The Federal Government has estimated that the “United States loses an estimated $345 billion in tax revenues each year as a result of offshore tax abuses primarily from the use of concealed and undeclared accounts held by U.S. taxpayers or their controlled foreign entities.” [1]
In consideration of the goal of eliminating this gap, “it is not surprising that the government recently ratcheted up its pressure on taxpayers who structured their activities, in many cases, with the active help and assistance of promoters and facilitators to avoid reporting their taxable income on their tax returns or hide these offshore accounts from the government.” [2] This increased “pressure” came in the form of the HIRE Act passed in the first quarter of 2010. [3] As was discussed earlier this week,[4] the new law provides for reporting requirements by foreign financial institutions with U.S. accountholders about the status, specifically identity and balance, of their account. [5] Read the entire article at AdvisorFYI.
There is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions. “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]
“Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]
Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]
The IRS released proposals for FATCA guidance on August 27, 2010, in Notice 2010-60. The notice outlines the shape of the regulations and raises grave concerns for a wide swath of transactions that have an offshore component— from foreign investments to captives and beyond.
The IRS’ Rev. Proc. 2010-28 finally provides guidance on life insurance contracts that now include maturity dates extending well beyond the insured’s 100th birthday. The IRS Revenue Procedure addresses the actuarial realties of increased longevity, but more importantly it helps clarifies when policy distributions will or will not be taxable to the insured.
The Private Fund Investment Advisers Registration Act of 2010, part of the Wall Street Reform Act, will require registration of many hedge fund manager who previously escaped registration with the SEC. Hedge fund, and other private fund, managers who do not fit into one of the Act’s exemptions will be required to register with either the SEC or a state regulatory agency. Advisers to larger funds will be required to register with the Securities and Exchange Commission (SEC), while advisers to smaller funds will be required by the Act to register at the state level.
As of January 1, 2011, the Securities and Exchange Commission will require advisers to make plain-English disclosures to their clients, laying out the adviser’s business practices, conflicts of interest, and the background of the firm and its personnel. The requirement is designed to drag information out of the fine print on client disclosures and present it in easily understandable language. Although innocuous sounding on its face, the requirement will carry a significant cost in time and resources.
National Underwriters Establishes Go-To Service for Producers
Effective this summer, in order to embrace the changing landscape of the greatest wealth transfer in global history, National Underwriter/Summit Business Media is honored to announce that the renown professor, author, and financial services industry analyst William Byrnes will lead our financial advisory publications. In an interview William Byrnes stated that “I will leverage community-comment blogging with innovative multimedia to deliver daily strategies for insurance producers and financial service regulatory updates for risk managers. National Underwriters’ Advanced Underwriter Service®(AUS®) will emerge as the dominant go-to strategy service for the insurance/financial planning industry.”
When asked how he intends to effectively connect AUS® strategic information with the needs of producers, Byrnes replied, “Through direct engagement with producers’ burning questions via the new AUS® Advisor blog, through my editorial panel of connected industry experts and enterprise-wide subscribers, and through feedback from the elected production leaders from the over 50,000 chartered wealth managers of the American Academy of Financial Management®. National Underwriters will proactively educate the AUS subscribers about developing insurance and wealth management advisory strategies and sales techniques before the subscribers’ competitors hear about them via industry word of mouth.”
William Byrnes’ Background
Byrnes continued, “I have a lot of experience delivering cutting edge information to professionals seeking to better serve their clients and win business from the competition. About twenty years ago, Dr. George Mentz and I pioneered residential executive training, and soon thereafter online degrees, for wealth managers seeking to become top producers. Over time we trained these industry leading wealth managers with our executive programs for the likes of EuroMoney-Institutional Investor, IIR, and the Society of Trust and Estate Practitioners. We even managed for the first time ever that the American Bar Association acquiesced to an online wealth management oriented graduate law degree being granted to both lawyers and non-lawyers alike by an accredited law school in the USA.”
“And in terms of executing multi-media publishing, I’ve written and edited 10 books and treatises and 17 chapters for best-of-class publishers like Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, and Oxford University Press, whereas Dr. Mentz focused on wealth management techniques and soft skills books distributed international via the 120-country membership of the American Academy of Financial Management. I have published my multi-media textbooks online since 1998!”
New Community-Collaborative Technology
When asked how he transitioned from practitioner to education-pioneer, Byrnes reminisced “I never imagined when I was an associate director of international tax of the big 6 audit firm Coopers & Lybrand, now known as PwC, that I would move from serving high net wealth families to helping wealth managers better serve their clients via my role as the Associate Dean of an ABA accredited law school, Thomas Jefferson. This year Thomas Jefferson School of Law will open its new $130 million dollar state-of-the-technology new campus in San Diego that will be able deliver via innovative ways interactive training and education to wealth managers across the nation, and the globe. Over the coming year I will combine the cutting-edge technology of Thomas Jefferson law school, my online training expertise, and the National Underwriters best-of-class information services to deliver real-time fresh strategy and sales approaches to AUS subscribers, with followup webinars and training where subscriber interests warrants.”
Delivering the Competitive Advantage to Producers
Byrnes added, “National Underwriters/Summit Business Media wants to deliver an information service that will place its subscribers in a better competitive advantage.” To this end National Underwriters has allowed me to assemble the industry’s finest editorial team in Investment Advisory, Wealth Management, and Risk Management. I already have commitments from the two well known industry experts, investment-advisory attorney Robert Bloink, and the chair of the American Academy of Financial Management®, Dr. George Mentz, who will underpin this team”.
Robert Bloink’s Background
“I think it is critical for National Underwriters subscribers to know that Robert Bloink, one of two underpinning editorial team members, put in force in excess of $2B of longevity pegged portfolios for the insurance industry’s producers in the past five years. Robert Bloink’s insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures. His success proves that he really has an unparalleled knowledge of the advanced insurance markets.”
“And in terms of risk management editorial expertise, I previously met Robert Bloink when he had just finished serving as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products, and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.”
Chartered Wealth Managers Endorse
“It is also critical for National Underwriters subscribers who serve middle America to know that the editorial team has Dr. George Mentz, chair of the 50,000 affiliated members of the American Academy of Financial Management® (AAFM®), Byrnes said.” In an interview with Dr. Mentz, he stated that “I am excited to introduce our membership of Chartered Wealth Managers to the competitive client advisory strategies of Advanced Underwriter Service® and Tax Facts®.” The AAFM® has endorsed National Underwriters’ Advanced Underwriter Service® as the information service of choice for its board designation CWM®s (Chartered Wealth Manager) in all of its 150 countries of membership.
Panel of Experts
In describing the newly formed editorial team, Byrnes said “To provide AUS® subscriber examples of other experts who will round out various aspects of the new editorial team, let me introduce you to three others, Mike Rodman, Don Goode and Robert Stuchiner. Mike Rodman is a three time qualifier for Top of The Table, MDRT’s highest honor, as well as a four-year member of the International Forum, and the Association of Advanced Underwriters (AALU). Rodman served as past president of NAIFA-San Diego as well as an active member of The Financial Planning Association (FPA), The Society of Financial Service Professionals (SFSP) and The National Association of Independent Life Brokerage Agencies (NAILBA). He founded Advanced Planning Services, Inc. (APS) as “the Premier Advanced Sales and Advanced Underwriting organization” serving the entire industry, including producers, producer groups, and other agencies and carriers, for which it has been a two-time INC 500 winner.”
“Don Goode joined Potomac West, where he was instrumental in building their large case department. Along with his partner, Don successfully designed and negotiated the Power Play program for American General, and most importantly to National Underwriter subscribers, his team lent support to the first agent in the history of the industry to ever receive more than $100mm in a single calendar year. When he stepped down from partner status at Potomac West, Don accepted a one year contract to lead the sales and marketing department for the esteemed Producer’s Group. Thereafter Don Goodman joined the Advanced Planning Division of the public company-Bisys-Potomac where he consistently produced individual policy transactions that were more than 20 times the company average.”
“Robert Stuchiner worked for some of the largest insurance companies, most recently AIG where he was Senior Vice President in charge of market development and strategy for the AIG Affluent Markets Group. He has also worked for consumers of insurance products ranging from large corporations (North American Phillips) to a major law firm (Davis, Polk & Wardwell). Robert Stuchiner has published articles on life insurance products in “Trusts & Estates” magazine as well as “CCH” professional publications. He is a frequent speaker to the insurance industry associations. Robert is the winner of the “National Career Achievement Award” granted by the Lighthouse for the Blind.
Community Calibration
Byrnes concluded the interview stating, “To bring AUS to the next level of becoming the industry’s leader for strategic information, this next six months is going to be about collaboration with AUS subscribers and calibration of the new information service to align to the feedback received from them. John Frey, Head of National Underwriters Institutional Relationships, and I will reach out to establish a focus group of the enterprise-wide subscribers, as well as a focus group of the producers.”
“Via my community-based feedback approach, the subscribers will drive AUS’ topic approach to strategic information, even receiving direct answers to ‘questions for the authors’ so that the producer may better address client questions either in the living room or in the board room. AUS will be a subscriber-focused service, tailored to the needs of the producer to place more product with customers”. Byrnes said that he welcomed feedback from current AUS subscribers and would provide his direct National Underwriters telephone number and email address on the AUS subscriber site.
Historical Anecdotes Regarding the European Union Savings Directive
This week I continue in my historical anecdotes on the subject of cross-border tax (financial) information exchange and cross-border tax collection in the context of the European Union Tax Savings Directive. In our live course webinars, we will continue our indepth address of the related compliance issues.
2003 Savings Directive Agreement
On 21 January 2003, the EU Finance Ministers meeting within the Council of Ministers (“the ECOFIN Council”) reached a political agreement on a “tax package”, which comprises a Code of Conduct for business taxation, a proposal for a Community Directive on the taxation of interest and royalty payments and a proposal for a Community Directive on the taxation of income from savings (“the Savings Directive”). Furthermore on 7 March the ECOFIN Council agreed the text of the Savings Directive, although the Directive has not yet been formally adopted.
In its current form, the Savings Directive only applies to interest paid to individuals, and in particular it does not apply to companies.
Article 2
Definition of beneficial owner
1. For the purposes of this Directive, ‘beneficial owner’ means any individual who receives an interest payment or any individual for whom an interest payment is secured…”[1]
The Savings Directive requires an automatic, cross-border, exchange of information between the EU members states and their territories.[2]
EXCHANGE OF INFORMATION
Article 8
Information reporting by the paying agent
1. Where the beneficial owner is resident in a Member State other than that in which the paying agent is established, the minimum amount of information to be reported by the paying agent to the competent authority of its Member State of establishment shall consist of:
(a) the identity and residence of the beneficial owner established in accordance with Article 3;
(b) the name and address of the paying agent;
(c) the account number of the beneficial owner or, where there is none, identification of the debt claim giving rise to the interest;
(d) information concerning the interest payment in accordance with paragraph 2.
Article 9
Automatic exchange of information
1. The competent authority of the Member State of the paying agent shall communicate the information referred to in Article 8 to the competent authority of the Member State of residence of the beneficial owner.
2. The communication of information shall be automatic and shall take place at least once a year, within six months following the end of the tax year of the Member State of the paying agent, for all interest payments made during that year.
Three EU members, the territories and dependencies of the UK, and to date the accession state of Switzerland have been granted a transitional period of time to implement automatic exchange of information. The transitional period of time is to last until all listed non-EU members, i.e. Switzerland, Monaco, Andorra, Liechtenstein, and the USA, have entered into automatic exchange of information with the EU member states. During the transition, these States and jurisdictions must collect a withholding tax of which 75% of that tax must then be forward to the Member State of residence of the beneficial owner of the interest.
Article 11
Withholding tax
1. During the transitional period referred to in Article 10, where the beneficial owner is resident in a Member State other than that in which the paying agent is established, Belgium, Luxembourg and Austria shall levy a withholding tax at a rate of 15 % during the first three years of the transitional period, 20 % for the subsequent three years and 35 % thereafter.
Each of the twenty-five members (including the accession of the new group of ten members), their relevant territories, and the non-EU members acceding to the Directive is allowed to interpret the Directive for legislative implementation under its national law.
Tax Based Elasticity and Capital Flight
The Savings Directive recognises the issue of capital flight due to the sensitivity of taxpayers to exchange of information. At paragraph 24 it states, “So long as the United States of America, Switzerland, Andorra, Liechtenstein, Monaco, San Marino and the relevant dependent or associated territories of the Member States do not all apply measures equivalent to, or the same as, those provided for by this Directive, capital flight towards these countries and territories could imperil the attainment of its objectives. Therefore, it is necessary for the Directive to apply from the same date as that on which all these countries and territories apply such measures.calls for.” This capital flight issue is based upon three historical benchmarks regarding the imposition of withholding tax on interest and the immediate and substantial impact that withholding tax on interest has on capital flight. The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the capital flight of hundreds of million of dollars and the corresponding creation of the London euro-dollar bond market; (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks; and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy of over a billion DM, so substantial that the tax was repealed but four months after imposition. Please refer to my earlier blogticles for further information about this topic.
Please contact me with any comments or follow up research materials.
Historical anecdotes relating to tax information exchange and cross-border assistance with tax collection (continued)
This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection. In this blogticle I turn to the OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims and the EU Directive on the Mutual Assistance for the Recovery of Claims In our live webinars in the tax treaty course, Marshall Langer will continue to address these issues indepthly.
1981 OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
This 1981 OECD Model provides for both the exchange of information (article 5) and the assistance in recovery (article 6), which state respectively:
EXCHANGE OF INFORMATION
At the request of the applicant State the requested State shall provide any information useful to the applicant State in the recovery of its tax claim and which the requested State has power to obtain for the purpose of recovering its own tax claims.
ASSISTANCE IN RECOVERY
1. At the request of the applicant State the requested State shall recover tax claims of the first-mentioned State in accordance with the laws and administrative practice applying to the recovery of its own tax claims, unless otherwise provided by this Convention.
Procedurally, the documentation must state (1) the authority requesting, (2) name, address and other particulars for identification of the taxpayer, (3) nature and components of the tax claim, and (4) assets of which the Requesting State is aware of from which the claim may be recovered. The nature of the tax claim must include documentary evidence in the form of the instrumentality establishing that the tax is determined, that it is due, and that it is without further recourse to contest under the Requesting State’s laws. The applicable Statute of Limitation is of the Requesting State.
The Requested State’s obligation is limited, as under the OECD DTA Model Article 26 and 27, if the request requires the Requested State to go beyond its own or the Requesting State’s capacity to either provide information or take administrative actions pursuant to their respective internal laws. The Requesting State has a duty to exhaust its own reasonable collection remedies before making the request which procedural requirement may be relied upon by the Requested State. All requests are also limited by ordre public.
1988 Convention On Mutual Administrative Assistance In Tax Matters
Coming into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, this multilateral convention was originally agreed in 1988. The Convention provides for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.
Tax covered includes income, capital gains, wealth, social security, VAT and sales tax, excise tax, immovable property tax, movable property tax such as automobiles, and any other tax save customs duties. The tax also includes any penalties and recovery costs. The tax may have been levied by the State and any of its subdivisions.
The convention allows the request of information regarding the assessment, collection, recovery and enforcement of tax. The information may be used for criminal proceedings on a case-by-case basis pursuant to the Requested State agreeing, unless the States have waived the requirement of agreement.
Spontaneous provision of information shall be provided without request when a State with information:
(1) has “grounds for supposing” a loss of tax to another State,
(2) knows that a taxpayer receives a tax reduction in its State that would increase the tax in the other State,
(3) is aware of business dealings between parties located in both States that saves tax,
(4) has grounds for supposing an artificial intro-group transfer of profits, and
(5) that was obtained from the other State has led to further information about taxes in the other State.
Similar to the OECD Model Conventions above, procedurally the requesting documentation must state (1) the authority requesting and (2) name, address and other particulars for identification of the taxpayer. For an information request, the document should include in what form the information should be delivered. For a tax collection assistance request, (1) the tax must be evidenced by documentation in the form of the instrumentality establishing that the tax is determined, that it is due and that it is without further recourse to contest, (2) the nature and components of the tax claim, and (3) assets of which the Requesting State is aware of from which the claim may be recovered.
This Multilateral Convention’s limitations follow the 1981 and 2003 OECD Model, but further provide for a non-discrimination clause. The non-discrimination clause limits providing assistance if such assistance would lead to discrimination between a requested State’s national and requesting State’s nationals in the same circumstances.
2001 EU Directive on the Mutual Assistance for the Recovery of Claims relating to Certain Levies, Duties, Taxes and Other Measures
The OECD is not alone in its quest to improve tax information exchanges. On June 15, 2001 the EU Commission issued a Directive that amended a previous 1976 Directive which substantially changed the impact of that 1976 Directive (on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties).
The 2001 Directive provided that Member States enact regulations that provide for the implementation of a number of EU Directives on mutual assistance between Member States of the Community on the provision of information in respect of, and the recovery in the State of, claims made by Other Member States in respect of debts due to the Member State in question from:
Import & Export Duties
Value Added Tax
Excise duties on manufactured tobacco, alcohol and alcoholic beverages and mineral oils
Taxes on income and capital
Taxes on insurance premiums
Interest, administrative penalties and fines, and costs incidental to these claims (with the exclusion of any sanction in respect of which the act or commission giving rise to the sanction if committed in the State would be criminal in nature)
Refunds, interventions and other measures forming part of the system of financing the European Agricultural Guidance and Guarantee Fund
Levies and other duties provided for under the common organization of the market of the market for the sugar section
In summary, the Directive provides for one Member State’s competent authority at the request of another Member State’s competent authority to disclose to the requester’s competent authority any information in relation to a claim which is required to be disclosed by virtue of the Directive.
On receipt of a request, the Revenue Commissioners can decline a request to provide information in the following circumstances:
– if the information would, in the opinion of the Competent Authority, be liable to prejudice the security of the State or be contrary to public policy;
– if the Competent Authority would not be able to obtain the information requested for the purpose of recovering a similar claim, or
– if the information, in the opinion of the Competent Authority, would be materially detrimental to any commercial, industrial or professional secrets.
Any information provided to a competent authority under the enacting regulations pursuant to the Directive can only be used for the purposes of the recovery of a claim or to facilitate legal proceedings to the recovery of such a claim.
Under the Directive, the collecting Member State is obliged to collect the amount of a claim specified in any request received from a competent authority in another Member State and remit the amount collected to that competent authority.
In the Tax Treaties course, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above regarding the IRS efforts to collect tax via assistance from foreign states. For further tax treaty course information, please contact me at William Byrnes (wbyrnes@tjsl.edu).
Tax Information Exchange (TIEA): an Opportunity for Latin American to Clawback Its Capital Flight Back from America? Perhaps even Switzerland?
This blogticle is a short note regarding the potential risk management exposure of US financial institutions’ exposure to a UBS style strategy being employed by foreign revenue departments, such as that of Brazil, and Switzerland. Of course, such foreign government strategies can only be productive if US financial institutions are the recipient of substantial funds that are unreported by foreign nationals to their respective national revenue departments and national reserve banks, constituting tax and currency/exchange control violations in many foreign countries.
The important issue of Cross Border Assistance with Tax Collection takes on more relevance when foreign governments begin seeking such assistance from the USA Treasury in collecting and levying against the hundred thousand plus properties purchased with unreported funds, and whose asset value may not have been declared to foreign tax authorities where such reporting is required in either the past, or the current, tax years.
In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.
Tax Elasticity Of Deposits
In the 2002 article International Tax Co-operation and Capital Mobility, prepared for an ECLAC report, from analysing data from the Bank for International Settlements (“BIS”) on international bank deposits, Valpy Fitzgerald found “that non-bank depositors are very sensitive to domestic wealth taxes and interest reporting, as well as to interest rates, which implies that tax evasion is a determinant of such deposits….”[1] Non-bank depositors are persons that instead invest in alternative international portfolios and financial instruments.
Estimating How Much Latin American Tax Evasion are US Banks Involved With?
Within two weeks I will post a short blogticle that I am preparing regarding an estimated low figure of $300B capital outflow that has begun / will occur from the USA pursuant to its signing of a TIEA with Brazil. Some South Florida real estate moguls have speculated that this TIEA has played a substantial role in the withdrawal of Brazilian interest in its real estate market, which has partly led to the sudden crash in purchases of newly contrasted condominium projects.
Three historical benchmarks regarding the imposition of withholding tax on interest illustrate the immediate and substantial correlation that an increase in tax on interest has on capital flight. The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the creation of the London Euro-dollar market;[2] (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks;[3] and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy[4]. The effect was so substantial that the tax was repealed only four months after imposition.
The Establishment of London as an International Financial Center
The 1999 IMF Report on Offshore Banking concluded that the US experienced immediate and significant capital outflows in 1964 and 1965 resulting from the imposition of a withholding tax on interest. Literature identifies the establishment of London as a global financial centre as a result of the capital flight from the US because of its imposition of Interest Equalisation Tax (IET) of 1964.[5] The take off of the embryonic London eurodollar market resulted from the imposition of the IET.[6] IET made it unattractive for foreign firms to issue bonds in the US. Syndicated bonds issued outside the US rose from US$135 million in 1963 to US$696 million in 1964.[7] In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.[8]
The Establishment of Miami as an International Financial Center
Conversely, when in 1984 the US enacted an exemption for portfolio interest from withholding tax, Latin America experienced a capital flight of $300 billion to the US.[9] A substantial portion of these funds were derived from Brazil. In fact, some pundits have suggested that Miami as a financial center resulted not from the billions generated from the laundering of drug proceeds which had a tendency to flow outward, but from the hundreds of billions generated from Latin inward capital, nearly all unreported to the governments of origination.
The Establishment of Luxembourg as an International Financial Center
In January of 1989, West Germany imposed a 10% withholding tax on savings and investments. In April it was repealed, effective July 1st, because the immediate cost to German Banks had already reached DM1.1 billion.[10] The capital flight was so substantial that it caused a decrease in the value of the Deutsche mark, thereby increasing inflation and forcing up interest rates. According to the Financial Times, uncertainty about application of the tax, coupled with the stock crash in 1987, had caused a number of foreign investment houses to slow down or postpone their investment plans in Germany. A substantial amount of capital went to Luxembourg, as well as Switzerland and Lichtenstein.
Switzerland’s Fisc May Come Out Ahead
Perhaps ironically given the nature of the UBS situation currently unfolding, a Trade Based Money Laundering study by three prominent economists and AML experts focused also on measuring tax evasion uncovered that overvalued Swiss imports and undervalued Swiss exports resulted in capital outflows from Switzerland to the United States in the amount of $31 billion within a five year time span of 1995-2000.[11] That is, pursuant to this transfer pricing study, the Swiss federal and cantonal revenue authorities are a substantial loser to capital flight to the USA. The comparable impact of the lost tax revenue to the much smaller nation of Switzerland upon this transfer pricing tax avoidance (and perhaps trade-based money laundering) may be significantly greater than that of the USA from its lost revenue on UBS account holders. Certainly, both competent authorities will have plenty of work on their hands addressing the vast amount of information that needs to be exchanged to stop the bleeding from both countries’ fiscs.
Let me know if you are interested in further developments or analysis in this area. Prof. William Byrnes (www.llmprogram.org)
[1] International Tax Cooperation and Capital Mobility, Valpy Fitzgerald, 77 CEPAL Review 67 (August 2002) p.72.
[2] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?
[3] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).
[4] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.
[5] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?
[9] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).
[10] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.
[11] Maria E. de Boyrie, Simon J. Pak and John S. Zdanowicz The Impact Of Switzerland’s Money Laundering Law On Capital Flows Through Abnormal Pricing In International Trade Applied 15 Financial Economics 217–230 (Rutledge 2005).
This week we continue with our examination of Cross-Border Information Exchange deciphering the Legal Privilege Limitation requirements of exchange contemplated by the OECD Model Agreement for Tax Information Exchange. In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.
Tax Evasion Request (1 January 2004)
In the BVI TIEA, criminal tax evasion, for which the exchange of information begins 1 January 2004, is defined:
“”criminal tax evasion” means willfully, with dishonest intent to defraud the public revenue, evading or attempting to evade any tax liability where an affirmative act constituting an evasion or attempted evasion has occurred. The tax liability must be of a significant or substantial amount, either as an absolute amount or in relation to an annual tax liability, and the conduct involved must constitute a systematic effort or pattern of activity designed or tending to conceal pertinent facts from or provide inaccurate facts to the tax authorities of either party. The competent authorities shall agree on the scope and extent of matters falling within this definition;” (emphasis added)[1]
The Cayman TIEA does not contain the last emphasized sentence. The Bahamas TIEA states more broadly that “”criminal matter” means an examination, investigation or proceeding concerning conduct that constitutes a criminal tax offense under the laws of the United States. The IOM and Jersey TIEAs define criminal tax matters as those “involving intentional conduct which is liable to prosecution under the criminal laws of the applicant Party.” Barbados and Bermuda TIEAs do not contain a specific definition of criminal tax evasion, that is the USA may request information regarding civil tax matters.
From January 1, 2006, information regarding any civil tax matters may be requested by the USA from all of the jurisdictions. This date coincides with the date established by the OECD it demanding its commitment letters from targeted tax havens regarding the 1998 and 2000 Reports.
Legal Privilege Limitation
The BVI, Cayman and Bahamas TIEAs contain a protection for information subject to legal privilege. The BVI TIEA broadly define legal privilege:
“items subject to legal privilege” means:
(a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client;
(b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and
(c) items enclosed with or referred to in such communications and made –
(i) in connection with the giving of legal advice; or
(ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when the items are in the possession of a person who is entitled to possession of them.
Items held with the intention of furthering a criminal purpose are not subject to legal privilege, and nothing in this Article shall prevent a professional legal adviser from providing the name and address of a client where doing so would not constitute a breach of legal privilege; (emphasis added)
The Cayman TIEA does not contain the provision that a professional legal advisor is not prevented from providing a client’s name and address. The Bahamas definition is more restrictive in that it does not contain the clause (c) regarding items enclosed in legally privileged communications. The NLA and Barbados TIEAs incorporate legal privilege pursuant to its definition under domestic law in that the TIEA limits the Requested Party to the information collection means available under domestic law. Whereas the IOM TIEA contains a definition of legal privilege, Jersey does not, though like NLA and Barbados, such definition and limitation is incorporated. Like Cayman, the IOM TIEA defines legal privilege as:
(i) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client;
(ii) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and
(iii) items enclosed with or referred to in such communications and made-
(a) in connection with the giving of legal advice; or
(b) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.
Items held with the intention of furthering a criminal purpose are not subject to legal privilege.
Procedural Application – Fishing Expeditions
The BVI TIEA provides in order to demonstrate the relevance of the information sought to the request that the US shall provide the following information:
(a) the name of the authority seeking the information or conducting the investigation or proceeding to which the request relates;
(b) the identity of the taxpayer under examination or investigation;
(c) the nature and type of the information requested, including a description of the specific evidence, information or other assistance sought;
(d) the tax purposes for which the information is sought;
(e) the period of time with respect to which the information is requested;
(f) reasonable grounds for believing that the information requested is present in the territory of the requested party or is in the possession or control of a person subject to the jurisdiction of the requested party and may be relevant to the tax purposes of the request;
(g) to the extent known, the name and address of any person believed to be in possession or control of the information requested;
(h) a declaration that the request conforms to the law and administrative practice of the requesting party and would be obtainable by the requesting party under its laws in similar circumstances, both for its own tax purposes and in response to a valid request from the requested party under this Agreement.
The Cayman TIEA does not include clauses (a) or (e) above, but practically such information should be included in any valid request under any TIEA. Jersey and IOM’s TIEA is similar to the BVI TIEA in respect of this section, absent clause (a). NLA does not contain this section in its TIEA, but such information by the USA should be provided.
Time to Comply
The BVI and Cayman TIEAs allow them 60 days to identify of any deficiencies in a request and provide the US notice. If BVI or Cayman will not provide requested information, or cannot, it must immediately notify the US.
Check back for Part 2 on Thursday, September 3. Prof. William Byrnes
This week we continue with our examination of Cross-Border Information Exchange deciphering the procedural and substantive requirements of exchange contemplated by the OECD Model Agreement for Tax Information Exchange. The other important issue of Cross Border Assistance with Tax Collection will be addressed in a few weeks.
In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.
2003 OECD Model Agreement for Tax Information Exchange (TIEA)
The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.
The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.” The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.
The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”
Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes. But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws. However, the TIEA is specific that each Party is obliged to provide:
“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;
b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”
Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:
“(a) the identity of the person under examination or investigation;
(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
(c) the tax purpose for which the information is sought;
(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information;
(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”
US TIEAs Coming into Effect since 2001
Barbados, 3 November 1984
Bermuda, 11 July 1986
Cayman Islands, 27 November 2001
Antigua & Barbuda, 6 December 2001
Bahamas, 25 January 2002
BVI, 3 April 2002
Netherlands Antilles, 17 April 2002
Guernsey, 19 September 2002
Isle of Man, 3 October 2002
Jersey, 4 November 2002
Aruba, 13 September 2004
Brazil, pending
Liechtenstein, pending
The BVI and Cayman TIEAs are nearly duplicate.
Tax Covered
The BVI and Cayman Islands TIEAs scope is limited to collecting information for issues of US federal “income” tax.[1] For more broad in scope are the Isle of Man (“IOM”)[2], Jersey[3], The Bahamas[4] and Netherlands Antilles[5] (“NLA”) TIEAs that apply to “all federal taxes”, thus by example encompassing federal estate tax, federal gift tax, federal social security tax, federal self employment tax and federal excise tax. The Barbados[6] and Bermuda[7] TIEAs apply to the specific federal taxes previously listed, which has the same broad affect as The Bahamas and NLA TIEAs.
Scope of Information
The BVI and Cayman TIEAs scope of information includes that “relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons.” The IOM, Jersey, Bahamas, NLA and Bermuda TIEAs provide that information means any fact or statement, in any form, by example an individual’s testimony or documents, that is foreseeably relevant or material to United States federal tax administration and enforcement. The Barbados TIEA provides more generally for the exchange of information to administer and enforce the TIEA listed taxes covered within the scope.
Jurisdiction : Parties and Information Subject to Requests
The BVI, Cayman, IOM, Jersey, and NLA TIEAs do not limit the scope of the request to parties that are nationals or resident in BVI and Caymans, but rather allow a request for information as long as either the information is within the jurisdiction or is in the possession of, or controlled by, a party within the jurisdiction. The Bahamas treaty does not address this jurisdictional issue directly but probably will result in the same application. The Barbados TIEA also does not limit the scope of the request to resident parties. The Bermuda TIEA, when the information is sought about a non-resident of both jurisdictions, requires that the requesting party establish the necessity of the information for the proper administration and enforcement of its tax law.
Notice to Taxpayer of Request
The TIEAs do not address the issue, however the TIEAs require that enabling legislation be enacted to ensure the carrying out of the TIEAs obligations. BVI may include in its enabling legislation that the taxpayer must receive notice that a TIEA request has been made targeting the taxpayer. The Government of Switzerland, in its public statements regarding the turning over information including bank records for approximately 5,000 accounts UBS settlement with the US IRS, stated that it will post notices to the UBS account holding US taxpayers whose information has been disclosed via the tax treaty between the US and Switzerland. The IRS has in turn said that these Swiss notices will not service a notice for IRS purposes that these (alleged) tax evaders may still, if not under current audit for this non-disclosure, may still quickly take advantage of the reduced civil penalty and elimination of criminal penalty amnesty.
Check back for Part 2 on Wednesday, September 2. Prof. William Byrnes
[1] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The British Virgin Islands, For The Exchange Of Information Relating To Taxes, Article 1 (BVI TIEA”; Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The Cayman Islands, For The Exchange Of Information Relating To Taxes, Article 1 (“CI TIEA”).
[2] Agreement Between The Government Of The United States Of America And The Government Of The Isle of Man For The Exchange Of Information Relating To Taxes, Art. 3.
[3] Agreement Between The Government Of The United States Of America And The Government Of The States Of Jersey For The Exchange Of Information Relating To Taxes, Art. 3.
[4] Agreement Between The Government Of The United States Of America And The Government Of The Commonwealth Of The Bahamas For The Provision Of Information With Respect To Taxes And For Other Matters, Article 1 d).
[5] Agreement Between The Government Of The United States Of America And The Government Of The Kingdom Of The Netherlands In Respect Of The Netherlands Antilles For The Exchange Of Information With Respect To Taxes, Article 3 f).
[6] Agreement Between The Government Of The United States Of America And The Government Of Barbados For The Exchange Of Information With Respect To Taxes, Article 3.
[7] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland (On Behalf Of The Government Of Bermuda) For The Exchange Of Information With Respect To Taxes, Article 2 i).
This week we continue with our examination of Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders. Information Exchange is of course one aspect of cross-border cooperation. Another important aspect is Cross Border Assistance with Tax Collection which we will address within the next two weeks.
2001 UN Model DTA – Tax Information Exchange (Art. 26)
The United Nations Model is similar in scope to the OECD model displayed in my previous blogticle. However, the UN Model defines the type of information and methodology of investigative exchange as regards the requesting state having access to cross border corporate records, though under the OECD Model such information may also be sought and methodology used.
Agreement Among The Governments Of The Member States Of The Caribbean Community For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income, Profits, Or Gains And Capital Gains And For The Encouragement Of Regional Trade And Investment
Article 24: Exchange of Information
1. The competent authorities of the Member States shall exchange such information as is necessary for the carrying out of this Agreement and of the domestic laws of the Member States concerning taxes covered by this Agreement in so far as the taxation thereunder is in accordance with this Agreement. Any information so exchanged shall be treated as secret and shall only be disclosed to persons or authorities including Courts and other administrative bodies concerned with the assessment or collection of the taxes which are the subject of this Agreement. Such persons or authorities shall use the information only for such purposes and may disclose the information in public court proceedings or judicial decisions.
2. In no case shall the provisions of paragraph 1 be construed so as to impose on one of the Member States the obligation:
(a) to carry out administrative measures at variance with the laws or the administrative practice of that or/of the other Member States;
(b) to supply particulars which are not obtainable under the laws or in the normal course of the administration of that or of the other Member States;
(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process the disclosure of which would be contrary to public policy.
2000 Improving Access to Bank Information for Tax Purposes (OECD)
In 2000, the OECD issued Improving Access to Bank Information for Tax Purposes. The 2000 OECD Report acknowledged that banking secrecy is “widely recognised as playing a legitimate role in protecting the confidentiality of the financial affairs of individuals and legal entities”. This Report focused on improving exchange of information pursuant to a specific request for information related to a particular taxpayer. In this regard, it noted that pursuant to its 1998 (OECD) Report, 32 jurisdictions had already made political commitments to engage in effective exchange of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006.
A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard
When we examine TIEAs, we will also look at the most recent OECD update A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standardissued August 25, 2009 (see http://www.oecd.org/dataoecd/50/0/42704399.pdf). The exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes is the standard the OECD developed in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting.
The OECD claims that the confidentiality of the information exchanged will be protected by the recipient jurisdiction though at this time no measures have been announced to assess any safeguards should such be established.
2003 EU-US Agreements for Mutual Legal Assistance
On 25 June 2003 the US and EU signed an agreement, applying to all EU member States, for Mutual Legal Assistance.[1] The EU-US MLA and Extradition Agreements (see my blogticle wherein I will address Extradition Agreements) do not currently extend to the United Kingdom’s Overseas Territories. Article 16 (1)(b) of the MLA agreement enables the agreement to apply to Overseas Territories of EU member States but only where this is agreed by exchange of diplomatic note, so it is not automatic.
The agreement’s purpose is to assist a requesting state to prosecute offences through cooperation of another State or jurisdiction in obtaining cross-border information and evidence. This Agreement applies to tax matters involving criminal tax evasion. This Agreement could widen the scope of financial institution and professional service provider information allowed to be requested specifically with regard to the financial information covered below.
Any party to the Agreement is required pursuant to the request to provide information regarding whether its banks, other financial institutions and non-bank institutions[2] within its jurisdiction possess information on accounts and financial transactions unrelated to accounts regarding targeted natural or legal persons. The Agreement specifically excludes banking secrecy as a defense for non-compliance. In order to receive banking or financial information from a financial institution or non-financial institution, the requesting State must provide the competent authority of the other State with:
the natural or legal person’s identity relevant to locating the accounts or transactions;
information regarding the bank/s or non-bank financial institution/s that may be involved, to the extent such information is available, in order to avoid fishing expeditions; and
sufficient information to enable that competent authority:
to reasonably suspect that the target concerned has engaged in a criminal offence;
to reasonably expect that the bank/s or non-bank financial institution/s of the requested state may have the information requested; and
to reasonably expect that there is a nexus between the information requested and the offence.
This multi-lateral MLAT Agreement, unlike TIEAs that have developed since 2001, contains a dual criminality requirement, but it applies retroactively to offences committed before the Agreement’s entry into force date, Article 12-(1) provides for this. Criminal tax fraud is an underlying crime for purposes of the offence of money laundering. Thus, this Agreement probably will allow any party to the Agreement to seek financial information from another State regarding a specific taxpayer’s criminal tax fraud for offences committed before the tax year beginning January 1, 2004. The retroactive provision in Article 12(1) may run counter to a fundamental principle of criminal law in that a person cannot criminally suffer for an act or conduct which was not an offence at the time the act was committed or conduct took place. Whether these MLAT agreements establish a situation of retroactive criminal application may eventually be addressed as a human rights issue.
Tax Treaties course
In the Tax Treaties course starting in September, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above.
[1] Agreement on Mutual Legal Assistance Between the European Union and the United States of America, Article 16, Territorial Application.
[2] Including trust companies and company service providers
Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes. Many topics have been left hanging for which further researched exploration is warranted.
However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.
Keep your emails coming about suggestion for this blog, and your comments. I have been keeping up with answering each of you within a day or two. Prof. William Byrnes (wbyrnes@tjsl.edu)
Cross-Border Information Exchange and Mutual Assistance (with regard to Tax)
To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:
(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;
(2) the EU Savings Directive and other related EU Directives;
(3) the US proposal to automatically report to EU State’s bank interest of their residents;
(4) the tax application of the mutual assistance and extradition treaty between the US and EU;
(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;
(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,
(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation.
Tax Information Exchange Background
We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being:
OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
UN Model DTA – Tax Information Exchange (Art. 26)
OECD Model Tax Information Exchange Agreement (TIEA)
EU Directive on Exchange of Information
EU Directive on Mutual Assistance for the Recovery of Claims
EU Savings Directive
Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
Improving Access to Bank Information for Tax Purposes
Financial action task force (FATF)
Offshore Group of Banking Supervisors Best Practices (OGBS)
Exchange Pursuant to the OECD Conventions
OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)
Article 26, Exchange of Information, of the 2003 OECD Model Convention reads:
The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. … Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.
The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure[1]
By request
Automatically
Spontaneously
Simultaneous examination of same taxpayer between the two States
Allowing requesting foreign Revenue examination of taxpayer in requested State
Industry-wide exchange of tax information without identifying specific taxpayers
Other methods to be developed between the States
The 2003 Model established limitations on the request of information:[2]
Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
Requested State should not invoke tax secrecy as a shield.
Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).
Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:
1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …
2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.
3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.
The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law. Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.
2003 OECD Model Agreement for Tax Information Exchange (TIEA)
The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.
The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.” The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.
The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”
Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes. But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws. However, the TIEA is specific that each Party is obliged to provide:
“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;
b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”
Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:
“(a) the identity of the person under examination or investigation;
(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
(c) the tax purpose for which the information is sought;
(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information;
(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”
Next Blogticle
In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there. In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.
In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above.
[1] Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.
[2] Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.
Over the past blogticles, we have been examining a number of financial crimes issues including several for anti money laundering. Now we turn to compliance costs and the dis-connect? Feel free to comment or email me with any burning questions, Professor William Byrnes (www.llmprogram.org), as well as join one of our weekly webcasts.
Are Financial Service Firms Serving High Net Wealth Suffering As a Result of Compliance Costs?
In my 900-page economic report on the international financial services industry, I examined and calculated the economic size and impact of the sector on local jurisdictions.[1] But for periods of global financial crisis, the sector had experienced double-digit annual growth and contributed robustly to the local economy and society. Since 1998, the international financial services sector client base has expanded nearly 10% on average.
In the past decade, the number of global high-net-worth individuals (HNWIs) served by practitioners, such as my able graduates, has doubled to more than 10 million by 2008 (though the global financial crisis has caused a decline to less than 9 million) —and their assets have more than doubled from $17 trillion to $40 trillion though currently just under $33 trillion due to the last twelve month’s financial crisis.[2]
Is The Future For Clients Dim?
Dim? On the contrary! In just four years, the pool of HNWI clients’ assets is projected to grow to nearly $50 trillion. Though the global re-calibrating of asset values may impact the nominal wealth value for HNWIs in the short term, historically, based upon both the recessions coined after the Asian Financial Crisis and the Tech-Bust, the wealth value will likely return to projected levels with a two-year lag.
The average HNWI, excluding the value of primary residences and collectables, is worth approximately $4 million! HNWI’s continue to leverage offshore skill sets, growing their assets from $5.8 trillion from 1998 to $11 trillion today.[3] That $11 trillion under management represents, at combined fees of just 1%, at least $100 billion to private bank firms offshore, and six times that taking all HNWI assets into account.
Some Financial Centers Spend More on Compliance than Others
39% of Florida banks surveyed reported that private banking accounted for more than 50% of their operating revenues. Florida’s international private banking and wealth management customers predominantly reside, as one would expect, in Latin America and the Caribbean, with 1/3 residing in Europe. South American residents account for 44% of private banking and wealth management customers of Florida’s international banks. Approximately 19% of international private wealth management clients reside in Mexico or Central America, while 4% reside in the Caribbean.
Even though the market has been growing in terms of the available pool of HNW clients, the international banking industry in Florida has been characterized by consolidation and contraction since 2000. The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005.[4] There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005. The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005.
Based on a survey of banks significantly engaged in international banking in South Florida, the economics firm based on direct surveys estimated Miami’s international bankers staffing cost for 271 full-time employees of anti-terrorism/anti-money laundering compliance at nearly $25 million in 2005. [5] The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005. Staff resources devoted to compliance increased by 160% between 2002 and 2005.
So Where is the Dis-Connect?
So if enough money is being spent by some banks, by example in Miami, and this expenditure is even potentially impacting earnings in some regions such as Miami, (as an industry – small institutions are being clobbered compared to their larger brethren), then why are some banks and other financial service providers employees failing in their implementation of AML programs in light of the expenditure? Where is the dis-connect between expenditure and results? Might the expenditure be more about white-washing than about achieving an educated work force? Might throwing money at the problem not be the answer? Or is not enough money flowing to training?
As the Miami marketplace apparently illustrates, in general the compliance and training budgets have reached the deal-breaker point at some banks and in some regions. Thus, rather than it being a quantitative issue of bigger budgets, it is more likely a qualitatively issue, that is, spending either on poorly designed products or on good products but with poor instruction, follow-up, and support. It may be that purchasing decisions are based not on price, but rather are based on how to spend as little labor time as possible to meet a minimum level of information and training sufficient for an employee to appear to be able to implement AML policy. That is, institutions may be spending more to obtain less quality products because the product requires less labor activity time.
By example, some institutions send the high level AML staff for a one or two day workshop at between one and three thousand dollars and now call that staff member an expert. A time-saving approach certainly. But is this a reasonable approach in light of the likely outcomes of such minimal education consisting of little to no follow up, guidance, and academic support? Can a board member, much less a regulator, feel confident that such a staff member is able to exercise the necessary skills gained from the one or two day session to protect the financial institution and public from an money laundering/financial crime incident?
By another example, some financial service provider compliance officers and their advisors will establish a library budget, purchasing a variety of publications. Yet the staff is not trained in knowledge management for the library, that is how to interact with and study such information. Thus, the library collects dust.
White-Washing
Is a two day course sufficient to qualify someone as a certified expert? A one week course even? How long will the regulators allow such white washing to continue, or is it merely an issue of fines when holes are found in the dikes?
[1] Report on the Economic, Socio-Economic, and Regulatory Impact of the Tax Savings Directive and EU Code of Conduct for Business Taxation upon Selected Offshore Financial Centers as well as a Competitiveness Report for Selected Offshore Financial Centers (Foreign Commonwealth Office 2004).
[2] Cap Gemini Merrill Lynch World Wealth Report 2003 through 2008.
[3] Tax Haven Abuses: The Enablers, The Tools and Secrecy” (Sen. Rep., Perm. Sub-Comm. On Investigations, August 1, 2006) and World Wealth Report 2008.
[4] In 2005, however, 7 of the 31 international banks had no deposits booked in Florida, while in 2000 only 2 of the 38 had zero deposits.
[5] It is important to note that these cost estimates only include manpower or staffing costs, and do not include costs such as transaction monitoring software, possible IT investments and services, legal counsel and similar support. The Washington Economics Group, The Economic Impacts of International Banking in Florida and Industry Survey: 2005.
In my previous blogticle I presented a few of the very many examples of regulatory fines for financial institutions failing to meet minimum money laundering training for staff, in many cases leading to failures of their money laundering risk management system. Hereunder I turn to expenditures on money laundering training.
Consider that the above regulatory enforcement actions, and those referred to by the GAO report, were issued at least three years after the US financial institutions were put on initial notice of the hawkish nature of enforcement of AML programs. Certainly, neither management nor staff wanted to, by example, be responsible for over 2,000 filing errors for only 1,639 SARs. Riggs divestiture of its international banking operations certainly provided a resounding warning for boards to take their AML compliance responsibilities seriously. Enforcement actions generally lead to management and staff level firing holding persons accountable for their errors.
In a global review of money laundering legislation throughout financial centers, none of the legislation provides specific benchmarks or at least an assessable minimum standard for a level of training of the staff or the MLRO. Further, the regulator guidance, where available, is scant to the issue of quality assurance of training. The US Federal Financial Institutions Examination Council’s (“FFIEC”) Bank Secrecy Act/Anti Money Laundering Manual (“Manual”) states that a bank must –
“[T]rain employees to be aware of their responsibilities under the BSA regulations and internal policy guidelines”
whereas the UK FSA Handbook states that a firm’s should ensure that its –
“systems and controls include (1) appropriate training for its employees in relation to money laundering …”.[1]
The FFIEC Manual’s most specific example of what should be contained within a training program is “…training for tellers should focus on examples involving large currency transactions or other suspicious activities; training for the loan department should provide examples involving money laundering through lending arrangements.”
Aren’t Expenditures on Training Going up, uP, UP?
Thus, to avoid enforcement actions and thus being fired, in some markets the training budgets and the compliance cost per-dollar-of-deposit have more than doubled. By example, from 2002 – 2005, banks offering international financial services in Miami reported a 160% increase both in the total costs of staff resources devoted to AML compliance and in the compliance costs of staff resources per dollar of deposit.[2]
Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[3] The cost of AML compliance increased around 58% globally and 71% in North America between 2004 and 2007.[4]
A 2005 survey of Florida banks engaged in international banking estimated the staffing cost of AML compliance at nearly $25 million. The study concluded that compliance costs are not uniform across institutions, even after making adjustment for size.[5] Banks estimate that training costs and transaction monitoring will require the largest investment of all AML activities. All North American banks provide AML training for nearly all of their employees. See KPMG’s Figure in its AML Survey.
Larger institutions (measured in terms of deposits) typically devote more resources and spend more on compliance than smaller ones, of course, but the compliance burden does not rise proportionately with size. That is, survey data indicates that economies of scale in compliance are present, and that compliance costs per dollar of deposits is greater for smaller institutions than for larger ones.[6] Even after the dramatic increases in compliance costs and regulatory complexity since 2001, the regulatory environment is likely to become increasingly challenging in coming years.
In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance with government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.[7]
Over the coming weeks we will examine a number of financial crimes issues including several for anti money laundering. Feel free to comment or email me with any burning questions. Professor William Byrnes (www.llmprogram.org) as well as join one of daily webcasts. This is part one in a series that I will compose on whether instiutions are implementing effective training programs or merely whitewashing to avoid criticism (at the cost of risk of non-detection of internal or external AML infraction).
For the past several years, the US banking industry has focused on regulatory issues, such as the corporate governance provisions of the Sarbanes-Oxley Act (enacted in 2002) and the banking-related parts of the USA Patriot Act (enacted in 2001). Much literature and studies have been provided regarding the cost impact of the various implemented measures.
Smaller community banks have contended that it is difficult for them to comply with certain Sarbanes-Oxley provisions, such as the requirement that audit committees be composed entirely of independent directors and that companies have a “financial expert” on the board of directors. The provisions of the USA Patriot Act require increased investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or activities).
The Reporting Impact
Resulting from the impetus of the Al Qaeda’s terrorist attacks of 9/11, the US financial institution regulators became an enforcement hawk of the money laundering provisions of the Bank Secrecy Act (“BSA”). In turn, hawkish enforcement has led to a drastic increase in the number of BSA filings. In 2007, the approximate two hundred thousand US depository institutions filed over 649,176 Suspicious Activity Reports (“SAR”s), as reported by the US Government Accountability Office (“GAO”) (over 1.2 million SARs filed by all financial service providers). In 2008, these deposit institutions increased their SAR filings by nearly a hundred thousand. In contrast, just two hundred, twenty thousand STRs were filed in the UK by all covered persons in 2006-07 (of which 140,000 were filed by banks) with a 10,000 total filing decrease last year.[2]
This begs the question: are too many being filed in the USA, clogging the investigatory system, or are too few filed in the UK, allowing criminals to operate freely? And leads to many other questions such as: Do criminals launder more money in the US and less in the UK? Are US personnel improperly trained and thus filing SARs improperly or with little use? Are UK institutions whitewashing their responsibilities and thus staff are not equipped to identify suspicious transactions and patterns? We will discuss these and many others if not here, in the webinars.
Notwithstanding this level of apparent US hawkish compliance, the GAO noted that the federal regulatory authorities cited well over 7,000 BSA violations, leading to over 2,000 various actions against banking institutions. Interestingly, a majority of 2005 actions were issued against the traditionally smaller credit unions that at first glance may be considered to carry less risk for money laundering.[3] Moreover, these enforcement figures did not include the actions taken against casinos, jewelry stores, and money service businesses, such as check-cashing, whose anti money-laundering (“AML”) program compliance is audited by the IRS.
Managing Risk through Training
International financial centers all have a requirement that firms subject to money laundering legislation have a designated compliance officer, known by different acronyms such as MLRO. Further, the legislation requires staff training on a continuing basis. By two examples, the USA and the UK respectively:
Bank Secrecy Act § 5318:
(h) Anti-Money Laundering Programs.—
(1) In general.— In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum— …
(B) the designation of a compliance officer;
(C) an ongoing employee training program; ….
The Money Laundering Regulations 2007 Training:
21. A relevant person must take appropriate measures so that all relevant employees of his are—
(a) made aware of the law relating to money laundering and terrorist financing; and
(b) regularly given training in how to recognise and deal with transactions and other activities which may be related to money laundering or terrorist financing.
KPMG reports that the training of employees to recognize money laundering, which is labor intensive, has required a big cost increase for banks. Yet, reviewing a few of the high dollar value civil penalty actions issued by the US regulators in the last two years illustrates that a lack of money laundering expertise at the management level and a lack of firm wide education and training at the staff level cuts across both large and small banking firms.
Penalties for Lack of Training and Expertise
The highest publicity action in the past few years occurred against American Express Bank International (“AMEX”) – shortly thereafter purchased by Standard Chartered. AMEX’s original sixty-five million dollar penalty resulted partly from the gross amount of errors in just one year in its SAR filings regarding its private banking services to its high net-worth individuals (HNWI) and the individuals’ respective businesses throughout Latin America. In the 12 month period from May 2006, over 2,000 filing error were found for only 1,639 SARs, not including over 1,000 late SAR filings. Other recent large penalties citing the lack of staff training include ABN-AMRO’s (forty million dollars) and fines of ten million dollars each for Bank Atlantic and AmSouth.
A medium size Chicago head office bank suffered a two million dollar penalty because “management failed to implement adequate training for appropriate personnel to ensure compliance with the suspicious activity reporting requirements”. The regulator found that the Bank staff was inadequately trained in suspicious activity identification and monitoring, detection of structured transactions, and identification of possible money laundering. Israel Discount Bank, with branches in a few states, paid a twelve million dollar file for inadequately training its staff regarding the heightened risks associated with its transaction involving Delaware LLC shell companies. On the opposite size spectrum from AMEX, a one branch bank, Beach Bank of Miami, with less than $150 million in assets, suffered an eight hundred thousand dollar fine for its lack of monitoring of high risk accounts, including six foreign correspondent accounts.
Financial service providers are required by the provisions of the USA Patriot Act to make substantial investments in technology (though many in the industry have questioned the effectiveness of these investments in preventing the funding of terrorist groups or other nefarious activities).[1] Senior banking management perceives rising and unpredictable compliance costs that undermine global competitiveness as the most significant threats to the future growth of banking.[2]
Based on the survey of Miami banks significantly engaged in international banking, staffing costs rose to 271 full-time employees of anti-terrorism/anti-money laundering compliance for approximately $25 million in 2005. The average survey respondents indicated that it devoted 2.9 FTE employment positions to BSA/AML compliance in 2002 versus 6.8 FTE positions in 2005. The number of full-time employees devoted to compliance represented 9% of the workforce in 2005. Staff resources devoted to compliance increased by 160% between 2002 and 2005.
The results have been that Miami’s banking industry has been characterized by contraction. The number of foreign bank agencies operating in Florida fell from 38 in 2000 to 31 in 2005, of which 7 did not book any deposits. There were 10 Edge Act banks operating in Florida in 2000, but only 7 in 2005. The number of international banking employees (in foreign agencies, Edge Acts and the international divisions of domestic banks chartered in Florida) declined from 4,660 in 2000 to 3,027 in 2005.
While the cost of AML compliance increased around 71% in North America between 2004 and 2007, it rose 58% globally.[3] By example, in 2003, the UK’s FSA’s Anti-Money Laundering Current Customer Review Cost Benefit Analysis estimated the implementation costs of the AML regime to firms at 152 million pounds sterling, substantial by European standards though paltry by America’s.
In a 2006 Economist Intelligence Unit survey, international senior bank executives were asked about the costs of compliance of government regulation. When asked what changes they expected in the regulatory environment over the coming three to five year, over 91% stated that they expected regulations affecting their institution to grow in complexity and breadth, 88% stated that compliance with industry regulations will become more onerous, and 81% reported that they expect penalties for non-compliance to increase in severity.
On the other hand, perhaps more (or more effective implementation of current) compliance and its resulting governance would have protected against or softened the blow of the systemic iceberg as well as protected against or softened the blow of the most recent investment fraud scandals. And UBS’ level of compliance expenditure neither deterred its activity regarding 52,000[4] USA non-complaint persons, nor its substantial investments in US mortgages leading to write-downs requiring a Swiss government substantial investment to shore up its capital. Certainly, based on the G7 and G20 meetings, as well as the discussions at the World Economic Forum, levels of compliance expenditure, compliance education, and governance will be required to be increased in order to restore institutional confidence.[5]
Based upon HNWI clients moving away from opaque investment firms toward transparent ones, there may be an opportunity for Chartered Wealth Managers advisors members / firms to market to stung HNWIs not just as well rounded advisors, but as trustable compliance and governance oriented advisors, collaborating transparently regarding developing the HNWIs portfolio of opportunities.
Information Tools
Besides the army of lawyers advising regulated firms and the chartered accountants undertaking compliance, anti-fraud, AML, terrorist activity, and qualified intermediary (QI) audits, near and dear to myself, the publications market employment is continuing to grow. Because compliance regulations, costs, and penalties are growing more onerous, all regulated financial service providers and their advisors must purchase some information resource to address the variety of compliance issues encountered regularly.
Moreover, to undertake the role of the ‘trusted advisor’, a sophisticated wealth manager must have a bundle of reliable resources enabling the holistic, international, business partner approach that modern HNWIs and UHNWIs now demand. By example of such information bundle for Chartered Wealth Managers, see the soon to be released online and print version of International Trust & Company Laws, Analysis, and Tax Planning.
Indication of this trend is that the legal, tax and regulatory publishing market has been and is growing consistently. Legal publishing is the largest segment in professional publishing, accounting for approximately 36% of the total market. In 2007, legal publishing revenue was about $10 billion, up 7.5% from $9.3 billion in 2006 and 14.9% from $8.7 billion in 2005.[6] Legal publishers are sparking growth by developing digital tools and software out of their reference book and journal content designed to make it easier for legal professionals to find information and automate mundane tasks.
New online publishing will use mind-mapping technology to educate users about holistic connections amongst ideas, issues, and strategies. Growth in publishing for an industry tends to indicate growth in that industry. By example of such new multimedia information resources see pilot projects as follows:
[4] Agreement was reached between the US and Swiss governments July 31,2009 for UBS to turn over of the 52,000 names to the IRS. See Wall Street Journal US State Dept: US Pleased, Relieved About UBS Deal July 31, 2009.
[5] See The Future Of Global Financial System, World Economic Forum World Scenario Series (2009) at 22.
[6] Simba Information, Global Legal & Business Publishing 2007-2008 (2007).
William Byrnes' Tax, Wealth, and Risk Intelligence 