• House Subcommittee Hears Testimony on Bank Secrecy Practices
  • April 17, 2009
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • On March 31,2009, the House Ways and Means Committee's Select Revenue Measures Subcommittee held a hearing entitled, “Bank Secrecy Practices and Wealthy American Taxpayers.” The hearing focused on the limitations of the withholding taxes imposed by the Unite States on U.S. source investment earnings received by foreign persons, the Qualified Intermediary (QI) program established by the IRS to enforce those withholding taxes, the limitations of our tax treaties, and the extent to which these may have contributed to non-compliance by U.S. taxpayers. In commenting on the necessity of the hearing, Subcommittee Chairman, Richard E. Neal (D-MA) stated,

    “The global economic and financial crisis has put pressure on these international jurisdictions to be less secretive and more cooperative.  The United States and other countries simply can no longer afford to lose billions of dollars each year in potential revenue to these secrecy jurisdictions.  I expect this hearing to be the start of a process that leads to bold and decisive action being taken to end opportunities for tax avoidance through foreign accounts.”

    The Committee heard testimony from the following witnesses:

    Panel 1:

    • Douglas Shuluman, Commissioner, Internal Revenue Service

    Panel 2:

    • Stephen E. Shay, Tax Partner, Ropes & Gray
    • Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan Law School
    • Peter H. Blessing, Partner, Shearman and Sterling

    Mr. Shulman, testifying on behalf of the IRS, noted that international issues are a “major strategic focus” of the IRS and its hope to restore citizen confidence in the fairness of the system. He stated that the IRS will not allow policies to exist where "wealthy individuals can go offshore an avoid paying taxes with impunity." He further noted that the IRS is aggressively pursing violators of tax evasion and the institutions that help to facilitate such violations. Specifically, the IRS is addressing this issue by:

    • developing an integrated approach;
    • engaging in international collaboration;
    • developing the QI program (an opt-in system that encourages foreign investment in the US by allowing foreign banks to deal on an aggregate basis with US withholding agents for all of their foreign customers investing in US Securities); and
    • utilizing whistleblowers.

    He concluded his testimony by articulating the following steps that the IRS, in conjunction with the Treasury Department, are considering:

    • expanding information reporting requirements to include more sources of income for US persons accounts at QI banks;
    • strengthening documentation rules to ensure that the program is delivering on its original intent; and
    • requiring withholding for accounts with documentation that is considered insufficient.

    Mr. Shay’s testimony focused on the following solutions to end tax evasion:

    • expand the responsibilities of QIs in relation to U.S. customers;
    • increase IRS enforcement resources devoted to cross boarder enforcement;
    • consider prospective elimination of the foreign targeted bearer obligation exception;
    • expand the network of treaties to encourage the exchange and reporting of U.S. persons non-U.S. income; and
    • support the Organisation of Economic Co-operation and Development (OECD) incentives to identify and promote best practices for electronic information exchange and procedures for implementing rate reductions at source.

    Mr. Yohan focused his testimony the recent cases where Bradley Birkenfield, a senior banker at Zurich-based USB’s private banking unit, pled guilty to assisting U.S. clients in evading taxes.  To address offshore tax evasion schemes, Mr. Yohan offered the following recommendations:

    • increase IRS enforcement;
    • use bilateral information exchange;
    • cooperate with the OECD and the G-20;
    • create incentives for tax havens to comply with applicable reporting requirements;
    • impose sanctions on non-cooperating tax havens; and
    • enhance withholding and information reporting requirements.

    Finally, Mr. Blessing noted that the solution to eradicating tax evasion should not be limited to the cross boarder sector. He noted that, “better controls can both serve as a deterrent and facilitate the early detection of such activity.” He further noted that the issue now is to maintain “controls that do not place an undue burden on the benefits that come with free flows of capital across borders.”