In its relentless drive against tax evasion, Washington
may have gone too far this time, reports John Evans. Business
dealings on behalf of US clients through foreign investment
managers and other institutions are shaping up to be disrupted – or
even halted – by new proposals.

Financial institutions are threatening to curtail or withdraw their
services to US clients if Congress approves changes to reporting
and withholding rules for tax purposes under the Obama
administration’s latest crackdown on tax evasion.

At the same time, the proposals threaten to put a big new
compliance burden on US institutions in dealing with foreign
counterparts. At worse, the Obama plan could block US citizens’
access to foreign banks, warned tax specialists.

At the centre of the controversy is the US Qualified Intermediary
(QI) programme, which is to be strengthened by the incorporation of
demanding new reporting rules.

The whole QI programme hit the headlines last year after UBS was
accused by the US Justice Department of evading its QI data-sharing
requirements by helping US customers set up foreign nominee
entities to hold US income and shield them from the eyes of the
IRS. UBS has been accused of helping US citizens hide $20 billion
of income from US tax authorities.

Under the new proposals announced by the US Treasury, aimed at
stamping out evasion, foreign financial institutions which have
business within the US will be required to sign an agreement with
the Internal Revenue Service (IRS) to become a qualified
intermediary and so share the same information on their US
customers as is currently required of US financial institutions. If
not, they face the presumption that they could be facilitating tax
evasion and have taxes withheld on payments to their clients.

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Under the plan, US banks would be required to withhold between 20
and 30 percent in taxes on US payments to individuals that use
non-QI banks. Investors must reveal their identities “and
demonstrate that they’re obeying the law,” in order to be refunded,
according to the plan.

So-called QI-compliant banks must certify that they are making the
appropriate tax withholdings on the income of US citizens and allow
their QI programmes to be audited on behalf of the IRS.

Among protesting groups, the British Association of Private Client
Investment Managers and Stockbrokers (APCIMS) has called on the IRS
to ensure that the QI changes are “proportionate and
cost-effective.”

The association believes that amendments to the process which will
require the involvement of American auditors will be “costly and
unnecessary”, observing that the IRS already has appropriate powers
as all of the big UK audit firms are registered with the Public
Company Accounting Oversight Board (PCAOB),”

In the US, the plan has caused similar concerns, including the
accusation that a culture of fear is being fostered by the IRS
toward foreign institutions. In addition, the costs associated with
reforming the QI system could outweigh the benefits, specialists
say.

Fortent, a US money-laundering monitoring service, quoted Josh
Ungerman, a partner with Meadows, Collier, Reed, Cousins & Blau
in Dallas, as stating: “You are going to see a lot of foreign
financial institutions that just no longer do business with US
citizens.”

The proposal could also put more burden on US banks, said Mark
Scheer, a tax specialist with Miami-based law firm Gunster Yoakley.
Under the Obama plan, US banks will need to monitor payments made
through QI and non-QI banks. They will also have to identify
suspicious transactions involving the foreign accounts of US
citizens, said Scheer.

“How are you going to know which transaction the 20 percent
withholding applies to?” said Scheer. “There has to be more details
because the blanket statement seems like it will present all sorts
of issues for institutions both foreign and domestic.”

Scheer and other specialists complain that, much like in the area
of money laundering, the US government is placing the burden of
enforcing tax evasion on banks.

REGULATION

New tax offensive against the über-wealthy

A campaign against tax evasion and avoidance by wealthy individuals
has been launched by tax authorities from 34 countries, marking a
further step in the co-ordinated offensive against offshore
banking.

The Forum of Tax Administration, a grouping of tax regulators,
agreed at a meeting in Paris to step up efforts to improve tax
compliance in a co-ordinated manner. In particular, the new
campaign will focus on the sort of tax avoidance which may enable
the rich to circumvent much of their tax obligations, according to
a communiqué released after the gathering.

The meeting was chaired by Pravin Gordhan, Finance Minister of
South Africa who declared that “aggressive tax avoidance is a
serious cancer eating into the fiscal base of many
countries.”

The communiqué, released by the OECD, declared that the proposals
come as governments face soaring budget deficits as they seek to
combat the global economic slump.

The tax commissioners said they would focus on examining how
revenue authorities, banks and wealthy individuals interact on tax
issues, with a view to finding ways to improve the collection of
taxes. They also intend to give greater prominence to offshore
compliance issues, given the greater willingness of countries to
engage in information-sharing to counter tax abuses.

The tax regulators even produced a new acronym ATP – Aggressive Tax
Planning – to underline their pursuit of tax dodging.

A report produced for the Paris meeting declared: “High net worth
individuals pose significant challenges to revenue bodies and to
the integrity of tax systems because of the complexity of their
affairs. Though potentially big tax-payers, they are wealthy enough
to engage in tax planning which may enable them to avoid
significant parts of their tax obligations.”

To improve compliance, tax administrations could consider changing
the structure of their operations to effectively focus resources,
for example through the creation of a dedicated HNWI unit and to
include a focus on the activities of HNWI related entities.