2 OverviewForeign Banking Depositors place securities/funds in financial/banking institutions located overseasDepositors do this to…Take advantage of lower or no taxesAchieve greater privacyProtect assets against local financial or political instabilityTake advantage of less regulation and easier accessTake advantage of higher rates of return offered by some foreign banks
3 OverviewTax Haven A country or territory that has lower or no taxes and provides a safe place for deposits in order to attract capitalTax havens create tax competition among governments in order to maintain or attract depositors via the altering of banking/fiscal policies and rules.
5 Tax haven Debate For Avoidance of excessive tax burden Greater security and lower riskPrivacyTax competition encourages pro-growth tax policies
6 Tax haven Debate Against Lack of transparency Tax avoidance and loss of tax revenueIn some instances, it perpetuates illegal activity i.e. money laundering
7 Laws And Regulations Affecting Foreign Banking & Taxes
8 The HIRE ACT (The Hiring Incentives to Restore Employment act) Law was passed to provide payroll tax breaks for businesses to hire unemployed workers, but includes a number of anti-evasion provisions relating to international complianceKey Provisions:Reporting on Foreign Accounts: must report on tax return if the amount in the account is $50,000 or moreStatute of Limitations of Cross-Border transaction: extended from 3 to 6 years where more than $5,000 in income is omittedPenalties: The 20% penalty that applies would be increased to 40% for transactions involving foreign accounts where the taxpayer failed to disclose reportable informationLaw was passed to provide payroll tax breaks for businesses to hire unemployed workers, but includes a number of anti-evasion provisions relating to international complianceKey Provisions:Reporting on Foreign Accounts: Individuals who are required to file a Foreign Bank and Financial Account Report would be required to report this information on the tax return if the amount in the account is $50,000 or moreStatute of Limitations: for cross-border transactions is extended from 3 to 6 years where more than $5,000 in income is omittedPenalties: The 20% penalty that applies would be increased to 40% for transactions involving foreign accounts where the taxpayer failed to disclose reportable information
9 Public law “The act”This law was put in effect to counter the issue of having foreign taxes paid abroad to be credited against U.S. tax on foreign earningsKey ProvisionsPreventing Splitting Foreign Tax Credits from Income: firms would no longer be able to recognize and take credits for foreign taxes paid without reporting the income that gave rise to the foreign taxes
10 P.L continuedKey ProvisionsDenial of Foreign Tax credits for Covered Asset Acquisitions: prevent firms from obtaining credits for excess taxesRepeal of 80/20 Rules: dividends and interest paid by a domestic corporation are generally U.S. source income and subject to gross basis withholding if paid to a foreign person. But interest and dividends paid by a firm with at least 80% of its gross income foreign source are not subject to withholding.Denial of Foreign Tax credits for Covered Asset Acquisitions: Because depreciation deductions are often smaller under foreign rules, the excess of foreign taxes over U.S. taxes on this transaction can be used to offset U.S. tax on unrelated foreign income. This proposal would prevent firms from obtaining credits for these excess taxesRepeal of 80/20 Rules: dividends and interest paid by a domestic corporation are generally U.S. source income and subject to gross basis withholding if paid to a foreign person. But interest and dividends paid by a firm with at least 80% of its gross income foreign source are not subject to withholding. This provision would repeal the 80/20 rule.
11 Bank Secrecy Act Currency and Foreign Transactions Reporting Act Anti-Money Laundering Law passed by Congress in 1970Requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money launderingFinancial Institutions must file reports of cash purchases of negotiable instruments over $10,000 and report suspicious activity that might signify tax evasion or money launderingAnyone who transports currency or any other monetary instrument in an amount of $10,000 or more into and out of the United States must file a report of International Transportation of Currency or Monetary Instruments
12 FATCA (Foreign Account Tax Compliance Act) Requires foreign banks to find all American Account holders and disclose their balances and other relevant information to the IRSIf foreign banks fail to report to the IRS, it would be subject to a 30% withholding tax on income from US financial assetsAccount holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial assetAmerican Citizens Abroad, an organization based in Geneva representing the interest of Americans living abroad has launched a campaign to repeal FATCAEnacts Chapter 4 of the HIRE Act and makes modifications to Internal Revenue code of 1986
13 Legislative proposals The Stop Tax Haven Abuse ActAuthorize special measures to stop offshore abuse by allowing Treasury to take specified steps against foreign jurisdictions or financial institutions that impede U.S. tax enforcement.Will Strengthen FATCA & detection of offshore activities and establish rebuttable presumptions to combat offshore secrecyThe American Jobs and Closing Loopholes ActSource Rules on Guarantees: The treatment of guarantee fees for interest and payment for services are unclear. When payments for services are sourced to the country where the service is performed, it allows U.S. subsidiaries of foreign firms to make deductible payments that reduce U.S. income with paying the withholding tax as they would with interest. This act will prevent firms from doing this
14 Criticisms of enacted legislation Many argue that the cost of compliance for these laws may exceed the revenue that is expected to come from itLaws targeting international institutions such as FATCA will significantly discourage foreign investment in the U.S and negatively impact U.S. businesses operating in global marketsCompliance is sometimes so expensive for non-U.S. banks that they are refusing to serve American investors
15 Criticisms of enacted legislation – continued World renowned tax havens like Switzerland and the Caymans are not always willing to comply with American laws because it would moderate their legitimacy as a tax havenThese laws create many biases, such as the targeting of Americans living abroad as opposed to Americans living at home. It tries to address the problems of tax evasion but does not do enough to combat tax avoidance, which is not illegal but costs money
16 Opposition to FatcaBanks argue that the measure imposes steep compliance costs and unrealistic deadlinesCreates significant hassle and paperwork for U.S. citizens living abroad – extra tax forms and very high penaltiesExpatriates complain that most of the information they are now required to report is already covered in the Foreign Bank and Financial Accounts form, known as FBARThe United States is alone among industrialized countries in taxing on the basis of nationality, rather than residence
17 Opposition to FatcaTo avoid withholding, foreign banks must enter into an agreement with the IRS to:Identify U.S. accounts;Report certain information to the IRS regarding U.S. accounts; andWithhold a 30% tax on certain payments to non-participating foreign financial institutions and account holders unwilling to provide the required information.Many Americans are finding it difficult to open legitimate new accounts abroad and facing closure of old ones based on their nationalitySome foreign banks have decided to refuse accounts to Americans rather than deal with this new law
18 Policy proposal Created unintended problems and threatens investment Placed extensive obligations on foreign financial institutionsThese institutions are now reluctant to accept American depositorsExample: Compliance costs are estimated between $150 million to $200 million for every medium sized bank.We need to reform the policy in order to:1. Curtail tax avoidance and ensure “tax justice”2. Allow for the free movement of capital and investmentFATCA has created a number of unintended consequences and threatens investment and capital movement for U.S. investors/depositors. FATCA’s scope has placed extensive obligations on foreign financial institutions. These institutions have become increasingly weary of accepting American depositors.If we want remove these burdens on U.S depositors and foreign financial institutions, reform is warranted.
19 Possible policy alternatives to fatca Make broad changes to International Tax RulesEliminate deferral for specified tax havens or countries with tax rates below U.S. ratesExpand multilateral and bilateral information sharingi.e. European Union Directive, expanding treaties to tax havens, OCED bilateral Tax Information Exchange AgreementSanctions on non-cooperative tax havens, ideally through a multi-lateral approach.Strengthen Report of Foreign Banks and Financial Accounts (FBAR) rules, resulting in more information exchange and allowing DOJ to pursue more tax haven cases.
20 Our proposalA number of proposals have already introduced in the U.S. Congress. These proposals can be modified and reintroduced to address tax havens without overburdening American depositors and foreign financial intuitions.1. Reintroduce the major provisions of the “Stop Tax Haven Abuse Act” introduced by Sen. Carl LevinClose Credit Default Swap loopholePrevent U.S. companies from claiming overseas status and close foreign subsidiary deposits loopholeStrengthen anti-money laundering programs and encourage greater information sharing between regulators, law enforcement and the IRSAllow treasury to take specified steps against foreign jurisdictions that impede U.S. tax enforcement., i.e. sanctions.
21 Our proposal2. Implement Senate Finance Committee recommendation outlined in their March 12, 2010 proposal.Require FBAR report to filled with tax reportDouble fines and penalties on payments attributable to offshore transactionsRequire entities transferring funds offshore to report to the IRS the amount and destination. Publicly traded companies are excluded3. Burden of proof should be placed more heavily on U.S. depositors and corporations. For foreign financial institutions to comply with U.S. requirements this necessitates non-compliance with their own domestic laws.