New legislation to tackle tax evasion has been proposed by the US Senate Finance Committee Chairman Max Baucus and the House Ways and Means Committee Chairman Charles Rangel, together with several other Democrats.
The Foreign Account Tax Compliance Act aims to give the Internal Revenue Service new administrative tools to detect and discourage offshore tax abuses.
In contrast to earlier legislative proposals, the new legislation would not include a so-called blacklist of countries that are considered tax havens.
Anthony Travers, chairman of Cayman Finance, commented on the proposal: ‘This entirely reflects the confirmations that Cayman Finance have received from key staffers in Washington in that the ‘list’-based approach favoured by Senator Levin’s proposed legislation appears to have been rejected in favour of a transparency- based approach.
‘Whilst the legislative process has not yet got underway we are pleased that these proposals are entirely consistent with the approach suggested by Cayman Finance.’
The proposed legislation would impose a tax on foreign banks that refuse to disclose the identity of US offshore account holders and corresponding account data.
The bill would levy a 30 per cent withholding tax on income that foreign financial institutions receive from US financial assets, unless they name US account holders and annual report balances and fund transfers.
‘This bill offers foreign banks a simple choice – if you wish to access our capital markets, you have to report on US account holders,’ said Mr Rangel.
‘I am confident that most banks will do the right thing and help to make bank secrecy practices a thing of the past.’
Under the bill, US individuals and entities would be required to report any offshore account, shares and interests in foreign entities or financial instruments with foreign counterparties exceeding an aggregated value of US$50,000 on their tax return.
Failure to report foreign assets would carry a penalty of up to $50,000 and a 40 per cent penalty would apply to cases of understated foreign assets.
The bill would also provide the US Internal Revenue Service with more time to investigate tax evasion by extending the statute of limitations from currently three years to six years.
In addition the legislative proposal targets advisors who assist US citizens and entities in setting up offshore accounts or in acquiring a direct or indirect interest in a foreign entity. Advisors would have to disclose their activities and file an information return on the US citizen and entities involved or face a penalty under the legislation.
With regard to foreign trusts, the bill attempts to tighten rules to determine if distributions from such trusts are going to US beneficiaries. It would also require the reporting of US transfers to foreign trusts.
The bill further intends to tackle foreign investors who use derivatives, such as total return swaps, to disguise dividend payments that would be subject to a 30 per cent withholding tax, unless reduced under a double taxation treaty. The bill would authorise the Treasury department to develop rules so that the withholding tax would also apply to dividend equivalent payments.