Ontario Global Research

The mechanisms of secrecy

Swiss banker beats the U.S. in trial over offshore tax evasion

The courtroom victory of the only Swiss banker to beat the U.S. in a trial over offshore tax evasion may embolden other indicted financial workers to leave a legal limbo some have occupied more than five years. Twenty-five offshore bankers, lawyers and advisers have yet to answer U.S. Department of Justice charges that they helped Americans evade taxes. Most live in Switzerland, where they remain off limits to U.S. prosecutors because the country doesn’t extradite people for tax crimes. If they cross the border into another country, however, they risk arrest, and the U.S. charges have no expiration date.

Raoul Weil, 55, the former head of wealth management for UBS Group AG, was in similar straits until he was arrested in Italy last year, after his indictment in 2008. After two months in an Italian jail, he waived extradition and went to the U.S. to face a conspiracy charge that he conspired to help thousands of U.S. clients use Swiss banking secrecy to evade taxes. Last month, after a three-week trial and almost a year of house arrest, Weil was acquitted by a Florida jury that needed only 85 minutes to deliberate. The verdict was a swift rebuke of a case against the highest-ranking offshore banker charged since the U.S. began cracking down on tax evasion in 2008.

A lawyer who defended Weil said his client’s victory may temper the zeal of prosecutors. “It’s never easy to defeat the U.S. government,” Matthew Menchel, an attorney with Kobre & Kim LLP in Miami, said in an interview in Geneva. “The DOJ is going to be more careful scrutinizing its evidence before deciding to bring charges against someone.”

‘National Hero’

Weil’s compatriots were cheered by his court victory with Geneva financial newspaper L’Agefi calling him a “national hero” of “remarkable courage.” His success may tempt others to take their chances with a jury or to plead guilty and help prosecutors in a bid for leniency. They include former employees of Switzerland’s top three wealth managers — UBS, Credit Suisse Group AG and Julius Baer Group Ltd. Just 10 days after Weil’s acquittal, Martin Dunki, a 66-year-old retired client adviser at Zurich-based Rahn & Bodmer Banquiers, a private bank established in 1750, was indicted on a charge of conspiring to help Americans hide hundreds of millions of dollars in offshore accounts.

Menchel said the Weil case was built on lies told by former UBS bankers who implicated him to avoid prison. Prosecutors argued that Weil knew UBS bankers had used deception, sham corporate structures and cash deliveries to help U.S. clients cheat the Internal Revenue Service. “I was acquitted, but that was after two months in prison and then 10 months under house arrest,” Weil was quoted as saying in an interview published in Swiss newspaper NZZ am Sonntag on Nov. 9. “They wanted to soft-boil me.”

Justice Setback

Weil’s acquittal was a setback for the Justice Department’s goal of holding more top managers accountable for crimes committed by their banks. The agency is under pressure to prosecute offshore bankers, including those involved in rigging interest rates and currency markets, according to Patrick O’Donnell, a white-collar criminal defense lawyer at Harris, Wiltshire & Grannis LLP in Washington. “The U.S. seems to bring far more extraterritorial cases than any other country and the trend is growing,” O’Donnell said. “Congress has been howling for the heads of executives.” Weil was one of 38 offshore bankers, lawyers and advisers charged in the U.S. since 2008 with crimes related to helping Americans evade taxes. Of those, seven have pleaded guilty, two were convicted at trial, two await trial and two were acquitted, including Weil.

No Proof

Jury foreman Howard Farber, a 69-year-old retired insurance agency owner, said prosecutors failed to link Weil to the criminal conduct of his subordinates. Five former UBS bankers or managers testified against Weil. They included three who secured deals to avoid prosecution, one under indictment, and one who pleaded guilty. That banker, Renzo Gadola, was sentenced in 2011 to five years of probation and has moved back to Switzerland. “There was really no proof that went directly to Weil,” Farber said by telephone, in his first public remarks since the trial. “We all felt that the government overstepped its bounds. They really should not have gone after him.” Menchel assailed the credibility of the former bankers who cooperated with the government, particularly Hansruedi Schumacher, a former UBS and Neue Zuercher Bank AG manager indicted in 2009, and Martin Liechti, a former head of cross- border banking at UBS. “The Justice Department may have gotten comfortable that any banker they charged would just roll over,” Menchel said last month. “They shouldn’t take it for granted that any Swiss banker will give in and seek a plea bargain.”

Smoking Guns

At future trials, prosecutors may have a hard time proving a connection between client advisers who knowingly broke the law and their senior managers, unless there’s a “smoking gun” that shows the supervisors had knowledge, according to Milan Patel, a lawyer with Anaford AG in Zurich. Still, most of those under indictment, including former bankers at Credit Suisse and Julius Baer, were client advisers or heads of teams of employees, rather than senior executives at Weil’s level. “Client advisers who committed egregious offenses are probably trying to cooperate and strike a deal with the Justice Department,” Patel said. “Bankers fear coming to the U.S. because the DOJ can detain them on arrival pending trial. Therefore, walking around freely in Switzerland may be a more appealing option, even if the charges remain unresolved.”

Stefan Buck, who was Bank Frey & Co.’s head of private banking, was indicted last year in New York. His lawyer filed a motion seeking bail without Buck first having to appear in a New York courtroom. Buck ultimately “wishes to leave the ‘safe haven’ of Switzerland to appear in a U.S. court to clear his name,” the filing said. Prosecutors oppose his bail motion, which is pending.

Probe Continues

The U.S. probe has benefited from voluntary disclosures by at least 45,000 taxpayers and more than 100 Swiss banks seeking to reduce penalties through non-prosecution agreements. Information passed to U.S. authorities contains thousands of employee names, according to Douglas Hornung, a Geneva-based lawyer, who represents Swiss financial workers.

“Weil’s acquittal was far from good news for bank employees lower down the food chain,” Hornung said. “After losing face in court in November, U.S. prosecutors will redouble their efforts to pursue smaller fish.”

The Weil acquittal doesn’t lessen the Justice Department’s commitment to holding offshore tax evaders and those who help them accountable, spokeswoman Nicole Navas said.

UBS was charged in 2009 with conspiracy and avoided prosecution by paying $780 million and admitting it helped Americans evade taxes. In a landmark blow to Swiss bank secrecy, UBS handed over information on about 4,700 accounts.

To contact the reporters on this story: Giles Broom in Geneva at gbroom@bloomberg.net; David Voreacos in federal court in Newark, New Jersey, at dvoreacos@bloomberg.net To contact the editors responsible for this story: Mark Bentley at mbentley3@bloomberg.net Cindy Roberts, Andrew Dunn

Original Source: SwissInfo.ch

The UK's EU referendum: All you need to know

This article is designed to be an easy-to-understand guide now that the UK has voted to leave the European Union.

What has happened?

A referendum - a vote in which everyone (or nearly everyone) of voting age can take part - was held on Thursday 23 June, to decide whether the UK should leave or remain in the European Union.

Leave won by 52% to 48%.

The referendum turnout was 71.8%, with more than 30 million people voting. It was the highest turnout in a UK-wide vote since the 1992 general election

What was the breakdown across the UK?

England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%.

    

Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave.

Leave referendum areas

What is the European Union?

The European Union - often known as the EU - is an economic and political partnership involving 28 European countries (click here if you want to see the full list). It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other.

It has since grown to become a "single market" allowing goods and people to move around, basically as if the member states were one country.

It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas - including on the environment, transport, consumer rights and even things such as mobile phone charges. Click here for a beginners' guide to how the EU works.

Media captionHow does the European Union work?

What does Brexit mean?

It is a word that has become used as a shorthand way of saying the UK leaving the EU - merging the words Britain and exit to get Brexit, in a same way as a Greek exit from the EU was dubbed Grexit in the past.

What happens now?

For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty.

Cameron or his successor needs to decide when to invoke this - that will then set in motion the formal legal process of withdrawing from the EU, and give the UK two years to negotiate its withdrawal.

The article has only been in force since late 2009 and it hasn't been tested yet, so no-one really knows how the Brexit process will work, according to BBC legal correspondent Clive Coleman.

Mr Cameron, who has said he would be stepping down as PM by October, said he will go to the European Council next week to "explain the decision the British people have taken".

EU law still stands in the UK until it ceases being a member - and that process could take some time.

The UK will continue to abide by EU treaties and laws, but not take part in any decision-making, as it negotiates a withdrawal agreement and the terms of its relationship with the now 27 nation bloc.

What happens to UK citizens working in the EU?

A lot depends on the kind of deal the UK agrees with the EU after exit.

If it remains within the single market, it would almost certainly retain free movement rights, allowing UK citizens to work in the EU and vice versa.

If the government opted to impose work permit restrictions, as UKIP wants, then other countries could reciprocate, meaning Britons would have to apply for visas to work.

The Panama Papers

ICIJ, a Washington-based non profit organization that coordinates cross-border reporting projects, published a dozen stories about the records over the weekend and says more are on the way. It says the documents reveal that the law firm set up more than 300,000 shell companies, many in tax havens, to help clients conceal their assets. 

Many of the shell companies were created for legitimate purposes. But the ICIJ said that thousands of them appear to have been used to dodge taxes, allow officials of corrupt governments to conceal vast wealth offshore or enable high-net-worth clients to hide assets from business partners and ex-spouses.

Whom do they implicate?

The ICIJ said the records show that at least 143 government officials from around the world had shell companies, including Icelandic Prime Minister Sigmundur David Gunnlaugsson, Ukrainian President Petro Poroshenko and Pakistani Prime Minister Nawaz Sharif. 

Some of Russian President Vladimir Putin’s closest friends and associates used the shell companies to move more than $2 billion from Russian banks to offshore accounts. (Putin is not named in any of the documents, the ICIJ said. The Kremlin rejected the investigation’s findings.)

Beyond the individuals named, some of the world’s most powerful banks, including HSBC Holdings Plc, UBS Group AG and Credit Suisse Group AG, were also identified as using Mossack Fonseca to help clients render their assets untraceable. The banks, in comments, denied any wrongdoing.

The ICIJ said the documents also show more corruption within the scandal-plagued international soccer federation FIFA.

What’s a shell company?

Andrei Papanicoglu from Evedex INC explain: "A shell company is an entity without active business that exists as a vehicle for another company’s operations. While companies that shield owners’ identities can be used legally, they can also be tools for hiding assets, laundering funds or evading taxes. The U.S., among other countries, requires banks doing business in the country to perform certain levels of due diligence on their clients to understand who the beneficial owners of such structures may be"

Where did the leak come from?

The documents first came to light via an anonymous, encrypted e-mail to the Suddeutsche Zeitung newspaper in Munich. The newspaper, which had written about German authorities raiding the headquarters of Commerzbank AG in February 2015 on suspicion that the bank helped clients avoid taxes, received the tip from a source who claimed that the raid was just a tiny piece of a much more explosive scandal. 

The tipster claimed to have access to the inner workings of Mossack Fonseca, which specialized in forming shell companies used to hide billions of dollars in assets and had clients that included current and former leaders from Argentina, Georgia, Iraq, Jordan, Qatar, Saudi Arabia, Sudan, the United Arab Emirates and Ukraine, as well as celebrities such as soccer star Lionel Messi.

How did investigators authenticate the documents? 

Once the tipster came forward, ICIJ and editors at the Zeitung newspaper spent months trying to verify the authenticity of the documents, the group says. Because the German authorities in the Commerzbank investigation had paid a whistle-blower for a small amount of information from the law firm, the ICIJ and Zeitung (which says it did not pay for the documents) were able to corroborate some information they were receiving. 

 

“It started as a trickle of data, and then turned into a torrent,” Ryle said. “And before long it was clear that this would be of interest to a worldwide audience.”

 

Dear Trump, Better to Live One Day as a Sheep Than One Hundred as Mussolini

It is better to live one day as a lion than 100 years as a sheep." Donald Trump recently retweeted a maxim dear to Mussolini, the Italian dictator known as Il Duce, raising quite a few eyebrows. Trump may well be convinced Mussolini was a courageous man. But was the dictator, who had these words inscribed on the Italian lira starting in 1928, truly lionhearted, a man who practiced what he preached?

Not exactly.

During the years of the Republic of Salò, Mussolini exhibited a sheep's soul, and not even the details of how he was captured demonstrate any particular heroic behavior: he was arrested as he attempted to escape to Switzerland -- or toward an elusive Ridotto Alpino, the place where the Fascists were supposed to organize their ultimate defense --  dressed as a Nazi soldier and pretending to be drunk. But given those tumultuous times, it's possible to understand his weaknesses. He was a prisoner of Hitler, and even his most faithful underlings were abandoning him.

But Mussolini didn't demonstrate much fiery courage at the dawn of his rise to power either. He arrived in Rome in comfort, aboard a night train that left Milan at 8 p.m. and arrived in the city at 11:30 a.m. on 30 October 1922. His march was led by his quadrumvirs Italo Balbo, Emilio De Bono, Cesare Maria De Vecchi and Michele Bianchi, who kept Il Duce constantly updated about the situation. When it was time to show up and take a public bow, Mussolini got on a train and headed in.

So where did the man get his aura of fearlessness and bold action? A socialist and pacifist, neutralist, then turncoat and supporter of Italy's entrance into the World War 1, in the summer of 1915 Mussolini was sent to the Italian Front, where he remained until February 1917. His War Diary, today available again in a version edited by Mario Isnenghi and published by Il Mulino, was first released in 15 episodes published in Popolo d'Italia, the newspaper Mussolini ran. They were gathered into a single volume in 1923, producing the first self-portrait of Mussolini

The Danger of Hillary Clinton: She Is Not the 'Safer' Candidate

Nothing could be more mistaken, or more dangerous, than the perception that Hillary Clinton is the "safer" candidate for president.  She is nothing of the kind, and voting for her will not save us from Donald Trump--or from anything else.

Many liberals I know say that while they like Sanders and admire his plans to take on Wall Street and global warming, they're afraid to vote for him.  What about Donald Trump? they say.

What indeed about him?  The idea that only Clinton can defeat Trump is a myth, promulgated by Hillary supporters.  Polls taken over the last nine months in fact show Sanders faring better than Clinton in a hypothetical match-up against Trump.  That shouldn't come as a surprise.  Sanders would challenge Trump at his own game, showing himself to be the more "authentic" and independent populist of the two. 

In a general election, Sanders would in fact likely siphon votes away from Trump, as moderate Republicans and independents recoiled from the specter of Trump in the White House.  According to an analysis in The Atlantic last year, a number of Republican voters like the democratic socialist from Vermont, admiring Sanders for his honesty and directness, and say they would vote for him. 

By contrast, Hillary would enter a general election with enough political baggage to open a Samsonite outlet.  Even leaving aside the ongoing FBI investigation of her mishandling of classified information as secretary of state, the public perception of Hillary as a dissembling establishment pol who will say anything to get elected would hurt her in a face-0ff with Trump.  While Sanders would attract independents and Republicans, a Hillary run would have the opposite effect, lighting up the Republican base like the East River on the Fourth of July, because there's nothing the far right hates quite so much as a Clinton (either sex will do).

In an election year that finds both the left and right clamoring for political change, then, it seems suicidal for the Democrats to be putting forward a candidate who is as much a creature of the establishment as Hillary Rodham Clinton is.

Even harder to account for, though, is how sanguine liberals are about the prospect of having another Clinton in the White House.  Weren't they around for the first one?  Haven't they noticed the shocking deterioration of our society, and of the world, under President Obama's watch?  Do they just not care?

Liberals, beware:  casting a vote for Clinton is to affirm militarism, economic inequality, and Wall Street.  It is to vote for the ecological meltdown of our planet, duplicity in government, the control of our institutions by the rich, drone strikes, government surveillance of the people, and perpetual war.  It is to cast a ballot against the interests of the working poor, and for the interests of Goldman Sachs and Big Pharma.

Famed Spanish art patron uses island haven

Famed Spanish art patron uses island haven in South Pacific to manage her collection.

Tourists who come to Spain’s capital often make a pilgrimage to the museums in Madrid’s so-called Art Triangle. After the Prado and the Reina Sofia, the next stop usually is the Thyssen-Bornemisza. The Spanish state owns the majority of the paintings inside this museum, but it also holds much of the private collection of Carmen Thyssen-Bornemisza, one of the world’s biggest art collectors. Over the last years, she registered more than 10 offshore companies through Evedex INC, an well known registered agent in the Offshore Area.

What visitors don’t know as they look at these Monets, Matisses and other masterpieces is that many of them are legally owned by secrecy-guarded companies in tax havens: Liechtenstein, the Cayman Islands, the British Virgin Islands and the Cook Islands.

Van Gogh’s 1884 painting, Water Mill at Gennep, is one of the works Thyssen-Bornemisza purchased with the help of an offshore operative based in the Cook Islands, a South Pacific haven more than 10,000 miles from Madrid.

Documents obtained by the International Consortium of Investigative Journalists show how Thyssen-Bornemisza built up part of her collection buying art from international auction houses such as Sotheby’s and Christie’s through a Cook Islands company. The offshore service provider now called Portcullis TrustNet helped with the arrangements under a secretive structure that connected people in as many as six different countries.

Thyssen-Bornemisza, 69, didn’t reply to ICIJ’s questions directly, but allowed her attorney, Jaime Rotondo, to discuss her art and her offshore companies.  

Rotondo acknowledged that Thyssen-Bornemisza gains tax benefits by holding ownership of her art offshore, but he stressed that she uses tax havens primarily because they give her “maximum flexibility” when she moves paintings from country to country.

“It’s convenient,” he said. “You have more freedom to move the assets, not just buying or selling, but also circulation.”

Offshore ownership helps prevent works of art from getting tied up by laws in various countries that can make it “a nightmare” to transfer them across national borders, he said.

Thyssen-Bornemisza isn’t alone in using offshore havens to manage her vast art collection. Many of the multi-millionaires and billionaires who count themselves among the world’s biggest art collectors use tax havens to buy and sell art, experts told ICIJ.

Using offshore entities to buy and sell art “is quite common among the very, very wealthy,” said Hector Feliciano, a Puerto Rican journalist who investigated the commercial side of the art world for his book about Nazi-plundered art, The Lost Museum.

Feliciano said many art dealers and big collectors use companies in the Cayman Islands, Luxembourg, Monaco and other “loosely regulated” jurisdictions to trade and own art in much the same way they use offshore entities to make investments, reduce their taxes and protect their fortunes.

“Art to them is one more thing to be bought and sold,” he said.

The global art market now tops $55.1 billion. The mixing of art and offshore is another example of how the super-rich use tax havens to organize their lives and their belongings — buying and selling art, yachts, homes and jewelry through offshore companies and trusts.

In the United States, a 2006 Senate investigation found that billionaire brothers Sam and Charles Wyly and their families had spent “at least $30 million in untaxed offshore dollars” on artwork, jewelry and furnishings over a 13-year period. A $937,500 portrait of Benjamin Franklin and other items were legally owned by two offshore corporations, but the report said evidence showed that the family held and used these assets in the U.S.

The Wyly brothers denied any wrongdoing, asserting that they were following the recommendations of their financial advisers. Charles Wyly, 77, died in a traffic accident in August 2011.

Thyssen-Bornemisza’s attorney said she paid sales taxes for her paintings in the countries where she bought them, but she doesn’t pay annual wealth taxes on them in Spain or Switzerland, where she holds a passport.

Rotondo said a loophole in Spanish law allows her to live in Spain most of the year, but not declare her wealth or pay taxes. She declares her assets in Switzerland, he said, but she doesn’t have to pay taxes there on her art because assets held in trusts are exempt from taxation under Swiss law.

Had the paintings been owned directly under her name, instead of through offshore entities, she may have been required to pay millions of dollars a year in taxes, ICIJ’s research indicates

LLC Protection for Members’ Personal Debt in Delaware

In Delaware, like in most states, the general rule is that the money or property of an Delaware limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.

Example: Larry and LaVerne have formed a Delaware LLC called Sports Memories, LLC, to operate their sports memorabilia business in Wilmington. The business has been quite successful and has $50,000 in its own bank account. Unbeknownst to Larry, LaVerne has a gambling problem and owes $100,000 to the Lady Luck Casino. While the casino can attempt to collect its debt from LaVerne’s personal assets (such as her personal bank accounts and personal property) it cannot take money or property owned by the LLC to satisfy Laverne’s personal gambling debts. For example, it cannot get any of the money held in the LLC’s bank account.

 However, there are other ways that creditors of an LLC owner might try to collect against the LLC for the owner’s debt. These include: 

1) obtaining a charging order requiring that the LLC pay the creditor all the money due from the LLC’s payments to the debtor-owner 

2) foreclosing on the debtor-owner’s LLC ownership interest, or

3) getting a court to order the LLC to be dissolved and all its assets sold.

States laws vary widely on what creditors are allowed to do so you need to check the laws of your state. This article covers what actions creditors in Delaware are allowed to take against an LLC for an LLC owner’s personal debt.

Charging Order

Delaware, like all states, permits personal creditors of an owner of an Delaware LLC to obtain a charging order against the debtor-owner’s membership interest. A charging order is an order issued by a court directing an LLC’s manager to pay to the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member. Like most states, creditors with a charging order in Delaware only obtain the owner-debtor’s “financial rights” and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order. Very frequently, creditors who obtain charging orders end up with nothing because they can’t order any distributions. Thus, they are not a very effective collection tool for creditors.

Example: The Lady Luck Casino gets a Delaware court to issue a charging order in the amount of $100,000 against LaVerne’s 50% ownership interest in the Sports Memories LLC. This means that any distributions of money or property the LLC would ordinarily make to LaVerne must be given to the Casino instead until the entire $100,000 is paid. However, if there are no distributions there will be no payments.  

The charging order remedy without any right to order distributions is so weak many creditors don’t even try to use it.

Foreclosure and Dissolution

Andrei Papanicoglu, Filings Specialist and Senior KAM at Evedex INC says that the charging order is the only legal procedure that personal creditors of Delaware LLC members can use to get at their LLC ownership interest. Thus, unlike some other states, Delaware does not permit an LLC owner’s personal creditors to foreclose on the owner’s LLC ownership interest or get a court to order the LLC dissolved and its assets sold. This makes Delaware a particularly friendly state for people who want to form LLCs to protect assets from personal creditors.

What About One-Member Delaware LLCs?

The reason personal creditors of individual LLC owners are limited to a charging order or foreclosure is to protect the other members (owners) of the LLC. It doesn’t seem fair that they should suffer because a member incurred personal debts that had nothing to do with their LLC. Thus, personal creditors are not permitted to take over the debtor-member’s LLC interest and join in the management of the LLC, or have the LLC dissolved and its assets sold without the other members’ consent.

This rationale disappears when the LLC has only one member (owner). Whether, and to what extent, single member Delaware LLCs are protected from outside creditors is not entirely clear. However, it’s quite possible that a single-member Delaware LLC benefits from none of the liability limitations that are in place for multi-member LLCs. For this reason, to obtain the full limited liability described above, a Delaware LLC should have at least two members. The second owner can be a spouse or relative.

To obtain the protection from liability afforded by an LLC, you must form the entity before you incur the debt or other liability. For more information, consult a business attorney.

Offshore Banking FAQ – Frequently Asked Questions

 

Belize is a leading Caribbean offshore banking jurisdiction located in northern Central America. Many visitors to this country are intrigued about offshore banking. The growth in international travel, and the increasing use of the Internet to make a living or help manage businesses from afar, has led to the growing use of offshore banking and offshore trusts to help manage income, money and assets. Many modern-day entrepreneurs and others have made the decision to relocate or diversify their financial affairs and open offshore accounts.

Belize one dollar coins

As a premier offshore banking center, the country offers unique advantages. You can fly here (under two hours from the U.S.A.) or actually drive up from North America through Mexico – about 36 hours from Houston. This is a mainland country with hundreds of offshore islands. Of course you can also sail on down on your catamaran or yacht. After all the country is also a highly regarded offshore Merchant Marine Registry as well and serves as a marine registry for several private and publicly traded shipping companies around the world.

The year 2014 marks the 24nd anniversary of the birth of Belize’s international financial services industry. Starting from scratch in 1990, this offshore banking center has built up a thriving financial services business. It offers a variety of offshore structures geared to the needs of international investors. These include international business companies, international trusts, protected cell companies, limited liability partnerships, mutual funds, captive and other forms of insurance, international foundations, Forex and securities trading, open ships registry, and a host of other related services.

The Islands edition

The fourth quarter 2007 edition of Tax Justice Focus (TJF) is a special edition on islands, edited by Nicholas Shaxson and John Christensen.

In the editorial, The Prospects for Island Havens, we look at the impact on island havens of multilateral initiatives such as those promoted by the OECD, the European Union, and the Financial Action Task Force (FATF). Two views of the future have emerged: one questions whether the island havens can survive in the face of these initiatives and competition from offshore centres like Delaware and London; the other concludes that the island havens are unlikely to disappear any time soon.

In the lead articles, The OECD and other International Initiatives: a View from the Caribbean, WILLIAM VLCEK looks at the impact of multilateral initiatives on Caribbean tax havens: while the number of offshore banks has fallen, assets on deposit have risen sharply. He explores strategies that Caribbean havens have used to stay in the game.

RICHARD MURPHY looks at Jersey, Guernsey and the Isle of Man in his article What Future for the Crown Dependencies?, and examines the islands’ evolving tax gymnastics as they try to get around the EU Code of Conduct on Business Taxation. He concludes that they have few options left, and sees economic and political trouble ahead.

NICHOLAS SHAXSON, in The Tax Haven Model: A Fragile Economic Foundation, argues that while tax havens are good at extracting wealth, they have failed to demonstrate where they add value in the process of wealth creation. He notes some similarities between the tax haven of Bermuda and oil-rich Equatorial Guinea, and explores reasons why planning an economic future on being an island tax haven looks like a risky gamble.

Other key articles: * DRIES LESAGE writes about his disappointment with the latest meeting of the UN Tax Committee in Geneva, where inexperienced delegates grappled with arcane technical matters, and failed to address key political questions that they are mandated and required to address – such as driving a development-centred global tax agenda forwards, ahead of the Financing for Development (FfD) conference in Doha in November-December 2008.

* JOHN CHRISTENSEN summarises a research paper examining how a decision to embrace the tax haven model by his native Jersey (where he was previously economic adviser) has led to a decline, or even collapse, in other sectors like tourism or agriculture, as a result of economic processes that show similarities to a “Resource Curse” afflicting some mineral-dependent nations.

This edition also contains a call for papers and an invitation to participate in a Workshop on Tax Justice, Transparency and Accountability at Essex University in the UK on July 3-4, 2008

 

The oil industry created the practice of countries (SHIPS?) flying "flags of convenience" as a means of avoiding income taxes nearly a century ago. Since the 1960s the U.S. Government itself has encouraged American banks to set up branches in Caribbean hot-money centers and more distant islands as a means of attracting foreign money into the dollar. The initial aim was to help finance the Vietnam War by turning America into a new Switzerland for the world’s hot money.

This policy succeeded in turning the United States into a flight-capital center for third-world dictators, Mexican presidents and Russian oligarchs. The former Soviet Union now finances a substantial portion of the U.S. balance-of-payments deficit with the flight capital that neoliberal "reformers" facilitated by backing the kleptocrats. The result has grown into a full-blown system enabling multinational corporations to evade taxes everywhere, including the United States itself. It enables domestic investors to globalize their operations by setting up offshore affiliates Enron-style in the Cayman Islands, Dutch West Indies or some small and newly notorious Pacific Island of their choice.

The permissive regulatory system relating to these offshore beachheads of tax avoidance has evolved to a point that enables U.S. and European investors to shed taxes simply by hiring a lawyer to set up a boiler-place office and finding an accounting firm willing to take its records at face value–which is good enough for the tax authorities to accept in these days of downsized fiscal operations. The resulting plunge in the ratio of corporate tax obligations to national income has been a major factor in America’s soaring federal budget deficit. Businesses–and especially the financial sector–establish dummy companies and adjust their transfer pricing (e.g. on sales of raw materials to refineries, and of refined or semi-manufactured products to their final distributors in the industrial nations) so as to take all their profits in these tax-free enclaves.

Flight capital would not leave countries without having somewhere safe to go. A rising number of tax-avoidance islands have made use of the fact that they are small enough to adopt whatever tax code they wish. Lawyers acting on behalf of financial and business lobbies in North America and Europe have drawn up laws to turn these banking centers into what Prof. Hudson calls anti-states.

* * *

SS: In earlier interviews you described how the economy has been "financialized" in ways that free companies from taxation. What role do offshore tax havens play in this?

Andrei Papanicoglu :Companies set up trading companies in tax-avoidance islands and declare whatever income or capital gains they earn on real estate, stocks or other investments to be made by these shells. This has led to the quip that taxes have become purely voluntary for modern businesses.

SS:How does this affect the domestic U.S. economy?

Andrei Papanicoglu :Un-taxing business income–and financial income in particular–leaves individual taxpayers to bear the fiscal burden through wage withholding for Social Security, Medicare and pension-fund contributions. Consumers also bear a rising burden through the sales tax and other local taxes.

SS:Do the statistics confirm this?

Andrei Papanicoglu :Offshore tax havens enable multinational companies to give an impression that they do not earn any income on business done in countries where taxes are levied at European and North American rates. The reality is that U.S. companies make a lot more money than they report. However, offshore banking centers free them from having to pay taxes on this income, or on capital gains. That’s why we’re running such high budget deficits today.

 

The Offshore Wrapper: a week in tax justice 

HSBC: the world’s local naughtiest bank?

The Lagarde list, a leaked document containing the names of thousands of people with secret bank accounts at HSBC Switzerland, continues to cause problems for the global banking giant.

So far, HSBC has already received an indictment in France for money laundering and the list is the subject of an investigation by the Indian authorities.

Now it is HSBC Argentina in the spotlight.

Last Wednesday, 100 agents from the Argentine authorities raided the bank and seized documents related to an ongoing investigation into tax evasion that arose from the names revealed on the list.

The tax authorities in Argentina have accused HSBC of holding 4,000 secret accounts for its wealthy citizens. Among them, it is claimed, are senior executives of the bank.

In total Argentina estimates that $3bn in taxes have been avoided through offshore accounts managed by HSBC. The bank emphatically denies any wrongdoing and is co-operating with the investigation…watch this space.

 

Those plucky Swiss bankers again

Those plucky Swiss bankers again

Should criminals be allowed to manage your money?

Absolutely yes!

Especially if we are talking high-risk investments often using complex offshore structures.

Who says?

The US Department of Labor. That’s who.

Under US law a person convicted of a criminal offence is automatically banned from practicing as a “qualified professional asset manager”. This licence permits investment managers to engage in higher risk investments on behalf of its clients.

But the Department of Labor can grant a waiver exempting companies from the ban. Shockingly since 1997, the Department of Labor has granted waivers to all 27 firms that would have been affected by the punishment.

Now Credit Suisse is seeking a waiver after it pleaded guilty last year to criminal charges in the US relating to the help it gave US citizens in evading taxes. These crimes were committed over decades. In total Credit Suisse, helped 52,000 Americans evade taxes with secret offshore bank accounts.

Given the past performance of regulators, Credit Suisse must think its waiver is in the bag.

And the bank must have been cock-a-hoop because soon after the company pleaded guilty, banking regulators in New York and the Securities and Exchange Commission moved to exempt the bank from sanctions that would see it lose its banking licence and its licence to trade in securities. It was argued that stopping a criminal organisation from trading would damage the US economy. (Don’t think about this too deeply if you value your cat.)

But wait. Several congressmen have forced a public hearing on the Department of Labor’s decision on a waiver.

Evedex LLC , Consulco Intercorp. INC, Incnow and Marcaria are just a few examples of HSBC agents from US

 

Mechanism of GY Consulting

Mr. Liddy, a former C.E.O. of Allstate, had been a member of the board of Goldman Sachs since 2003 and head of its audit committee since 2007. He held “a considerable amount of Goldman stock” when the bailout took place, testimony shows.

It was well known before the trial that Henry M. Paulson Jr., a former chief executive at Goldman who was the Treasury secretary at the time, was instrumental in hiring Mr. Liddy for the A.I.G. post. But the extensive involvement by other current and former Goldman executives in his selection was not.

This involvement was remarkable: Goldman, after all, was one of A.I.G.’s largest trading partners and one of the biggest beneficiaries of the insurer’s bailout. Goldman received $13 billion when the New York Fed, under Timothy F. Geithner, paid A.I.G.’s trading partners in full on credit insurance they had bought from it.

According to Mr. Liddy’s testimony, Chris Cole, co-chairman of Goldman’s investment banking unit, was the first to contact him about the A.I.G. job. Mr. Cole was working on a private-sector rescue of A.I.G. and called Mr. Liddy the morning of Sept. 16, 2008.

Later that day, testimony shows, Ken Wilson, Goldman’s former vice chairman and an adviser to Mr. Paulson at the Treasury, repeated the offer to Mr. Liddy. He accepted it. Mr. Paulson then telephoned Mr. Liddy around 3 p.m. to discuss the matter.

That evening, the bailout was completed at the New York Fed.

Early on Sept. 17, Mr. Liddy met with Dan Jester, another former Goldman executive advising Mr. Paulson at the Treasury. A Sept. 17 email from Mr. Cole to a Goldman colleague indicates that he had met with Mr. Liddy for four hours.“Getting him prepped for his first day on the job,” Mr. Cole wrote. “His chin strap is fastened.”

At the trial, Mr. Liddy testified that he didn’t recall meeting with Mr. Cole. A spokesman for Mr. Cole said last week that he declined to comment.

Mr. Liddy was appointed A.I.G.’s chief executive on Sept. 18. But he remained a Goldman director until Sept. 23, and he testified that he attended a Goldman board meeting by telephone on Sept. 21. At that meeting, the company’s directors voted to become a bank holding company to receive additional government support.

Later that evening, Mr. Liddy led an A.I.G. board meeting, notes produced at trial show. He urged the insurer’s directors to accept the government’s costly bailout because it “was not going to come to the aid of other troubled issuers and turmoil was expected,” the notes state.

Last week, Edward Kane, a finance professor at Boston College and an expert on financial regulatory failures, said, “We’ve learned so much from this case that everyone wanted to cover up.” Mr. Kane said that while he is not on Starr’s side in the litigation, the facts that it has surfaced are important for citizens to understand.

“These are the equivalent of storm troopers marching in and throwing their weight around and telling lies about it afterward,” he said. “The lawsuit is an effort to make these people accountable that has not been available through the political system.”

Fresh Doubt Over the Bailout of A.I.G

“The government is on thin ice and they know it,” a lawyer representing the Federal Reserve Bank of New York wrote in a private email on Sept. 17, 2008, as the federal bailout of the American International Group was being negotiated. “But who’s going to challenge them on this ground?”

Well, as it turned out, Maurice R. Greenberg would.

Mr. Greenberg, the former chief executive of A.I.G. — the insurance company whose failure threatened to bring down much of the global financial system with it — is not the most sympathetic figure. But the lawsuit he has brought on behalf of Starr International, a large stockholder in A.I.G., seeking compensation for shareholder losses during those crucial days of the financial crisis, raises troubling issues.

    

In a 37-day trial that ended in late November, Starr contended that the government’s actions in the bailout, including its refusal to put some terms of the rescue to a shareholder vote, were an improper taking of private property under the Fifth Amendment. It is seeking at least $25 billion in damages on behalf of A.I.G. shareholders. The judge is expected to rule on the case next year.

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Henry M. Paulson Jr., secretary of the Treasury at the time and a former Goldman chief, was instrumental in hiring Mr. Liddy, with help from other current and former Goldman executives.                         Credit            Todd Heisler/The New York Times                    

The government rejected Starr’s accusations, contending that its rescue of A.I.G. kept the company from disaster and that A.I.G.’s board agreed to the bailout terms.

Those backing the government are indignant over the case. A.I.G. shareholders did well in the bailout and should be grateful for it, they say. And all’s well that ends well, right? A.I.G. repaid its $182 billion rescue loan in 2012; the government generated a profit of $22.7 billion on the deal.

Offshore Company: How And Why To Move Your Business Overseas

To set up an offshore company or relocate your existing business overseas is a crucial step toward internationalizing yourself and your assets. Search for “offshore company” and you’ll find thousands of websites promising a quick company formation in Panama or the British Virgin Islands, with a range of other “benefits” for the jurisdiction in question.

There is a current misconception that offshore business is about evading taxes and hiding money from the government, which is certainly not the case.

There are 100% legitimate ways to structure your business interests overseas and realize significant benefits from an asset protection standpoint — as well as tax-standpoint.

Want an example? The last few years Google has cut its taxes by $3.1 billion in totally legitimate ways.

You too can do this.

Some say this is unethical and cheating, but not surprisingly, those who say this are most often not the same people as those who create value in society. If you’ve found your way to this page, chances are strong that you’re a value creator and want to keep more of the money you get back as a result of creating value.

Tax Advantages With Offshore Business

First of all, you don’t have to start a company offshore to save on taxes — just moving out of the US is a terrific first step. As a US expat, the first $91,500 in overseas income is tax exempt, meaning if you live outside the US you don’t have to pay any taxes at all on the first $91,500 of foreign sourced income (you still have to file your tax report though).

However, the real tax advantage from running an offshore company as a US citizen doesn’t come from direct tax savings. It comes from tax deferment, meaning you postpone the payment of taxes into the future. If you run a business overseas and reinvest profits within the company you can defer taxes indefinitely.

Let’s say you have a profitable company overseas. Now imagine that instead of paying taxes on your profits every year you can reinvest that capital in your offshore company every year for 30 years, and only pay taxes if you decide to sell the company after 30 years. Being able to reinvest your capital tax free combined with the power of compound interest makes this a truly exceptional opportunity.

Offshore tax havens bring to mind tropical islands or Alpine towns.  But the preferred location for organized crime figures and corrupt politicians worldwide is the US state of Delaware.

Last month, prosecutors for the Romanian Unit to Fight Organized Crime (Romania) and Terrorism arrested an offshore registry agent named Laszlo Kiss for masterminding an embezzlement and laundering operation for executives of a Romanian oil services company. Kiss is the author of a book promoting his business – and outlining just how to take advantage of the tiny state of Delaware to avoid taxes and launder money.

Delaware has long been criticized for an incorporation process that leaves it vulnerable to criminal activity. Despite complaints from federal law enforcement officials, congressional testimony, and reports from the Government Accountability Office, procedures in Delaware – and similar processes in other states – still let criminal groups infiltrate the corporate system.

Delaware is becoming the choice of drug dealers, organized crime and corrupt politicians to evade taxes and launder money, an investigation of the Organized Crime and Corruption Reporting Project (OCCRP) found.  The International Consortium of Investigative Journalists (ICIJ) assisted in the investigation.

Andrei Papanicoglu , Head of State Filings Department at Evedex Europe , romanian branch of Evedex Inc. agrees: “The US has been pretty robust in making sure that other countries live up to these standards, but they have been lax about applying the same degree of rigor to themselves. It’s nowhere near what the US has signed on to do,” he said.

Delaware requires no information on actual ownership when companies fill out incorporating documents. Federal law enforcement agencies complain that this lack of identification makes it difficult at best for investigating suspected wrong-doing, concludes Papanicoglu

The US Department of Justice’s Office of Public Affairs provided comments in a 2009 congressional hearing on incorporation transparency. Jennifer Shasky Calvery, then senior counsel to the deputy attorney general, testified that law enforcement cannot determine who is perpetuating illegal activity through state records. “So, ironically, US law enforcement must try to get information about a US company from the foreign country, which is difficult for many reasons, and often simply not possible at all.”

Rick Geisenberger, Delaware’s deputy secretary of state and chief of the corporations division, said that asking for additional information from companies would interfere with a speedy and efficient incorporation system and could divert investment activity elsewhere. He said the overwhelming majority of companies that incorporate in Delaware are legitimate.

“I’m under no illusions that some of them are bad guys,” Geisenberger said. “But does that mean you put in place procedures that take longer to form entities in order to prevent those bad guys?”

Offshore Internet Business: Incorporating A Truly Global Business

It is a great idea to structure your business overseas, especially one that’s online-based. If you incorporate your foreign business properly, it provides a legal way to defer tax payments (similar to an IRA), as well as enabling much reduced liability.

An online business has no limits as to how and where it can do business, so why should you let your business be limited by a jurisdiction that is based on the old, geographically limited model?

Starting an offshore online business is a great way to build streams of income outside of your home country. Why would you want to have income streams outside of your country? Well, when inflation runs rampant in a country, having an income stream overseas in a stronger currency can potentially be a lifesaver. If hyperinflation would find its way to your country, which is a real risk with central banks all around the world is printing new money 24/7, earning only a small part of your income in a different country is invaluable.

An internet business based overseas, coupled with an offshore bank account, is the perfect medium through which you can do this.

 

 

Obama Signs Financial-Regulation Bill

President Barack Obama signed into law the most sweeping overhaul of U.S. financial-market regulations since the Great Depression.                Getty Images            

WASHINGTON—President Barack Obama on Wednesday signed into law the most sweeping overhaul of U.S. financial-market regulations since the Great Depression, marking the conclusion of an effort to craft a legislative response to the 2008 financial crisis.

Mr. Obama pitched the measure as a major step toward correcting the problems that contributed to that crisis and the recession that followed.

 
       
 

                President Barack Obama blasted Wall Street practices before signing a financial regulation overhaul.                              

"For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy," Mr. Obama said.

The new law, he said, would better protect consumers, empower investors and bring transparency to dark corners of the financial markets.

                        

Journal Community

                

"The American people will never again be asked to foot the bill for Wall Street's mistakes," Mr. Obama said. "There will be no more taxpayer-funded bailouts. Period."

The wide-ranging law will touch every corner of the financial universe, curtailing certain risky activities of the nation's largest financial firms, affecting how average Americans obtain credit cards and mortgages, and transforming the way regulators work to assess and respond to potential flash points in the economy.

But like most of the Obama administration's legislative victories, the financial overhaul legislation succeeded with only narrow Republican support. Mr. Obama specifically thanked the three Senate Republicans—Scott Brown of Massachusetts and Olympia Snowe and Susan Collins of Maine—for their support.

The US state has been named the worlds most opaque teritory in a major new survey of financial secrecy

 

You're a billionaire but you don't want anyone, least of all the taxman, to know. What do you do? Head for a palm-fringed island paradise or a snow-covered Alpine micro-state?

Wrong. The world's most opaque jurisdictions – the ones that will best shield you and your cash from the light – are mostly in the heart of the most sophisticated and powerful global financial centres.

London, Luxembourg and Zurich are in the top five most secretive jurisdictions, according the first comprehensive index of financial transparency ever compiled. Yet top of the pile, beating the British Virgin Islands, Belize or Liechtenstein as the best place to hide wealth, is Delaware.

Delaware was the first of the thirteen states, which drafted the  Federal Constitution, to ratify it and is thus known as "The First State".

Located midway between New York City and Washington D.C.,  Delaware which is one from the last in population, sits among one third of the  entire population of the US and has excellent access to major domestic and  export markets by highway, train, air and sea. The infrastructure is highly  developed and has deepwater berths at Port Wilmington on the Delaware River,  just 60 miles from the Atlantic Ocean shipping lanes.

In October of 1992, Delaware law recognized Limited Liability  Companies (LLC's). The LLC combines the best aspects of the Corporation and the  Limited Partnership without many restrictions.

Delaware is well known for the Delaware General Corporation Law  which is said to be the friendliest in America. Also the dedicated court called  The Chancery Court, which adjudicates on matters of Delaware Company Law, is  fast and efficient. The trials are by appointed judges (not a jury), who issue  written and well thought-out decisions. All this means is that you know the  rules from a stable legal system when you incorporate in Delaware.

Delaware is the home to 50% of corporations listed on the New  York Stock Exchange

One of the smallest states in the US, it offers the best protection for anyone who does not want to disclose their identity as a beneficial owner of a company. That is one very good reason why the East Coast state hosts 50% of the US's quoted firms and 650,000 companies – almost equivalent to one company per Delaware resident.

The Financial Secrecy Index took 18 months to compile, was researched by senior academics, accountants and investigators under the banner of the Tax Justice Network, and runs to 1,800 pages. It uses findings from the Financial Action Task Force, the high-level global body combating money laundering and terrorist finance, and the International Narcotics Control Strategy Report, as well as 12 key indicators involving bank secrecy rules, disclosure of beneficial ownership and trust law.

It finds that Delaware – the political power-base of the US vice-president, Joe Biden – offers high levels of banking secrecy and does not make details of trusts, company accounts and beneficial ownership a matter of public record. Delaware also allows companies to re-domicile within its borders with minimal disclosure, and allows the existence of privacy-enhancing "protected cell" or "segregated portfolio" companies, among many other stratagems useful for protecting the identity of those who do business there.

The only financial privacy indicator on which Delaware scores positively is that it is party to a large number of international tax information sharing agreements, but this is because those agreements are signed by the United States.

Delaware state officials say it is not the ability to protect identities that attracts so many companies and individuals to register businesses; rather, it is the state's sophisticated judicial system, which has evolved, they say, into the top corporate dispute resolution centre in America.

To enjoy the US tax free benefit, it is advised that the LLC have two or more members.

Features of a Delaware Limited Liability Company

  • A Delaware LLC may be formed by one or more organizer or member. For tax purposes, non-resident legal entities (such as companies or Corporations) who are members of the LLC may cause the IRS to classify the LLC as a branch of a foreign company in the US, and the LLC will be taxed on its worldwide income. It is therefore recommended that the non-resident members of Delaware offshore companies be physical persons.
  • An LLC does not issue shares and therefore does not have shareholders. The owners of an LLC are referred to as members.
  • A Delaware LLC is a legal entity, registered with the state, and is treated separate from its members.
    • The Delaware LLC is recognized anywhere in the world as a legally registered US company.
  • Because of the Limited Liability status, the law protects the members (owners) from the debts and other obligations of the LLC.
  • After Delaware offshore incorporation, the risk to an owner of a Delaware offshore LLC is to the extent of his investment in the LLC, and all his personal assets are protected.
  • A Delaware Limited Liability Company may be fully owned by non-resident aliens

 

But lawyer Jack Blum, a former US Senate staff attorney who has worked on high-profile fraud cases, including the BCCI investigation, says: "Secrecy in Delaware has been a massive problem and has been for sometime. They have a lot of rules that… make it so advantageous to be there that it is breathtaking." And, he adds, requests for legal assistance from other countries fall on deaf ears. "The requests pile up in district courts. It's beyond embarrassing. It's a disgrace."

Delaware's top position in the index will be greeted with raised eyebrows in Switzerland, which has just emerged from a bitter two-year legal dispute with the US over Swiss bank UBS's role in facilitating tax evasion on a vast scale.

Both jurisdictions are joined in the top five by the UK. Though Britain does not have many of the features of a secrecy jurisdiction – for instance, accounts are publicly available and companies cannot change their domicile without trace – London has been dragged into the list because of its sheer scale as a financial centre and its capacity to facilitate money-laundering and terrorist finance.

In a devastating appraisal of the UK's financial investigation powers, the Financial Action Task Force, in its most recent assessment two years ago, stated: "There are not adequate measures in place to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion."

Not surprisingly, representatives from the Caymans and Luxembourg, which made it into the top five, are aggrieved at their inclusion. Anthony Travers, chairman of Cayman Finance, the islands' business representative body, says: "Anybody who claims to have evidence that Cayman is opaque hasn't read the IMF and Financial Action Task Force reports nor the US version from the General Accountability Office... [This] report [has a] selective bias and [is] totally discredited, and will be seen as such by everybody in the financial world."

Luxembourg's Association of Banks & Bankers (ABBL) takes a similar line: "The ABBL does not consider Luxembourg to be a 'secrecy jurisdiction'. In both penal and fiscal matters, Luxembourg already co-operates more fully on an international basis than 80% of countries in the world."

But John Christensen, a director of Tax Justice Network and a joint author of the report, says: "The secrecy jurisdictions are found in North America, the former British empire and Europe. These are the regions which have driven the neo-liberalisation project that has skewered financial markets and turned them into criminogenic markets. They can attract capital with no questions asked. What this reveals is the massive hypocrisy of OECD states."

The world's most powerful countries will aim to clamp down further on offshore tax havens at the G20 finance ministers' meetings in Scotland later this month. The question of whether they should extend the measures they take to their own jurisdictions will not, in all likelihood, be on the agenda.

Delaware is recognized for its General Corporations Law which provides a stable legal platform. There is a Chancery Court which adjudicates on corporate matters. The courts do not use juries, so decisions are issued as written opinions and litigation is not settled by the emotions of a jury, but on stable law.

Washington DC, United States - When President Barack Obama meets Palestinian Authority President Mahmoud Abbas on Monday,

Washington DC, United States - When President Barack Obama meets Palestinian Authority President Mahmoud Abbas on Monday, it will be the next in a string of meetings held in the US capital to develop a "framework" for peace negotiations between Israelis and Palestinians.

Supporters on both sides have been making their case in the court of public opinion, with the American Israel Public Affairs Committee (AIPAC) policy conference in early March celebrating the "special relationship" between the US and Israel, and critics only a few days later suggesting this relationship receives too much favour.

At AIPAC, US Secretary of State John Kerry, whose visit was meant to bolster support for the framework agreement, said he had no illusions about the state of negotiations between Israeli and Palestinian leaders. "This isn't about me," he said of his efforts. "This is about the dreams of Israelis and the dignity of Palestinians."

ONE GOOD REASON TO DO SOMETHING NOW ABOUT YOUR FOREIGN ACCOUNT

We have spoken before about the agonizing decision many people are facing today about what to do about their secret foreign accounts.  This article applies especially to those who are getting on in years and may be inclined to just blow off foreign account/asset reporting under the Bank Secrecy Act and FATCA and let their wives and children worry about it when they are gone. Let’s say your estate is big enough to require the filing of a U.S. Estate Tax return. Although most of your assets are in U.S. real estate, stocks and other investments, you have somehow managed to tuck away a little stash in a European bank which you hoped to dip into in your golden years to enjoy some of the finer things in life.

It is clear that four years after its enactment in 2010, FATCA is getting closer  to full implementation even though it could take the IRS another five years to absorb and figure out what to do with the mega data it is about to start receiving on an ongoing basis. This will happen either directly from financial institutions unlucky enough to be based in a country which has yet to have its act together in getting an IGA (Intergovernmental Agreement) with Uncle Sam, or the lucky ones in “FATCA friendly” countries who get to  rely on their own governments to deal with the IRS to “out” their American clients.

Even the most naïve and wishful thinking people are starting to realize that doing nothing is not an option. The IRS is going to get your foreign account information sooner or later. It is already happening as Switzerland and a host of other countries are rolling over, so as not to miss out on any future business involving U.S. source income.

Just to be clear, here is what happens when you die with enough money to require the filing of an Estate Tax return: hardly anyone these days who is about to receive even a small part of a seven-figure estate is silly enough to try to file it on their own. That means you probably need both a lawyer and an accountant whose first job is to “marshal” the assets of the estate. Today, this inevitably leads to the heirs’ discovery that Dad had a secret honey pot in Switzerland.

For some, the first instinct is to try to enlist the accountant or attorney into a plan to keep Dad’s little secret and just not declare the foreign assets on the Estate Tax return. You can forget that idea. Only the most reckless and unethical practitioner would risk their right to practice before the IRS or even their personal freedom with anything that resembles a conspiracy to deceive Uncle Sam.

Why not simply not tell the estate’s attorney about the foreign assets? Another bad move. Assume the Estate Tax return is filed, audited and the IRS doesn’t find out about the foreign account. What are you going to do with the money? Try to withdraw it yourself and split up the money with your brothers and sisters? Thousands of people have already learned that banks abroad are starting to give Americans a really hard time with the simplest of transactions, such as closing foreign accounts  without some dialogue about whether any withholding is called for or whether the bank is being drawn into some unwitting plot to avoid the Bank Secrecy Act.

For some who now understand that doing nothing is not an option, all kinds of creative plans are being concocted to move in the opposite direction: have their wife and adult children agree to take further action to conceal the foreign nest egg through the use of nominees, fake trusts or corporations, or converting their cash to gold and storing it in a European vault somewhere. Here is where people start to move out of the realm of just-take-your-medicine and agree to pay a 27.5% tribute to Uncle Sam as part of the Offshore Voluntary Disclosure Program, and into the world of cases which really gets the attention of the IRS’ Criminal Investigation Division. Here the risk is a three year criminal investigation and the possibility of prosecution and/or devastating penalties plus jail time. We have written many times that in the world of taxation, the dividing line between civil penalties and criminal prosecution is one of degree. It is one thing to simply have an account in Switzerland which is just sitting there, but quite another to take affirmative steps to further conceal the foreign money through paper transactions, deceptive schemes, suborning others to take part, or doing anything at all which puts people in the position of continuing the lie and cause them to file false returns and reports in the future.

The point here is very simple. The IRS is receiving plenty of applications on behalf of decedent’s estates to enter the Offshore Voluntary Disclosure Program. There are more than a few families who are wondering what on earth Dad was thinking when he set up the secret account in the first place. There are many heirs right now who are not the least bit happy about having to engage specialists in foreign tax issues and private investigators to clean up the mess caused by someone’s incredibly bad investment strategy.

But more importantly, people who may not be around five or ten years from now when the government finds out what they had overseas should think of the position in which they are placing their loved ones because of their own unwillingness to face the reality of the post-modern digital world.

FATCA, The Foreign Account Tax Compliance Act,

What is FATCA?

The Foreign Account Tax Compliance Act, better known as FATCA, was passed in 2010 as part of the HIRE act. Starting in 2014 foreign financial institutions (FFI) will be required by the US government, under FATCA, to report information regarding accounts of US citizens, US persons, Green Card holders and individuals holding certain US investments to the IRS. This law requires foreign financial institutions such as your local bank, stock brokers, hedge funds, insurance companies, trusts, etc. - to report directly to the IRS all their clients who are "US persons.” FFIs that do not become compliant will be subject to a 30% withholding on these investments, which will directly impact FFI clients.

FATCA also requires US citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas – $200,000 for single filers and $400,000 for joint filers – see the IRS website for more details) to report those assets on a new Form 8938 to be filed with the 1040 tax return. Instructions for form 8938 were published in December 2011 and can be found on the IRS website.

Many Americans residing overseas are reporting banking lock-out. Many foreign financial institutions have simply chosen to eliminate their US citizens and US person client basis in order to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties.

The US Treasury has entered into Intergovernmental Agreements (IGAs) with a limited number of countries which will facilitate the transfer of information. The IGA agreements do include a non-discriminatory clause that is aimed at helping to alleviate issues of lock-out of banking services US citizens and US persons.

To learn more about FATCA and how it might impact you, you can consult the IRS website or speak to your tax advisor for more information.

 

RESPONSIBLE OFFICIALS

John Koskinen, Commissioner of Internal Revenue

Heather C. Maloy, Commissioner, Large Business and International Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

Debra Holland, Commissioner, Wage and Investment Division

William J. Wilkins, Chief Counsel

DEFINITION OF PROBLEM

Congress has long been concerned that U.S. taxpayers are not fully disclosing the extent of financial assets held abroad.1 In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA) to address this issue.2 FATCA imposes extensive reporting obligations on U.S. taxpayers, foreign entities, and withholding agents.3 Sanctions for FATCA noncompliance are so severe that failure to undertake the requisite reporting and disclosure can conceivably result in penalties in excess of the unreported foreign assets.4

The reporting obligations and potential penalties FATCA implements are, according to some expatriates and practitioners, responsible for the surge in the number of Americans renouncing their citizenship or permanent resident status.5 Moreover, some foreign financial institutions (FFIs), such as DeutcsheBank, HSBC, and ING have reportedly been closing out foreign accounts of U.S. citizens in response to FATCA’s “onerous U.S. Regulations.”6 Some stakeholders and commentators have questioned, from both a financial and tax policy perspective, whether the benefits of FATCA, including the additional tax

1 Some international tax policy experts believe that tax revenue losses are in the billions of dollars annually. Government Accountability Office (GAO), GAO-12-403, Reporting Foreign Accounts to IRS: Extent of Duplication Not Currently Known, but Requirements can be Clarified, App. 2 (Feb. 2012). A relatively recent response to this concern was passage of the Bank Secrecy Act, which requires U.S. citizens and residents to report foreign accounts on the FinCEN Report 114, Report of Foreign Bank and Financial Accounts (“FBAR”). See 31 U.S.C. § 5314(a).

2 Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat 71 (2010) (adding Internal Revenue Code (IRC) §§ 1471-1474; 6038D).

3 For example, U.S. citizens, resident aliens, and certain non-resident aliens must file a Form 8938, Statement of Specified Foreign Financial Assets, with their annual federal income tax returns, reporting foreign assets exceeding certain thresholds. IRC § 6038(D)(a); Treas. Reg. § 1.6038D-2T(a). Reporting by certain domestic entities of interests in specified foreign financial assets will be required after the IRS issues final regulations under IRC § 6038D. IRC § 6038D(f); Prop. Reg. § 1.6038D-6; Notice 2013-10, 2013-8 I.R.B. 503. An individual may also have to file the FBAR and separate penalties may apply for failure to file each form.

4 IRC § 6038D(d); IRC § 6662(j). Any associated FBAR penalties would be in addition to these penalties imposed by the FATCA regime.

5 See Tom Geoghegan, Why Are Americans Giving up Their Citizenship?, BBC News Mag., Sept. 26, 2013, available at http://www.bbc.co.uk/news/ magazine-24135021. More renunciations have occurred in 2013 than in any other year on record. See Laura Sanders, More U.S. Taxpayers Renounce Citizenship, Wall St. J., Nov. 14, 2013, at C3; 78 Fed. Reg. 68151, 2013-27072.

6 Rowan Morrison, When Banks Pay the Price, Editions Financial (Aug. 30, 2012), available at http://www.editionsfinancial.co.uk/2012/08/30/ when-banks-pay-the-price/. See also Sofia Yan, Banks Lock out Americans Over New Tax Law, CNNMoney (Sept. 15, 2013), available at http:// money.cnn.com/2013/09/15/news/banks-americans-lockout/; Simon Bradley, U.S. Expats Feel the Burden of FATCA (May 28, 2013), available at http://www.swissinfo.ch/eng/politics/US_expats_feel_the_burden_of_FATCA.html?cid=35932576; Tom Geoghegan, Why Are Americans Giving up Their Citizenship?, BBC News Mag. (Sept. 26, 2013), available at http://www.bbc.co.uk/news/magazine-24135021; Katie Holliday, HSBC Cuts Ties with US Clients Ahead of FATCA, Investment Week (

 

IRS Announces Revisions to ITIN Applications

A Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. It is issued either by the Social Security Administration (SSA) or by the IRS. A Social Security number (SSN) is issued by the SSA whereas all other TINs are issued by the IRS.
 Note:

WASHINGTON — The Internal Revenue Service today announced several steps to strengthen controls over the issuance of Individual Taxpayer Identification Numbers. The changes will help ensure that ITINs are issued for their intended tax administration purpose for administering the tax code and not for other reasons, such as providing personal identification. In addition, the IRS is taking steps to help ensure that applicants can continue to obtain ITINs without undue burden.

Beginning today, new ITIN applicants must use a revised Form W-7, Individual Taxpayer Identification Number Application. ITIN applicants also must provide proof that the ITIN will be used for tax administration purposes. For applicants seeking an ITIN in order to file a tax return, the return must be filed along with the W-7.

“About one-quarter of the ITINs issued for tax return purposes never actually find their way onto a tax return,” said IRS Commissioner Mark W. Everson. “The steps taken today ensure ITINs will be issued only to those seeking to comply with their tax obligations.”

Federal law requires individuals with U.S. income, regardless of immigration status, to pay U.S. taxes. The ITIN, a nine-digit number that begins with the number 9, was created for use on tax returns for those taxpayers who do not qualify for a Social Security Number. The IRS has issued 7 million ITINs since 1996.

However, some ITINs issued by the IRS do not appear in tax filings or tax reporting documents and may have been procured solely to serve as a form of identification. Earlier this year, the IRS issued letters to all governors and state motor vehicle departments advising that ITINs were not designed to serve as personal identification and would not be suitable for determining identification of applicants for driver’s licenses.

After a review of the ITIN program, the IRS will implement these changes effective immediately:

  • All new ITIN applicants will have to show a federal tax purpose for seeking the ITIN. For those seeking an ITIN to meet their income tax filing obligations, this will require attaching a federal tax return to the Form W-7 when they are ready to file their tax return with the IRS.
  • ITIN applications without proof of need for tax administration purposes will be rejected.
  • The IRS will reduce to 13 from 40 the number of documents it will accept as proof of identity to obtain an ITIN. The 13 acceptable documents are listed in the new Form W-7 instructions.
  • The IRS also will change the appearance of the ITIN from a card to an authorization letter to avoid any possible similarities with a Social Security Number card.

A small number of non-U.S. residents apply for an ITIN to report income under a tax treaty, and a small number of U.S. resident and non-resident applicants apply for an ITIN to report income from a U.S. bank or brokerage account. Neither type of applicant will be required to file a tax return along with their ITIN application. Non-resident applicants will be required to furnish evidence of their ownership of the asset that gave rise to the reporting obligation. Resident applicants will be required to furnish evidence of actual rather than intended ownership of the bank or brokerage account.

The IRS will continue to help individuals who seek ITINs comply with the tax laws. The IRS has found no indication of any differences in accuracy rates between tax returns filed with ITINs and tax returns filed with SSNs. The agency understands the need to continue to monitor challenges posed by ITINs, and will do so over the course of time.

The IRS will continue to review ways to improve Form W-7 and will conduct a public comment period until June 15, 2004. The IRS will be publishing an announcement in the Internal Revenue Bulletin that will ask for comments on the revised form and the application process. Internal Revenue Bulletin 2004-2, to be published on Jan. 12, 2004, will give instructions on when and how comments may be submitted.

Additional information is available at IRS.gov where English and Spanish versions of the Form W-7 are available. A list of frequently asked questions (FAQs) also is available

Taxpayer Identification Numbers

  • Social Security Number "SSN"
  • Employer Identification Number "EIN"
  • Individual Taxpayer Identification Number "ITIN"
  • Taxpayer Identification Number for Pending U.S. Adoptions "ATIN"
  • Preparer Taxpayer Identification Number "PTIN"

Note: The temporary IRS Numbers previously assigned are no longer valid.

Do I Need One?

A TIN must be furnished on returns, statements, and other tax related documents. For example a number must be furnished:

When filing your tax returns - A change in IRC section 6109 regulations in 1996 mandates the use of a TIN on tax returns.

When claiming treaty benefits - There was a change in the IRC section 1441 regulations in 2001 which mandates the use of a TIN in order to claim tax treaty benefits. A TIN must be on a withholding certificate if the beneficial owner is claiming any of the following:

  • Tax treaty benefits (other than for income from marketable securities)
  • Exemption for effectively connected income
  • Exemption for certain annuities

When Claiming Exemptions for Dependent or Spouse:

You generally must list on your individual income tax return the social security number (SSN) of any person for whom you claim an exemption. If your dependent or spouse does not have and is not eligible to get an SSN, you must list the ITIN instead of an SSN. You do not need an SSN or ITIN for a child who was born and died in the same tax year. Instead of an SSN or ITIN, attach a copy of the child's birth certificate and write Died on the appropriate exemption line of your tax return.

How Do I Get A TIN?

SSN

You will need to complete Form SS-5, Application for a Social Security Card (PDF). You also must submit evidence of your identity, age, and U.S. citizenship or lawful alien status. For more information please see the Social Security web site.

Form SS-5 is also available by calling 1-800-772-1213 or visiting your local Social Security office. These services are free.

EIN

An Employer Identification Number (EIN) is also known as a federal tax identification number, and is used to identify a business entity. It is also used by estates and trusts which have income which is required to be reported on Form 1041, U.S. Income Tax Return for Estates and Trusts (PDF). Refer to Employer ID Numbers for more information.

The following form is available only to employers located in Puerto Rico, Solicitud de Número de Identificación Patronal (EIN) SS-4PR (PDF).

ITIN

An ITIN, or Individual Taxpayer Identification Number, is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get a Social Security Number (SSN). It is a 9-digit number, beginning with the number "9", formatted like an SSN (NNN-NN-NNNN).

To obtain an ITIN, you must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number (PDF) . The Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual. You may either mail the documentation, along with the Form W-7, to the address shown in the Form W-7 Instructions, present it at IRS walk-in offices, or process your application through an Acceptance Agent authorized by the IRS. Form W-7(SP), Solicitud de Número de Identificación Personal del Contribuyente del Servicio de Impuestos Internos (PDF) is available for use by Spanish speakers.

Acceptance Agents are entities (colleges, financial institutions, accounting firms, etc.) who are authorized by the IRS to assist applicants in obtaining ITINs. They review the applicant's documentation and forward the completed Form W-7 to IRS for processing.

NOTE: You cannot claim the earned income credit using an ITIN.

Foreign persons who are individuals should apply for a social security number (SSN, if permitted) on Form SS-5 with the Social Security Administration, or should apply for an Individual Taxpayer Identification Number (ITIN) on Form W-7. Effective immediately, each ITIN applicant must now:

  • Apply using the revised Form W-7, Application for IRS Individual Taxpayer Identification Number; and
  • Attach a federal income tax return to the Form W-7.

Applicants who meet an exception to the requirement to file a tax return (see the instructions for Form W-7) must provide documentation to support the exception.

New W-7/ITIN rules were issued on December 17, 2003. For a summary of those rules, please see the new Form W-7 and its instructions.

Tax Treaty Overview

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.

Publication 901, U.S. Tax Treaties will tell you whether a tax treaty between the United States and a particular country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that particular country. Tables in the back of the publication show the countries that have income tax treaties with the United States, the tax rates on different kinds of income, and the kinds of income that are exempt from tax. In addition to the tables in the back of the publication, the publication contains discussions of the exemptions from tax and certain other effects of the tax treaties on the following types of income:

  1. Pay for certain personal services performed in the United States,
  2. Pay of a professor, teacher, or researcher who teaches or performs research in the United States for a limited time,
  3. Amounts received for maintenance and studies by a foreign student or apprentice who is here for study or experience,
  4. Wages, salaries, and pensions paid by a foreign government.

CAUTION! You should use the publication only for quick reference. It is not a complete guide to all provisions of every income tax treaty.

Some common tax treaty benefits available to U.S. citizens and resident aliens with foreign income are explained in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.

If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for Form 1040NR (PDF). Also see Publication 519, U.S. Tax Guide for Aliens, and Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Many of the individual states of the United States tax the income of their residents. Some states honor the provisions of U.S. tax treaties and some states do not. Therefore, you should consult the tax authorities of the state in which you live to find out if that state taxes the income of individuals and, if so, whether the tax applies to any of your income, or whether your income tax treaty applies in the state in which you live.

Tax treaties reduce the U.S. taxes of residents of foreign countries. With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or residents. U.S. citizens and residents are subject to U.S. income tax on their worldwide income.

Treaty provisions generally are reciprocal (apply to both treaty countries). Therefore, a U.S. citizen or resident who receives income from a treaty country and who is subject to taxes imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. Treaty benefits generally are available to residents of the United States. They generally are not available to U.S. citizens who do not reside in the United States. However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U.S. citizens residing in the treaty countries. U.S. citizens residing in a foreign country may also be entitled to benefits under that country's tax treaties with third countries. Foreign taxing authorities sometimes require certification from the U.S. Government that an applicant filed an income tax return as a U.S. citizen or resident, as part of the proof of entitlement to the treaty benefits. For information on this, refer to Form 8802, Application for United States Residency Certification – Additional Certification Requests. In addition, refer to the discussion at Form 6166 - Certification of U.S. Tax Residency.