Global focus on tax enforcement initiatives

International Tax Compliance Alert

International tax evasion has been high on the political agenda since the beginning of 2009, reflecting the spotlight that the global financial crisis has focused on financial centers generally. Industrialized countries have heightened their scrutiny of offshore financial centers (a multitrillion-dollar industry) and the use of offshore accounts in efforts to recoup much needed tax revenues from taxpayers improperly using these centers to evade tax.

Many of these tax enforcement initiatives are already paying off for governments. On November 17, the US Department of Justice and the Internal Revenue Service announced that over 14,700 taxpayers have come forward to report income or foreign bank accounts previously undisclosed under the offshore voluntary disclosure initiative implemented by the IRS, which recently ended October 15, 2009. The DOJ and IRS noted, “This figure represents almost double the initial numbers the IRS announced in October and dwarfs the number of voluntary disclosures received in 2008.”

In late October, the Foreign Account Tax Compliance Act of 2009 (FATCA) was introduced simultaneously in both houses of Congress and endorsed by the Administration, aiming to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong penalties.1

Around the world, 2009 saw many governments working assertively and cooperatively to address international tax evasion. This article looks at the most significant events of the year, globally and in the United States.

Global Developments

Since April 2009, when the G-20 leaders at the London Summit agreed “to take action against uncooperative jurisdictions, including tax havens,” to “deploy sanctions to protect our public finances and financial systems” and announced that “the era of bank secrecy is over, a fundamental transformation has occurred in international tax cooperation practices. Numerous well-known offshore financial centers that maintained bank secrecy have endorsed the Organisation for Economic Co-operation and Development (OECD) exchange of information standards and many of these countries have been active in taking steps to implement these standards.

G-20 countries have been working in concert to prevent abuses of the global financial system in a wide range of areas, including taxation. The G-20 countries have focused on international cooperation of tax authorities and establishing effective exchange of information standards, based on the OECD exchange of information article, so that countries can ensure compliance with their national tax laws.

These are among the significant developments of this year:

  • All OECD countries now accept the OECD exchange of information standard following the withdrawal by Austria, Belgium, Luxembourg and Switzerland of their reservations to that standard.
  • All jurisdictions surveyed by the Global Forum’s assessments have now agreed to implement the OECD exchange of information standard.2
  • Well-known financial centers in Europe, Asia and the Caribbean, such as Switzerland, Liechtenstein, Austria, Belgium, Luxembourg, Singapore, Barbados, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and the Netherlands Antilles have been elevated to the White List of countries that have substantially implemented the internationally agreed standards by entering into at least 12 tax information exchange agreements, as reflected in The Progress Report of the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard, as of November 13, 2009. There no longer are any countries on the Black List.
  • Hong Kong (China) and Macao (China) have each announced that they will put forward relevant legislation in 2009 to comply with the internationally agreed tax standard.
  • More than 90 tax information exchange agreements have been signed and more than 60 tax treaties have been either initiated or renegotiated to incorporate the OECD exchange of information standards since the past April G-20 London Summit.

When an offshore financial center adopts OECD exchange of information standards, either by treaty or implementing legislation, it becomes obligated (as of the applicable effective date of the agreement) to exchange information relating to tax evasion upon a specific request furnishing detailed evidence of wrongdoing (in contrast to either the automatic exchange of information or broad-based fishing expeditions), thereby piercing bank secrecy in individual criminal tax probes. The OECD international exchange of information standard requires: (1) exchange of information that is “foreseeably relevant” to administering and enforcing the domestic laws of the treaty partner; (2) no restrictions on exchange caused by bank secrecy; (3) availability of reliable information and power to obtain it; (4) respect for taxpayer’s rights; and (5) strict confidentiality over the information exchanged.

After their recent meetings, the G-20 announced that the main focus of the Global Forum's work would be to improve tax transparency and exchange of information, by monitoring the quality and relevance of agreements3 and conducting a two-stage peer reviews of the agreements, so that countries can fully enforce their tax laws to protect their tax base.4 The G-20 also reaffirmed their resolve to use countermeasures against non-cooperating tax havens from March 2010. Another important aspect of the overall G-20 initiative is the integration of developing countries into the more transparent tax environment.

A significant by product of the global initiative is increased cooperation among tax authorities. Tax authorities from 34 countries attended the Fifth Meeting of the OECD's Forum on Tax Administration, held in Paris on May 28 and 29, 2009; there, tax administrators announced they had agreed on new international cooperation plans to encourage tax compliance and counter tax evasion and abusive tax avoidance. Their efforts will focus on financial institutions, wealthy individuals and offshore activities. US Internal Revenue Commissioner Douglas Shulman has been appointed the chair of this group.

Developments in the United States

The United States has been extremely active in international tax enforcement.

The Internal Revenue Commissioner has testified that international tax issues are a major priority and that the IRS needs additional resources, information (from foreign countries and financial institutions) and regulatory and legislative changes. The IRS is already using a number of methods to detect non-compliant taxpayers using offshore accounts or tax haven entities. These include: (1) international collaboration through the exchange of information provisions of bilateral tax agreements and cooperative information agreements that the United States has entered into with more than 70 countries; (2) the qualified intermediary (QI) program that the IRS has with foreign financial institutions that agree to become QIs; (3) criminal investigations in collaboration with the US Department of Justice; (4) the whistleblower program, through which the IRS receives numerous tips; and (5) the “John Doe” summons authority, deployed by the IRS to obtain information about tax evasion carried out by people whose identities are not known.

This past year has seen major US enforcement developments and initiatives:

  • The deferred prosecution agreement between a well-known Swiss financial institution and the DOJ, whereby the financial institution agreed to pay the US government $780 million in fines, penalties, interest and restitution for facilitating US tax evasion. Under the deferred prosecution agreement, the financial institution also agreed to provide the US government with the identities of and account information of certain US depositors pursuant to an order issued by the Swiss Financial Market Supervisory Authority.
  • The resolution of the John Doe summons enforcement action against this same financial institution, whereby, as a result of agreements among the United States, Switzerland and the financial institution, the United States will receive information on approximately 4,450 accounts of US persons, owned either directly or through an offshore company, that are or had been maintained at the financial institution.
  • Ongoing prosecutions of individuals, bankers and consultants (and guilty pleas and sentencing) of selected individuals whose names were obtained by the US in the above matter.
  • Continuing, active investigations by the IRS and DOJ of other offshore financial institutions, offshore bankers and consultants and US taxpayers.
  • The well-publicized IRS voluntary disclosure penalty guideline initiative to encourage US taxpayers with undisclosed offshore accounts to participate in its voluntary disclosure program, which expired October 15, 2009. It is still possible, however, for US taxpayers to come forward under the general provisions of the IRS voluntary disclosure program, provided a taxpayer is otherwise eligible to do so.
  • The establishment by the IRS of a Global High Wealth Industry Group, which will centralize and focus IRS compliance expertise involving high-wealth individuals and their related entities. The group will build new risk assessment techniques to identify high-wealth individuals and their related enterprises for holistic review.5
  • The coming focus by the IRS on offshore financial centers located outside of Europe, to include Asia, Central America and the Caribbean. To that end, the IRS has announced the opening of Criminal Investigation offices in Beijing, Panama City and Sydney.
  • Continuing focus and scrutiny of FBARs (Report of Foreign Bank and Financial Account), to include updating definitions and instructions.
  • Legislative initiatives to curtain offshore tax abuse (discussed below). 

US Legislative Efforts

An important element of the US initiative to combat tax evasion is legislation that would remedy perceived deficiencies in the current system of identifying US persons and their use of foreign financial accounts or foreign entities so that the IRS more effectively can enforce compliance with US tax laws. The introduction of FATCA, mentioned earlier in this article, is the most recent example.

FATCA’s central provisions would impose expansive new compliance burdens on foreign persons, requiring them to disclose US account holders and investors or subject the foreign person to a complicated new US withholding tax regime with respect to any payment of US source investment income and proceeds from the sale of equity or debt instruments of US issuers.

In order to obtain information, FATCA generally would require foreign financial institutions (FFIs) and their controlled affiliates (broadly defined to include banks, brokers, hedge funds, private equity funds and other investment vehicles) to enter an agreement with the IRS whereby the FFI would be required to obtain sufficient information from all of their account holders (which, for this purpose, would include non-publicly traded debt or equity in the FFI) to enable the FFI to verify which accounts are owned directly by US persons or by foreign entities more than 10 percent of which are owned by US persons (“Substantial US Owners”)6 and to report detailed, annual information with respect to financial accounts owned directly or indirectly by these US persons,7 or, alternatively, elect to report US account holders or US-owned foreign entities as if the FFI were a US financial institution and the account holder is a U.S. individual. These new reporting requirements would be in addition to the existing obligations that the FFI has under any QI Agreement.

A companion provision would require foreign entities other than FFIs (Non-FFIs) to similarly report information about Substantial US Owners or certify that such entities do not have Substantial US Owners, but such entities, unlike FFIs, would not be required to enter into an agreement with the IRS.

Exceptions would exist with respect to certain US persons who would not have to be identified and reported, such as a publicly traded corporation or a member of its expanded affiliated group and with respect to payments made to certain classes of foreign beneficial owners that are considered unlikely to represent a risk of tax evasion, such as foreign central banks.

FATCA would impose a significant sanction if an FFI were not to enter into an information reporting agreement8 or if an FFI or Non-FFI were to fail to comply with their respective information reporting obligations. A 30 percent US withholding tax would be imposed on the gross amount of all US source investment income and gross proceeds from the sale of any equity or debt instruments of US issuers paid to the FFI or Non-FFI, whether or not the item would be exempt from US withholding tax and the residence of the beneficial owner.9

These provisions would apply to all payments of US-source investment income or sales proceeds made to FFIs and Non-FFIs after December 31, 2010.

In addition to the foregoing provisions, FATCA also contains a series of other far-reaching and important provisions, including: (1) new foreign asset information reporting (in addition to FBAR reporting), assessment and penalty provisions; (2) a new reporting provision imposed on material advisors with respect to the direct or indirect acquisition of any interest in a foreign entity; (3) the repeal of the “foreign targeted exception” for bearer bonds and the related portfolio interest exemption for bearer bonds; (4) the treatment of a dividend equivalent payment10 generally as a dividend from US sources for US withholding tax purposes; and (5) certain provisions related to foreign trusts.

The proposed legislation may move quickly through Congress. FATCA, which has been scored to raise $8.5 billion over ten years, is likely to be considered this year as a means of paying for part of the $25-30 billion cost of extending certain tax benefits which would otherwise expire at the end of this year.


The numerous, substantive and far-reaching international tax enforcement developments globally and in the United States and which, to a degree, are mirrored in the initiatives of other countries (such as the United Kingdom, France, Germany and Italy) reflect that international tax enforcement is now a dominant theme that will continue and gather greater momentum as countries continue to seek to collect additional tax revenues and rationalize their tax systems in the global economy.

1 To further enhance the IRS enforcement efforts, the President’s budget provides funds to add nearly 800 new IRS employees to combat offshore tax evasion and improve US tax compliance.

2 The Global Forum survey covers nearly 90 jurisdictions, to include the 30 OECD countries, countries that participate in the OECD’s Committee on Fiscal Affairs as “observer” countries (Argentina, Chile, China, Russia, South Africa), jurisdictions that meet the tax haven criteria and other financial centers.

3 In illustration, although Monaco is on the “White List,” very few of its agreements are with major trading partners, such as Italy. So too, although San Marino is on the White List, most of its agreements are with tax havens. In evaluating agreements, the reviewers plan to look carefully at the quality of the agreements, and whether they are with countries that have an economic relevance in terms of the relationship with the countries that are signing the agreements.

4 The first stage of the two-stage peer review process will be to study domestic provisions and regulations to ensure that no legal barriers exist in a country that has signed new agreements to achieving a full and effective implementation of the exchange of information. The second stage will be with respect to practical application. It is intended that the peer reviews will be in-depth, transparent, and universal, and their results will be published.

5 The Commissioner noted in describing this new IRS group that other countries including Australia, Canada, Japan, Germany and the United Kingdom have formed similar groups.

6 In the case of foreign investment entities, it should be noted that any equity ownership would be required to be reported. A foreign investment entity is any entity engaged, or holding themselves out to be engaged, primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or other interests, including derivatives, with respect thereto.

7 If local law prohibited the reporting of such information, the FFI would need to seek a waiver of the law from the account holder, and if the waiver were not obtained, to close the account. The FFI would not be required to report an account owned by a US individual if the balance were not exceed $10,000, which amount is increased to $50,000 for an account in place on the date of enactment.

8 Note that an FFI that does not enter into an agreement with the IRS would be subject to the new withholding regime even if it had no US account holders.

9 A beneficial owner would be able to obtain a refund to the extent permitted under the existing withholding regime; although under a special rule, no refund would be available on payments beneficially owned by an FFI unless that entity were treaty protected; further and, in the case of an FFI, no interest would be paid to an FFI with respect to a refund claim.

10 A payment made under a notional principal contract that directly or indirectly is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States.