Post by Snowdon on Mar 13, 2009 7:31:00 GMT 4
Tax haven use faces sanction in the US
Catherine Snowdon, New York
The abuse of so called tax havens is facing renewed attacks in the US.
President Obama referred vaguely to tackling this practice in his budget plans released on February 26.
The attention on tax havens is dividing tax professionals. "The whole area of tax havens is very tricky," said an experienced adviser from Washington DC. "In today's world there is not a lot of tolerance for people who don't pay their fair share of tax understandably."
One taxpayer has a different view.
"There is a fundamental misunderstanding of the term tax haven and their use in business," said an in-house tax counsel, "I don't disagree with the history, it was a smart move to go after disclosure, but it is high net worth individuals they should be after, we disclose everything we do and are heavily regulated. To attack multinationals on this topic is either a misunderstanding of how we work or a manipulation to the general public."
Democrat Senator Carl Levin produced an updated version of his draft Stop Tax Haven Abuse Act which he first introduced in the Senate in 2007, on March 2.
"Senator Levin has been after this for years," said one adviser familiar with Capitol Hill.
What gives supporters of the draft legislation hope that it will make it into law is that Barack Obama was a co-sponsor of the earlier bill in the Senate.
The bill, which Levin reintroduced to the Senate on the same day as party colleague Representative Lloyd Doggett introduced a companion bill tin the House, is similar to the legislation introduced in February 2007, but contains several new provisions including one regarding treating certain foreign corporations as US domestic corporations for US federal income tax purposes.
This change could have a considerable detrimental impact on structures commonly used by hedge funds, real estate funds and other investment funds.
Section 103 of the Stop Tax Haven Abuse Act provides that certain foreign corporations that are managed or controlled, directly or indirectly, primarily in the US would be treated as domestic corporations for federal income tax purposes.
For the provision to apply to a foreign corporation, either (i) the stock of the foreign corporation must be regularly traded on an established securities market or (ii) the aggregate gross assets of the foreign corporation, including assets under management for investors, whether held directly or indirectly, must equal or be more than $50 million at any time during a given taxable year or a preceding taxable year.
A foreign corporation can seek a waiver where the provision is only applicable because the foreign corporation's assets were more than $50 million in a prior taxable year. In addition, the provision does not apply to a controlled foreign corporation that is a member of an affiliated group, the common parent of which is a US domestic corporation that owns substantial assets held for use in the active conduct of a trade or business in the US.
If enacted, section 103 of the Act would apply to taxable years beginning on or after two years from when the provision is enacted.
Section 103 could apply to foreign corporations, such as hedge funds, real estate funds and other investment funds, that utilise offshore entities for a variety of purposes, as do many financing structures. For example, many hedge funds are organised as corporations to avoid having their foreign investors be partners in partnerships that invest in US stocks and securities, which could lead to them being exposed to excessive US taxation. The use of a foreign corporate vehicle does not change the US tax liability of the foreign investors in the foreign entity, but can be used to prevent the foreign investors from being subject to US tax on trading gains.
This provision could substantially reduce liquidity in the US markets at a time when the markets are already suffering.
The Obama administration is gearing up to make changes to punish taxpayers that use tax havens.
"The Budget addresses the use of offshore structures and accounts by US corporations and individuals to avoid and evade US taxes," said Treasury Secretary Timothy Geithner in his opening statement at a House Ways and Means Committee hearing on March 3. "Over the next several months, the President will propose a series of legislative and enforcement measures to reduce such US tax evasion and avoidance... We will propose rules to both reform US corporations' ability to defer foreign earnings and deter high income individuals and corporations from using tax havens to avoid taxation."
Catherine Snowdon, New York
The abuse of so called tax havens is facing renewed attacks in the US.
President Obama referred vaguely to tackling this practice in his budget plans released on February 26.
The attention on tax havens is dividing tax professionals. "The whole area of tax havens is very tricky," said an experienced adviser from Washington DC. "In today's world there is not a lot of tolerance for people who don't pay their fair share of tax understandably."
One taxpayer has a different view.
"There is a fundamental misunderstanding of the term tax haven and their use in business," said an in-house tax counsel, "I don't disagree with the history, it was a smart move to go after disclosure, but it is high net worth individuals they should be after, we disclose everything we do and are heavily regulated. To attack multinationals on this topic is either a misunderstanding of how we work or a manipulation to the general public."
Democrat Senator Carl Levin produced an updated version of his draft Stop Tax Haven Abuse Act which he first introduced in the Senate in 2007, on March 2.
"Senator Levin has been after this for years," said one adviser familiar with Capitol Hill.
What gives supporters of the draft legislation hope that it will make it into law is that Barack Obama was a co-sponsor of the earlier bill in the Senate.
The bill, which Levin reintroduced to the Senate on the same day as party colleague Representative Lloyd Doggett introduced a companion bill tin the House, is similar to the legislation introduced in February 2007, but contains several new provisions including one regarding treating certain foreign corporations as US domestic corporations for US federal income tax purposes.
This change could have a considerable detrimental impact on structures commonly used by hedge funds, real estate funds and other investment funds.
Section 103 of the Stop Tax Haven Abuse Act provides that certain foreign corporations that are managed or controlled, directly or indirectly, primarily in the US would be treated as domestic corporations for federal income tax purposes.
For the provision to apply to a foreign corporation, either (i) the stock of the foreign corporation must be regularly traded on an established securities market or (ii) the aggregate gross assets of the foreign corporation, including assets under management for investors, whether held directly or indirectly, must equal or be more than $50 million at any time during a given taxable year or a preceding taxable year.
A foreign corporation can seek a waiver where the provision is only applicable because the foreign corporation's assets were more than $50 million in a prior taxable year. In addition, the provision does not apply to a controlled foreign corporation that is a member of an affiliated group, the common parent of which is a US domestic corporation that owns substantial assets held for use in the active conduct of a trade or business in the US.
If enacted, section 103 of the Act would apply to taxable years beginning on or after two years from when the provision is enacted.
Section 103 could apply to foreign corporations, such as hedge funds, real estate funds and other investment funds, that utilise offshore entities for a variety of purposes, as do many financing structures. For example, many hedge funds are organised as corporations to avoid having their foreign investors be partners in partnerships that invest in US stocks and securities, which could lead to them being exposed to excessive US taxation. The use of a foreign corporate vehicle does not change the US tax liability of the foreign investors in the foreign entity, but can be used to prevent the foreign investors from being subject to US tax on trading gains.
This provision could substantially reduce liquidity in the US markets at a time when the markets are already suffering.
The Obama administration is gearing up to make changes to punish taxpayers that use tax havens.
"The Budget addresses the use of offshore structures and accounts by US corporations and individuals to avoid and evade US taxes," said Treasury Secretary Timothy Geithner in his opening statement at a House Ways and Means Committee hearing on March 3. "Over the next several months, the President will propose a series of legislative and enforcement measures to reduce such US tax evasion and avoidance... We will propose rules to both reform US corporations' ability to defer foreign earnings and deter high income individuals and corporations from using tax havens to avoid taxation."