Permanent Subcommittee on Investigations Issues Report On Offshore Tax Haven Abuses That Cost U.S. Taxpayers Over $40 Billion Each Year

Report: Tax Haven Abuses: The Enablers, The Tools and Secrecy [PDF]

WASHINGTON – At a Tuesday hearing entitled, Tax Haven Abuses: The Enablers, The Tools & Secrecy, the Senate Permanent Subcommittee on Investigations will expose how offshore and U.S. professionals are helping U.S. citizens move assets offshore and dodge U.S. taxes, adding to tax haven abuses that cost U.S. taxpayers an estimated $40 to $70 billion dollars each year.

A year-long bipartisan Subcommittee investigation examined six case studies illustrating the operation of the offshore tax industry, its service providers and clients, and how tax haven abuses are undermining, circumventing, or violating U.S. tax, securities, and anti-money laundering laws. Subcommittee Chairman Norm Coleman (R-Minn.) and Ranking Minority Member Sen. Carl Levin (D-Mich.) will release on Tuesday a 370-page joint staff report [PDF] detailing the findings of the investigation.

“Offshore tax havens hold trillions of dollars in assets supplied by high-net-worth individuals around the world,” Levin said. “Our investigation blows the lid off tax haven abuses that use sham trusts, shell corporations, and fake economic transactions to hide the fact that U.S. citizens are controlling offshore assets, circumventing U.S. legal requirements, and dodging taxes. These outrageous tax haven abuses are eating away at the fabric of our tax system, and it is long, long past time to shut them down. Tax havens have, in effect, declared war on honest U.S. taxpayers, and we’ve got to fight back utilizing the full legislative, executive, and administrative powers of the United States government.”

“Using offshore jurisdictions to shelter income is unfair and I intend to fix this problem,” said Coleman. “Offshore tax havens and secrecy jurisdictions are used to hold trillions of dollars in assets that are out of reach from taxation. I'm particularly troubled by an industry of tax professionals, lawyers, trust specialists, bankers, and brokers, that permit, facilitate, promote, and exploit loopholes in the tax code. We need our professional community to be pillars of commerce rather than pillars of circumvention. We need to close these loopholes.”

The Levin-Coleman report describes a range of sophisticated schemes being used today to enable U.S. citizens to shift assets offshore and dodge U.S. taxes. The six case studies raise a wide range of U.S. tax avoidance, securities, and anti-money laundering issues:

1. EDG. This case history examines an offshore promoter located in the United States who recruited clients through the internet and helped them create offshore structures.

2. Turpen-Holliday. This case history examines an offshore promoter who developed a how-to manual for going offshore and one of his U.S. clients who used that manual to move his assets to several tax havens.
3. Greaves-Neal. This case history examines a U.S. businessman who, with the guidance of a prominent offshore promoter, moved between $400,000 and $500,000 in untaxed business income offshore.

4. Anderson. This case history examines a wealthy American facing criminal charges for allegedly hiding $450 million in stock and cash offshore and disguising his ownership of the offshore corporations that held the assets.

5. POINT. This case history examines an abusive tax shelter sold to five clients, including Haim Saban and Robert Wood Johnson IV, to erase $2 billion in capital gains and about $300 million in taxes. It used an offshore stock portfolio held by shell corporations with fake securities losses, operating under offshore secrecy practices that hid the scheme.

6. Wylys. This case history examines two U.S. citizens, Sam and Charles Wyly, who moved about $190 million in stock options offshore to a complex array of 58 offshore trusts and corporations, and utilized a wide range of offshore mechanisms to exercise direction over these assets and hundreds of millions of dollars in investment gains, which were then used to provide loans, finance business ventures, acquire real estate, and buy art, furnishings and jewelry for the personal use of Wyly family members.

In reviewing these case histories, the investigation found: (1) that offshore “service providers” use trustees, directors, and officers who comply with client directions when managing offshore entities and do not operate them independently; (2) tax haven secrecy laws and practices make it easy to conceal and obscure the economic realities underlying financial transactions with unfair results unintended under U.S. tax and securities laws; (3) tax haven secrecy laws and practices intentionally make it difficult for U.S. law enforcement, creditors, and others to learn the identity of the beneficial owners of offshore entities; (4) U.S. citizens, with the assistance of lawyers, brokers, bankers, and offshore service providers, use offshore entities to circumvent U.S. tax, securities, and anti-money laundering requirements; (5) U.S. financial institutions have failed to identify the beneficial owners of offshore trusts and corporations that opened securities accounts, even when the financial institutions knew that the offshore entities were closely associated with U.S. taxpayers; (6) U.S. corporate insiders have used offshore entities to trade their company’s stock, circumventing U.S. securities disclosure and trading requirements; (7) stock options, which are taxed when exercised rather than when granted, are the subject of potentially abusive tax shelters to avoid the U.S. tax due on this compensation; and (8) U.S. citizens who have transferred assets to allegedly independent offshore entities in tax havens have directed those offshore entities to transfer the assets to a hedge fund controlled by the same U.S. persons, thereby regaining control of the assets.

Reforms recommended by the Levin-Coleman report to reign in tax haven abuses include the following:

1. Presumption of Control. U.S. tax, securities, and anti-money laundering laws should include a presumption that offshore trusts and shell corporations are under the control of the U.S. persons supplying or directing the use of the offshore assets, where those trusts or shell corporations are located in a jurisdiction designated as a tax haven by the Treasury Secretary.

2. Disclosure of U.S. Stock Holdings. U.S. publicly traded corporations should be required to disclose in their SEC filings company stock held by an offshore trust or shell corporation related to a company director, officer, or large shareholder, even if the offshore entity is allegedly independent. Corporate insiders should be required to make the same disclosure in their SEC filings.

3. Offshore Entities as Affiliates. An offshore trust or shell corporation related to a director, officer, or large shareholder of a U.S. publicly traded corporation should be required to be treated as an affiliate of that corporation, even if the offshore entity is allegedly independent.

4. 1099 Reporting. Congress and the IRS should make it clear that a U.S. financial institution that opens an account for a foreign trust or shell corporation and determines, as part of its anti-money laundering duties, that the beneficial owner of the account is a U.S. taxpayer, must file a 1099 form with respect to that beneficial owner.

5. Real Estate and Personal Property. Loans that are treated as trust distributions under U.S. tax law should be expanded to include, not just cash and securities as under present law, but also loans of real estate and personal property of any kind including artwork, furnishings and jewelry. Receipt of cash or other property from a foreign trust, other than in an exchange for fair market value, should also result in treatment of the U.S. person as a U.S. beneficiary.

6. Hedge Fund AML Duties. The Treasury Secretary should finalize a proposed regulation requiring hedge funds to establish anti-money laundering programs and report suspicious transactions to U.S. law enforcement. This regulation should apply to foreign-based hedge funds that are affiliated with U.S. hedge funds and invest in the United States.

7. Stock Option-Annuity Swaps. Congress and the IRS should make it clear that taxes on stock option compensation cannot be avoided or deferred by exchanging stock options for other assets of equivalent value such as private annuities.

8. Sanctions on Uncooperative Tax Havens. Congress should authorize the Treasury Secretary to identify tax havens that do not cooperate with U.S. tax enforcement efforts and eliminate U.S. tax benefits for income attributed to those jurisdictions.

This hearing and report follow numerous investigations into offshore abuses by the Subcommittee. Hearings held by the Subcommittee in 2001 examined the historic and ongoing lack of cooperation by some offshore tax havens with international tax enforcement efforts and their resistance to divulging information needed to detect, stop and prosecute U.S. tax evasion. A hearing held in December 2002 and report issued in January 2003 provided an in-depth examination of an abusive tax shelter used by Enron. Two days of hearings in November 2003, and a bipartisan report issued in 2005, provided an inside look at how some respected accounting firms, banks, investment advisors, and lawyers had become engines pushing the design, sale, and implementation of abusive tax shelters to corporations and individuals across the country.