Who says that a little pressure doesn’t work these day? Singapore and Liechtenstein have both apparently decided that they wanted to be one of the cool kids after all. This week, both countries received word that they are slated to be removed from the dreaded gray list of the Organisation of Economic Cooperation and Development (OECD).
The gray list is a list of countries – more than 30 currently – who have made noise about increasing financial transparency but have not taken the necessary steps.
In the case of Singapore, it had publicly endorsed the transparency standard for tax purposes earlier in the year but had not signed the requisite number of financial agreements with other countries. It will hit the magic number *12* when it signs an Avoidance of Double Taxation Agreement or DTA with France this week. Singapore has also renegotiated agreements or signed new agreements with Mexico, Qatar, Norway, Austria, Australia, the Netherlands, UK, Denmark, New Zealand, Belgium and Bahrain.
Similarly, Liechtenstein has agreed two new treaties with Belgium and the Netherlands, respectively. Liechtenstein has also signed agreements with Germany, France, UK and the US. It is negotiating with Italy, Sweden and Norway.
The countries follow on the heels of Switzerland and Austria, which were removed from the grey list in September. This brings to 15 the number of countries which have been moved to the “substantially implemented” category since April 2009. The fallout from UBS is widely viewed to have contributed to the rush to be considered “mainstream.” The OECD is laughing all the way to the, er, transparent banks…
Germany, like the US, has been highly critical of countries considered to be tax havens. Mostly, those are countries outside of Europe with financial and banking secrecy laws meant to woo (mostly) westerners with the lure of escaping taxation. There are a few notable exceptions within Europe: Luxembourg, Liechtenstein and Switzerland.
All three are small, wealthy countries which lean heavily upon their allies. Luxembourg, in particular, has no navy, no air force and approximately 800 citizens in its army. It looks to its neighboring allies for military protection, as well as for sources of income. Heavily dependent on finance, it follows the US as the second largest investment fund center in the world and is the most important private banking center among countries that have converted to the Euro.
So while the three claim to not care what other countries think about their banking secrecy laws – and the source of their wealth – they clearly do, with both Switzerland and Liechtenstein taking steps to appease their friends and neighbors with promises of a more transparent banking process.
But Luxembourg won’t go quietly. The tiny country is now fighting a very public war of words with Germany. On Sunday, Luxembourg’s prime minister complained about recent comments made by Germany’s Finance Minister Peer Steinbrueck. Steinbrueck has been extremely critical of Switzerland, Luxembourg and Liechtenstein, down to outright accusing them of aiding tax evasion. Steinbrueck has actually encouraged others to crack down on those countries engaging in such behavior, with his party chair going so far as to say that “in the old times one would have sent in troops” to combat tax havens.
Luxembourg Prime Minister Jean-Claude Juncker was not laughing. “We don’t find that funny,” he was quoted by Der Spiegel. “We suffered under German occupation. Thank God we no longer resolve our problems with soldiers.” He continued, “We don’t talk that way about the Germans. And the Germans have no right to talk that way about Luxembourgers.”
German Chancellor Angela Merkel made what almost sounds like an apology (almost) when she said, “If there has been irritation, I as head of government will do everything I can so that it is dispelled quickly.”
Merkel, however, also made it clear that she welcomed changes in banking secrecy laws as promised by her neighboring countries. It is not certain when those changes will occur as Luxembourg, Liechtenstein and Switzerland have made no secret of the fact that they feel bullied into accommodating the wishes of their allies. Not surprising, since the three countries are somewhat stalwarts of tradition. Luxembourg’s motto perhaps sums this up best: “Mir wëlle bleiwe wat mir sinn” or “We want to remain what we are.”
For years, it was believed that you had to be mega-rich to have accounts in exotic locations. Switzerland, for example, was the millionaire’s playground. Billions and billions of dollars were *allegedly* stashed in secret accounts, “safe” from the probing fingers of Uncle Sam. Along with Switzerland, countries such as Liechtenstein, developed successful industries based on the idea that strict banking secrecy laws made them money. And lots of it.
And as our society grew both more mobile and more tech savvy, other countries realized that this idea of socking away cash from other countries inside their own jurisdictions was a pretty good deal. Why not, they figured, appeal to the not so mega-rich? Lowered minimums and flexible fee structures suddenly made offshore accounts all over the world appear attractive to professionals and tech wizards who might not have Spelling-type millions but had a bit of extra cash to stash. With the lure of asset protection and the added bonus of not reporting income for purposes of income tax, more and more “ordinary rich” people were taking advantage of offshore accounts.
Heck, it was so popular at one point to have offshore accounts to avoid income taxes that it wormed itself into my curriculum for my “Wills and Trusts” class. The most infamous case of its time, FTC v. Affordable Media, LLC – or as it’s simply known, “The Anderson Case” – remains one of my favorites to talk about to this day. (Yes, I do this at cocktail parties.)
Of course, it’s important to get one thing straight: offshore accounts are not illegal. And some of them serve legitimate purposes (I should know, I helped draft some of the trust agreements).
But what tended to get lost, whether intentionally so or not, is that the US taxes on worldwide income. That is, if you’re a resident for tax purposes (which is a very different definition than for immigration purposes), you are required to report your income, no matter where it’s located. So, just because you might not be paying taxes on your money in say, Belize, doesn’t mean that you don’t pay tax in the US. And just because the bank in the Cook Islands doesn’t issue you a form 1099 for interest earned doesn’t mean that it’s not reportable on your form 1040.
This is exactly where a lot of folks fell down – with a little help from the banks, trust companies and in some instances, the countries themselves.
It became apparently that reporting these bank accounts, with amounts ranging from as little as tens of thousands to billions, would be “voluntary” in some countries. US laws make it mandatory – but if the banks (and the laws of the countries where the banks are located) help taxpayers hide those accounts… well, who’s going to tell? That has resulted in as much as $11.5 trillion in “hidden” accounts across the globe according to the OECD (Organization for Economic Cooperation and Development). The estimated lost tax revenue from those funds tops $255 billion each year (approximately half of that is thought to be from US taxpayers).
And it’s not all individuals. The GAO found that nearly 85% largest publicly traded U.S. corporations have subsidiaries in tax havens.
That may be changing. Following high profile tax avoidance cases in Liechtenstein and Switzerland, countries around the world like Germany, the US and the UK are saying “enough” to so-called tax havens. The G-20 meeting in London today is expected to send a strong message that the status quo must end. The group is expected to present a platform calling for increased reporting and transparency from tax havens; they’re also calling for tightened banking regulations.
What is not yet decided is whether the G-20 will offer up a list of “blacklisted” countries, or countries that are being uncooperative with respect to disclosure. The OECD already maintains such a list. But the idea of being on a G-20 list is a bit more disconcerting to some countries, like Switzerland, who are already responding by promising more cooperation. Nine other tax havens have also promised changes.
Opposition to the crackdown includes those who says that closing down recognizable tax havens like Switzerland will just lead to other countries in places like western Africa (Nigeria, perhaps) and the Middle East from picking up the pieces. I happen to think they’re wrong. I agree that your die hard tax dodgers may risk dollars in unpredictable countries. But part of the appeal of havens like Switzerland and the Cook Islands is that they always felt like nice places to be (I often offered to accompany folks to personally set up offshore accounts in the Bahamas, but alas, no one took me up it). Somehow, even with super strict banking laws, you felt like your money was okay in the Alps or the tropics. But in war-torn, politically challenging climates? No way. You might get a Bernie Madoff to put his dollars in Nigeria but you’re not going to get Dr. “I just want to save a buck.”
It will be interesting to see what comes of the talks today. For political reasons, the tax haven discussion is a tricky one – but in today’s economic climate, one that can hardly be avoided.
It’s time for our annual review! Here are my picks for the top stories on taxgirl.com for the year:
10, Dancing With The Stars champ and race car driver Helio Castroneves is indicted on federal tax evasion charges. In a related story, my mother is stricken with grief and may never samba again (okay, I’m not sure that she sambaed before but I’m pretty sure that this will end any chance).
9, Prop 8 in California passes and prompts the promise of tax boycotts by the gay and lesbian community.
8, taxgirl endorsed Obama for President. I was both roundly cheered and jeered for my picks but stand behind my choice. One of my most controversial and commented posts of the year.
7, Tax evaders hit the slopes. A massive tax fraud investigation in Germany, the UK, the US and other countries points the finger at the tiny Alpine principality of Liechtenstein. I am elated to finally have a reason to prove that I can spell Liechtenstein.
6, After Congress says no, President Bush says yes and earmarks taxpayer dollars to save the Big 3 automakers. As a result, Fiat misses its chance to hit it big in the US.
5, Wesley Snipes is acquitted of tax fraud. Remarkably, the world did not end, though we will now be subjected to more of his movies.
4, Congress commits US taxpayers to a remarkable bailout package. Treasury Secretary Paulson is now more powerful than Oprah.
3, The “biggest tax fraud ever” tax trial finally reaches an end. Out of the original 19 defendants involved in the spectacle that was the KPMG trial, only 3 were eventually convicted.
2, Rebates, rebates and rebates. I probably posted the most – and received the most comments – about this year’s rebate checks. Taxpayers were confused about the amount of the check, set-offs, when checks might arrive and more. An overwhelming majority of Americans admitting to being as cynical about the chances of the checks stimulating the economy as they are about Paula Abdul “just being tired.”
1, taxgirl gets a nod by the editors of the American Bar Association in the ABA Journal Blawg 100 for 2008. In case you missed it before, voting by readers for the best of the blawgs runs through January 2 – just click to vote. And no, this tidbit never gets old (not for me, anyway)!
So those are my picks for the year. What did you like? What did you hate? And what did I miss?
