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Stop Tax Haven Abuse: Do the Means Justify the End?

By John Dietz - Email Editor

Date : 27-March-2007

Dear Subscriber:

Hello everyone, I am on the ground in Singapore. The Asia Offshore Conference is about to begin. Before the conference, I had the chance to interview Jack Flader, chairman of the Asian Offshore Association. Jack is a veteran of the International Business community. He has been living in this part of world for over 20 years and is considered by many to be the guy in the know when it comes to Asian business operations.

One of the questions I asked Jack was what he though about the recent proposed Stop Tax Haven Abuse Act bill in the U.S. Congress. He said, "Funny you ask, I just wrote an article on it."

Here are some poignant excerpts. ...

Excerpts from Jack's article: The purpose of this article is to provide a summary of a portion of a Bill recently submitted by Senators Levin, Coleman and Obama to the USA Senate. The short title of the Bill is Stop Tax Haven Abuse Act. It is important to note that this article does not include an analysis of the various sections of the Internal Revenue Code of 1986, Securities Exchange Act of 1934, Securities Act of 1933, Investment Company Act of 1940 and Investment Advisers Act of 1940 that the Bill proposes to modify. The analysis is, therefore, necessarily limited.

The stated purpose of the Bill is to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation, and for other purposes. This is consistent with my (and I would like to think all practitioners) viewpoint that offshore products and services should not be misused to achieve illegal or inappropriate objectives. However, the means proposed to achieve this end and the targeted offshore secrecy jurisdictions should raise concern to certain USA persons engaged in international business or offshore planning.

Section 101 of Title I creates the tone for the balance of the Bill and is the focus of this article. Section 101 seeks to establish a rebuttable presumption regarding control and transfers of income in relation to Subchapter F of the Code. Although very cumbersome reading, I think it is important to review some excerpted language of the Bill. The author has highlighted certain language in bold letters.

"For purposes of any United States civil, judicial or administrative proceeding to determine or collect tax, there shall be a rebuttable presumption that a United States person (other than an entity with shares regularly traded on an established securities market) who directly or indirectly formed, transferred assets to, was a beneficiary of, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership or foundation (other than an entity with shares regularly traded on an established securities market) formed domiciled or operating in an offshore secrecy jurisdiction, exercised control over such entity...The presumptions established in this section may be rebutted only by clear and convincing evidence, including detailed documentary, testimonial, and transactional evidence...Any court having jurisdiction...shall prohibit the introduction by the taxpayer of any foreign based document that is not authenticated in open court by a person with knowledge of such document, or any other evidence supplied by a person outside the jurisdiction of a United States court, unless such person appears before the court."

A. "Rebuttable presumption": A rebuttable presumption is an assumption that is made that is taken to be true unless someone comes forward to contest it and prove otherwise. This is a troubling situation, as rebutting a presumption when facing the enormous resources of the Internal Revenue Service is likely to be a losing effort even if the taxpayer is successful. Simply stated, the emotional and financial toll would be devastating for most taxpayers. The likely impact of this language would be, in effect, to deter USA persons, other than publicly listed/quoted companies, from engaging in virtually any business activity with non-USA persons from an "offshore secrecy jurisdiction".

B. “Other than an entity with shares regularly traded on an established securities market”: On its face, this language seems to fly in the face of the equal protection of the law afforded all USA persons in the USA as it makes it the exclusive domain of publicly quoted/listed companies. Ordinary people and private companies, who make up the overwhelming number of economic actors in the largest economy in the world, would not be in a position to avail of this protection. Given the multitude of transactions between USA persons not protected by this exception and persons in the “offshore secrecy jurisdictions”, I have to wonder how this can be implemented.

C. “Directly or indirectly formed, transferred assets to, was a beneficiary of, or received money or property or the use thereof from an entity, including a trust, corporation, limited liability company, partnership or foundation”: It seems exceedingly unfortunate that ordinary people and private companies should be worried about being subjected to the scrutiny of the USA Internal Revenue Service (“IRS”) simply because he/she/it decided to form or pay or receive payment from a private entity or person in an “offshore secrecy jurisdiction”. A troubling example: If a USA person (other than an entity with shares regularly traded on an established securities market) received a payment (let’s say a refund) from a B&B in Switzerland (the shares of which are not regularly traded on an established securities market), then I gather the IRS would have cause to initiate an audit, investigation or even a prosecution simply because the USA person was unable to produce “clear and convincing evidence” (lost his receipt) to “rebut the presumption”.

D. “Offshore secrecy jurisdiction”: The initial list of “offshore secrecy jurisdictions” is recreated below. I do not like these sort of lists as they often involve little thought, are based on unsubstantiated claims, emanate from outdated lists and the decisions are often made by people in the USA who do not even have a passport!!! Hong Kong and Singapore are included on this list. Given these jurisdictions, among others on the list, engage in substantial trade and investment activities with the USA, I do not see how this list of “offshore secrecy jurisdictions” is useful even to the USA.

Anguilla	Antigua /Barbuda	Aruba	Bahamas	Barbados	Belize
Bermuda	BVI	Cayman Islands	Cook Islands	Costa Rica	Cyprus
Dominica	Gibraltar	Grenada	Guernsey /Sark/Alderney	Hong Kong	Isle of Man
Jersey	Latvia	Liechtenstein	Luxembourg	Malta	Nauru
Netherlands Antilles	Panama	Samoa	St. Kitts	St. Lucia	St. Vincent
Singapore	Switzerland	Turks & Caicos	Vanuatu	Nevis

E. ”Clear and convincing evidence”: In the USA, the burden of proof in civil cases is usually “preponderance of evidence” and in criminal cases “beyond a reasonable doubt”. It is probably fair to say that “clear and convincing evidence” is the mid-level between the civil and criminal standards. It is troubling to make it so easy for the IRS to pursue a taxpayer by creating a “rebuttable presumption” based on fairly common conduct with a non-USA person (other than an entity with shares regularly traded on an established securities market) and then require the taxpayer to meet this higher burden of proof. It seems to me this Bill will likely discourage USA persons (other than an entity with shares regularly traded on an established securities market) from investing in a non-USA company (other than an entity with shares regularly traded on an established securities market) simply because the USA person may not be able to meet the burden of proof when receiving a distribution.

F. “Shall prohibit the introduction by the taxpayer of any foreign based document that is not authenticated in open court by a person with knowledge of such document, or any other evidence supplied by a person outside the jurisdiction of a United States court, unless such person appears before the court”: First, this language, in effect, denies the authenticity of a “foreign based document” despite the fact it may be issued by a recognized, sovereign state. Second, this language, in effect, extends personal jurisdiction of an USA court over a foreign person. If he/she is unwilling to take the time and spend the money to “appear before the court”, then the taxpayer loses. This may be true despite the fact the “foreign based document” may be wholly authentic. I cannot imagine the authors of this Bill seriously wish to offend every member of the international community by requiring the “re-authentication” of documents issued by sovereign states.

To be fair, my concerns initially reflect those of an offshore practitioner doing business via “offshore secrecy jurisdictions” with USA persons, who are not publicly traded companies. Having said that, I am equally concerned about the impact on USA persons, who are not publicly traded companies, but who are exercising their rights to engage in international business or offshore planning. This parochial effort to achieve what should be a desired objective by all persons via questionable means is something all members of the international community, including USA persons, should read with concern.

Thanks Jack for an interesting albeit sobering read. More from Singapore in the upcoming weeks. Off to fetch a Singapore Sling...whatever that is...cheers.

Untill next time,

John

Jack W. Flader, Jr. is the CEO & Group Managing Director of The GCSL Group of Companies, which is based in Hong Kong with offices in Anguilla, Belize, Cook Islands, Samoa, Singapore and Shanghai. Jack has more than 20 years of experience in law, financial and fiduciary services in Asia dating from his initial posting to Singapore in 1985. He is a member of the International Tax Planning Association, Asia Offshore Association, Hong Kong General Chamber of Commerce, Hong Kong Securities Institute, American Bar Association, International Bar Association and the Center for International Legal Studies. Jack has been an independent member of the board of directors of a Nasdaq quoted public companies, Hong Kong listed companies and is an advisor to several other quoted/listed public companies in the USA and Hong Kong. Jack has Bachelor of Arts, Masters of Business Administration and Doctor of Jurisprudence degrees and is an attorney and counselor at law of the State Bar of California and the Northern District of California of the United States District Court.

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