G20 tackles tax evasion

The governments of top G20 countries have stepped up their efforts in tackling tax evasion and recovering lost tax revenue.

While the US, British, German and Italian governments have taken common action to put pressure on tax havens within international organisations such as the G20 and the Organisation for Economic and Co-operation and Development, they follow distinctly different approaches in the pursuit of tax evaders.

The German government agreed measures on Wednesday last week that will enable it to penalise offshore tax evaders on their operations in Germany. If approved by Germany’s Upper Chamber, the Bundesrat, the Cabinet-backed rules will result in a new law to combat tax evasion and sanction tax havens.

The law would empower the government to withdraw tax allowances from individuals and entities registered in countries deemed uncooperative in the fight against tax evasion. Companies doing business with non-complying jurisdictions would be forced to provide more information about their dealings or suffer tax disadvantages.

Germany’s Finance Minister Peer Steinbrueck said that the new law will bring ‘more fairness and strengthen trust in the state’.

He estimates that Germans are holding a ‘triple-digit billion-euro amount’ in offshore accounts without declaring the money to tax authorities.

The Bundesrat could approve the law as early as September 19, in time for it to come into force in 2010.

A list of countries deemed uncooperative tax havens will be named at a later date, offering respite for potential candidate countries to comply with OECD standards on tax evasion.

Three of Germany’s neighbouring countries, Austria, Switzerland and Luxembourg, feature on the OECD’s so-called ‘grey list” which includes jurisdictions that have not fully implemented international accords on tax evasion.

At a conference of OECD countries in Berlin in June, Swiss Finance Minister Hans-Rudolf Merz informed Germany that Switzerland intended to provide assistance on tax evasion cases.

The Cayman Islands which is also named on the grey list, is currently in negotiations with Germany, as well as other countries, over a Tax Information Exchange Agreement.

The Cayman government is scheduled to sign a similar agreement with New Zealand at a meeting in Washington next week. This will bring the number of TIEAs signed by Cayman to 12 and may be sufficient for the OECD to remove it from the grey list.

However, it is not clear whether it will put Cayman out of the scope of the planned German legislation.

Germany’s action can be seen in the context of wider G20 efforts to put pressure on tax havens.

In February, the US government forced Switzerland to abandon traditional Swiss bank secrecy laws.

Swiss bank UBS AG agreed to turn over the names of 250 US customers and pay US$780 million, after the bank became the focus of US criminal probes over its role in helping US customers evade taxes.

In an unrelated investigation, the US Internal Revenue Service is seeking the names of up to 52,000 of the bank’s US customers. The US sued UBS and is expected to reach an out-of-court settlement with the bank.

A new double-taxation treaty between Switzerland and the US, which has been signed but is not yet in force, may become the framework for the settlement.

In March the IRS announced a Voluntary Disclosure Programme giving US tax payers the opportunity to report and pay any taxes on undeclared offshore income. In light of the tax dispute between the US and UBS, hundreds of tax payers have come forward under the programme, according to the IRS. The IRS warned that after the September 23 deadline, penalties for offshore tax evasion will become more severe.

However, any tax payer participating in the Voluntary Disclosure Programme can only expect leniency rather than amnesty. The IRS still reserves the right to criminal prosecution and the imposition of fines.

The same applies to British tax payers aiming to take advantage of a similar disclosure programme in the UK.

UK residents who hold undeclared savings in offshore bank accounts are also granted a final opportunity to pay back their taxes or face the risk of increased fines and criminal prosecution.

HM Revenue and Customs revealed details of its latest disclosure initiative on July 27. The partial offshore amnesty will allow UK residents with unpaid taxes related to offshore accounts to settle their tax liabilities at a lower penalty rate.

If savers make a full and accurate tax liability disclosure between 1 September 2009 and 12 March 2010 they will qualify for a 10 per cent penalty. After the deadline, the penalty increases to at least 30 per cent and the likelihood of criminal prosecution will increase.

It is the second amnesty granted to offshore account holders with unpaid tax liabilities. The first initiative in 2007 targeted the customers of five large British banks and raised £450m from approximately 45,000 customers.

The ‘New Disclosure Opportunity’ focuses on the customers of more than 250 smaller banks with branches in the UK.

Italy is expected to be more successful in repatriating offshore funds than efforts in the UK and the US

Italy’s planned tax amnesty is more generous to the tax payer, promising a 5 per cent tax rate, a simple procedure and most importantly exemption from prosecution.

Between 15 October 2009 and 15 April 2010, Italian tax payers will be able to transfer offshore funds to their Italian banks who will then calculate and pay the lower tax rate on their behalf.

Two previous Italian tax amnesties in 2001 and 2003 imposing an even lower tax rate of 2.5 per cent managed to repatriate a staggering 80 billion euros.

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