Senator Levin Targets Tax Havens, Offshore Accounts with New Bill

In mid July, Democratic Senator Carl Levin and five Senate co-sponsors introduced legislation that could drastically alter financial reporting requirements for multinational corporations. This is not the first time Senator Levin has taken on what he sees as abuses that cost the government billions in lost revenue: in four previous sessions of Congress, Levin introduced similar comprehensive bills aimed at offshore accounts and tax shelters.

While none of Senator Levin's previous efforts resulted in wholesale enactment, many provisions of his bills have made it into law. And, this year Senator Levin's anti-tax haven crusade appears to be gaining more traction than ever before. Any business or individual engaged in offshore transactions can benefit from a clearer understanding of the possible changes to the law.

Provisions of the Stop Tax Haven Abuse Act

In his floor statement introducing the Stop Tax Haven Abuse Act, Senator Levin claimed that offshore tax abuses cause a $100 billion annual drain on the U.S. Treasury, "not only undermining public confidence in our tax system, but widening the deficit and increasing the tax burden on middle America." The 61-page bill seeks to address these concerns in a number of ways.

First, the Stop Tax Haven Abuse Act would grant a range of new enforcement powers to the Treasury Secretary against foreign banks or jurisdictions that "impede United States tax enforcement." For instance, the Treasure Secretary would be able to force American financial institutions that have correspondent accounts with an impeding foreign bank to reveal that bank's customer information. Or, an impeding foreign bank or jurisdiction may be cut off from accessing the U.S. financial system (the Treasury Department could prohibit American financial institutions from opening accounts or honoring credit card transactions involving targeted foreign banks or jurisdictions, simultaneously sanctioning foreign offenders and limiting taxpayer access to funds hidden offshore).

A primary goal of the Stop Tax Haven Abuse Act is ensuring fuller disclosure and reporting regarding the financial activities of individuals and corporations conducting financial transactions outside the country. The bill clarifies and strengthens disclosure requirements under the Foreign Account Tax Compliance Act, mandating disclosure by U.S. taxpayers of accounts held by foreign banks, broker-dealers, hedge funds, investment advisers, private equity funds, and other types of financial entities.

Securities and Exchange Commission-registered corporations would further have to annually report basic business information on a country-by-country basis to the government and the investing public. Currently, the provision of country-specific data is not required, and this makes it more difficult for U.S. authorities to detect tax evasion and fraud. Senator Levin believes hiding this information from investors also deprives them of insight into a company's financial solvency.

U.S. financial firms would also face more reporting requirements in terms of foreign transactions involving their customers. For example, under current laws, a bank opening an account for a foreign entity not subject to U.S. taxes does not have to file a 1099 form with the IRS to report income from that account. But, due to money laundering prevention review, domestic banks often have reason to know that accounts opened in the name of foreign entities are actually controlled by American individuals or corporations. Even though U.S. persons should report income from controlled foreign corporations, these taxpayers may avoid liability because the IRS is commonly unable to establish a link between a particular U.S. taxpayer and an offshore accountholder; for their part, banks are now under no clear legal obligation to disclose accounts held in the name of a foreign corporation that they believe is merely a façade meant to mask the identity of a U.S. person subject to tax liability. Under the Stop Tax Haven Abuse Act, any bank or broker who learned of such a connection between a U.S. person and a foreign account holder would have an unequivocal legal duty to disclose any income generated by the account to the IRS.

More provisions of the Stop Tax Haven Abuse Act close several specific tax loopholes: any publicly traded companies or companies with gross assets greater than $50 million that are primarily managed and controlled within the U.S. would prospectively be treated as domestic organizations for tax purposes, regardless of claimed foreign status; credit default swap payments funneled offshore would be treated as taxable income; and, any foreign subsidiary deposits classified as offshore funds but actually held at U.S. banks or securities firms would be treated as a taxable distribution to a U.S. parent company.

The Stop Tax Haven Abuse Act devotes attention to a number of additional tax haven enforcement, reporting, and structural concerns, and also strengthens penalties against those who facilitate tax evasion.

Potential for Huge Changes

The Stop Tax Haven Abuse Act could spell major headaches for multinational businesses and U.S. financial institutions; ensuring compliance with the range of new requirements would be daunting, to say the least.

But, in these economic hard times, supporting a bill that purports to reign in offshore tax abuses to the tune of $100 billion a year may be sounding better and better to lawmakers looking to appease increasingly frustrated voters. In late July, Representative Lloyd Doggett introduced Levin's bill in the U.S. House of Representatives, backed by over 40 of his colleagues.

With support growing for the Stop Tax Haven Abuse Act in both houses of Congress, it may be time for business leaders to prepare for the bill's potential impacts. If you have questions about how you may be affected by the new legislation, or have any other tax enforcement concerns, contact a qualified attorney today.

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