Senate 'Offshore' Hearing Called 'One-Sided'

by Mike Godfrey, Tax-News.com, Washington

03 August 2006

The US Senate pursued its crusade against 'offshore' at a hearing on Tuesday, threatening savage reprisals against people who use low-tax jurisdictions for tax-planning purposes; but the Centre for Freedom and Prosperity called the hearing 'entirely one-sided'.

Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs billed its hearing 'Tax Haven Abuses: The Enablers, the Tools, and Secrecy'. “Using offshore jurisdictions to shelter income is unfair and I intend to fix this problem,” said Subcommittee Chairman Norm Coleman (R - Minn), while Ranking Minority Member Carl Levin (D - Mich) thundered: “Our investigation blows the lid off tax haven abuses that use sham trusts, shell corporations, and fake economic transactions to hide the fact that US citizens are controlling offshore assets, circumventing US legal requirements, and dodging taxes."

The Sub-Committee heard from IRS Commissioner Mark Everson along with a range of promoters and clients of tax-planning schemes that had been judged to be abusive. Senators Coleman and Levin presented a 400-page report that they said would 'expose how offshore and US professionals are helping US citizens move assets offshore and dodge US taxes, adding to tax haven abuses that cost US taxpayers an estimated $40 to $70 billion dollars each year.

The Sub-Committee's recommendations include:

• US tax, securities, and anti-money laundering laws should include a presumption that offshore trusts and shell corporations are under the control of the US persons supplying or directing the use of the offshore assets, where those trusts or shell corporations are located in a jurisdiction designated as a tax haven by the US Treasury Secretary.
• US publicly traded corporations should be required to disclose in their SEC filings company stock held by an offshore trust or shell corporation related to a company director, officer, or large shareholder, even if the offshore entity is allegedly independent. Corporate insiders should be required to make the same disclosure in their SEC filings.
• An offshore trust or shell corporation related to a director, officer, or large shareholder of a US publicly traded corporation should be required to be treated as an affiliate of that corporation, even if the offshore entity is allegedly independent.
• Congress and the IRS should make it clear that a US financial institution that opens an account for a foreign trust or shell corporation and determines, as part of its anti-money laundering duties, that the beneficial owner of the account is a US taxpayer, must file a 1099 form with respect to that beneficial owner.
• Loans that are treated as trust distributions under US tax law should be expanded to include, not just cash and securities as under present law, but also loans of real estate and personal property of any kind including artwork, furnishings and jewelry. Receipt of cash or other property from a foreign trust, other than in an exchange for fair market value, should also result in treatment of the US person as a US beneficiary.
• The Treasury Secretary should finalize a proposed regulation requiring hedge funds to establish anti-money laundering programs and report suspicious transactions to US law enforcement. This regulation should apply to foreign-based hedge funds that are affiliated with US hedge funds and invest in the United States.
• Congress and the IRS should make it clear that taxes on stock option compensation cannot be avoided or deferred by exchanging stock options for other assets of equivalent value such as private annuities.
• Congress should authorize the Treasury Secretary to identify tax havens that do not cooperate with US tax enforcement efforts and eliminate US tax benefits for income attributed to those jurisdictions.

The Sub-Committee's stand is heavily criticized by right-wing policy institutes. Andrew F. Quinlan of the Center for Freedom and Prosperity said: "Companies have a fiduciary obligation to shareholders to minimize their tax burdens. Because of the punitive tax rates and pervasive double-taxation of capital in the US tax code, low-tax jurisdictions often are excellent platforms for economic activity. So-called tax havens also play a valuable role by encouraging better tax policy in the rest of the world. Policies designed to penalize low-tax jurisdictions would primarily benefit Europe's uncompetitive, high-tax welfare states."

Dan Mitchell of The Heritage Foundation said: "Attacking taxpayers or low-tax jurisdictions for tax planning is a perverse form of 'blaming the victim.' If politicians really want to penalize so-called tax havens, they should fix the tax code by adopting a simple and fair flat tax. Protectionist assaults on low-tax jurisdictions would boomerang against America, which is the world's largest beneficiary of global capital flows. Every jurisdiction should have the sovereign right to choose their own tax laws, and if high-tax nations are upset that jobs and capital are flowing to jurisdictions with better tax law, they should lower their tax rates rather than seeking to bully others into adopting bad policy."

Veronique de Rugy of the American Enterprise Institute said: "In part because of the liberalizing impact of tax havens and tax competition, personal income tax rates have dropped by 23 percentage points since 1980 and corporate tax rates have dropped by about 19 percentage points. These pro-growth reforms will be jeopardized if profligate politicians undermine low-tax jurisdictions and succeed in creating a tax cartel. An 'OPEC for politicians' will lead to bigger and more wasteful government."

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