The Administration's Proposal

• Require U.S. Businesses That Establish Certain Foreign Corporations To Treat Them As Corporations For U.S. Tax Purposes: The Administration's proposal seeks to abolish a range of tax-avoidance techniques by requiring U.S. businesses that establish certain corporations overseas to report them as corporations on their U.S. tax returns.  As a result, U.S. firms that invest overseas would no longer be able to make their subsidiaries - or their income shifts to tax havens - disappear for tax purposes.  This would level the playing field between firms that invest overseas and those that invest at home.
  Raise $86.5 Billion from 2011 to 2019: This loophole would be closed beginning in 2011, raising $86.5 billion from 2011 to 2019.

2. Cracking Down on the Abuse of Tax Havens by Individuals: The IRS is already engaged in significant efforts to track down and collect taxes from individuals illegally hiding income overseas. But to fully follow through on this effort, it will need new legal authorities. Current law makes it difficult for the IRS to collect the information it needs to determine that the holder of a foreign bank account is a U.S. citizen evading taxation. The Obama administration proposes changes that will enhance information reporting, increase tax withholding, strengthen penalties, and shift the burden of proof to make it harder for foreign account-holders to evade U.S. taxes, while also providing the enforcement tools necessary to crack down on tax haven abuse.

Current Law

• A Free Ride for Financial Institutions that Flout Reporting Rules: A centerpiece of the current U.S. regime to combat international tax evasion is the Qualified Intermediary (QI) program, under which financial institutions sign an agreement to share information about their U.S. customers with the IRS. Unfortunately, this regime, while effective, has become subject to abuse:
  • At Non-Qualifying Institutions, Withholding Requirements Are Easy to Escape: Currently, an investor can escape withholding requirements by simply attesting to being a non-U.S. person. That leaves it to the IRS to show that the investor is actually a U.S. citizen evading the law.
  • Loopholes Allow Qualifying Institutions to Still Serve as Conduits for Evasion: Moreover, financial institutions can qualify as QIs even if they are affiliated with non-QIs. As a result, a financial institution need not give up its business as a conduit for tax evasion in order to enjoy the benefits of being a QI. In addition, QIs are not currently required to report the foreign income of their U.S. customers, so U.S. customers may hide behind foreign entities to evade taxes through QIs.
  • Legal Presumptions Favor Tax Evaders Who Conceal Transactions:  U.S. investors overseas are required to file the Foreign Bank and Financial Account Report, or FBAR, disclosing ownership of financial accounts in a foreign country containing over $10,000.  The FBAR is particularly important in the case of investors who employ non-QIs, because their transactions are less likely to be disclosed otherwise. Unfortunately, current rules make it difficult to catch those who are supposed to file the FBAR but do not. And even when the IRS has evidence that a U.S. taxpayer has a foreign account, legal presumptions currently favor the tax evader - without specific evidence that the U.S person has an account that requires an FBAR, the IRS cannot compel an investor to provide the report or impose penalties for the failure to do so.   This specific evidence may be almost impossible for the IRS to get.
• The IRS Lacks the Tools It Needs to Enforce International Tax Laws: In addition to the shortcomings of the QI program, current law features inadequate tools to crack down on wealthy taxpayers who evade taxation. Investors who withhold information about overseas investments face penalties limited to 20 percent of the amount of the understatement. The statute of limitations for enforcement is typically only three years – which is often too short a time period for the IRS to get the information it needs to determine whether a taxpayer with an offshore account paid the right amount of tax.  And there are no requirements that U.S. individuals or third parties report transfers to and from foreign accounts, limiting the ability of the IRS to determine whether taxpayers are paying what they owe.

Example Under Current Law

• Through a U.S. broker, a U.S. account-holder at a non-qualified intermediary sells $50 million worth of securities.
• If the seller self-certifies that he is not a U.S. citizen and the non-qualified intermediary simply passes that information along to the U.S. broker, the broker may rely on that statement and does not need to withhold money from the transaction.
• As a result, a U.S. taxpayer who provides a false self-certification can easily avoid paying taxes, since the non-QI has not signed an agreement with the IRS, and the IRS may have limited tools to detect any wrongdoing.

Proposal

• In addition to initiatives taken within the G-20 to impose sanctions on countries judged by their peers not to be adequately implementing information exchange standards, the Obama administration proposes to make it more difficult to shelter foreign investments from taxation by cracking down on financial institutions that enable and profit from international tax evasion. These measures – expected to raise $8.7 billion over 10 years – would:
• Strengthen the "Qualified Intermediary" System to Crack Down on Tax Evaders:  The core of the Obama Administration's proposals is a tough new stance on investors who use financial institutions that do not agree to be Qualifying Intermediaries. Under this proposal, the assumption will be that these institutions are facilitating tax evasion, and the burden of proof will be shifted to the institutions and their account-holders to prove they are not sheltering income from U.S. taxation. As a result, the Administration proposes to:
• Impose Significant Tax Withholding On Transactions Involving Non-Qualifying Intermediaries: The Administration's plan would require U.S. financial institutions to withhold 20 percent to 30 percent of U.S. payments to individuals 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.
• Create A Legal Presumption Against Users Of Non-Qualifying Intermediaries: The Administration's plan would create rebuttable evidentiary presumptions that any foreign bank, brokerage, or other financial account held by a U.S. citizen at a non-QI contains enough funds to require that an FBAR be filed, and that any failure to file an FBAR is willful if an account at a non-QI has a balance of greater than $200,000 at any point during the calendar year. These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders. This shifting of legal presumptions is a key component of the anti-tax haven legislation long championed by Senator Carl Levin.
• Limit QI Affiliations With Non-QIs:  The Administration's plan would give the Treasury Department authority to issue regulations requiring that a financial institution may be a QI only if all commonly-controlled financial institutions are also QIs.  As a result, financial firms couldn't benefit from siphoning business from their legitimate QI operations to illegitimate non-QI affiliates.
• Provide the IRS With The Legal Tools Necessary to Prosecute International Tax Evasion: The Obama administration proposes to improve the ability of the IRS to successfully prosecute international tax evasion through the following steps:
  Increase Penalties for Failing to Report Overseas Investments:  The Administration's plan would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.
• Extend the Statute of Limitations for International Tax Enforcement:  The Administration's plan would set the statute of limitations on international tax enforcement at six years after the taxpayer submits required information.
• Tighten Lax Reporting Requirements: The Administration's plan would increase the reporting requirement on international investors and financial institutions, especially QIs. 
• QIs would be required to report information on their U.S. customers to the same extent that U.S. financial intermediaries must.  And U.S. customers at QIs would no longer be allowed to hide behind foreign entities.  U.S. investors would be required to report transfers of money or property made to or from non-QI foreign financial institutions on their income tax returns.  Financial institutions would face enhanced information reporting requirements for transactions that establish a foreign business entity or transfer assets to and from foreign financial accounts on behalf of U.S. individuals.

3. Hire Nearly 800 New IRS Staff to Increase International Enforcement: As part of the President's budget, the IRS would be provided with funds to support the hiring of nearly 800 new employees devoted specifically to international enforcement. The funding would allow the IRS to hire new agents, economists, lawyers and specialists, increasing the IRS' ability to crack down on offshore tax avoidance and evasion, including through transfer pricing and financial products and transactions such as purported securities loans. According to estimates by the IRS, every additional dollar invested in enforcement in recent years has yielded about four dollars in added tax revenues.