Chad P. Ralston, Going it Alone: a Pragmatic Approach to Combating Foreign-effected Tax Evasion

• Jurisdiction: United States,Federal
• Citation: Vol. 24 No. 2
• Publication year: 2010
• topic: Banking and Finance Law,Corporate / Commercial,Tax Law,Criminal Law

GOING IT ALONE: A PRAGMATIC APPROACH TO COMBATING FOREIGN-EFFECTED TAX EVASION

INTRODUCTION

The United States has had a number of encounters with the Swiss recently that can hardly be described as amicable. At the heart of these confrontations is one of Switzerland's most hallowed institutions: bank secrecy. Oftentimes, this bank secrecy can lead to tax evasion, a crime that costs the United States alone an estimated $100 billion per year.¹The recent confrontations between the two nations began when the United States received information from a former Swiss banker about the "concerted effort[s]" made by Swiss bank UBS to recruit wealthy U.S. clients to open Swiss bank accounts.²After months of political maneuvering, UBS finally agreed to hand over information on fewer than 4500³of an estimated 52,000 U.S.-client accounts.⁴Only two months after the United States began applying pressure to UBS,⁵Swiss officials stumbled upon⁶and arrested Roman Polanski, the famous director⁷wanted by U.S. authorities since the 1970s. The arrest was not for tax evasion, but for an entirely unrelated crime.⁸Some commentators think Switzerland's move smacks of political expediency, a mere "attempt to curry favour with the

[United States]" to shift attention away from the recent tax scandals.⁹After all, Polanski has maintained a chalet in the Swiss Alps for years but was only arrested within the last year.¹⁰Most recently, even UBS's settlement with the United States to release data on U.S.-client accounts is in jeopardy. A Swiss court held that much of the information sought by the United States is legally protected in Switzerland and is thus off limits.¹¹What is more, one senator described the language of the U.S.-Swiss settlement relating to UBS accounts as too soft on the Swiss.¹²The Senator went on to lament the United States's capitulation to the agreement, believing it to be fraught with ambiguous wording that allows Switzerland to retain much of its bank secrecy.¹³

As alluded to earlier, these recent events share a common theme: they all involve, in some way or another, Switzerland's bank secrecy, an institution that often encourages tax evasion.¹⁴Nor is Switzerland alone when it comes to helping individuals hide assets and evade taxes;¹⁵the efforts of various tax- friendly jurisdictions have produced a number of well-publicized tax scandals.¹⁶These scandals have occurred despite a broad multilateral initiative by the Organisation for Economic Co-operation and Development ("OECD") to pressure tax havens to reform their ways,¹⁷and despite a number of bilateral initiatives taken by the United States to address tax evasion.¹⁸All of this begs the question: do political maneuverings and nations' self-interest in general render futile multi- and bi-national approaches to combating tax evasion? That question informs the heart of this Comment, which attempts to provide a thorough answer, and proposes solutions to what this Author terms "foreign- effected tax evasion," or tax evasion accomplished by concealing one's assets in a foreign jurisdiction.

When the United States recently pressured UBS "to disclose the names of all of its U.S. clients who [had] opened accounts in Switzerland," it marked the "first time [in history] that the United States . . . attempted to pierce Swiss bank secrecy by compelling a Swiss bank to name its U.S. clients."¹⁹That this was the first time the United States has ever pressured Swiss banking secrecy might come as a surprise, but the federal government's ramped-up efforts to combat foreign-effected tax evasion should not. After all, the U.S. budget deficit has grown steadily over the past decade and has recently surged to an unprecedented level. Given that tax evasion costs the United States an estimated $100 billion per year,²⁰putting a stop to it offers a robust, albeit partial, solution to help tame the deficit. The deficit level may help explain the United States's new approach in combating tax evasion by attempting to pierce Switzerland's bank secrecy for the first time.

Even if the means by which to combat tax evasion have changed, the focus on the issue of tax evasion is nothing new to the United States or to developed nations in general. During the 1990s, the OECD began to research the costs of international tax evasion, the manner in which "tax havens" and "harmful . . . tax regimes" were providing services to allow residents of developed nations to evade taxes, and remedies to what was perceived as the problem of "harmful tax competition."²¹Beginning in 1998, the OECD issued a series of reports on this topic.²²After identifying traits common to tax havens and laying out steps that havens could take to reform their ways, the OECD threatened to list jurisdictions that failed to comply with the OECD's suggested reforms as uncooperative.²³In the end, though, and not in the least because tax-friendly regimes succeeded in painting the OECD's objectives as hypocritical,²⁴the OECD's multilateral initiative largely came up short.²⁵

This Comment aims to provide a detailed synthesis of the issues surrounding tax flight and tax evasion, with the ultimate goal of providing suggestions as to future strategies to use against foreign-effected tax evasion. The Introduction provides background information on and a synopsis of the issues attendant with foreign-effected tax evasion. Part I lays the foundation for the forthcoming analysis. It explains what tax flight and tax evasion are and how they can be achieved. It also examines arguments for and against the tax competition that makes foreign-effected tax evasion attractive and shows why foreign-effected tax evasion is harmful not only to the United States's purse, but also to wealth-creation in general. Lastly, it shows methods that an individual taxpayer can take to conceal her assets from the Internal Revenue Service ("IRS"). The example illustrates how hard it is to fight the issue, especially with either a multi- or bilateral approach.

Part II details the various multi- and bilateral approaches that the OECD and the United States have taken to combat foreign-effected tax evasion and deter tax havens from providing an outlet for such abuse. In detailing these strategies, Part II considers tactics actually employed by the OECD, as well as tactics it decided against, which may have proved favorable in the "war against tax flight." It then analyzes why the OECD's initiative failed. Following this, Part II briefly summarizes and evaluates one commentator's innovative multilateral approach to curbing foreign-effected tax evasion. It then examines the United States's bilateral agreements aimed at curbing tax evasion, including bilateral tax treaties, Tax Information Exchange Agreements

("TIEAs"), and Qualified Intermediary ("QI") programs. Finally, this Part concludes by discussing and highlighting the shortcomings of each of these bilateral approaches.

Part III shifts to a discussion of recent unilateral approaches for addressing the issue of foreign-effected tax evasion. It summarizes Germany's informant- driven approach, in which German officials acquired data on tax-evading Germans from a defector of a prominent Liechtenstein bank. It then segues into an exploration of the United States's recent informant-driven approach and recommends proposals to strengthen such an approach. Next, Part III recounts the United States's well-publicized 2009 amnesty program and advances measures to make this voluntary disclosure program even more effective. As Part III shows, the results achieved by these tactics generally weigh in favor of a unilateral approach. Lastly, it examines the current laws on tax evasion, as well as the Racketeering Influenced and Corrupt Organization Act ("RICO") statute, when advocating for the inclusion of tax evasion into RICO as a predicate act. This Comment concludes by emphasizing that, although the United States has demonstrated a step in the right direction towards curbing foreign-effected tax evasion, much more remains to be done.

I. FOREIGN-EFFECTED TAX EVASION AND TAX COMPETITION

A. Overview

In a broad sense, tax flight²⁶is the movement of taxable capital to lower- or no-tax jurisdictions by either individuals or corporations.²⁷Tax abuses²⁸cost the U.S. government an estimated $100 billion per year in the form of foregone tax revenue.²⁹Of this figure, estimates of the amount of tax revenue lost to individual tax flight-as opposed to corporate tax flight-range from $40 billion-$70 billion.³⁰This figure is alarming given the steady growth of the U.S. budget deficit to a level never before seen: the budget deficit was projected to be more than $1 trillion in 2009 alone³¹and, from the period spanning 2010 to 2019, the U.S. government projects its deficit to be over $6.9 trillion.³²Given these astronomical levels of debt, the U.S. government obviously has an incentive to make up ground in any way it can. Stopping tax evasion offers one solution, albeit a partial one. This Comment focuses on individual tax evasion, the mechanics of which are addressed in the next

Subpart.

B. Mechanics

It is important to note the difference between tax avoidance and tax evasion. While tax avoidance is the "act of taking advantage of legally available tax-planning opportunities in order to minimize one's tax liability,"³³tax evasion is the "willful attempt to defeat or circumvent the tax law [of the United States] in order to illegally reduce one's tax liability."³⁴Both criminal and civil prosecutions are available in tax evasion cases.³⁵

An individual can evade taxes in countless conceivable ways. Some schemes involve simple attempts to underreport one's earned income by failing to report some or all of it.³⁶However, other more elaborate schemes involve offshore holding companies, foreign trusts, and jurisdictions noted for their banking secrecy; often, tax havens or "harmful preferential tax regimes."³⁷The complexity of these structures makes combating such tax...