVAL, HENRI
               SAINT-SURIN
                OVERVIEW

 Foreign Banking        Depositors do this to…
                       • Take advantage of
  Depositors place        lower or no taxes
 securities/funds in   • Achieve greater privacy
 financial/banking     • Protect assets against
institutions located      local financial or political
      overseas            instability
                       • Take advantage of less
                          regulation and easier
                          access
                       • Take advantage of
                          higher rates of return
                          offered by some foreign
                          banks

                                                     2
                            OVERVIEW

               Tax Haven
A country or territory that has lower or     Tax havens create tax
 no taxes and provides a safe place           competition among
for deposits in order to attract capital
                                            governments in order to
                                               maintain or attract
                                           depositors via the altering
                                           of banking/fiscal policies
                                                   and rules.




                                                                   3
4
         TAX HAVEN DEBATE

For
• Avoidance of
  excessive tax
  burden
• Greater security
  and lower risk
• Privacy
• Tax competition
  encourages pro-
  growth tax policies
                            5
          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

                             6
LAWS AND REGULATIONS AFFECTING
   FOREIGN BANKING & TAXES




                                 7
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


                                                                    8
   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


                                                     9
        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.

                                                         10
             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



                                                       11
  FATCA (FOREIGN ACCOUNT TAX
       COMPLIANCE ACT)

 Requires foreign banks to    Account holders would be
find all American Account      subject to a 40% penalty
 holders and disclose their     on understatements of
     balances and other       income in an undisclosed
   relevant information to      foreign financial asset
           the IRS
                                 American Citizens
  If foreign banks fail to    Abroad, an organization
report to the IRS, it would      based in Geneva
    be subject to a 30%       representing the interest
     withholding tax on          of Americans living
income from US financial      abroad has launched a
           assets               campaign to repeal
                                      FATCA


                                                      12
         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



                                                                        13
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


                                                      14
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


                                                    15
          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

                                                                 16
           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


                                                                      17
             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                                   18
 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.
                                                                   20
                     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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