Crackdown on Offshore Havens Faces Hurdles
President Obama’s plans to crack down on offshore tax havens collided with Swiss bank secrecy at a Capitol Hill hearing Wednesday, illuminating the daunting political, legal, and economic obstacles facing an administration that is counting on aggressive tax collection to help fund its ambitious domestic agenda.
“The U.S. government is taking unprecedented measure to aggressively pursue individuals and institutions that facilitate unlawful tax avoidance, and there is more to come,“ said Douglas Shulman, commissioner of the Internal Revenue Service, at a Senate subcommittee hearing Wednesday.
Illustration by: Matt Mahurin
But Shulman was followed by Mark Branson, a top official at the United Bank of Switzerland (UBS) who repeatedly declined to say if the bank would share the names of thousands of U.S. citizens who live overseas and hold Swiss bank accounts that have not been reported to the IRS.To do so, he said, might violate Swiss law.
“They’re looking for as many ways as possible to hang on to these ill-begotten gains,” said an exasperated Sen. Carl Levin (D-Mich.) after the hearing.
The appeal of shutting down the tax havens has grown during global economic meltdown, with British Prime Minister Gordon Brown connecting bank secrecy to the global economic meltdown in his address to the U.S. Congress “How much safer would everybody’s savings be if the whole world finally came together to outlaw shadow banking systems and offshore tax havens?”
Demands for reform have been hastened in Washington by revelations from the General Accounting Office (GAO) in January that some of the biggest U.S. corporations — including several that have been bailed out by taxpayers–have set up offshore operations that could help them avoid paying U.S. taxes on their profits**. **Congress’s Joint Committee on Taxation money estimates that the failure to tax foreign income of U.S. controlled corporations will cost $56.4 billion in potential tax revenues (Pdf. p. 70) between 2008 and 2012. It is not known how much tax revenue is lost because of U.S. citizens holding money overseas.
The report identified 30 countries around the world as tax havens. American International Group was found to have 115 subsidiaries in tax haven countries including 59 in the Cayman Islands. The ailing Citigroup had 427 subsidiaries in such countries, including 90 in the Cayman Islands and 21 on the Isle of Jersey, a spot of land off of Great Britain that is nominally its own country
Obama has signaled he wants to go after those tax havens. His 2010 budget counts on collecting an additional $210 billion (pdf) in international tax revenues through 2019. On Tuesday Secretary of Treasury Tim Geithner said the White House “fully” supports a bill introduced this week by Levin that would make close reporting loopholes for accounts held in countries like Switzerland, Panama and the Cayman islands that have tight banking secrecy laws. As a Senator, Obama co-sponsored a similar bill with Levin in 2007.
But winning approval of such legislation will not be easy. Levin’s bill has attracted three Senate co-sponsors, but none of them is a member of the Senate Finance Committee, which has to approve any such legislation. After the hearing, Levin only said he hoped the committee would approve such a bill “this year.”
In the meantime, UBS is sure to have its say. Between 2000 and 2008 employees and political action committees of the Swiss banking giant gave $783,070 to current members of the finance committee, according to an analysis done for The Washington Independent by the Center for Responsive Politics.
Among the top recipients of UBS contributions in those eight years are Sen. Charles Schumer (D-N.Y.) with $139,250 and Sen. Robert Menendez (D-N.J.) with $81,000. The committee’s chairman Sen. Max Baucus (D-Mont.) got $43,000, including a $2,000 donation from the CEO of UBS’s American subsidiary last May. All told UBS employees and PACS gave more than $3 million to U.S. political candidates in 2007-2008, 57 percent of it to Democrats
And UBS is hardly the only beneficiary of tax havens. The GAO found that 83 of the 100 largest publicly traded U.S. corporations had subsidiaries in tax haven countries, including many with good reputations as corporate citizens.
Microsoft, for example, has eight subsidiaries in tax haven countries, including five in Ireland, according to the GAO. One of those subsidiaries, Microsoft Ireland Research , paid 460,000 euros on 1.2 billion euros in profits, the Irish broadcasting network RTE reported last May. That tax rate of 3.8 percent is far less than the software would have paid if those profits were reported in the United Kingdom, Germany or the United States.
“Its very common,” Richard Murphy , a British accountant and founder of the Tax Justice Network, which does research and consulting on international tax issues., said in a phone interview.
“Companies like Microsoft, Apple, Dell, and NCR all use Ireland as a European center for distribution. Irish law makes it very difficult to know what they’re doing because if they register as an unlimited liability company they don’t have to put their accounts on the public record. Microsoft put lots of intellectual property and some employees into Ireland, so it’s no surprise that they make lots of profit in Ireland.”
That same lack of transparency, Murphy said, has contributed to the global meltdown.
“The meltdown was not created offshore,” he said. “It was facilitated offshore. Those subprime mortgages and dodgy loans were created on shore. But when those loans were sliced and diced for reselling, a lot of that took place in the Cayman Islands and Jersey. And when the banks started wondering what all those instruments were really worth in 2007,” he went on, “they couldn’t see what was behind each other’s balance sheets, in part because a lot of their business was hidden in the tax havens. So they stopped lending to each other.”
“You can’t have efficient markets if people don’t know what is going on,” Murphy concluded. “The whole purpose of tax havens is to hide information. They’re a massive market imperfection.”
But as long as entrenched interests stand to benefit from that imperfection, the prospects for reforming a dysfunctional global financial system will remain confined to a Senate hearing room crowded with lobbyists tapping messages on their Blackberries.