Two bills proposed in the Senate last year that take aim at tax havens and the U.S. taxpayers that operate in them have been given greater impetus by the recent European and U.S. probes into accounts in Liechtenstein that were alleged to hide assets from national taxing authorities.S. 396, introduced by Sen. Byron Dorgan, D-N.D., would prevent American companies from deferring the imposition of a second layer of tax on their foreign-source income if they operate in selected low-tax nations. It would amend the Internal Revenue Code to treat certain controlled foreign corporations created or organized under the laws of a tax-haven country as domestic corporations for tax purposes. It sets forth a list of “tax-haven” countries, and grants the Treasury authority to remove or add a country from the list.

S. 681, the Stop Tax Haven Abuse Act, would establish legal presumptions against the validity of transactions involving offshore secrecy jurisdictions, including foreign tax havens identified in the act, and by the Treasury.

“Clearly, the recent Liechtenstein scandal and GAO investigation in the Caymans should make it easier to move S. 681 and similar anti-tax haven legislation forward than would otherwise be the case,” said Martin Tittle, a Washington, D.C.-based international tax attorney.


The IRS is currently initiating enforcement action involving more than 100 U.S. taxpayers to ensure proper income and tax payment in connection with accounts in Liechtenstein. The investigations began after Germany’s intelligence service obtained a list of foreign account holders from a former employee of Liechtenstein Bank LGT.

The IRS announced that the tax administrations of Australia, Canada, France, Italy, New Zealand, Sweden, the U.K. and the U.S. are working together following the revelations.

Meanwhile, the Government Accountability Office is continuing its investigation of potential offshore tax evasion by U.S. companies and individuals in the Cayman Islands.

As a follow-up to requests from the Senate Finance Committee, the GAO sent investigators to the Cayman Islands to check on a five-story Cayman Islands building listed as the address of thousands of U.S. and international companies. Investigators were also scheduled to meet with the primary tenant of the building in question. Ranking member Charles Grassley,

R-Iowa, said that the Finance Committee hopes to use the GAO’s findings to gain a greater perspective on the problem of offshore tax evasion.


Sen. Carl Levin, D-Mich., who introduced S. 681 along with Sens. Norm Coleman, R-Minn., and Barack Obama, D-Ill., said that it targets offshore tax abuses that drain $100 million away each year from the U.S. Treasury.

The bill establishes presumptions to combat offshore secrecy by allowing U.S. tax and securities law enforcement to presume that non-publicly traded offshore corporations and trusts are controlled by the U.S. taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise.

“The main thing that the Stop Tax Haven Abuse Act does is criminalize transactions with particular jurisdictions by creating presumptions that, while rebuttable, could be almost impossible to rebut,” said Tittle. “For instance, it says that any money that you have in account in an offshore secrecy jurisdiction is presumed to have not been taxed by the U.S. So if you read How You Can Profit From the Coming Devaluation 30 years ago and put something into a tiny Swiss bank account, it’s unlikely that you could ever prove that you paid tax on the money you sent there.”

“A taxpayer that does not or cannot rebut these presumptions could be taxed three times on the same income,” he said.

“If you read through the Levin bill,” said Daniel Mitchell, a senior fellow at the Cato Institute, “there’s no ‘there’ there, just a bunch of hurdles and restrictions that would make it difficult for Americans to compete in the global economy. And the Dorgan bill clearly imposes a burden on American multinationals that other countries don’t impose. Every multinational will use subsidiaries in places like the Caymans. ... If U.S. companies are the only ones facing these restrictions, they will be severely hampered in competition.”


Guernsey, Luxembourg and the Isle of Man have all petitioned the U.S. Treasury to be removed from the list of “offshore secrecy jurisdictions” in S. 681.

“Although there’s nothing wrong with tax competition between countries, it’s a good idea to try and cut down on tax evasion using countries that actually promote themselves for that purpose, or whose laws are set up to lend themselves for that purpose,” said Tittle. “But S. 681 does this in a heavy-handed way — it gives the government all the cards.”

“Overall, tax havens are good,” agreed Dr. Dirk Nitzsche, senior lecturer in finance at Cass Business School in London. “Individuals prefer to invest abroad for all sorts of reasons. As long as all the taxes are paid, there should be no problem with offshore centers.”

“The problem is when individuals try to evade taxes,” he said. “That’s what Germans did in Liechtenstein on a massive scale. When it’s a way not to pay taxes in your home country ... it’s tantamount to stealing from the state.”

Germany had previously initiated an amnesty to recover some of the projected $5 billion in evaded tax revenue, but got very little response, Nitzsche said. “The Germans who shifted their money offshore must have felt absolutely safe that the authorities would not find out about them,” he said. “When the taxing authority was offered information about German account holders, it was too good to pass up.”

The developments in Liechtenstein and the current anti-tax haven legislation indicate that we are moving into a new period, according to Nitzsche: “The tax authorities all over the world are changing their tactics and are willing to use information which has been obtained in an illegal way. Investors who are not declaring all their income to the taxman need to re-assess the probabilities of being found out.”

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