Thursday, July 17, 2008

IRS To Close Offshore Account Loophole

The fun-busters at the IRS are up to it again and the Swiss banks are the targets.

The IRS is to close a loophole relating to its agreements with foreign banks that allegedly led to UBS's troubles.

Barry Shott, the IRS's deputy commissioner of international affairs, said in an interview the crackdown will make it harder for Americans to conceal assets in offshore shell companies. The agency for the first time will require accounting firms to report any activity that may constitute fraud as defined by the U.S., he said.

``We're trying to pierce the veil,'' Shott said. ``It's going to happen in the near future. This is not a long-term project.''

The legislation has been brewing for 2 years and is aimed at tightening the 'Qualified Intermediary' contracts. This program was original developed so that the IRS could keep a beady eye on US citizen’s money in foreign banks.

Under this contract the banks would confirm the identities of the account holder and notify the IRS of income earned within the accounts. The pay-off was that the banks could eliminate withholding taxes or withhold taxes at favourable rates. Without this agreement they would have to withhold 30%.

Banks participating in the program also must agree to be examined by external auditors approved by the IRS. Foreign banks generally agree to take part in order to maintain access to U.S. markets.

The new rules would require banks to identify the actual owner of an account's assets and the recipient of any interest payments. If the individual is an American, the bank must file a 1099 tax form with the IRS and withhold taxes at a 28 percent rate or face possible criminal charges, Shott said.

Shott said the IRS is still in discussions with the Treasury Department over whether to make the rules retroactive.

In court papers filed last month, the IRS quoted former UBS official Bradley Birkenfeld as saying the bank separated clients into those willing to comply with disclosure rules and those who wanted to remain hidden. Many of the clandestine depositors hid assets by using layers of shell companies.

Basically, the new rules would require banks to let officials know the ultimate beneficiaries of the shell company to determine whether it is an American that owns the account.

This opens up all sorts of questions about dealing with offshore banks in the US. For example, does this mean that if you are not a US citizen, using a shell company to protect your assets that an IRS approved auditor will then sift through to the beneficial holder to see if it is a US citizen. If so, and they find that the beneficial holder is not a US citizen, what will they do with this information?

To suggest, in the current climate, that the IRS would not share the information with the UK tax authorities, for example, is far fetched...I would say.

What we are seeing is an international tax conspiracy aimed at wiping out any sort of tax loophole. It is, in my opinion, futile. Yes, for the average Joe trying to save a few bucks on tax it is going to become very, very difficult. Swiss banks, for example will be turning away 'unofficial' American clients by the truck load. Would you, as a Swiss banker, now take on an American client? Me neither. But there will be others clever guys working on news ways of saving tax... it's a big industry. To stamp it out will be impossible.

Bradley Birkenfeld knows only too well the fate of those who are involved in this area, however.``I was employed by UBS and paid a large salary and incentivized to do this business,''
Birkenfeld, 43, said to U.S. District Judge William Zloch in Fort Lauderdale, Florida, at his plea hearing. Birkenfeld faces a maximum sentence of five years in prison at his sentencing, set for Aug. 13.

Birkenfeld implicated other unidentified UBS bankers and wealthy clients in his plea, helping U.S. prosecutors as they deepen their probe of whether the bank assisted Americans in evading taxes. In a document accompanying his plea, Birkenfeld described the bank's systemic efforts to help U.S. clients conceal $20 billion in assets abroad. UBS collected about $200 million in annual revenue through those efforts, he said.

In court, Mr. Birkenfeld wore a charcoal pinstripe suit that was as solemn as his face. He told Judge William J. Zloch that he knew he was breaking the law but did so because of the “incentives” UBS offered him, meaning large bonuses.

Judge Zloch asked if he had not been troubled by his actions.

“It did concern me, your honor,” Mr. Birkenfeld said. (... comment)

Is this the end for Swiss banking and the offshore tax industry in general? I don't think so. The Swiss have said that their banking secrecy rules are not up for negotiation which I hope is the stance they continue with.

It appears to me that the business model is changing and this change is going to kill off the world-wide nature of Swiss banks such as UBS. The model going forward would be best seen as 'localisation' of services.

What I mean by this is a pull back, by banking and wealth management operations, into Switzerland. Closing offshore operations in unfriendly jurisdictions or structuring such companies under separate ownership with defined rules that do not allow links between citizens of unfriendly jurisdictions to open swiss accounts.

This would be a great boon for the private banks and wealth managers who are solely based in Switzerland, protected by the laws of this country.

Personally, I find the current nature of the tax authorities to be very sinister. It appears that countries such as the United States can impose on the rest of the world their own rules when it suits them, but who avoid international feelings on other matters.

Take Kyoto, for example. The US refuses to sign up to this agreement. In rejecting the Kyoto Protocol, which 178 other nations had accepted, President Bush claimed that the treaty requirements would harm the U.S. economy, leading to economic losses of $400 billion and costing 4.9 million jobs. Bush also objected to the exemption for developing nations. The president’s decision brought heavy criticism from U.S. allies and environmental groups in the U.S. and around the world.

No worries about the Swiss banking industry going under though, is there Mr President?
Should Switzerland therefore ban US imports or perhaps detain US citizens working in 'polluting industries'.

Unlikely, n'est pas.

I know you will say this is comparing apples and oranges and that tax issue are legal matters blah blah... but see my point on this, where does it end?

When will a corporate advisor be arrested for advising a US company on its tax strategy or a CEO arrested for moving his company offshore to save taxes.

Sounds ridiculous right?

Tell that to Bradley Birkenfeld and UBS.

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