Read the WSJ articles above that show the scope of offshore tax evasion. You can also Google “UBS offshore tax evasion“, “Credit Suisse offshore tax evasion”, etc. and you will see lots of hits).
Write a response in Word on the history or developments of these Swiss bank cases and/or the effect on the Swiss bank secrecy laws and the IRS’s efforts to curb offshore tax evasion via John Doe summons’s and OVDI initiative. and new FATCA rules. You are welcome to do any outside research that you find helpful. Remember that you can also use the online WSJ website search bar and input search terms to see past articles as well as any other outside source.
Solution
Introduction
As revenue is a critical concern for any government; therefore, tax evasion gravely affects the capacity of a state to deliver its obligations and as this capacity deteriorates, so does the ability to realize various political-economic objectives. Therefore, states/governments are extremely sensitive and serious regarding tax evasion. The sensitivity/seriousness of the state about this matter is evident from the sets of laws that are introduced to curb the menace of tax evasion.
The United States is one of the countries which are at war with the tax evaders. A report to Congress presented in 2008 estimated that the country loses US 100 billion because of offshore tax evasion. With the rise of globalization, new channels have been opened to individuals and businesses with the aim of avoiding taxes and minimizing taxes. A tax haven is the countries which through their lowered tax policies can attract geographically mobile capital.
Tax Evasion Scandals
UBS Scandal
The UBS AG tax scandal was one of the largest kinds of tax evasion scandals in which the bank UBS admitted to conspiracy and fraud for an exchange price of US 780 million fees. It was the scandal which pushed forward the stage for FATCA enactment. The former banker of UBS Bradley Birkenfeld in 2007 blew his whistle by showing the IRS that UBS is involved in helping the US customers conceal their off-shore accounts and evade tax. As per the former banker, from 2000 to 2007, the bank has aided the US clients to open accounts in Swiss banks by fraudulently listing foreign owners as beneficiaries and representing it to IRS as non-US-owned outside of the IRS disclosure requirement. The Swiss bank secrecy laws and the non-disclosure by the bank were enough to convince the clients that the IRS would never find out about them. In February 2009, the Department of Justice secured a DPA through which the UBS admitted guilty of fraud and conspiracy and also agreed to give the names for account holders of US customers. The bank paid 780 million USD is a settlement for the discontinuance of the criminal prosecution by the department of justice. The whistleblower gets awarded $104 million, which is 26% of the $400 million, which paid in tax by UBS to IRS. The large-award program offers to pay from 15% to 30% from the proceeds collected. Even though the IRS collected $ 5 billion of revenues from the information revealed by the banker, not all the amount is eligible for the award (Saunders & Sidel, 2012).
The identities of the account holders are still not disclosed because of the domestic banking secrecy laws of Switzerland. Switzerland had threatened to seize all data from UBS to ensure that it could not comply with the order and was insisting the US authorities to obtain the information only through treaty request.
Credit Suisse Scandal
Another scandal which has been highly noted is that of the second largest bank in Switzerland; Credit Suisse who recently found itself in the middle of an international tax evasion case. The Dutch government is leading the investigation with the coalition of five different tax authorities for the investigation of tax evasion into several European countries, also including the UK, Germany, France, and Australia. The main aim was to look for signs of black money and money laundering. The bank has pleaded guilty to the crime of aiding tax evasion and has agreed to pay the settlement amount of $ 2.6 billion. The bank was engaged in extensive and very wide ranged scheme for helping the Americans to hide their wealth riches. The bank pleaded guilty to knowingly and willingly helping its clients from the US to open accounts and conceal assets from IRS (Grossman, Letzing, & Barrett, 2014).
These inquiries and investigations have shaken up the world of the private banking by making Switzerland lose some of its cachet. The Swiss private banking fees have also fallen by 25% in last two years because of the lack of trust of the foreign clients in stashing money.
Panama Papers
These Swiss private banks are not the only tax haven which provides facilitation for tax evasion. A huge batch of paperwork has linked various 140 figures around the world for owning overseas assets in the offshore tax havens like the British Virgin Islands to Panama. A Panamanian law firm which specialized in the offshore holding companies had its papers revealed offshore accounts owned by foreign individuals. For instance, the close friends of Mr. Putin the president of Russia was involved in transactions of $2 billion and also the relatives of President Xi Jinping also connected them to offshore companies. The prime minister of Iceland was blamed for the non-disclosure of the partial ownership of the company in the British Virgin Islands for which he resigned (Mauldin & Saunders, 2016).
Free-Ports
Even though there has been a sharp decline in the use of such vehicles for tax evasion, there are always new ways to do so as well. With the investment of the world riches inexpensive stuff, the free-ports like that of Luxembourg has become a repository of choice, the attraction of these free ports lies in their similarity to the offshore companies which is secrecy and confidentiality. As not much scrutiny is conducted in the Freeport, which the goods are technically in transit, and as no duties and taxes are applied on these free or neutral zones, space has become an attraction for the tax dodgers, Kleptocrats, and plutocrats. Geneva Freeport is the leading Freeport with giant treasure chests as big as 22 football pitches. The Singapore Freeport is trying to become the Geneva Freeport of Asia by targeting to achieve 10 to 12% of the gold storage on the market currently at 2%. It has erased the 7%, sales of the precious metals (The Economist, 2013).
In response to the scandals and revenue shortcoming, Congress has enacted the Foreign Account Tax Compliance Act or FACTA. It was signed by the Obama administration to solve the offshore tax evasion problem which brought to light by the scandals of UBS. The purpose of FACTA is to detect and also deter offshore tax evasion through the requirement of non-US trusts, foreign financial institutions, and non-US companies to annually identify and report their US account holders to the IRS. Noncompliance with the FACTA provision by the overseas entities comes with 30% of withholding tax on all payments to non-US business or person. It can cause the financial institutions to forgo all US investments rather than comply with FACTA. FACTA can this way be harmful as the burden of compliance can cause the investment in the US to decline consequently causing lower revenues (Shepsman, 2013). The IRS also frequently uses the relatively unknown gathering tool of information; the John Doe summons which is used to record and obtain information for the class of unidentified taxpayers in case the IRS has some reasonable belief that the taxpayers are violating the US laws.
The United States Steps against Tax Evasion
With the revelation of the UBS scandal, the United States government showed that it could no longer depend on the QIs for the reporting of the account information. The department of justice is continuously investigating Swiss banks and the most noticeable development it the dramatic behavioral change because of the perception of the US is successful in its probes. The department of justice has shown that an unprecedented number of citizens of US have voluntarily disclosed their tax evasions under their OVDI 2009 disclosure program for coming clean with fear of the discovering of their assets by the IRS (Shepsman, 2013).
Conclusion
In the end, it can be concluded that Tax evasion is indeed a global concern which needs global cooperation. The current treaties and models have proven to be insufficient regarding incentivizing the multilateral cooperation for the tackling of this issue. United States has indeed spearheaded the resolution through its enactment of the FATCA even though the regime is not a viable solution to this problem. It is needed that the United States adopt tax flight treaties to force the traditional havens for cooperation and also reduce tax evasion through decreasing the information asymmetry.
References
Grossman, A., Letzing, J., & Barrett, D. (2014, May 19). Credit Suisse Pleads Guilty in Criminal Tax Case. Retrieved from https://www.wsj.com/articles/credit-suisse-top-brass-dodge-tax-evasion-bullet-1400505829
Mauldin, W., & Saunders, L. (2016, April 5). What are the Panama papers? Retrieved May 27, 2018, from https://blogs.wsj.com/briefly/2016/04/05/the-panama-papers-scandal-at-a-glance/
Saunders, L., & Sidel, R. (2012, September 11). Whistleblower Gets $104 Million. Retrieved from https://www.wsj.com/articles/SB10000872396390444017504577645412614237708
Shepsman, M. D. (2013). Buying FATCA Compliance: Overcoming Holdout Incentives to Prevent International Tax Arbitrage. Fordham International Law Journal, 36(5), 1767-1813.
The Economist. (2013, November 23). Über-warehouses for the ultra-rich. Retrieved from https://www.economist.com/briefing/2013/11/23/uber-warehouses-for-the-ultra-rich
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