Offshore, Out of Mind?

Feb 6 2010 | 10:08am ET

In November, a pair of US Congressmen proposed a new law that would penalise foreign banks that refuse to disclose the identity and contents of accounts held by US citizens. Sponsored by two Democrats, Senate Finance Committee chairman Max Baucus of Montana and House Ways and Means Committee chairman Charles Rangel of New York, the bill lends force to an existing IRS programme, the Qualified Intermediary programme, whereby foreign banks agree to confirm the identities of US depositors and inform the IRS of income earned in their accounts. It was the violation of this programme by UBS AG that sparked the entire assault on offshore banking secrecy for US citizens.

Quite apart from the US Department of Justice’s recent campaign against UBS and the Swiss government, the proposed Baucus-Rangel law would levy a 30 per cent withholding tax on income from US assets held by foreign institutions that provide information about US account holders. As Philip West, a Washington tax lawyer and former international tax counsel at the US Treasury, puts it: ‘It’s basically a fee for maintaining bank secrecy. The IRS has a very legitimate interest in knowing if there are Americans holding assets offshore in an undisclosed account.’

The legislation is expected to force foreign banks to comply rather than pay the withholding tax. Its sponsors hope that it will generate $3.1 billion in tax revenue over the next decade. Since Switzerland is the largest offshore financial centre in the world, according to the Boston Consultancy Group — it accounted for $1.8 trillion (28 per cent) of offshore wealth in 2008 — it remains the primary target of the US authorities.

In Switzerland, banks will face the prospect of violating their nation’s own banking secrecy laws or paying the US withholding tax. ‘This really becomes a fight between two countries over bank secrecy,’ says Reuven Avi-Yonah, a tax law professor at the University of Michigan.

The head of UBS, Oswald Grübel. has told Swiss radio that ‘banking secrecy is not disappearing’, but that customers will ‘no longer be able to hide their money from their home governments’. Other Swiss bankers agree. ‘Banking secrecy will continue to exist, but not for tax reasons’. says Boris Collardi, chief executive of Swiss private bank Julius Baer. ‘Private banks will have to offer services on a fully compliant basis.’

At the same time as the US has been throwing its weight against Switzerland, the Tax Justice Network, a British organisation that campaigns against financial secrecy, has compiled a Financial Secrecy Index which ranks the US state of Delaware — the political base of US vice-president Joe Biden — as number one offender when it comes to hiding wealth. With high levels of banking secrecy, Delaware does not make details of trusts, company accounts, and beneficial ownership a matter of public record and it allows companies to re-domicile within its borders with minimal disclosure. However, Delaware’s banking secrecy is not available to US citizens.

Delaware is party to numerous international tax information sharing agreements signed by the US, but how effectively it responds to requests made under such agreements is open to question. ‘Secrecy in Delaware has been a massive problem and has been for some time,’ says Jack Blum, a former US senate staff attorney who worked on the BCCI fraud investigation. ‘They have a lot of rules that… make it so advantageous to be there that it is breathtaking… The requests [for information] pile up in district courts. It’s beyond embarrassing. It’s a disgrace." Continued on next page...

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