U.S. lawmakers’ latest efforts to enact the Stop Tax Haven Abuse Act have caused concern among the international tax community, with some practitioners saying the legislation overreaches and that the bill, if passed, would likely be a revenue loser.
The March 2 introduction of the bill is the second attempt by Sen. Carl Levin, D-Mich., to get the legislation through Congress (a companion bill was introduced in the House by Rep. Lloyd Doggett, D-Texas).
Levin’s efforts to get the bill passed in 2007 went nowhere,as Congress took no action on either the Senateor House versions.
Now, however, it appears there may be more political will to move the legislation forward. President Obama cosponsored the bill when he was in the Senate and vowed during his presidential campaign to shut down offshore tax havens. A provision in Obama’s recent budget proposal seeks to ″implement international tax enforcement, reform deferral and other tax reform policies,″ a budget line item projected to raise $210 billion over 10 years. Treasury Secretary Timothy Geithner, testifying at a March 3 Ways and Means Committee hearing on the budget, declined to elaborate on the administration’s plans for international tax reform but said the administration ″fully supports″ the Stop Tax Haven Abuse Act. Bruce Zagaris, a partner with Berliner, Corcoran & Rowe LLP, Washington, told Tax Analysts on March 4 that the tax haven bill is well-intentioned but misguided.
″It’s clear from Obama’s budget that they’re looking for revenue,″ he said. ″However, they can’t tell the American people that they need to raise taxes, so instead they go after foreign countries under the guise of closing loopholes.″
Zagaris described section 203 of the bill, which would require anti-money-laundering programs for hedge funds and company formation agents, as the wrong solution for improving corporate transparency.
He said the U.S. should instead start by fixing its ″defective″ corporate transparency laws (the Financial Action Task Force rated the U.S. noncompliant in 2006 with the FATF’s revised 2003 anti-money-laundering recommendations for gatekeepers) and that it should work to improve its securities and insurance regulatory systems.
″There need to be mechanisms in place, but we need to start in the U.S. and not scapegoat foreign countries,″he said.
Zagaris also found troubling the inclusion in section 101 of a list of 34 ″Offshore Secrecy Jurisdictions,″ which Levin has said was compiled based on IRS court filings identifying the jurisdictions as probable locations for U.S. tax evasion. Zagaris said the U.S. would probably be sued under WTO law for violating trade and services agreements, as the jurisdictions on the list could claim discriminatory treatment. Zagaris also pointed out that the court filing on which the list is based was from a John Doe summons issued by the IRS in 2005 and that no other countries took part.
″Having a list is hard to do, which is why the OECD stopped doing it,″ he said. ″No one agrees on the right criteria for selecting jurisdictions, and it just gets political.″
He noted that a December 2008 report by the Government Accountability Office (GAO-09-157) that examined corporations with subsidiaries in financial secrecy jurisdictions acknowledged that there is no set definition of a tax haven or set list of jurisdictions that should be considered tax havens. Zagaris also noted that the report included a letter from Michael Mundaca, Treasury deputy assistant secretary for international tax affairs, expressing concern about the GAO compiling a list of purported tax havens based on an IRS John Doe summons.Zagaris also wondered how frequently the bill’s list would be updated and whether Treasury would be able to credibly update it. ″Treasury simply doesn’t have the capacity to oversee such a list,″ he said.
Zagaris said the bill, if passed, also would likely hurt the U.S. economy. ″This won’t raise revenue — in the end, it will make the U.S. taxpayers pay,″ he said. ″A bill like this will upset the flow of foreign capital into the United States, which is what we need now more than ever. At a time when countries like China are starting to question the purchase of U.S. capital, now is not the time to scare off foreign investors. It could take decades for foreigners to come back.″
″It’s a well-intentioned bill, but it would be better to tell the American people that we can’t control spending and need to raise taxes,″ Zagaris said.
Joseph Calianno, international technical tax practice leader and partner at Grant Thornton LLP, expressed concern over section 103, one of the three new provisions in Levin’s revamped bill. Section 103, which Levin said would cure the problem of shell companies claiming foreign status, would treat foreign corporations that are publicly traded or have gross assets of $50 million or more and whose management or control occurs primarily in the United States as U.S. domestic corporations for income tax purposes.
″The addition of a management and control test, variations of which are often seen in foreign jurisdictions to determine whether a corporation is a resident corporation, would be a somewhat novel concept in the U.S.,″ Calianno said. ″Although section 103 would only apply to certain foreign corporations and includes some carveouts — such as certain CFCs — it nevertheless represents another attempt to broaden U.S. taxing jurisdiction. It will be interesting to see how other countries react if this is enacted.″
Calianno pointed out that Congress already expanded the definition of a domestic corporation as part of the American Jobs Creation Act of 2004 when it introduced IRC section 7874, the anti-inversion provision, which can treat a corporation that is not organized or created in the U.S. as a domestic corporation if conditions are met.
Calianno wondered whether the Stop Tax Haven Abuse Act is just the beginning of U.S. efforts to reduce what it perceives as offshore tax abuse. ″Given Secretary Geithner’s support of the bill, it is likely that the administration also will be focusing its efforts on similar types of international tax proposals,″ he said.