Tax is a big deal

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AccountingWEB in  the US has reported the comments of IRS Commissioner Doug Shulman to the OECD on 2 June. He said a lot. I highlight:

In the U.S., international tax issues have moved to center stage. It is a major priority for President Obama, and last month he outlined a bold suite of international legislative proposals.

At the same time, the IRS has been stepping up enforcement measures in this area. We are aggressively tracking down tax evaders hiding their wealth overseas and the promoters who aid and abet these schemes. We are steadily increasing the pressure on offshore financial institutions that facilitate concealment of taxable income by U.S. citizens.

On the world stage, the global economic downturn and recent tax evasion scandals have spurred urgent calls for fairness and transparency of the tax system. In April, the G-20 heads of state agreed in a show of unity to act against tax havens that impede legitimate tax enforcement. …

The tide is indeed turning … [b]ut more is required to get us on top of our international game. Let me sketch out some of the key points Рwhat I call the "must haves."

First, for too many years, the IRS was in the position of not having the resources to go toe-to-toe with taxpayers operating in the international markets. They had deep pockets and could hire a cadre of legal and tax experts. Some observers said, "We were outmanned and outgunned."

To meet this challenge, we must keep existing personnel current on emerging techniques and hire top examiners, lawyers, economists, special agents and financial specialists who can unravel the sophisticated and complex world of international tax issues.

Second, the IRS is an information intensive organization. Data is our lifeblood. It informs all of our activities – from service to enforcement. But it's not just about getting the data, but rather analyzing and making the best use of it.

For example, we know that those taxpayers who have their taxes withheld and reported to the IRS through third parties are the most compliant. On the other end of the scale, those operating without withholding and reporting are the least compliant.

What's the lesson here? Simple – better information reporting can boost compliance and we need more of it from foreign countries and foreign financial institutions.

Third, regulatory and legislative changes and enhancements are needed. For example, the Qualified Intermediary program gives the IRS an important line of sight into the activities of U.S. taxpayers at foreign banks and financial institutions. But it's not problem-free.

We need to shore up the QI program and enhance, improve and strengthen it.

QI is not the only way to gain transparency. The President's 2010 budget also calls for additional information reporting on cross-border wire transfers, which will allow the IRS to focus examination resources on the areas of highest risk.

[Fourth], [t]ime is also one of our greatest enemies. Cases involving offshore bank and investment accounts located in bank secrecy jurisdictions take additional time to complete. These cases often present challenges for the IRS in obtaining information from a financial institution that is not subject to U.S. jurisdiction.

Extending the statute of limitations would be an important asset to our efforts, and we hope Congress will pass legislation giving us the time we need to pursue our investigations and other enforcement activities.

These are our challenges. Let me now talk about the solutions, including the proposed set of international measures that President Obama announced.

And before discussing them, I want to again make the distinction between corporations and individuals in the international tax compliance context.

International business transactions can be complex. …. However, we also know that some businesses use the complexity of the tax code and the international capital markets to push the envelope too far.

That is where we have issues, and where we will continue to focus. I have highlighted in the past some of the areas where we have particular interest and these include: transfer pricing, financial instruments, hybrid structures, and withholding taxes.

For individuals with overseas income and assets, it's much more straightforward. If you are a U.S. taxpayer holding overseas assets, you must pay your taxes or we will be very focused on finding you. It's as simple as that. ….

Now, I would like to focus on the President's proposals aimed at individuals avoiding tax by hiding income in offshore accounts. These proposals will enhance information reporting, increase tax withholding in certain situations, strengthen penalties, and shift the burden of proof to make it harder for offshore account-holders to evade U.S. taxes. They will also provide the enforcement tools we need to crack down on offshore tax abuse.

The core of the Administration's proposals is to strengthen and expand the Qualified Intermediary system. Although the multi-faceted proposal is complicated, I would summarize it into five key components. First, U.S. financial institutions and QIs will be required to determine the true beneficial owner of a particular account. Similar to the issues the EU has had with enforcing its Savings Directive, we have found that many U.S. taxpayers have formed shell entities to hold offshore accounts.

Second, we want to encourage Non-QIs to become QIs. Thus, the Administration proposes to impose significant withholding tax on transactions involving non-Qualifying Intermediaries. Specifically, it would require U.S. financial institutions and QIs to withhold 20 percent to 30 percent of U.S. payments to individuals or businesses who use non-QIs. To get a refund for the amount withheld, investors must disclose their identities and demonstrate that they're obeying the law.

In addition, the President's plan would create a legal presumption against users of non-Qualifying Intermediaries. This is a real game changer. U.S. citizens who send money to foreign banks that don't cooperate with us will have to provide convincing evidence to prove they're not breaking U.S. tax laws. Moreover, these presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders.

Third, the Administration's plan would increase various reporting requirements. For example, QIs would be required to report worldwide information on their U.S. customers to the same extent that U.S. financial intermediaries do. In addition, U.S. persons, U.S. financial institutions, and QIs will be required to report cross-border transfers to Non-QIs.

On all of the QI issues, let me note that we understand that these changes will require a commitment and resources by financial institutions in the QI program, and we look forward to discussing the proposals with them and ensuring a smooth and orderly implementation.

The fourth component of our plan is to improve the ability of the IRS to successfully prosecute international tax evasion. For example, the proposals would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.

Fifth, the Administration also asks Congress to extend the current statute of limitations on international tax enforcement from three to six years after the taxpayer submits required information. As discussed earlier, these cases are often highly complex and require additional time to resolve beyond the current three-year statute.

As part of the President's budget, the IRS would be funded to hire nearly 800 new employees devoted specifically to international enforcement, such as agents, economists, lawyers and specialists.

This would increase the IRS' ability to crack down on offshore tax avoidance and evasion. It would also give us more resources to devote to complex international corporate tax issues such as transfer pricing and financial products.

Lastly, we have begun a dialogue to take international cooperation to the next level. I believe this should include joint examinations with other nations and working towards joint definitions around information reporting requirements.

Such new cooperation and coordination would, if done right, decrease burden on businesses and individuals trying to comply with the law, and help tax authorities consistently enforce the tax law on a global basis.

In conclusion, let me end where I started. The complexity of global capital markets and global capital flows presents new challenges to regulators worldwide. This is true of financial markets regulators, and also for tax authorities.

There are no simple answers, but there is clearly a desire among policymakers to ensure that businesses and individuals are playing by the rules and paying their fair share of taxes.

At the IRS, we are very committed to adapting and evolving as circumstances evolve. We have a multi-year, highly focused international strategy. The President and Secretary Geithner have given us the tools needed to pursue that strategy, and we have asked Congress for new authorities and laws to make it possible for us to succeed.

And our efforts will depend on a closely coordinated strategy among nations, because this is a challenge that all countries are confronting. We are committed to get it right, and it will remain a top agenda item for us.

Thank you for the opportunity to speak here today. I hope you enjoy the rest of the conference.

He said more than that: I left in the key bits.

What messages do I take from it?

First, offshore remains a massive problem despite all those denials we hear so often from politicians and regulators in all the usual culprit places.

Second, offshore promoters are as willing to sell structures to promote tax evasion as ever they have been, and turn a blind eye to what they are being sued for. Why else say “Similar to the issues the EU has had with enforcing its Savings Directive, we have found that many U.S. taxpayers have formed shell entities to hold offshore accounts.”

Third, automatic information exchange is key to cracking this issue.

Fourth, so is combining tax law and anti-money laundering data.

Fifth: transfer pricing remains the big issue in international tax (and so the need for country-by-country reporting is proven).

But most what I hear is something quite different; that here we have an administration that believes that tax is important, is willing to invest resources in it, and is going to really try to tackle the issue of tax evasion and complex avoidance.

Why don’t I hear the same messages coming out of the UK? Because I don’t? That’s what worries me.