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…
Suddenly, it’s not so fashionable to have your money in Swiss banks. That’s sooo February 2009. This season, all of the trendy tax evaders are heading somewhere else.
In the wake of increased activity by IRS to track down previously undisclosed assets (joined by the taxing authorities in countries like the UK and Germany), banks in Switzerland are reporting that the assets just aren’t pouring in like they used to. The slowdown started midyear, not coincidentally the time when the US government was exerting pressure on Switzerland to relax its banking secrecy laws.
In support of this trend, two BoA/Merrill Lynch analysts, Derek De Vries and Marc Brehm, have reported that at least one Swiss Banking Group, the Julius Baer Group, “was slightly more cautious than we expected on net new money.” In other words, Baer isn’t drawing the number of new accounts globally that they once were.
And the pendulum swings both ways. If it’s no longer attractive for Americans to do business in Switzerland, then many Swiss have countered that they will pull out of the US. Wegelin & Co., Switzerland’s oldest bank, is recommending that clients “exit from all direct investments in US securities… on the grounds of the threat of inheritance tax coupled with uncertainty as to whether one might not, one way or another, be turned into a US person.” Their gist, and I’m not making this up, is that our state of “moral and fiscal decline” means that it doesn’t make sense to invest in the US anymore.
So it’s time to panic, right? Not at all. Pulling out of investing in US-controlled securities is an interesting recommendation but not a terribly viable one. Like it or not, even in the midst of a recession, the US economy is a huge part of the global scene.
It’s kind of like how you’ll continue to see Paris Hilton in the papers. Even if you don’t like her, she adds value to an event – even if it’s just added publicity.
In other words, they don’t have to like us but I think the Swiss will still invite us to their parties.
Last month, the IRS announced a new settlement program targeted at taxpayers with offshore accounts.
As previously reported, IRS has become more aggressive in their efforts to identify taxpayers with offshore accounts who have not reported those accounts to the feds. Steep civil penalties apply and, in some cases, criminal charges could be imposed.
However, under a new six month settlement program, the IRS will trim the usual penalty to a one-time payment of 20% of the account value, or 5% for an inherited account so long as certain criteria are met. In most cases, that involves filing amended returns for the last six years.
In light of recent crackdowns – the most infamous being the investigation at UBS which reportedly resulted in more than 52,000 US held accounts being brought to light – some taxpayers may take this opportunity to come clean. The IRS hopes so. If not, they caution, you’d better watch out. Doug Shulman, Tax Commish at IRS warns:
“The IRS will be aggressive in pursuing people who shirk their obligations under the tax law. For people who are hiding money offshore, this serves as a wake-up call that they need to get right with their government.”
Consider yourself on notice!
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.
