U.S. Rules Contribute to Tax ‘Opacity' For Multinationals, OECD Adviser Says

By Rick Mitchell

PARIS--Current U.S. financial rules allow major multinationals to hide behind banking secrecy veils of certain offshore financial centers to avoid paying taxes in the United States and other jurisdictions, an adviser to the Organization for Economic Cooperation and Development said Oct. 26.

Francois d'Aubert, an auditor at the French Court of Audit who heads the peer review group of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, said although improvements have been made in the exchange of information, financial rules in the United States continue to allow multinationals and other big taxpayers to avoid taxation.

He also said Switzerland's recently announced information exchange agreements with Germany and the United Kingdom will contribute to a lack of transparency in tax matters.

D'Aubert, speaking after the close of the Global Forum's Oct. 25-26 plenary session at OECD's Paris headquarters, noted that the peer review group in June identified a deficiency in U.S. tax law that impedes international exchange of ownership and accounting information for tax purposes regarding certain limited liability companies with single foreign owners.

The report said circumstances arise, in particular the case of certain LLCs with only one foreign owner that are not subject to federal tax law filing requirements, where the required information may not exist or be obtainable by U.S. authorities and this deficiency should be addressed.

At the time, Pascal Saint-Amans, head of the Global Forum secretariat, called the finding “a serious deficiency.”

De Facto Bank Secrecy in U.S.

David Spencer, a New York-based attorney specializing in tax and banking and a Tax Justice Network member, told BNA Oct. 28 that under Delaware law, a non-U.S. resident foreign person can set up a U.S. company anonymously, and use it to make tax free investments in such places as the Cayman islands and other financial centers.

But he said the issue raised by the OECD report is only part of the story.

Several financial regulations in the United States allow for “de facto bank secrecy,” Spencer said. “In fact, the United States is the biggest tax haven in the world.”

For example, Spencer said the Internal Revenue Code does not require that foreign persons not residing in the United States disclose to the U.S. government that they own bank deposits in the United States, or to report interest from these deposits.

“When the U.S. government doesn't have that information, it can't exchange it with foreign tax authorities,” he said.

Under a so-called qualified intermediary program, non-U.S. based investors can indirectly invest in the United States through institutions based in offshore financial centers, where their identifying information is held secret, said Spencer.

The United States doesn't go after these practices because they bring large amounts of investment into the United States, boosting the U.S. economy, he said.

FATCA May Encourage Changes

He said that the Foreign Account Tax Compliance Act (FATCA) will require foreign financial institutions to give the IRS information on accounts held by U.S. taxpayers in their countries, but doesn't require U.S. institutions to do the same for foreign tax authorities.

“As FATCA takes effect, it will be harder and harder for the United States to argue that it should not also provide this kind of information,” said Spencer.

D'Aubert said U.S. rules are also costing the United States tax revenues.

“For example, you have big American companies, multinationals, that keep billions of dollars in cash, in offshore centers because, they say, U.S. taxes are too high,” said d'Aubert.

“This is both a tax problem and an American regulation problem,” he said.

260 recommendations

D'Aubert said the peer review group has made some 260 recommendations overall. He said most countries that have been reviewed by the group have made the changes recommended in the reports.

“I think the United States will do the same thing. There are regulatory adjustments needed to make to deal with [U.S.] structures that allow opacity,” he said.

Spencer said the proposed Stop Tax Haven Abuse Act (H.R. 2669, S. 1346) aims to recoup tax revenues lost to U.S. coffers, but would do nothing to end U.S. practices that cause other countries to lose tax revenues.

OECD also released 13 new reviews by the group that D'Aubert heads evaluating jurisdictions' commitment to tax information exchange on request and transparency standards set out in Article 26 of OECD's Model Tax Convention.

OECD has called the peer reviews the first step in a three-year process to ensure member jurisdictions implement and comply with agreements they have signed and that signed agreements meet the OECD standard.

The forum also produced a report to Group of 20 Country leaders, who are due to meet Nov. 3-4 in Cannes, France, on progress the forum has made since 2009 in improving global tax information exchange.

Information Exchange Agreements Growing

OECD Secretary-General Angel Gurria said the report will tell the G-20 that the Global Forum's work has yielded more than 700 new tax information exchange agreements since the 2009 London G-20 Leader's Summit asked OECD to lead its campaign to improve global tax compliance.

Gurria said that in 18 months, the group has produced 59 reports assessing the capacity of members' legislative frameworks to implement these agreements, leading 32 countries to make regulatory changes to implement the reports' recommendations.

The newest reports among other things made recommendations for the Chinese jurisdictions Hong Kong and Macau to improve their tax information exchange. They said such financial centers as Brunei, Uruguay, Vanuatu, which the organization has previously cited as tax havens, have a long way to go to comply with the OECD standard.

The forum also has released seven update reports assessing progress that seven jurisdictions made since the forum declined to pass them on in earlier reviews, making a total of 66 reports, Saint-Amans said.

D'Aubert said that in addition to the new TIEAs, many countries have rewritten or renegotiated bilateral double-tax conventions.

‘Skeptical' of Some New Agreements

He said that when he took the job as head as of the peer review group he was “skeptical” that these new agreements could accomplish much.

But out of 2,400 new or updated conventions and agreements the group has examined, some three-quarters apply the OECD standard. “When we compare them to what existed before, they are infinitely more demanding than before, an enormous plus in the question of transparence,” D'Aubert said.

“There really are mutual obligations, requiring countries to respond to requests for information with criteria that are specified. They can't just say, we don't have that information,” he said.

Gurria said during the forum that widespread implementation of the OECD standard through tax information exchange agreements is leading toward eradication of banking secrecy laws that have long let tax evaders elude detection in havens worldwide.

A recent OECD survey of 20 major countries found information agreement among Global Forum members, combined with national disclosure initiatives, have spurred more than 100,000 taxpayers to reveal previously undisclosed offshore assets, yielding roughly 14 billion euros [$19.8 billion] in additional tax revenues.

“Tax evaders know it's no longer worth the risk” to hide assets, said Gurria.

Bank Secrecy Still Here

But the London-based Tax Justice Network and Christian Aid said in a recent report that tax havens are alive and well, and their secrecy is getting worse.

Tax Justice Network has argued that although the OECD standard is an advance on what existed before, the agreement based on the information-on-request standard don't work. The group said that is especially true for developing countries because such agreements require tax authorities to already know what they are looking for.

It said most of the agreements signed since 2009 are between OECD countries, or between OECD and developing countries, not between developing countries.

Consequently, this effort benefits wealthy OECD countries much more than developing countries, the group said. Francois Baroin, French minister of economy, finance, and industry, told the forum that at a time when many governments are struggling with budget deficits, some developing countries may be tempted to establish offshore financial centers.

He urged G-20 governments and their partners to develop “new methods” to ensure countries honor their agreements to share tax information.

(Appeared Oct. 31, 2011)