News from the United States that the proposals for the Foreign Account Tax Compliance Act will not include the damaging features of Senator Levin’s Stop Tax Haven Abuse Act, which would have relied on “lists” and other provisions that could have discouraged lawful business in Cayman, have been welcomed by the islands’ financial sector.
Cayman Finance said today that the latest proposals plan to tackle offshore tax abuse through increased transparency and enhanced reporting requirements, which is consistent with the message that it was promoting in the US over the last few months.
The latest legislative proposals from Senate Finance Committee Chairman Max Baucus (D-Mont.), House Ways and Means Committee Chairman Charles Rangel (D-NY), senior Senate Finance Committee member John Kerry (D-MA), and Ways and Means Select Revenue Subcommittee Chairman Richard Neal (D-MA), intended to clamp down on tax evasion and improve taxpayer compliance, will give the IRS new administrative tools to detect, deter and discourage offshore tax abuses, the US legislators have said.
Based on proposals included in President Obama’s 2010 Budget on legislation proposed by Senator Carl Levin and Representative Lloyd Doggett, and a draft released by Senator Max Baucus, the Foreign Account Tax Compliance Act will force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their US accountholders, grantors, and owners, respectively.
Cayman Finance Chair Anthony Travers said today that this latest proposal is entirely consistent with the approach suggested by Cayman Finance in meetings with US policymakers. “Cayman Finance is confident that enactment of the US legislation proposed by the two chairmen will contribute significantly to the certainty and stability that the capital markets require, as well as the ability of the Cayman Islands to continue to successfully fund United States institutions from those markets,” he added.
The new Senate-House proposal sets in place practices that will clamp down on jurisdictions which still practice tax evasion and improve taxpayer compliance by giving the IRS new administrative tools. The act aims to force foreign financial institutions, foreign trusts and foreign corporations to provide information about their U.S. accountholders, grantors and owners.
The government and financial firms in the Cayman Islands have supplied full financial information and tax information for many years under the 1990 and 2001 treaties with the United States, and take pride in the regulatory and fiscal transparency that is a requirement for IOSCO (International Organization of Securities Commissions) membership. Cayman has also signed tax transparency treaties with the European Union and more than 12 other jurisdictions.
The drive to find legislation to address the issue of US money going to tax havens is based on the belief that US citizens are evading billions of dollars in tax by using offshore financial centres. The provisions in this act will prevent people from evading as much as $8.5 billion in US taxes over the next ten years, the Joint Committee on Taxation has estimated.
Senator Carl Levin’s original proposals had caused concern in offshore financial service centres because of the suggestion of once again blacklisting jurisdictions. Sen. Baucus said yesterday that this latest draft is more durable, more likely to become law and will strengthen IRS resources to root out tax cheats once and for all. “These tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law-abiding taxpayers pay the price. Not only is this practice fundamentally unfair, this is money that could be used in any number of other important areas, such as reducing our fiscal deficits,” Baccus added.
Ways and Means Committee Chairman Rangel said the bill offers foreign banks a simple choice – if they want to access US capital markets they have to report on US account holders. “I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past.”
Sen. Kerry said that when he first arrived at the Senate he investigated what he called “the murky and opaque network that allows people to hide assets abroad and evade US tax laws.” Decades later, the senator said that there was still work to do but this legislation would be a step forward. “It will prevent another UBS and strengthen taxpayer compliance. The Treasury Department’s efforts to improve how we share tax information with other countries and the compliance provisions in this bill will help crackdown on the bad actors who try to hide funds offshore instead of playing by the rules,” he added.
Last March, Ways and Means Select Revenue Subcommittee Chairman Neal held a hearing in the Subcommittee on Select Revenue Measures, addressing what he called the nexus between bank secrecy and tax avoidance. He said with billions of dollars in US tax revenue being lost each year due to uncooperative foreign financial institutions, it was clear the issue had reached tipping point.
“The demand for standards on bank secrecy has even gone international, with British Prime Minister Gordon Brown calling for the beginning of the end of tax havens. As a long-time critic of US individuals and companies engaging in unlawful foreign tax avoidance, I believe this bill provides the Treasury Department with the tools it needs to crack down on those Americans hiding assets overseas,” he added.
The basic points in the proposed legislation cover the implementation of a 30% withholding on payments to foreign financial institutions and other entities unless they acknowledge the accounts’ existence to the IRS and disclose relevant information; Individuals and entities would be required to report offshore accounts with values of $50,000 or more on their tax returns; Advisors who help set up offshore accounts would be required to disclose their activities or pay a penalty; strengthening of rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to US beneficiaries; and that US dividend payments received by foreign persons are treated as dividends even when couched as another type of distribution in an effort to avoid US taxes.
Relief over tax act changes
