The Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations will hold a hearing tomorrow on the way foreign banks have facilitated US taxpayers' tax avoidance through structuring accounts offshore to avoid IRS notice. Senators Levin and Coleman released late today (Wednesday) a 109-page staff report that details their investigation into Swiss banking giant UBS and Liechtenstein bank LGT. See Bradley Klapper, UBS, LGT aided US Tax Cheats, Forbes.com (July 16, 2008). The report estimates that approximately $100 billion a year has been lost in offshore tax abuses. For various links to stories on the Liechtenstein matter, see this TaxProf Blog posting.
Michigan Democrat Carl Levin noted the report's recommendation for action. "The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States," the Michigan Democrat said. "Congress needs to enact strong penalties on tax haven banks that help U.S. taxpayers avoid paying taxes to Uncle Sam." id. Levin also stated that "The documents show there's such a pattern of activity here that the top executives of these banks had to not only be aware of these practices but had to have approved these practices," Foreign Banks Helped Rich Evade US Taxes, Report Says, USA Today. July 16, 2008. (This assertion is of interest in the campaign context as well, since Phil Gramm, primary economic adviser to candidate John McCain, is a vice chairman at UBS's investment bank and his wife Wendy is a lobbyist for UBS Americas. See here.)
The report notes that Birkenfeld, a UBS banker now cooperating with the US authorities, has said that UBS bankers made numerous trips to the US to pitch their "services" to wealthy clients and that "both sides" knew that no US taxes would be paid. The report itself names names that have turned up in internal documents made available in part by an informer who is now hiding from Liechtenstein authorities. Id. According to a July 17 dispatch from Bloomberg.com's Ryan Donmoyer, those wealthy asset-hiders include shopping mall magnate Frank Lowy, Australia's second-richest person, who had $68 million in one of these hidden accounts when it was closed in 2001. For more background on the US request for client names, see Judge Clears US Request for UBS Clients' Names, July 2, 2008.
According to the Forbes report, UBS has stated that it will disclose the identities of its US clients, as requested by the IRS in its subpoena. But it has also forbidden Swiss bankers from travelling to the United States, presumably for fear of service of process demanding further documentation. UBS spokeswoman Karina Byrne said of the possible misconduct by UBS: "As we're going to describe in more detail in our testimony, UBS intends to address and correct in a responsible manner any misconduct identified in the course of the ongoing investigation by U.S. authorities." UBS, LGT Helped Clients Hide Assets, Dodge Taxes, Bloomberg.com (July 17, 2008).
As I reported yesterday, the IRS is about ready to release new qualified intermediary rules applicable to foreign banks. Those rules will require banks to identify actual owners of accounts, file Forms 1099 to report interest earned by their American clients, and withhold appropriate taxes. See IRS Set to Close Tax Loopholes, Bloomberg.com.
The problem of foreign banks as facilitators of tax evasion is not a phenomenon limited to the US. Yesterday, Spanish tax administrators raided offices in various Spanish cities for documentation about Liechtenstein accounts related to Spanish taxpayer "investments" in banking products deposited at LGT. BNA Daily Tax Realtime reports that these included raids on another Swiss bank's offices in Spain, Vontobel.
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