Tax Haven, USA

By:
Erica Rubin, CPA, CGMA
Published Date:
Jun 1, 2016

International tax structuring and cross border planning has always been a complex and evolving process. The massive leak at Mossack Fonseca, the Panamanian law firm responsible for setting up countless offshore companies, along with the U.S. Treasury Department’s challenge to the corporate inversion “loophole” have brought forth issues that will again challenge the status of tax havens in the global marketplace.

Known as the Panama Papers, the leak of these offshore financial records and their exposure of hidden tax haven assets have caused a global furor. So far, client information published by the International Consortium of Investigative Journalists has focused on foreign individuals. The European Union regulators and the G-20 are now aggressively looking to draft accounting legislation that would demand greater tax transparency from large multinational companies by requiring them to disclose their earnings, paid taxes, and tax havens. Certainly once a U.S. politician or businessperson is implicated in the scandal, the fallout will impact U.S. policy as well in an effort to regain the public trust.

The timing of the Panama Papers could not have been better for President Obama, who urged Congress to address corporate inversions and applauded new rules from the Treasury Department that cracked down on them. It is no wonder that soon after, the Pfizer-Allergan merger talks collapsed. Is there a company out there willing to challenge the Treasury Department’s authority?

The additional proposal to curb earnings stripping will greatly impact multinational companies issuing debt to subsidiaries. This technique is often used to load U.S. subsidiaries with debt and interest payments while shifting profits offshore to the parent company. The new proposed power would give the IRS and Treasury Department the ability to turn interest deductible debt transactions into taxable equity transactions.  

Over the last few years, the banking and financial industries have been overwhelmed by the Foreign Account Tax Compliance Act (FATCA) regime. The enormous costs associated with compliance are ongoing and cannot yet be tallied by financial institutions. The scenario would be similarly nightmarish for multinational companies who would need to test and document transactions to determine compliance with the new proposals and ensure they be treated as legitimate debt.

Does it seem ironic that the United States has been in hot pursuit of offshore accounts but will not sign the Automatic Exchange of Information (AEOI), the new global standard on transparency that has been signed by nearly all members of the Organization for Economic Cooperation and Development (OECD)? The United States says that it will not participate in the AEOI and that it operates under FATCA, which assures that worldwide financial institutions will provide U.S. citizens’ tax information. The U.S. Treasury Department, however, will not deliver information of non-U.S. citizens to U.S. financial institutions. This makes the United States a very attractive haven for those interested in shielding their assets. Perhaps it is chutzpah or just plain smart? True tax reform would be too easy. Lowering the U.S. corporate tax rates to keep monies and assets onshore would be the straight path to keeping the United States competitive in the market.

As details of the strategically released Panama Papers continue to provide interesting backstories, we may ask the following questions:

-- Will the United States be pressured to sign off on AEOI and join the other countries in the OECD agreement (GATCA)?

-- Will states such as Nevada and South Dakota continue to be popular havens, or will they be forced to promote more transparency?

-- As CPA practitioners, how much due diligence should we perform when a client is structuring an offshore company? Will firms shy away from this business so as not to appear as enablers?

-- What additional new regulations will be forthcoming after this crackdown on multinational tax avoidance?

-- Following pressure abroad, especially from the United Kingdom, should U.S. politicians and others disclose their involvement in any offshore matters?

As we consider these potential issues, we also need to address how such a leak took place and what we can do to secure our clients’ documents. Most importantly, once the nature of the breach is revealed, we must learn how to prevent such an event and properly protect ourselves and our clients.


EricaRubinErica Rubin, CPA, CGMA, is a business and tax advisor. She is a member of the NYSSCPA Taxation of Individuals, Trust and Estate Administration and International Taxation committees. She can be reached at erubincpa@gmail.com.

 
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