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The Clash of Titans

By John Dietz - Email Editor

Date : July 21, 2009

Dear Valued Reader,

Two weeks ago a shot was fired over the bow of the Department of Justice from the Swiss Justice Ministry. The DOJ is looking for their 52,000 alleged American tax dodgers with non-disclosed UBS accounts in Switzerland. The Swiss Ministry indicated they would actively block UBS from handing over the information. Swiss law prohibits UBS from complying with the Miami court order. Therefore, the Swiss Government is acting to acknowledge and enforce its laws, while reaffirming their lucrative offshore financial business.

In February, UBS entered into an agreement with U.S. authorities in which the firm agreed to pay $780 million in disgorgement, unpaid taxes, penalties and interest to the U.S. government. As part of that pact, the firm also agreed to end its U.S. cross-border business.

This would include offshore trusts, foundations and non-operating companies with one or more U.S. individuals as a beneficial owner. Included in the pact is an end to servicing U.S. residents as private clients who maintain this status exclusively through subsidiaries or affiliates registered with the U.S. Securities and Exchange Commission. At the time of the pact, UBS was willing to make available the names of more than 300 American clients allegedly involved in evading U.S. taxes.

Last week the stage was set for the trial to begin in Miami’s Federal District Court between the DOJ, representing the IRS and UBS AG. Settlement talks ended with a mutual request for a stay of the trial until August 3, 2009. Presiding Judge Alan Gold agreed to the joint request and reset the trial opening for Aug. 3. Karina Byrne, a UBS spokeswoman, called the delay a “positive development” that provided an opportunity “to come to a potential resolution”.

So is this trial really between the DOJ and UBS or between the U.S. and Swiss governments? On the surface, it seems like the clash of the titans, as each country now flexes their muscles. The Swiss Ministry has openly stated that if UBS loses the case, the Swiss will not allow UBS to hand over the names. The fallout from the standoff is a demonizing position by the U.S. to coin everything “offshore” as a tax cheat or money laundering scheme, or both!

The DOJ would like you to believe there are a bunch of no good dirty tax cheats hiding all the gold bars they have acquired through illicit dealings. The Swiss would have you believe they are wrongly accused, and their sovereign laws are being violated.

This case at its very core boils down to tax competition around the globe. Offshore Financial Centers or Tax havens (if you’re a high tax country) are nothing more than smaller countries with fewer resources attempting to level the playing field. As with any type of competition, goods and services become cheaper, better and more efficient; tax competition helps keep over spending bloated governments in check. Well, at least that’s the idea anyway.

Taxation in the U.S. is sufficiently complicated so much that clients who are good taxpaying citizens get out of compliance when their advisor (foreign or domestic) did not fully comprehend the tax code, tax treaties and information reporting requirements. Consider that out of 52,000 wealthy Americans on UBS’s list, is it possible there could be Congresspersons, Senators or government officials?

Take the case of Kansas Governor Kathleen Sebelius. The current Obama nominee to be and HHS secretary has admitted to some mistakes on her tax returns and paid about $8,000 in taxes and penalties for errors on her 2005-2007 returns.

Also, you may remember when the Wall Street Journal reported that in 2006 the current Secretary of the Treasury, Timothy Geithner, was audited by the IRS for 2003 and 2004 taxes and concluded that he owed taxes and interest totaling $17,230, according to documents released by the Senate Finance Committee. The IRS waived the related penalties.

During the vetting of Mr. Geithner late last year, the Obama transition team discovered the nominee had failed to pay the same taxes for 2001 and 2002. "Upon learning of this error on Nov. 21, 2008, Mr. Geithner immediately submitted payment for tax that would have been due in those years, plus interest," a transition aide said. The sum totaled $25,970.

The Obama team said Mr. Geithner's taxes have been paid in full, and that he didn't intend to avoid payment, but made a mistake common for employees of international institutions. That characterization was contested by Senate Finance Republicans, who produced IMF documents showing that employees are repeatedly told they are responsible for paying their payroll taxes.

As to why Mr. Geithner didn't pay all his back taxes after the 2006 audit, an Obama aide said the nominee was advised by his accountant he had no further liability. Senate Finance aides said they were concerned that Mr. Geithner or his accountant used the IRS's statute of limitations as a means to avoid further back-tax payments at the time of the audit.

Other tax issues also surfaced during the vetting, including the fact that Mr. Geithner used his child's time at overnight camps in 2001, 2004 and 2005 to calculate dependent-care tax deductions. Sleepaway camps don't qualify.

Amended tax returns that Mr. Geithner filed recently include $4,334 in additional taxes, and $1,232 in interest for infractions, such as an early-withdrawal penalty from a retirement plan, an improper small-business deduction, a charitable-contribution deduction for ineligible items, and the expensing of utility costs that went for personal use.

Settlement reports indicate that a comprise is possible, and the Swiss will consider handing over the names of those clients who violated Swiss fraud laws as a partial list (translation – overtly, well-healed potential individual revenues sources) of violators instead of handing over all 52,000 names.

Both sides have much to gain and lose; but in the end, my guess is that neither have the stomach for trade sanctions and economic warfare.

If you have questions about these types of tax structures, including trusts, please email us at info@trustmakers.com.

Until next time,

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