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House Committee Schedules Hearing On Banking Secrecy

by Mike Godfrey,, Washington

27 March 2009

Congressman Richard Neal has announced that a House of Representatives committee will hold a hearing on issues involving 'banking secrecy practices and wealthy American taxpayers.'

Neal said that the hearing will focus on the apparent limitations of the withholding taxes imposed by the United States on US source investment earnings received by foreign persons, the Qualified Intermediary (QI) program established by the Internal Revenue Service to enforce those withholding taxes, the limitations of US tax treaties, and the extent to which these may have contributed to non-compliance by US taxpayers.

The hearing will be held by the Ways and Means Subcommittee on Select Revenue Measures, chaired by Neal, a Massachusetts Democrat, on March 31. Neal has championed anti-offshore tax legislation in the past and last year he introduced legislation that would disallow deductions for excess reinsurance premiums with respect to US risks paid to affiliated insurance companies that are not subject to US tax.

In announcing the hearing, Neal stated: "This will be our first hearing to address the troublesome issue of international tax avoidance. The global economic and financial crisis has put pressure on these international jurisdictions to be less secretive and more cooperative. The United States and other countries simply can no longer afford to lose billions of dollars each year in potential revenue to these secrecy jurisdictions. I expect this hearing to be the start of a process that leads to bold and decisive action being taken to end opportunities for tax avoidance through foreign accounts.”

Similar types of hearings focusing on the perceived problems that 'tax havens' pose to the US tax base have been held recently by committees in the Senate, but new legislation that would carry through the much-threatened offshore crackdown has yet to become law. However, that could soon change now that President Obama is the driving force behind this campaign.

In its defense, Switzerland, one of the prime targets of US lawmakers looking to neutralize offshore 'secrecy jurisdictions' has insisted that it already has adequate exchange of information procedures in place. On March 13, Switzerland reaffirmed its commitment to fight global fiscal crime by announcing that it would adopt the OECD standard with regard to administrative assistance in tax matters pursuant to Article 26 of the OECD Model Tax Convention. This would permit an exchange of information with other countries on a case-by-case basis, provided that the inquiry is "specific and justified."

However, this commitment is unlikely to satisfy the likes of Senator Carl Levin, the Michigan democrat who believes that “tax havens are engaged in economic warfare against the United States." He has pledged a "fight back against secrecy jurisdictions" with sweeping new legislation introduced into the Senate earlier this month, although many of his contentious (and legally dubious) proposals look set to be kicked into the long grass after the more moderate Finance Committee chairman, Max Baucus, introduced his own legislation recently.

Meanwhile, the administration is continuing with its efforts to strengthen the QI program, including expanding information reporting requirements to include more sources of income for US persons with accounts at QI banks, strengthening documentation rules and requiring withholding for accounts with documentation that is considered insufficient.

Additionally, IRS Commissioner Doug Shulman has reported that the agency is considering changes that would shore up the QI program in "substantial ways." Under these proposals, which were put out to consultation in October 2008, financial institutions that are QIs must provide early notification of material failure of internal controls, must improve evaluation of risk of circumvention of US taxation by US persons, and must include audit oversight by a US auditor.

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