WEBINAR UNDERSTANDING OFFSHORE TAX HAVENS

Transcription

1 WEBINAR UNDERSTANDING OFFSHORE TAX HAVENS Presented by: Mikhail Reider-Gordon, Managing Director, Capstone Advisory Group LLC Alan Granwell, Partner, International Tax, DLA Piper Bruce Zagaris, Partner, Berliner, Corcoran + Rowe LLP James Dowling, President/Managing Director, Dowling Advisory Group January 27, 2011 If you cannot hear us speaking, please make sure you have called the teleconference number on your invitation. Toll Free: Toll: The audio portion is available via conference call. It is not broadcast through your computer.

2 JUST WHAT DO THEY KNOW? EXCHANGE OF INFORMATION BETWEEN TAX AUTHORITIES January 27, 2011 Alan Winston Granwell This power point presentation is offered for informational purposes only and and the content should not be construed as legal advice on any matter.

3 Tax Transparency and Exchange of Information Introduction Industrialized and developing countries have heightened their scrutiny of offshore financial centers and the use of offshore accounts in efforts to recoup tax revenues from taxpayers improperly using offshore financial centers saw a dramatic expansion of exchange of information agreements, particularly with offshore jurisdictions. Administrations are moving beyond standard forms of exchange of information (automatic, on request, spontaneous) to other types of sharing of information. January 27,

4 Why Now? Today s increasingly borderless world. Growth in international transactions. Increased complexity of transactions and tax laws. Recent international tax evasion scandals put the spotlight on improving international compliance. Economic crisis: ensuring compliance by all taxpayers and collecting all tax legally due. January 27,

5 Revolution in Tax Cooperation Tax transparency was a key feature of the G20 Summit. In London, the G20 leaders stated that: We agree to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of bank secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of information. In Pittsburg (September 2009), the G20 Leaders underscored the need for quick progress, stating that they stand ready to use countermeasures against jurisdictions that do not adopt the OECD Standard. In 2009, more progress toward full effective exchange of information was made than in the past decade. In the run up to the G20 summit held in London on 2 April 2009, the standards on transparency and exchange of information developed by the OECD (the OECD Standard) were endorsed by all key players, including jurisdictions that had so far been opposed to exchange of information. January 27,

6 Revolution in Tax Cooperation The OECD Standard has been universally endorsed. All OECD countries accept the OECD Standard, with the withdrawal of opposition to the reservation by Austria, Belgium, Luxembourg and Switzerland. Andorra, Liechtenstein and Monaco, the three non-cooperative tax havens, that previously refused to endorse the standard now agree to the OECD Standard. Costa Rica, Malaysia, Philippines and Uruguay, the four Global Form Jurisdictions that had not previously committed to implement the OECD Standard, have now committed to the standard. All non-oecd countries that previously expressed a reservation to the OECD Standard have withdrawn their reservation, including Brazil, Chile and Thailand. January 27,

7 Revolution in Tax Cooperation The UN has endorsed the standard. To date, well over 500 agreements have been signed by jurisdictions which were identified by the OECD as not substantially implementing the standard in the progress report published on 2 April in conjunction of the G20. Signing agreements is a necessary step towards full implementation of the standard. Austria, Andorra, The Bahamas, Chile, Costa Rica, Guatemala, Hong Kong, Liechtenstein, Macao, Malaysia, Panama, the Philippines, San Marino and Singapore have adopted (or are in the process of adopting) legislation to allow them to meet the OECD Standard. Brazil and Indonesia, have since joined the Global Forum and have provided detailed information on their treaty networks. Both jurisdictions have demonstrated that they have substantially implemented the OECD Standard. January 27,

8 2009 Revolution in Tax Cooperation 32 more jurisdictions have now moved in the White List, the category reflecting that a jurisdiction has substantially implemented the OECD Standard by initialing 12 or more tax agreements. Jurisdictions: Andorra Anguilla Antigua and Barbuda Aruba Austria The Bahamas Bahrain Belgium Bermuda British Virgin Islands Brunei Cayman Islands Chile Cook Islands Dominica Gibraltar Grenada Indonesia Liechtenstein Luxembourg Malaysia Monaco Netherlands Antilles Philippines St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Samoa San Marion Singapore Switzerland The Turks and Caicos Islands January 27,

9 YEARS OF THE G20: IMPACT ON IMPLEMENTATION January 27,

10 Progress made as at 4 January 2011 Jurisdictions that have substantially implemented the internationally agreed tax standard * 1 Andorra Cyprus Jersey St. Vincent and the Grenadines Anguilla Czech Republic Korea Samoa Antigua and Barbuda Denmark Liechtenstein San Marino Argentina Dominica Luxembourg Seychelles Aruba Estonia Malaysia Singapore Australia Finland Malta Slovak Republic Austria France Marshall Islands Slovenia The Bahamas Germany Mauritius South Africa Bahrain Gibraltar Mexico Spain Barbados Greece Monaco Sweden Belgium Grenada Netherlands Switzerland Belize Guernsey Netherlands Antilles Turkey Bermuda Hungary New Zealand Turks and Caicos Islands Brazil Iceland Norway United Arab Emirates British Virgin Islands India Philippines United Kingdom Brunei Indonesia Poland United States Canada Ireland Portugal US Virgin Islands Cayman Islands Isle of Man Qatar Chile Israel Russian Federation China 2 Italy St Kitts and Nevis Cook Islands Japan St Lucia January 27,

11 Progress made as at 4 January 2011 Jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented Jurisdiction Liberia Year of Commitment 2007 Number of Agreements (9) Jurisdiction Tax Havens 3 Niue Year of Commitment 2002 Number of Agreements (0) Monserrat 2002 (11) Panama 2002 (10) Nauru 2003 (0) Vanuatu 2003 (10) Other Financial Centres Costa Rica 2009 (1) Uruguay 2009 (7) Guatemala 2009 (0) January 27,

12 The Global Forum The Global Forum brings together jurisdictions, both OECD and non- OECD, that have made commitments to transparency and exchange of information and have worked together to develop the OECD Standard in tax matters. The Global Forum was established in 2000 to provide a global and inclusive forum for cooperation on issues of transparency and information exchange and currently has 95 members. New participants are being invited to join, from both the developed and the developing world. Since 2006, the Global Forum has published annual assessments of the legal and administrative framework for transparency and exchange of information in over 80 countries. The Global Forum survey covers OECD countries, countries that participate in the OECD s Committee on Fiscal Affairs as Observer countries (Argentina, China, Russia, South Africa), jurisdictions that meet the tax haven criteria and other financial centers. January 27,

13 The Global Forum The principle that has guided the Global Forum s work is that all jurisdictions, regardless of their tax systems, should meet the OECD Standard so that competition takes place on the basis of legitimate commercial considerations rather than the basis of lack of transparency or lack of effective exchange of information for tax purposes. Political attention to the Global Forum s work, and the urgency of ensuring that high standards of transparency and exchange of information are in place around the work made it imperative to review the Global Forum s structure and mandate. January 27,

14 Global Forum Mandate An initial 3-year mandate to create a strengthened Global Forum to promote rapid and consistent implementation of the standards through a robust and comprehensive peer review process. Peer-based two-phase reviews. Phase 1 is a review of each jurisdiction s legal and regulatory framework for transparency and the exchange of information for tax purposes. Phase 2 involves a survey of the practical implementation of the standards. In-depth ongoing monitoring of legal instruments which allow for exchange of information. This is necessary to monitor that agreements enter into force and are effectively implemented. Review process to be overseen by a Peer Review Group, made up of 30 Global Forum members. January 27,

15 Global Forum Peer Reviews Peer reviews commenced in March All jurisdictions will undergo Phase 1 reviews before June 2012 and all Phase 2 reviews should be completed before June A schedule of reviews has been published and the outcome of the reviews will be published once they are adopted by the Global Forum. A system of on-going monitoring has been put in place to ensure that developments that occur after a review is complete are acknowledged, and to ensure that the most complete and up-to-date information about all the jurisdictions covered by the Global Forum s work is available to the public, and also to include a database of information concerning transparency and exchange of information on the Global Forum website. January 27,

16 The OECD Standard The OECD Standard was developed in 2002 by the OECD in cooperation with non-oecd countries, and was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004, by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting and by all members of the Global Forum. The OECD Standard imposes an obligation to exchange all types of information foreseeably relevant to the administration and enforcement of the requesting country's domestic tax laws, including information on companies, trusts and their owners and beneficiaries. The OECD Standard can be implemented through: Bilateral tax treaties; Tax Information Exchange Agreements (TIEAs); Multilateral Agreements; or Domestic legislation allowing for the provision of information on a unilateral basis. January 27,

17 OECD Standard Elements The OECD Standard requires: Exchange of information on request where foreseeably relevant to administration or enforcement of all tax matters of the treaty partner. Without regard to a domestic tax interest, bank secrecy, or dual criminality. Availability of reliable information and powers to obtain it. Respect of taxpayer s rights. Strict confidentiality of information exchanged. January 27,

18 OECD Standard Key Principles Existence of mechanisms for exchange of information upon request. Exchange of information in both criminal and civil matters. No restrictions of information exchange caused by application of dual criminality principle or domestic tax interest requirement. Respect for safeguards and limitations. Strict confidentiality rules for information exchanges. Availability of reliable information (in particular, bank, ownership identity and accounting information) and powers to obtain and provide such information in response to a specific request. January 27,

19 International Cooperation OECD Forum on Tax Administration (FTA). Joint International Tax Shelter Information Center (JITSIC). OECD Aggressive Tax Planning Directory. Joint Audits. January 27,

20 OECD s Forum on Tax Administration (FTA) The FTA was established by the OECD s Committee on Fiscal Affairs in 2002, and brings together tax commissioners from over 40 countries to promote cooperation between revenue bodies and to develop good tax administration practices. The FTA will assist cooperation by tax authorities to identify tax evasion and tax avoidance schemes by focusing on: Offshore compliance. Financial institutions. High net worth individuals. IRS Commissioner Shulman is the current chair of the FTA. January 27,

21 JITSIC JITSIC established in 2004 by Australia, Canada, UK and US to supplement ongoing work of tax administrations in identifying and curbing abusive tax avoidance transactions, arrangements and schemes. Japan joined in Purpose of JITSIC is to provide support to the parties through identification and understanding of abusive tax schemes and those who promote them; share expertise, best practices and experience in tax administration to combat abusive tax schemes; exchange information on abusive tax schemes, their promoters and investors consistent with the provisions of bilateral tax conventions; and enable the parties to better address abusive tax schemes promoted by firms and individuals who operate without regard to national borders. January 27,

22 Joint Audits Forum Tax Administration study Bilateral or multilateral treaties (e.g., Convention on Mutual Administrative Assistance in Tax Matters) provide legal framework for such audits. The Global Forum updated this agreement, which is a powerful tool to counter offshore non-compliance open to all countries. January 27,

23 Data Stolen from Private Banks and Use of that Data There have been at least three well-publicized incidents where a bank employee stole data and sold it to tax authorities; one involving Liechtenstein and the other two in Switzerland. January 27,

24 Whistleblower Disclosure On January 17, 2011, The WikiLeaks announcement today that it plans to release information on more than 2,000 international bank accounts threatens to provide the IRS and other tax authorities with the names of persons with undeclared foreign accounts. The data was provided by a former chief operating officer who managed the Caribbean operations of a prominent Swiss private bank. This data to significant ramifications for undeclared account holders whose names will soon become public. January 27,

25 United States Efforts to Combat Global Tax Evasion 2009 was a turning point in efforts to curb global tax evasion. Global tax evasion continues to be high on the political agenda, and is a priority for the Internal Revenue Service (IRS) and the US Department of Justice (DOJ). The United States was extremely active in the area of international tax enforcement this past year. The Commissioner of the IRS has testified that international tax issues are a major priority and that the IRS needs additional resources, information (from foreign countries and financial institutions) and regulatory and legislative changes (all of which are in process or have been implemented). January 27,

26 Efforts of the IRS and DOJ to Combat Global Tax Evasion The IRS currently uses multiple methods to detect noncompliant taxpayers using offshore accounts or tax haven entities. These include: International collaboration through the exchange of information provisions of bilateral tax agreements and cooperative information agreements that the US has entered into with over 70 countries; The qualified intermediary ("QI") program that the IRS has with foreign financial institutions that agree to become QIs; Criminal investigations in collaboration with the DOJ; The "whistleblower" program through which the IRS receives many tips; and The "John Doe" summons authority, which the IRS uses when it strongly suspects U.S. taxpayers are using offshore bank accounts to avoid paying taxes, but does not know their identities. January 27,

27 Changes in the Enforcement Landscape Deferred Prosecution Agreement and John Doe Summons with Respect to a Well Known Swiss Financial Institution. Criminal Prosecution of Bankers, Account Holders and Others. Voluntary Disclosure Initiatives/Focus on Foreign Bank Account Reports (a new initiative may be proposed soon). Enhanced Whistleblower Incentives. Increased Cooperation by G-20 & Others (noted above). New IRS Offices Offshore. Additional Dedicated Resources. Proposed Regulations on Reporting of Bank Interest by US Banks. Foreign Account Tax Compliance Act. January 27,

28 Dedicated Resources Added The Criminal Investigation Division (CID) has offices in 11 countries. The IRS has opened new CID Offices in Beijing, Panama City and Sydney. CID employs 4,200 workers worldwide, of whom 2,700 are special agents with police authority. The President's budget would provide funds to add nearly 800 new IRS employees to combat offshore tax evasion and improve US tax compliance. CID Agents specially dedicated to international compliance. January 27,

29 Dedicated Resources Added International Agents on West Coast to Focus on Pacific Rim Activities. IRS Global High Wealth Industry Group Will centralize and focus IRS compliance expertise involving high wealth individuals and their related entities. The purpose of the group is to build new risk assessment techniques to identify high wealth individuals and their related enterprises that should be reviewed holistically. The IRS has started to hire revenue agents, flow-through specialists and international examiners to conduct reviews to "get the entire picture. Currently, the group has 100 staff members; examining 250 enterprises, with 40 under audit. DOJ to Lead Inter-Agency Team to Review SARS Regarding Foreign Activity. Hiring of New Prosecutors. January 27,

30 Introduction Section 501 of the HIRE Act (new Chapter 4 of the Code) is sometimes described as the centerpiece of the FATCA provisions of the Act. FATCA provides for a new withholding regime aimed at expanding reporting on foreign accounts owned by certain U.S. persons and disclosure of U.S. owners of certain foreign entities. January 27,

31 Reasons for Legislation The legislation is a direct result of the focus by the United States on combating offshore tax evasion and recouping much needed tax revenues. The legislation (and earlier versions) was proposed to remedy perceived deficiencies in the current methods used by the IRS and the U.S. Department of Justice ( DOJ ) to identify U.S. persons who utilize foreign financial accounts or foreign entities and thereby provide more information to the IRS to enforce compliance. January 27,

32 Chapter 4 of the Code Chapter 4 of the Internal Revenue Code imposes new compliance burdens on foreign financial institutions and other foreign entities, requiring them to identify and disclose U.S. account holders and investors or be subject to a new 30 percent U.S. withholding tax under a new U.S. withholding tax regime on any payment of U.S. source investment income and proceeds from the sale of equity or debt instruments of U.S. issuers ( New U.S. Withholding Tax Regime ). January 27,

33 Ultimate Objective The ultimate goal of Chapter 4 is for the United States to obtain information with respect to offshore accounts and investments beneficially owned by U.S. taxpayers, in an efficient and timely manner, rather than have the New U.S. Withholding Tax regime imposed. January 27,

34 Effective Date Payments made after December 31, Grandfathered Treatment of Outstanding Obligations. Any payment under any obligation outstanding on date which is two years after date of enactment of the Act (March 18, 2010) or gross proceeds from disposition of such obligation. January 27,

35 IRS Authority to Promulgate Regulations During this interim period, the IRS, pursuant to a wide grant of regulatory authority, will draft regulations to implement the new provisions. In drafting its guidance, it is understood that the IRS will endeavor: To construct a workable information reporting and withholding system that can be effectively implemented and utilized by foreign reporting entities; To obtain information consistent with the purposes of the legislation; and In a manner that will not discourage or disrupt foreign investment in U.S. capital markets. In Announcement , the IRS has requested comments on future guidance concerning the interpretation and implementation of the new law. In Notice , the IRS provided preliminary guidance on selected issues. January 27,

36 Withholdable Payments to Foreign Financial Institutions Entities Covered. Section 1471 applies to foreign financial institutions (FFIs) (except as otherwise provided by the Secretary; a financial institution organized under the laws of a U.S. possession is not an FFI). Except as otherwise provided by the Secretary, an FFI is any entity that is not a United States person and: Accepts deposits in the ordinary course of a banking or similar business; As a substantial portion of its business, holds financial assets for the account of others; or Is engaged (or holds itself out to be engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or other interests, including derivatives (Foreign Investment Vehicle). January 27,

37 Withholdable Payments to Foreign Financial Institutions Accounts Subject to Reporting Requirements. In order for an account to be subject to these rules, it must constitute a financial account that is held by one or more specified U.S. persons or U.S. owned foreign entities (a U.S. Account ). Financial Account. This term, except as otherwise provided by the Secretary, means with respect to an FFI: Any depository account maintained by the FFI; Any custodial account maintained by the FFI; and Any debt or equity interest in an FFI that is not regularly traded on an established securities market. Specified U.S. Person. Generally a U.S. non-exempt recipient (individual, trust, partnership or estate) and a privately held U.S. corporation. U.S. Owned Foreign Entity. A foreign entity that has Substantial U.S. Owners: Corporation, partnership or trust where specified U.S. person owns a greater than 10-percent interest, directly or indirectly. Foreign investment vehicles. 10 percent is reduced to 0 percent. January 27,

38 Withholdable Payments to Foreign Financial Institutions Withholdable Payment. A Withholdable Payment, except as otherwise provided by the Secretary, means: Any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments and other fixed or determinable annual or periodical gains, profits and income from sources within the United States; Interest paid on deposits by foreign branches of domestic banks (861(a)(1)(B) does not apply for this purpose); and Gross proceeds from the sale or other disposition of property which can produce U.S. source dividends or interest. Rate of Withholding: 30 percent. Exceptions: Effectively connected income. To the extent provided in regulations, certain payments made with respect to short-term debt or short-term deposits (including gross proceeds), may be excluded. January 27,

39 Withholdable Payments to Foreign Financial Institutions Passthru Payment. Definition: Any withholdable payment or other payment to the extent attributable to a withholdable payment. Includes: A withholdable payment made by an FFI to a Recalcitrant Account Holder. A withholdable payment made by an FFI to another FFI which does not meet the requirements of Chapter 4 (Non-Compliant FFI). A withholdable payment made to an FFI that has entered into an agreement with the IRS and which has in effect an election with respect to such payment (and meets such other requirements as the Secretary may provide). In the case of a withholdable payment, the passthru payment is so much of the withholdable payment as is allocable to accounts held by Recalcitrant Account Holders or Non-Compliant FFIs. To the extent provided by the Secretary, the election may be made with respect to certain classes or types of accounts of the FFI. January 27,

40 Withholdable Payments to Foreign Financial Institutions Recalcitrant Account Holders and Non-Compliant FFIs. To deal with situations where an FFI has a Recalcitrant Account Holder or an FFI that does not meet the IRS agreement requirements, the statute provides certain rules: Recalcitrant Account Holder. An account holder that fails to comply with reasonable requests for information pursuant to IRS mandated verification, and due diligence procedures to identify U.S. Accounts, to provide a name, address and TIN or fails to provide a bank secrecy waiver upon request. Under the general rule, an FFI that makes a payment to a Recalcitrant Account Holder or a Non-Compliant FFI, is required to withhold 30 percent of the gross amount of such payment. January 27,

41 Withholdable Payments to Foreign Financial Institutions Agreement. An FFI satisfies the requirements of section 1471 if it enters into an agreement with the IRS under which the FFI agrees: To obtain such information regarding each holder of each account maintained by the FFI as is necessary to determine which accounts (if any) are U.S. Accounts; To comply with IRS verification and due diligence procedures with respect to the identification of U.S. accounts; To annually report U.S. Account information to the IRS; To withhold 30 percent on Passthru payments; To comply with additional IRS information requests with respect to U.S. Account Holders; and To attempt to obtain a waiver in any case in which any foreign law would (but for the waiver), prevent the reporting of information as required under this provision, and if a waiver is not obtained within a reasonable period of time, to close the account. The IRS may terminate the agreement if the FFI is out of compliance with the agreement. January 27,

42 Withholdable Payments to Foreign Financial Institutions Certain FFIs Deemed to Meet Reporting Requirements. The statute provides two procedures for FFIs to avoid having to enter into an IRS agreement because, for example, the FFI may not have U.S. Accounts: The first way is if the FFI complies with such procedures as the IRS may prescribe, to ensure that the FFI does not maintain U.S. Accounts, and the FFI meets such other requirements as the IRS may prescribe, with respect to accounts of other FFIs maintained by the first FFI. The second way is if the FFI is a member of a class of institutions with respect to which the IRS has determined that the application of the agreement/withholding provisions is not necessary. January 27,

43 Withholdable Payments to Foreign Entities that are not FFIs Section 1472 General Rule. Withholding applies at a 30 percent rate on withholdable payments unless: The NFFE (or beneficial owner) provides the withholding agent either: (a) with a certification that the NFFE does not have a Substantial U.S. Owner or (b) the name, address and TIN of each Substantial U.S. Owner to the IRS; The withholding agent does not know, or have reason to know, that any information provided above is incorrect; and The withholding agent reports the information to the IRS in such manner as the IRS may provide. Or an exception applies. January 27,

44 Alan Winston Granwell Alan Granwell has practiced in the area of international taxation for 40 years. He represents US multinational groups and US high-net worth individuals investing or conducting business abroad, and foreign multinational groups and foreign high net-worth individuals investing or conducting business in the United States. From 1981 through 1984, Mr. Granwell was the International Tax Counsel and Director, Office of International Tax Affairs at the US Department of the Treasury. In that capacity, Mr. Granwell was the senior international tax advisor at the Treasury Department and was responsible for advising the Assistant Secretary for Tax Policy on legislation, regulations, and administrative matters involving international taxation and directing the US tax treaty program. T E. January 27,

45 Circular 230 Notice In compliance with U.S. Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. January 27,

46 OFFSHORE TAX HAVEN WEBCAST TAX HAVENS: THE INTERPLAY BETWEEN TAX AND MONEY LAUNDERING Association of Certified Anti Money Laundering Specialists Webcast on Off Shore Tax Havens January 27, 2011 Bruce Zagaris 2011 Berliner, Corcoran & Rowe, LLP th St. NW Suite 1100 Washington DC, (202) dc.com 2011 This presentation is a reprint from the ALI ABA International Trust and Estate Planning Course of Study August 19,2010 January 27, The information in these slides reflects the views of the presenter and do not reflect the views of DLA Piper.

47 I. Overview of Slides* Limits on Bank Secrecy Implementation of Gatekeeper Standards US Legislative Initiatives Other US Legislative Initiatives Initiatives of Int l Organizations Extradition Analysis and the Way Forward January 27,

48 II. Limits on Bank Secrecy Limits from Soft Law (FATF & OECD) International Enforcement Conventions SOX and QI Regime June 10, 2010 Swiss Parliament Approves US Swiss Agreement on UBS Whistleblowers & Wikileaks Governments Encourage Whistleblowing January 27,

49 II. Limits on Bank Secrecy (2) The US Panama TIEA illustrates the limits to bank and financial confidentiality. To a large extent the Panama financial services sector has attracted investors through offering them confidentiality, including the use of bearer shares. Even the US Panama MLAT was limited in terms of the scope of assistance. January 27,

50 II. Limits on Bank Secrecy (3) On November 30, 2010, the United States and Panama signed a new tax information exchange agreement (TIEA) that would allow for access to information about Panamanian bank accounts and information on bearer shares for the first time. The TIEA has enormous significance because Panama is the most important entry point for capital from Latin America into the U.S. and Panama has long resisted signing a TIEA due to its strong international financial sector, which has been based in part on strong bank and financial confidentiality. January 27,

51 II. Limits on Bank Secrecy (4) The agreement allows the United States and Panama to seek information from each other on all types of national taxes in both civil and criminal matters for tax years beginning on or after November 30, According to a joint declaration between the two countries, the TIEA will take effect as soon as practicable after Panama passes implementing legislation. January 27,

52 II. Limits on Bank Secrecy (5) The diplomatic note to the convention states that Panama expects to enact implementing legislation before the end of According to the diplomatic note Panama intends that the legislation would require the identification of bearer shares. Resident agents acting for Panamanian entities would have to obtain and retain in their records sufficient information to identify those entities, including, where the owner is a legal person, information sufficient to identify substantial owners of that legal person. However, a resident agent will not be required to obtain and maintain information sufficient to identify substantial owners of legal persons in cases where the resident agent acts for a professional client that is part of an organization that is required to maintain information on such entities and that has agreed to make such information available to the resident agent when requested. January 27,

53 II. Limits on Bank Secrecy (6) Under the contemplated legislation, agents will have to produce ownership and client identity information in response to a proper request under the TIEA, regardless of whether the entity is newly formed or already existing at the time the legislation is enacted, the declaration said. The agents must produce ownership and client identity information in their possession in response to a proper request under the Agreement, whether with respect to newly formed entities or entities in existence at the time the legislation is enacted January 27,

54 II. Limits on Bank Secrecy (7) With respect to already existing entities, ownership information would have to be obtained within a five year period from the date of enactment. The TIEA itself provides for the exchange of information, through competent authorities, that may be relevant to the administration and enforcement of the domestic laws of the parties concerning the taxes covered by this agreement. This includes information relevant to determining, assessing, enforcing, or collecting tax, as well as to the investigation or prosecution of criminal tax matters. January 27,

55 II. Limits on Bank Secrecy (8) The TIEA applies to all U.S. federal taxes, including income taxes, taxes related to employment, estate and gift taxes and excise taxes. The TIEA does not apply to taxes imposed by states, municipalities, or other political subdivisions, or possessions of a party. For Panama the TIEA applies to income tax, real estate tax, vessels tax, stamp tax, notice of operations tax, tax on banks, financial and currency exchange companies, insurance tax, tax on the consumption of fuel and oil derivatives, tax on the transfer of movable goods and the provision of services January 27,

56 II. Limits on Bank Secrecy (9) The agreement requires that requests for information can only be made when the requesting Party is not able to obtain the requested information by other means, except where recourse to such means would give rise to disproportionate difficulty. Privileges under the laws and practices of the requesting Party will not apply in the execution of a request by the requested Party and these matters must be reserved for resolution of the requesting Party. January 27,

57 II. Limits on Bank Secrecy (10) Any request for information must be made with the greatest degree of specificity as possible, and in all cases must specify, in writing, the taxpayer's identity, the period of time for which information is requested, the nature of the information requested and the form in which the requesting party would prefer to receive it, and reasons for believing the information requested (1) is relevant to tax administration or enforcement, and (2) is present or in the possession or control of a person in the other country. January 27,

58 II. Limits on Bank Secrecy (11) In addition, requests must provide the grounds for believing the information requested is present in the requested Part or is in the possession or control of a person within the jurisdiction of the requested Party; a statement as to whether the requesting Party would be able to obtain and provide the requested information if a similar request were made by the requested Party; and a statement that the requesting Party has pursued all reasonable means available in its own territory to obtain the information, except where that would give rise to disproportionate difficulty January 27,

59 II. Limits on Bank Secrecy (12) However, under the TIEA, the parties are not obligated to obtain or provide ownership information with respect to publicly traded companies or public collective investment funds or schemes, unless such information can be obtained without giving rise to disproportionate difficulties. January 27,

60 II. Limits on Bank Secrecy (13) Competent authorities can decline requests where: the request does not conform to the agreement; the requesting party has not pursued all reasonable means available in its own territory to obtain the information, except where recourse to such means would cause disproportionate difficulty; and where the disclosure of the information would be contrary to the public policy of the requested party January 27,

61 II. Limits on Bank Secrecy (14) The Agreement must not impose on a Party any obligation: to provide information that under the laws of the requested Party is subject to legal privilege or contains any trade, business, industrial, commercial or professional secret or trade process. The Agreement does not require a Party to carry out administrative measures at variance with its laws and administrative practices. January 27,

62 II. Limits on Bank Secrecy (15) The requested Party need to obtain and provide information which the requesting Party would be unable to obtain in similar circumstances under its own laws for the purpose of the administration/enforcement of its own tax laws or in response to a valid request from the requested Party under the Agreement. January 27,

63 II. Limits on Bank Secrecy (16) The statute of limitations of the requesting Party pertaining to the taxes described in the Agreement will govern a request for information. Once the TIEA enters into force, it will have effect for requests made or after the date of entry into force, with regard to taxable periods beginning on or after three years prior to the signature of the Agreement, to which the matter relates. January 27,

64 II. Limits on Bank Secrecy (17) One of the main incentives for Panama to sign a TIEA with the U.S. was its desire to obtain ratification by the U.S. of the free trade agreement, which was blocked by the U.S. government s demand for Panama to conclude a TIEA. This condition was reflected by the remarks of the leaders of the House Ways & Means Committee subsequent to the signing of the TIEA. January 27,

65 II. Limits on Bank Secrecy (18) The fact that the ratification of the Panama US TIEA has been delayed for three years and the signing of a TIEA imposed as a condition to the U.S. ratification raises the question of whether the U.S. and other countries (EU and its members) may impose the condition of a TIEA as a prerequisite to other future trade and investment agreements. January 27,

66 III. Gatekeeper Standards 2003 Revised FATF Recommendations 2006 FATFFinds US Non Compliant with Gatekeeper Requirements GAO Report on Company Formations FATF Risk Based Guidance for Lawyers and other Gatekeepers ABA RB Guidance January 27,

67 III. Gatekeeper Standards (2) The U.S. private sector is caught between the U.S. leadership in the OECD, G 20, and FATF and the pressure those orgs/groups are exerting on the tax havens. Because of the agreement in the OECD and G 20 of the need for a level playing field, the U.S. needs to take the same medicine it is prescribing for tax havens. January 27,

68 III. Gatekeeper Standards (3) Some OECD members, such as Luxembourg and Switzerland, and many members of the OECD s Global Forum, such as the Channel Islands, as well as some civil society groups and media, have pointed out that, notwithstanding the non compliant marks received by the US from FATF in 2006 on the gatekeeper standards, the U.S. has not acted satisfactorily on the non compliant marks. January 27,

69 III. Gatekeeper Standards (4) Interested members of the US Congress and international organizations/foreign governments are pressing the U.S. (and hence the ABA) to effectively implement the voluntary guidance and show that they are really binding. It seems that the next step is for the ABA to insert the guidance into the model rules for professional conduct, meaning that the states will be expected to adopt them and use them to potentially discipline attorneys violating them. January 27,

70 IV. New & Proposed U.S. Legislative Initiatives The Incorporation Transparency and Law Enforcement Assistance Act (S. 569) Require States to obtain a list of the beneficial owners of each corporation or limited liability company (LLC) formed under their laws; Ensure this information is updated annually; and Provide the information to civil or criminal law enforcement on receipt of a subpoena or summons. Corporations and LLCs with non U.S. beneficial owners would provide a certification that an in state formation agent has verified the identity of those owners. 70 January 27,

71 IV. New & Proposed U.S. Legislative Initiatives (2) U.S. law enforcement have battled the states and private sector on S Treasury has tried to intermediate a compromise, but seems poised to side with U.S. law enforcement. Treasury has indicated that it will amend the BSA to include company formation agents in financial institutions subject to AML. January 27,

72 IV. New & Prop U.S. Legislative Initiatives (3) Treasury has said that it expects ITLEA to pass in the next session of Congress. However, it remains to be seen if the Administration can develop legislation that satisfies the states, the private sector, and the new Congress. One of the problems is developing sufficient funding for the states to implement ITLEA. January 27,

73 IV. New & Prop U.S. Legislative Initiatives FATCA (4) 501 requires 30% withholding on payments to foreign financial institutions and other entities unless: They acknowledge accounts to IRS Disclose relevant info (account ownership, balances, and amounts moving in & out of accounts) Exception for Qualified FFI January 27,

74 IV. New & Proposed U.S. Legislative Initiatives FATCA (5) Withhold 30% from any pass thru payment that is made to: (1) a recalcitrant account holder, (ii) a non QFFI, or (iii) a QFFI that has elected to be withheld upon with respect to the part of the payment allocable to a recalcitrant account holder or to a non QFFI; and Try to obtain a waiver in any case in which any foreign law would (but for the waiver) prevent the reporting of the required information required with respect to any US owned account maintained by the FFI; if a waiver is not obtained, the QFFI is required to close the account. January 27,

75 IV. New & Proposed U.S. Legislative Initiatives FATCA (6) 522 authorizes Treasury to require financial institutions to electronically file information reports about withholding on transfers to foreign accts to enable the IRS to better match reports to tax returns strengthens rules & penalties re foreign trusts, including rules to determine whether distributions from foreign trusts are going to US beneficiaries & reporting requirements on US transfers to foreign trusts. January 27,

76 IV. New & Propose Legislative Initiatives FATCA (7) 541 clarifies that U.S. dividend payments received by foreign persons are treated as dividends even when couched as another type of distribution in an effort to avoid U.S. taxes. An unknown will be whether FFIs without a large U.S. client base will decide it is costeffective to participate in the regime or will decide to avoid U.S. clients. January 27,

77 V. International Organizations and Related Initiatives The OECD, FATF, G 20, and IMF/World Bank Group have taken some important and dynamic action with respect to tax enforcement and money laundering. See Alan Granwell s presentation for these developments. January 27,

78 V. International Organizations and Related Initiatives (2) Third EU Directive on Money Laundering: Adopted by most member states Belgium, Ireland, Spain, and Sweden not implemented Finland, France, Poland, partially implemented EU Savings Directive: Subject interest payments made to an account held by an EU citizen in a country other than that of his/her residence to taxation in country of residence EU members receiving inward investments have the choice to withhold tax and share in the withholding or exchange information with country of residence of the depositor 78 January 27,

79 V. International Organizations and Related Initiatives (3) Three initiatives that the European Commission is currently pursuing: The review of the savings tax directive, to close certain loopholes; The proposed directive on mutual assistance between the member states to help EU members assess the tax positions of their residents in other countries and to collect the tax that is due. Communication on good governance in the area of taxation, which would cover exchange of information, transparency, and fair tax competition, "the three pillars of good governance in the tax area. 79 January 27,

80 V. International Organizations and Related Initiatives (4) On December 7, 2010, the Council of the European Union at a meeting of the Economic and Financial Affairs Council reached political agreement on a draft directive aimed at strengthening administrative cooperation in the field of direct taxation in order to enable the EN Members to better combat tax evasion and tax fraud. January 27,

81 V. International Organizations and Related Initiatives (5) The draft directive has the goal of fulfilling the EU members growing need for mutual assistance, especially through the exchange of information, in order to enable them to better assess taxes due, in the context of greater taxpayer mobility, globalization, and a growing number of crossborder transactions. Among other activities, the directive will overhaul directive 77/799/99/EEC, on which administrative cooperation in the field of taxation has been based since January 27,

82 V. International Organizations and Related Initiatives (6) The directive will ensure that the OECD standard for the exchange of information on request is implemented in the EU as regards the exchange of information on request. It will prevent an EU member from refusing to furnish information concerning a taxpayer of another EU Member on the sole ground that the information is held by a bank or other financial institution. January 27,

83 V. International Organizations and Related Initiatives (7) The directive will extend cooperation between EU members to cover taxes of any kind. It will establish time limits for the provision of information on request and other administrative enquiries. The directive will introduce provisions on the automatic exchange of information. Under the directive officials of one EU member can participate in administrative enquires on the territory of another EU member. January 27,

84 V. International Organizations and Related Initiatives (8) With respect to automatic exchange of information the Council agreed on a step by step approach aimed at eventually ensuring unconditional exchange of information for eight categories of income and capital. Those categories are: income from employment, directors fees, dividends, capital gains, royalties, certain life insurance products, pensions, and ownership of and income from immovable property. From 2015, EU members will communicate automatically information for a maximum of five categories, provided that such information is readily available. January 27,

85 V. International Organizations and Related Initiatives (9) By July 1, 2017, the Commission will provide a report and, if required, a proposal. When examining that proposal, the Council will examine the possibilities for removing the condition of availability and extending the number of categories from five to eight. January 27,

86 V. International Organizations and Related Initiatives (10) The European Commission proposed the legislation calling for automatic information exchange almost two years ago, stating the legislative proposal included a transition to automatic information exchange that was already agreed in the EU cross border savings directive. However, Luxembourg and Austria disputed that claim and cited the original terms of the EU crossborder savings tax directive agreed in 2000 that permitted them to preserve bank secrecy laws as long as Switzerland and other independent territories such as the Channel Islands, Monaco and others kept them. January 27,

87 V. International Organizations and Related Initiatives (11) In 2009, Luxembourg and Austria softened their positions as part of the G 20 agreement in London, which targeted tax havens where tax evaders have been hiding trillions of dollars. In order to avoid the OECD gray list backed by the G 20, both Luxembourg and Austria as well as Switzerland agreed to the OECD Tax Model convention that requires them to exchange info on request. January 27,

88 V. International Organizations and Related Initiatives (12) Because the EU coordinates tax and foreign policy and has key policymaking positions in groups, such as the G 20 and international organizations, such as the OECD and the IMF/World Bank Group, the draft directive has implications well beyond the EU. January 27,

89 VI. Analysis & the Way Forward Clear Domestic and Global Impetus to Crackdown on Tax Havens President Obama supportive of STHAA, FATCA, and other international tax enforcement initiatives. Increasing convergence and prosecution of: Money laundering Bribery/foreign corruption (FCPA) Tax evasion Pressure on a macro level on offshore centers and large international banks as well as micro level facilitators (lawyers, accountants, financial advisers, etc.) Get to know your clients better! 89 January 27,

90 VI. Analysis & the Way Forward (2) The current crackdown on tax havens may lead to increased movement of assets globally. The current increased regulatory and enforcement environment has practice implications for all the players, including banks, financial institutions, professionals, such as lawyers and other gatekeepers, and governments. Financial institutions and gatekeepers will increasingly take AML due diligence action for tax reasons (e.g., UK Code of Conduct in Tax for Banks). 90 January 27,

91 VI. Analysis & the Way Forward (3) The level playing field, whereby OECD countries must have and enforce the same AML, tax and entity transparency, as the small financial centers, will exert significant pressure for meeting international standards in onshore jurisdictions, such as the U.S. On Aug 10, 2010, the ABA House of Delegates approved AML good practice standards to ensure lawyers meet Know Your Customer and due diligence standards when they conduct financial transactions. Emphasis will turn to integrating the standards into state ethical codes. Increasingly, transnational enforcement cases will be initiated outside the U.S., requesting assistance from and asserting jurisdiction over U.S. transactions and professionals. 91 January 27,

92 VI. Analysis & the Way Forward (4) A continuing trend is the use of unilateral extraterritorial measures to obtain evidence, such as John Doe summons. Another trend is the investigation of foreign financial institutions for potential prosecution (e.g., HSBC), as well as foreign professionals. Other countries will emulate US tax enforcement actions. January 27,

93 VI. Analysis & the Way Forward (5) Stakeholders must construct a better architecture that affords transparency, due process, and a meaningful opportunity to participate. Stakeholders should ascertain that the decisions made by informal groups (e.g., G20, FATF, G8) and int l orgs were done, after proper due process and debate. January 27,

94 VI. Analysis & the Way Forward (6) Without better and fair process the decisions will not be sustainable. Hence, when FATF or G20 issue revised standards and has difficulty engaging some of the gatekeepers and/or jurisdictions on implementing the standards, FATF learns that the gatekeepers believe that some standards are fundamentally flawed because they January 27,

95 VI. Analysis & the Way Forward (7) violate fundamental national law and that some of the polices were not democratically or fairly adopted. Trying to assess the future scope and substance of international financial regulation is difficult because the world is still at the very start of developing transnational networks in the area of international financial regulation. January 27,

96 ADDENDUM TO FATCA Reprint from B. Zagaris, FATCA and Bank Secrecy: A View from Abroad Florida International Bankers Assoc. webinar, Dec. 17, 2010 January 27,

97 I. Overview of Foreign Views A. Some critics complain that FATCA extends the QI whereby US obtains automatic exchange of information w/o reciprocity: it permits non US persons to invest in the US thru a QI in a foreign jurisdiction w/o the identity of these foreign persons being disclosed to the U.S. payors of income of the USG, thereby precluding US to exchange the relevant info with the respect foreign government where foreign investor resides. January 27,

98 I. Overview of Foreign Views (2) B. If you can beat them, join them: foreign governments emulate the U.S. and more E.g., EU Savings Directive. E.g., Proposal for a Directive on Alternative Investment Fund Managers C. Another response is a practical one: small and medium size and indigenous foreign financial institutions (FFIs) whose clients are not predominantly U.S. taxpayers must make a costbenefit decision: are the costs and administrative burdens worthwhile? January 27,

99 I. Overview of Foreign Views(3) In this regard, already some FFIs, such as Lloyds and Sarasin, have decided to avoid U.S. taxpayers as clients because the administrative burdens and costs of due diligence, plus the costs (reputational risk, penalties, and prof. fees) of penalties outweigh the benefits of having U.S. clients. January 27,

100 I. Overview of Foreign Views(4) Other responses are to Notice They call for exclusions, clarification, simplification, and more practical rules. In particular, they call for redesigned W 8 forms and self certifications. January 27,

101 II. Issues Impacting USFIs A. Identification of Payees by USFIs A USFI making withholdable payments must determine whether the recipient is a US person, an FFI, an entity described in sec. 1471(f), or a Non Foreign Financial Institution (NFFE). If an entity is determined to be an FFI, the USFI must then determine whether it should be treated as a participating FFI (pffi), deemed compliant FFI (dcff) or non participating FFI (npffi). January 27,

102 II. Issues Impacting USFIs (2) If an entity is determined to be an NFFE, the USFI must determine if it should be treated as an excepted NFFE or other NFFE. To comply with FATCA, USFIs will need clear and workable rules. January 27,

103 II. Issues Impacting USFIs (3) 1. New Form W 8 Commentators have suggested new (redesigned) W 8 to identify new foreign entity payees. Separate Forms W 8 for individuals and entities would facilitate the work of USFIs. An entity checking the box that it is an NFFE should have to attach a schedule with the name, address and TIN of each of its substantial U.S. owners. January 27,

104 II. Issues Impacting USFIs (4) The USFI will use this information to prepare its annual IRS information reporting with respect to the NFFE s substantial US owners 2. Standards to Determine Pre Existing Payee Status Instead of requiring USFIs to prove the negative (i.e., that an entity is non US), the IRS should provide presumption rules to allow January 27,

105 II. Issues Impacting USFIs (5) USFIs to rely on the IRS Reg eyeball tests as proof that an entity is foreign. B. USFI Verification of FFI Status as Participating or Non Participating USFFIs have recommended that the IRS provide simple and clear rules for the due diligence to verify the certifications by foreign payees of their pffi status andcertifications by NFFEs with substantial US owners. January 27,

106 II. Issues Impacting USFIs (6) The IRS should develop an FFI validation program similar to the current IRS TIN matching program. The program would require a USFI to submit a list of pffi names/tins to the IRS for validation. The IRS would notify the requesting USFI of FFIs on the submitted list that are in fact pffis and those that have not been validated as pffis. January 27,

107 II. Issues Impacting USFIs (7) C. Exclusion of Certain Payments from the Definition of Withholdable Payment FATCA exempts certain types of payments from the definition of withholdable payments. The IRS has broad authority to exclude other types of payment. Commentators are asking the IRS to use the authority to exclude payments that have a very low risk of US tax January 27,

108 II. Issues Impacting USFIs (8) evasion, such as certain investment type income (i.e., interest payments on short term debt and bank deposits, as well as payments to vendors for services and license fees). January 27,

109 II. Issues Impacting USFIs (9) D. Presumption Rules w/ Respect to CFCs, US Branches of FFIs, & Foreign Branches of USFIs Some recommend the IRS reconsider its position w respect to prior requests that certain entities be treated as dcffis because these entities are already subject to various information reporting and withholding requirements. January 27,

110 III. Issues Affecting FFIs A. Members of the Same Expanded Affiliated Group IRS should clarify that an FFI belonging to an expanded affiliated group need not certify that no other member of the same expanded knows, or has reason to know, that any information provided to the FFI by a customer is incorrect. Processing systems usually do not permit members of the same expanded affiliated group to share certain information about each other. January 27,

111 III. Issues Affecting FFIs (2) B. Carve Out Provisions 1. Carve Out Provision for Certain FFIs Carve outs have been recommended for: a) FFIs owned by US parents or US holding cos. b) FFIs located in jurisdictions where they are already required to provide comprehensive reports on their clients and c) FFIs located in jurisdictions that have TIEAs or tax treaties with the US. January 27,

112 III. Issues Affecting FFIs (3) 2. Carve Out Provision for Certain FFEs Including NFFEs located in a country that a)has a DTA or TIEA; and b) is regarded by the US as actively complying with the same. January 27,

113 III. Issues Affecting FFIs (4) 3. Carve Out Provision for Certain Beneficial Owners Some comments are that the IRS should clarify that investors such as foreign insurance companies, foreign pension funds, pension fund pooling vehicles and other pooled investment vehicles utilized by charities, other entities exempt from US withholding under tax treaties and publicly traded companies are included in the beneficial owner exceptions for Foreign Financial institutions or NFFEs. January 27,

114 III. Issues Affecting FFIs (5) 4. FFI Determination of Specified US Person IRS should develop practical rules with examples since most FFIs and NFFEs are unfamiliar with US tax laws and are likely to have difficulty determining the classification of entities for US tax purposes. January 27,

115 III. Issues Affecting FFIs (6) FFIs and US withholding agents should be permitted to rely on either information already in their records or self certifications to identify and exempt the following entities from reporting rules: (1) corps regularly traded on an established securities market and their affiliates (2) tax exempt entities (3) US governmental bodies & their wholly owned agencies or instrumentalities; (4) US states and their political subdivisons and whollyowned agencies or instrumentalities; and (5) banks. January 27,

116 III. Issues Affecting FFIs (7) 5. Reporting of Specified US Persons and Substantial US Owners FFIs and NFFEs may be precluded by the banking confidentiality laws in some foreign jurisdictions from disclosing the required information. The new W 8 should reflect the authority of an FFI/NFFE to report this information. The IRS should consider engaging in greater multilateral coordination with the jurisdictions with banking confidentiality for the purpose of resolving the legal impediments to reporting. January 27,

117 III. Issues Affecting FFIs (8) C. Problems for Investment Funds with Bearer Shares Investment fund laws and regs in various jurisdictions (i.e., Germany and Luxembourg) allow investment funds to issue bearer shares in which the beneficial owner is the person who holds the share(s) in certificated, physical form. January 27,

118 III. Issues Affecting FFIs (9) Although FATCA rules, as presently drafted, give an incentive for FFIs to identify their US account holders on an annual basis, they cannot establish the beneficial owners of bearer shares at a given point in time. FFIs issuing bearer shares with a term greater than one year will not be able to verify ownership on annual basis. January 27,

119 III. Issues Affecting FFIs (10) None of the potential solutions are attractive for an affected FFI wanting to have a FATCA compliant business: 1) divesting all US investments that could generate payments subject to reporting; or 2) only issuing financial instruments in registered form to clearly identify US holders to comply with FATCA reporting requirements. January 27,

120 IV. Problems of Foreign Law A. Sec. 511 Identification and Reporting Requirements Will Override Foreign Law 511 imposes subject to the Chapter 4 withholding tax a 30 percent tax withholding on payments either to foreign banks and trusts that fail to identify U.S. accounts and their owners and assets to the IRS, or to foreign corporations that do not furnish the name, address, and tax identification number of any U.S. individual with: January 27,

121 IV. Problems of Foreign Law (2) (1) at least 10 percent ownership by vote or value of a foreign corporation, (2) interest in a partnership, or (3) is treated as a grantor of a foreign trust or, (4) holds more than 10% of the beneficial interest in a foreign trust. This will take effect for payments made after December 31, 2010, with some exceptions for grandfathered agreements. January 27,

122 IV. Problems of Foreign Law (3) The foreign institution must agree to annually report on the account balance, gross receipts, and gross withdrawals/payments from such account. Foreign financial institutions must also agree to disclose and report foreign entities that have substantial U.S. owners. January 27,

123 IV. Problems of Foreign Law (4) The ability to avoid a withholding tax requires foreign financial institutions (FFIs) and nonfinancial foreign entities to identify and report information with respect to U.S. account holders and U.S. investors. Treasury and the IRS should be careful and sensitive to concerns that the reporting requirements be implemented in a way that does not violate the local laws to which FFIs and NFFEs are subject. January 27,

124 IV. Problems of Foreign Law (5) Local laws on regulatory, privacy, information disclosure and other matters, some of which may impose criminal sanctions for the disclosure of information relating to persons that are investing in or doing business with the reporting entity, may prevent FFIs and NFFEs from identifying and reporting U.S. account holders and U.S. investors. January 27,

125 IV. Problems of Foreign Law (6) Hence, FFIs or NFFEs, even if part of the same expanded affiliate group, may be subject to differing legal restrictions and requirements. January 27,

126 IV. Problems of Foreign Law (7) B. Sec. 511 Reporting May Be Duplicative The bank asked IRS to exclude, from the definition of a U.S. account that must be disclosed, depository accounts held in foreign jurisdictions that already must report to local tax authorities and that routinely exchange the information with the United States. January 27,

127 IV. Problems of Foreign Law (8) It pointed out that under the new law, accounts are excluded if they already are subject to reporting requirements that the U.S. treasury secretary determines are duplicative. TD Bank explained that in Canada, banks are required to file Forms NR4 reflecting amounts paid or credited to nonresidents subject to Canadian withholding tax on Form NR4. January 27,

128 IV. Problems of Foreign Law (9) The information that goes to the Canadian tax authority is similar to that required to be reported by foreign financial institutions on the Form 1099, the bank said. January 27,

129 V. Emulating FATCA An example of foreign countries emulating FATCA is the European Union s proposed Alternative Investment Fund Managers Directive (AIFM), first published by the European Commission in April It seeks to establish a harmonized framework for monitoring and supervising the risks posed by alternative investment funds, such as hedge funds and private equity. January 27,

130 V. Emulating FATCA (2) One of the two competing drafts, from the European Parliament, proposes that third country funds may be marketed exclusively to professional investors in the EU provided a number of key conditions are fulfilled: 1) an agreement between the supervisor of the fund and the EU Member in which it wishes to market, agreeing to exchange information; January 27,

131 V. Emulating FATCA (3) 2) the third country from which the manager operates must be approved by the Commission, subject to its compliance with FATF s 40+9 recommendations; 3) an agreement between the third country and the EU Member, in which the manager wants to market, granting authorization subject to compliance with the OECD Model Tax Convention and an agreement to January 27,

132 V. Emulating FATCA (4) the Commission s decision that confirms EU managers will have marketing opportunities in that third country equal to the market access received by the non EU manager in Europe. On Nov. 11, 2010, the European Parliament approved the Directive. Once approved by the Council, the European Securities & Marketing Authority will lead in the drafting and negotiation of detailed Level 2 regulations. January 27,

133 V. Emulating FATCA (5) Although Treasury Secretary Geithner has lobbied against the adoption of the AIFM, the EU has responded that the AIFM is precisely in response to the G20 s initiative to improve gaps in int l securities regulation to protect against some of the foreign (e.g., U.S.) products that resulted in the financial crisis. January 27,

134 VI. FATCA is Unilateral & w/o Reciprocity Critics charge that FATCA extends the qualified intermediary (QI) provisions, requiring each foreign financial institution (FFI) that is a QI to provide information automatically to the U.S. government about U.S. persons investing in the U.S. through the QI. January 27,

135 VI. FATCA is Unilateral & w/o Reciprocity (2) Neither the QI program nor FATCA allows non U.S. persons to invest in the U.S. without disclosing the identity of such persons to the U.S. payors of income or to the U.S. government. As a result, the U.S. cannot exchange the information with foreign governments where the foreign investor resides. January 27,

136 VII. Practical Issues Some FFIs may decide not to implement FATCA because their U.S. business may not be large enough make it worthwhile to invest in the new resources it will take to implement FATCA. Developing countries will have trouble implementing FATCA because they do not have the technical and resource capacity. January 27,

137 VII. Practical Issues (2) Already indigenous financial institutions in small jurisdictions lost access to the U.S. when they had difficulty implementing the antimoney laundering requirements of the PATRIOT Act. The more FFIs that decide it is not worthwhile to implement FATCA, the more opportunity for U.S. investors to put their money outside of the QI and FATCA. January 27,

138 VII. Practical Issues (3) The more FFIs that decide not to implement FACTA means loss of U.S. market to foreign capital at the very time when the U.S. needs continued access to foreign capital to finance the U.S. deficit. January 27,

139 Understanding offshore tax havens and the impact of the new tax transparency laws Who Is Involved and What Financial Institutions Need To Look For Jim Dowling Managing Director Dowling Advisory Group January 27, The information in these slides reflects the views of the presenter and do not reflect the views of DLA Piper.

140 Who Is Involved There are two groups of individuals involved in illegal offshore tax havens: 1.Those who start with illegal proceeds (narcotics, organized crime, financial fraud, etc.) 2.High net worth individuals looking to hide money to evade taxes or to hide from spouse or business associates. January 27,

141 The Government s Approach Traditionally the government has only pursued individuals who placed illegal proceeds offshore because they could. Most countries have MLAT (Mutual Legal Assistance Treaties) with the U.S. Government for sharing information on those involved in the sale of narcotics and other illegal activities. Many countries do not recognize tax evasion as a crime rising to the level of mutual assistance. January 27,

142 UBS: The Game Changer Cooperating witnesses and undercover tapes U.S. government got an inside view of foreign financial institution s involvement in assisting U.S. citizens in committing tax evasion John Doe Summons served on UBS in the U.S., requiring the names and account numbers of U.S. citizens. January 27,

143 UBS and the Voluntary Disclosure Program Results 15,000 voluntary disclosures from individuals who came in before the special VDP program ended. Another 3,000 voluntary disclosures from individuals with bank accounts from around the world. More than 7,500 previously unreported accounts. FBARs have increased more than 125% January 27,

144 Offshore Investigations Offshore Investigations January 27,

145 January 27,

146 January 27,

147 Undercover money laundering sting Covert investigation lasting three years $470, laundered by undercover agents Two SUA s bankruptcy fraud and bank fraud IRS CI committed more than 90% of their undercover agents in different roles during this investigation 147 January 27,

148 January 27,

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150 January 27,

151 Guards with automatic weapons The Compound 20 walls with barbed wire and razor wire January 27,

152 January 27,

153 $30,000 Isle of Man, England Novi, MI Reno, NV Chicago, IL Bridgeton, NJ Vienna, Austria Bahamas Costa Rica January 27,

154 $100,000 Boston, MA Fresno, CA Costa Rica January 27,

155 January 27,