Statement of Senator Carl Levin Before Senate Finance Committee Hearing on Tax Issues Related to Ponzi Schemes and an Update on Offshore Tax Haven Legislation

Mr. Chairman, Ranking Member Grassley, and distinguished Members of the Committee, thank you for holding a hearing on this important subject and giving me the opportunity to add my comments.

Scope of the Problem

Each year, the United States loses an estimated $100 billion from U.S. taxpayers using offshore tax schemes to dodge their U.S. tax obligations. Those offshore shenanigans cheat honest U.S. taxpayers who pay their fair share and rob the U.S. Treasury of funds needed for the operations of our government.

The Permanent Subcommittee on Investigations, which I chair, has dedicated significant effort to combating offshore tax abuse. We’ve exposed some of the facilitators – the lawyers, accountants, broker-dealers, company formation agents, trust administrators, and others that help clients dodge their U.S. tax obligations.  We’ve exposed some of the schemes, such as mass marketed tax shelters peddled as investment strategies, networks of offshore trusts and corporations with hidden assets, and deceptive offshore transactions used to recast taxable income as allegedly tax free payments.

Here are just a few of the examples offshore tax abuse uncovered by the Subcommittee:

• Enron, with its 440 plus shell corporations in the Cayman Islands.
• KPMG, which sold the abusive FLIP and OPIS tax shelters employing shell Cayman Island corporations as part of a scheme to generate phony losses.
• Two Americans who transferred over $190 million in stock options to 58 offshore trusts and corporations, which they secretly controlled, and which they used to enjoy over $700 million in offshore profits, while paying no taxes on that income.
• A U.S. tax shelter promoter that relied on $9.6 billion worth of phantom stock trades between two offshore shell companies to generate fake stock losses which were then used to shelter billions in income for six U.S. taxpayers.
• Offshore banks in tax havens that used code names, subterfuge, and shell companies to help Americans hide billions of dollars from the Treasury.

The hallmark of all these schemes is the use of offshore jurisdictions that make it difficult, if not impossible for the IRS to find out what the facts really are.

Switzerland and a major Swiss bank UBS provide a timely example.  Just last month UBS entered into a deferred prosecution agreement with the Department of Justice in which they admitted to participating in a scheme with certain U.S. taxpayers to defraud the United States of tax revenue.  UBS agreed to pay a $780 million fine.  Now our government is attempting to identify and recover unpaid taxes from the tens of thousands of U.S. citizens who hid $18 billion in income and assets in UBS accounts. UBS has refused to provide us the names of their clients, saying that to do so would violate Swiss law.  These actions show the inadequacies of our tax treaties in protecting U.S. interests.

Stopping Offshore Tax Abuses

Tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality products or services.  And though they go to great lengths to justify and defend their practices, that secrecy is utilized by thousands of people to cloak tax evasion and other misconduct.  The “Stop Tax Haven Abuse Act,” S. 506, which I have introduced with Senators Whitehouse, McCaskill, Nelson and Shaheen as cosponsors, offers a powerful set of tools to stop offshore abuses and put tax dollars in the U.S. Treasury, where they belong. 

Our bill would:

• ESTABLISH PRESUMPTIONS TO COMBAT OFFSHORE SECRECY (§101) by allowing U.S. tax and securities law enforcement to treat for tax purposes non-publicly traded offshore entities as being controlled by the U.S. taxpayer who formed them, sent them assets, received assets from them, or benefited from them, unless the taxpayer shows otherwise.
• IMPOSE TOUGHER REQUIREMENTS ON U.S. TAXPAYERS USING OFFSHORE SECRECY JURISDICTIONS (§101) by authorizing Treasury to develop a list of jurisdictions starting from an initial 34 jurisdictions identified in IRS court proceedings.
• AUTHORIZE SPECIAL MEASURES TO STOP OFFSHORE TAX ABUSES (§102) by giving Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement, including by prohibiting U.S. banks from doing business with them.
• CURE THE UGLAND HOUSE PROBLEM OF SHELL COMPANIES RUN FROM THE UNITED STATES CLAIMING FOREIGN STATUS (§103) by treating foreign corporations that are managed primarily from the United States and are publicly traded or have gross assets of $50 million or more as U.S. domestic corporations for income tax purposes.
• STRENGTHEN DETECTION OF OFFSHORE ACTIVITIES (§105) by requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities in offshore secrecy jurisdictions for U.S. clients, to report such actions to the IRS.
• CLOSE OFFSHORE TRUST LOOPHOLES (§106) by taxing distributions, gifts and loans from foreign trusts of real estate, artwork, or jewelry to U.S. persons, and treating U.S. persons who receive offshore trust assets as trust beneficiaries.
• CLOSE THE OFFSHORE TAX DIVIDEND LOOPHOLE (§108) by treating all U.S. corporate dividend-based payments to non-U.S. persons as taxable income subject to withholding.
• EXPAND IRS REPORTING REQUIREMENTS (§109) for passive foreign investment companies (PFICs) to include not only U.S. persons who own a PFIC but also those who have formed, sent assets to, received assets from, or benefitted from a PFIC.
• REQUIRE ANTI-MONEY LAUNDERING PROGRAMS (§203) for hedge funds and company formation agents to ensure they screen their clients and any offshore funds.
• STRENGTHEN PENALTIES (§§301-302) on persons who aid or abet tax evasion by increasing the maximum fine to 150% of their gains, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine to $1 million per violation of U.S. securities laws.
• BAN TAX SHELTER PATENTS (§303) by prohibiting the U.S. patent office from issuing patents for “inventions” designed to minimize, eliminate, or defer taxes.

These provisions represent a partial list of the innovative measures we’ve included in the bill to strengthen the ability of federal regulators to combat offshore tax haven and tax shelter abuses.

One bill provision that has already caught the attention of some offshore tax havens is a requirement that the Treasury Department maintain a list of “Offshore Secrecy Jurisdictions” that have corporate, bank, or tax secrecy rules or industry practices, and a poor record of cooperation with U.S. tax enforcement.  S. 506 doesn’t attempt to do what we don’t have the power to do: change any jurisdiction’s secrecy laws or tax rates.  Instead, the bill aims at making it more difficult for U.S. taxpayers to use offshore secrecy laws and practices to hide essential facts from the IRS.  It would greatly strengthen the IRS’ ability to collect tax dollars hidden offshore.  Americans will still be free to utilize banks in tax haven jurisdictions for legitimate purposes, but in a court of law the burden will shift to the taxpayers to prove that they don’t control the corporations and trusts they’ve established or financed in those jurisdictions.

Recent Developments

Last week, in response to growing international pressure and spurred in part by the work of my Subcommittee, several offshore secrecy jurisdictions, including Andorra, Austria, Belgium, Liechtenstein, Luxembourg, and Switzerland, announced significant changes in how they will apply their bank secrecy laws.  Each of these countries seems to say that it will no longer use secrecy laws to help people evade taxes, and will begin exchanging information on all types of alleged tax evasion, not just so-called ‘tax fraud.’  That is a very welcome development which is long overdue, and we look forward to effective implementation of the promised new policies.  Hopefully, dozens of other secrecy jurisdictions which have cost the U.S. Treasury so many billions of dollars will follow suit.

At the same time, the promised new limits on offshore secrecy will not only likely take years to implement, but even after taking effect, will not eliminate all offshore tax abuses.  For example, even after implementation of the proposed reforms, the IRS will still be at a disadvantage in trying to obtain notice of abusive accounts, the names on those accounts, and in proving beneficial ownership and control of the accounts in court.  That’s why Congress needs to enact the Stop Tax Haven Abuse Act to strengthen U.S. offshore tax enforcement and help end offshore abuses that enable U.S. tax cheats to offload their tax burden onto the backs of honest, hardworking taxpayers.

Conclusion

These are exceedingly difficult times.  The economy is in turmoil; the unemployment rate is as high as it has been in a generation and rising.  Congress just passed an unprecedented stimulus package in order to get the economy back on track, but it comes at a significant cost to the Treasury.  Now more than ever, the government needs to collect all of the money it is lawfully owed.  Tax cheats make it harder to maintain our highways, protect our borders, advance medical research, and inspect our food.  They make it difficult to give needed tax relief to small businesses and middle-income victims of the alternative minimum tax.  And at a time when the government must borrow hundreds of billions of dollars to shore up our financial system and stimulate our economy, tax cheats deepen the deficit and threaten the economic well-being of our children and grandchildren.

We must vigorously enforce our tax laws.  S. 506 offers a set of practical and innovative tools that would help shut down offshore tax cheats and begin to reduce the $100 billion offshore tax gap that forces honest taxpayers to shoulder a greater tax burden than they would otherwise have to bear.

I applaud Chairman Baucus and Ranking Member Grassley for their willingness to tackle offshore tax abuses.  I look forward to working with the Committee on legislation this year to reduce this unfair drain on our treasury.

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