I just returned from a conference in San Antonio sponsored by the American Bar Association's Section on Taxation. I attended this conference to learn more about plans the Department of Justice (DOJ) and the IRS have going forward in their anti-offshore vendetta, and how the financial institutions and nations affected by it are likely to react.
While I was there, I attended briefings in which high-level officials from these agencies participated. Among them was Victor Song, Deputy Chief of the IRS Criminal Investigation Division and Jeffrey A. Neiman, Assistant U.S. Attorney for the Southern District of Florida. I also heard a presentation from Thierry Boitelle, a tax partner with the Altenburger law firm in Geneva, Switzerland.
The bottom line is that these very knowledgeable and influential individuals believe that what we witnessed in 2009—the UBS affair, the capitulation of Switzerland and other offshore centers, dozens of new tax information exchange agreements, etc.—is only the beginning. Here's what they expect in the months ahead:
* Swiss court decision won't prevent UBS data from being turned over to the IRS. On January 22, the Federal Administrative Court issued a ruling forbidding UBS from giving the IRS information on approximately 4,500 U.S.-based UBS accounts. The same court ruled earlier this month that Switzerland's financial regulator violated Swiss law when it turned over data on another 255 UBS clients in 2009. While the decision can't be appealed, Boitelle observed that the Swiss government is desperate to mollify the IRS. One possible outcome would be an emergency decree by the Swiss government to enforce the original agreement, plus a new information exchange protocol with the IRS with retroactive effect.
* More offshore banks are ratting on their customers. According to Neiman, in response to DOJ subpoenas, several offshore banks have sent letters to U.S. clients informing them their accounts are under investigation. Neiman also stated that DOJ welcomes voluntary disclosures from offshore banks. "If they give us a road map, they may avoid indictment," he told attendees at one briefing. This is a cynical but brilliant strategy. It damages the fundamental relationship between banks and their customers, and gives taxpayers an incentive not to hide money.
* The IRS Criminal Investigation Division is opening offices in 11 foreign countries, including Panama and Switzerland. This will make it MUCH easier for a rogue banker seeking an informant commission (or trying to avoid indictment) to turn over client data to the IRS. If this action violates local law, the banker may get in trouble at home, but will get a hero's welcome in the United States. However, the judge in the DOJ case against former UBS banker turned IRS informant Bradley Birkenfeld just confirmed a 40-month prison sentence. If it's not commuted, Birkenfeld's sentence will be a spectacular disincentive to become a whistleblower.
* U.S. customers have become hugely more expensive for foreign banks to service. Compliance costs have risen to the point where many banks simply find it easier to forbid U.S. customers from opening or even maintaining account. If H.R. 4213, the Foreign Account Tax Compliance Act (FATCA) becomes law, even more foreign banks will shed their U.S. clients. FATCA passed the House of Representatives in December 2009, and is now before the Senate. It's on a fast track to enactment in the next few weeks.
* Hundreds of billions of dollars in foreign investments are fleeing the United States. Several attendees in San Antonio told me they represent offshore banks that are pulling their clients' money out of the United States. While offshore banks make a good income by managing non-U.S. clients' money in U.S. stocks, the compliance cost of doing so has become overwhelming. Again, FATCA will exacerbate this exodus. The implications for U.S. stocks—and the U.S. dollar—are ominous.
* National tax authorities are talking to each other. One significant initiative is called the Joint International Tax Shelter Information Centre. The participants—tax authorities in Australia, Canada, Japan, the United Kingdom, and the United States—are teaming up to conduct what the IRS calls "holistic taxpayer analysis" of high-net-worth taxpayers. This will consist of simultaneous tax audits in one or more jurisdictions of every facet of an individual's economic activity. The audits will not just be of the taxpayer's personal tax situation, but of every business or charitable entity connected to that individual. Wealthy individuals can expect audits not only of themselves but also of their corporations, limited partnerships, limited liability companies, trusts, insurance and annuity arrangements, and charitable giving.
I wish I could present some aspect of this meeting as having a "silver lining." Honestly, I can't. It's become increasingly apparent to me that there is a systematic effort by tax authorities in every high-tax country to systematically shut down the offshore "escape hatch." The only alternative for high net worth people in these jurisdictions may be to relocate to countries with more inviting tax regimes (e.g., Panama, Singapore, and Hong Kong). Or, in the case of U.S. citizens, to formally give up their citizenship and leave the United States.
Copyright © 2010 by Mark Nestmann
Update: FATCA became law in March, 2010. Click here to learn more about the provisions of this act.
(An earlier version of this post was published by The Sovereign Society, https://banyanhill.com/)
