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"Overview Of Obama's Stop Tax Haven Abuse Act
The STHAA would restrict the use of offshore financial centers by US persons by (i) imposing a rebuttable presumption that certain transactions between US persons and entities located in certain offshore jurisdictions are taxable, (ii) raising reporting and withholding requirements on financial institutions and fiduciaries dealing with offshore jurisdictions, and (iii) increasing penalties for tax avoidance through offshore jurisdictions.
It has been estimated that the Proposal would generate up to $50 billion of additional tax revenue annually. This anticipated tax revenue could be used to offset the costs of proposed tax breaks for middle-income Americans and a wide array of new spending programs, which Obama has promised to champion over the first few months of his presidency.
Guilty until proven innocent
The centrepiece of the STHAA is a provision that would force taxpayers to prove that they do not have control over any offshore entities with which they contract. Under this 'guilty until proven innocent' approach, the STHAA presumes that a US person has control of an entity (which includes trusts, corporations, limited liability companies and partnerships) created or domiciled in a so-called Offshore Secrecy Jurisdiction if the US person directly or indirectly formed, transferred, received assets or is a beneficiary of that entity.
The STHAA also creates a presumption of taxable income for any transfer from an offshore entity to a US person, and a presumption of unreported taxable income for any transfer from a US person to an offshore jurisdiction. Taxpayers could only rebut these presumptions by providing direct evidence that all tax owed on such amounts had been paid.
Tax havens???
The initial list of 34 'Offshore Secrecy Jurisdictions' is surprisingly broad and includes Jersey, Guernsey, the Isle of Man, Switzerland, Singapore, the Cayman Islands, the British Virgin Islands, Bermuda, the Bahamas, Hong Kong, Costa Rica and Belize. Designation as a 'tax haven' would result if the Treasury Department determines that the jurisdiction has rules in place that "unreasonably restrict the ability of the US to obtain information relevant to the enforcement" of its tax laws.
Many practitioners have expressed concern that the initial list of jurisdictions fails to separate those jurisdictions operating in conformity with widely accepted international standards from other 'rogue' jurisdictions. For example, several listed jurisdictions have signed Tax Information Exchange Agreements with the US (some very recently) and are nevertheless included on the list. Should this legislation be enacted, it is uncertain which jurisdictions ultimately may be targeted, but it appears that additional consideration should be given to what triggers inclusion on the STHAA blacklist.
Heightened reporting requirements
In an effort to ferret out potential tax abuses, the STHAA would create a presumption that any account with a financial institution formed, domiciled or operating in an Offshore Secrecy Jurisdiction has sufficient funds to trigger reporting to the IRS. The STHAA also would require financial institutions that open accounts for US persons or create nonpublicly- traded entities in Offshore Secrecy Jurisdictions to report such transactions to the IRS.
The reporting of such transactions is already required of the individual taxpayers involved, but the Proposal would place this burden on intermediaries as well and would apply to US and foreign financial institutions, fiduciaries and corporate directors.
Grantor trust rules
The STHAA expressly targets offshore trusts. The Proposal would further expand the already broad rules setting out when a US person establishing an 'offshore' trust is treated as the tax owner of the trust's income and gains. This would be accomplished by amending Section 672 of the Internal Revenue Code (the 'Code') by attributing to the grantor of a trust any power held by a trust protector and amending Section 679 of the Code to treat any US person receiving cash or other property from a foreign trust as a beneficiary of such trust.
Personal use property and loans
With respect to personal use property, the Proposal would amend Section 643(i) of the Code to treat cash, marketable securities, artwork, jewellery or other personal property loaned by a foreign trust to a US person as a taxable distribution. Such a loan would be deemed taxable on the value of the use of such property, although it is unclear how the amount of these taxes would be calculated.
Penalties and deterrents
The STHAA is clearly not intended to be a paper tiger, as evidenced by several provisions that give this tiger teeth. Senator Carl Levin, the principal sponsor of the STHAA, announced when introducing the legislation that some of the current penalties for tax evasion are "like a jaywalking ticket for robbing a bank."
The Proposal would give the IRS six years instead of three to complete audits, combating the perceived sluggishness of offshore jurisdictions to respond to audit requests. It would also broaden the use of socalled 'John Doe' summonses that are used to obtain information from offshore jurisdictions in tax investigations. Both provisions would give the IRS a decided advantage in the audit process.
Financial institutions and fiduciaries would not escape penalty for failing to comply with the STHAA. The US Department of Treasury could prohibit US banks from opening accounts for noncompliant foreign financial institutions and could prohibit US financial institutions from accepting credit card transactions involving noncompliant foreign banks.
The Proposal also calls for the codification of the 'economic substance' doctrine. This doctrine requires that transactions not only satisfy all relevant legal requirements but also must have a real economic purpose other than the creation of tax benefits. Courts have used the economic substance doctrine in the past to combat what they perceived to be 'sham' transactions. The STHAA would codify this doctrine and levy a 40 percent penalty on underpayments of tax resulting from transactions that lack economic substance."
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