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 apparent 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 say 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.
I don’t know if this is particularly relevant, but while I was reading this I was thinking about how many people I know who have offshore accounts so they can play online poker – People who would never have an offshore account except that you don’t have a choice if you want to play poker online with money. I wonder, then, if they are more likely not to declare their poker income, whereas maybe they would have if they could have just used a domestic bank account.