FOREIGN BANKING &
TAX HAVENS
KATHRYN PHILLIPS, LAZARO SANDOVAL, HENRI
SAINT-SURIN
OVERVIEW
Foreign Banking
Depositors place
securities/funds in
financial/banking
institutions located
overseas
Depositors do this to…
• Take advantage of
lower or no taxes
• Achieve greater privacy
• Protect assets against
local financial or political
instability
• Take advantage of less
regulation and easier
access
• Take advantage of
higher rates of return
offered by some foreign
banks
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OVERVIEW
Tax Haven
A country or territory that has lower or
no taxes and provides a safe place
for deposits in order to attract capital
Tax havens create tax
competition among
governments in order to
maintain or attract
depositors via the altering
of banking/fiscal policies
and rules.
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TAX HAVEN DEBATE
For
• Avoidance of
excessive tax
burden
• Greater security
and lower risk
• Privacy
• Tax competition
encourages progrowth tax policies
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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
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LAWS AND REGULATIONS AFFECTING
FOREIGN BANKING & TAXES
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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
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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
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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.
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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
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FATCA (FOREIGN ACCOUNT TAX
COMPLIANCE ACT)
Requires foreign banks to
find all American Account
holders and disclose their
balances and other
relevant information to
the IRS
If foreign banks fail to
report to the IRS, it would
be subject to a 30%
withholding tax on
income from US financial
assets
Account holders would be
subject to a 40% penalty
on understatements of
income in an undisclosed
foreign financial asset
American Citizens
Abroad, an organization
based in Geneva
representing the interest
of Americans living
abroad has launched a
campaign to repeal
FATCA
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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
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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
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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
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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
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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
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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
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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.
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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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