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Much of MNEs’ "offshore" (and hence untaxed) cash hoards held onshore

by Linda Beale

Much of MNEs’ “offshore” (and hence untaxed) cash hoards held onshore

The Wall Street Journal, in its editorial pages a great friend to big business and low taxes for same, had a decent front-page article  on the corporate hoard of cash designated as “permanently invested offshore”.  In fact, much of that cash is sitting in U.S.-dollar-denominated assets in the good ole USA.  Nonetheless companies are permitted under the tax rules to claim that those profits are earned overseas and kept there.  See  Kate Limbaugh, Firms keep stockpiles of cash in U.S., Wall St. J. (Jan 22, 2013).

Some companies, including Internet giant Google Inc., GOOG +5.74%software maker Microsoft Corp. MSFT +1.36%and data-storage specialist EMC Corp.,EMC +1.03%keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies’ cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn’t flow back to the U.S. parent company, the U.S. doesn’t tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

***

Of course, the designation can be changed in an instant if the company is prepared to accept the tax bite.  United Technologies Corp., for instance, used $4 billion of such “permanently” reinvested funds held by foreign subsidiaries to help pay for last year’s acquisition of Goodrich Corp. Id.
That last quoted paragraph is a giveaway.  Thse foreign subsidiaires are controlled by the US MNE and have no real say in the ultimate use of the cash.  When the MNE wants it for something, it can get it in an instant.  As my colleague Calvin Johnson at University of Texas has noted, this “reinvorces the idea that a foreign sub is just a ledger entry, with no significance”  (email statement quoted with permission).

Meantime, these US-based MNEs are busy lobbying Congress to give them even more tax breaks.   They want a so-called territorial system or the ability to bring home their hoarded cash at low (or effectively negative) tax rates.   MNEs are married to the idea of pushing for paying nothing for the many ways the US economy has boosted their profits through tax expenditures and nothing for the many other ways in which the US system has increased their profits–both at home and abroad.

Remember that their owners already get an extraordinarily preferential rate of tax on dividends paid out to them (treated as net capital gains, recently made permanent in one of the sillier giveaways of the “deal” between Dems and Republicans on whether or not to let the Bush tax cuts expire as the Republicans originally wrote the bill) and on capital gains when they sell the shares.  The very low effective corporate tax rate–not infrequently a negative rate because of the way the rules and time value of money works–means that wealthy shareholders are still getting very much a free ride to accumulated wealth through the US tax system.  It’s time that stopped.

The Journal article’s suggestion–that the Congress needs to “set[] the [corporate income tax] rate low enough that companies opt to pay the tax rather than continue to pile up an estimated $300 billion a year beyond Uncle Sam’s reach.”  Id.  That suggestion must be tongue in cheek–no matter how much the rate is lowered on the wealthy corporations making incredibly high profits, they still insist that they don’t want to pay any tax.  They will not be happy unless the rate is zero or negative.  That is the reason that Oracle “derives about half of its revenue from the US but keeps more than three-quarters of its cash and short-term investments–or $26 billion-in the hands of its foreign subsidiaries” and has established a bunch of new foreign subsidiaries in tax havens for holding these profits.  Id.

From my perspective, Congress should not lower the rate.  It should instead stop many of the loopholes that permit companies to claim to “sell” essential IT property to offshore affiliates in order to then claim profits offshore.  And it ought to deal with similar gambits to lower US taxes, such as disallowing completely any interest deductions for debt to the extent that the company holds “offshore” funds of its controlled foreign subsidiaires in US-dollar-denominated assets in the United States –i.e., no interest deduction for debt of the US MNE consolidated group that is matched by a US-dollar denominated, US asset held by a controlled foreign subsidiary.

Professor Johnson recommends a “global consolidated return” for multinationals, with international negotiations to determine each country’s taxing jurisdiction on that whole.
These and similar ideas should be considered by a Congress truly intent on reasonable reform, economic justice, and distributional justice.

ataxingmatter

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Offshored Assets still in IRS cross-hairs but new disclosure program available

by Linda Beale

Offshored Assets still in IRS cross-hairs but new disclosure program available

As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases.

There have been two “voluntary programs” for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty–the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5.

Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.  In addition, of course, participants have to file returns and pay back taxes and interest for the preceding 8 years, and pay any accuracy-related penalties due.

originally published at ataxingmatter

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New Program for Offshore Accounts

by Linda Beale

New Program for Offshore Accounts
crossposted with Ataxingmatter

As I mentioned in earlier posts, the IRS has released information about a new voluntary disclosure program for offshore account holders.  The last program, which closed in October 2009, provided a low penalty of 20% of the highest aggregate balance in offshore accounts for the various failure to file information returns (FBAR and others) and elimination of any risk of a 75% fraud penalty or criminal prosecution for those accepted into the program who ‘truthfully, timely, and completely” comply with their disclosure obligations under the initiative.  This one is only slightly harsher, with a 25% aggregate-balance penalty.  Participants would also pay a 20% accuracy-related penalty on any tax underpayments for relevant years.

The information is available on the IRS website under “How to make a Voluntary Disclsure under the 2011 OVDI (standing for “Offshore Voluntary Disclosure Initiative”) and in a new Q/A on the website, 2011 OVCI frequently asked questions and answers.  Generally, a taxpayer (or representative) asks the IRS criminal investigation division for a “pre-clearance”.  If granted, it essentially means that the taxpayer is not already a person of interest to the IRS for offshore accounts.  Then the taxpayer has thirty days to comply with the reporting obligations by filing an “offshore disclosure letter“.  That letter discloses the source of the funds, informs the IRS if the taxpayer or related entities are under audit or criminal investigation, and estimates the highest values and income of the offshore accounts for the years between 2003 and 2010.  The taxpayer has to reveal the country, institution, contact at the institution, date account opened, information about any entities connected with the account(s), and details of all meetings and other communications with the account institution and with other advisers about the account.  Once accepted into the program, the taxpayer must make a “full” voluntary disclosure by August 31, 2011–this includes filing amended returns, paying the prescribed penalties, providing complete information on facilitators of the offsore accounts, and filing a closing agreement with the IRS.

The Q&A uses an example of a person with a million on deposit since before 2003, earning $50,000 a year from 2003 to 2010.

They would pay $518,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,

  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and

  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

If the taxpayers didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

It will be interesting to see how this plays out.  Some of my colleagues who practice in this area tell me they believe there are at least several hundred thousand Americans who have “substantial” foreign accounts.  But there are a number of them, I understand, who have decided to take the risk of not being discovered in order to continue to avoid paying these taxes and penalties.  As these programs increase the numbers of accountholders who report contacts, banks and advisers who have assisted in this process, the risk becomes measurably greater.  Personally, I hope that those who choose to continue being scofflaws are the losers and not the government (which is just “we the people”).

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Offshore bank accounts–getting riskier

by Linda Beale

Offshore bank accounts–getting riskier
crossposted with Ataxingmatter

As I noted in an earlier posting, the IRS has continued its focus on secret offshore bank accounts. Naturally, the media covers this issue for their wealthy readers who are following the IRS’s every action in this matter. See, e.g., Paul Sullivan, Hiding Money Overseas? You’re Taking a Big Chance, NYTimes, Feb. 4, 2010.

Sullivan runs through the ways that it has become riskier to hide accounts, as Wikileaks now has indicated that it plans a release of additional names provided by a whistleblower. It’s not just whistleblowers that secret account holders need to worry about, of course. Jilted lovers, business competitors, disgruntled employees–anyone who knows about the account could turn into a whistleblower for personal reasons, with the whistleblower reward just icing on the cake.

Sullivan reminds us that keeping money offshore isn’t illegal in itself; rather, it is the failure to report and pay taxes on the income according to US tax laws that is the illegal activity. Some of those caught by the law are unintentional scofflaws. Sullivan runs through the various reasons that someone may end up facing a penalty for an offshore account even though they had no intention of using the account to evade tax laws, such as beneficiaries of Holocaust survivors who had moved assets into Swiss banks to escape Nazi confiscation.

For the evaders, Sullivan talks about their “risk” of getting caught and their risk of paying significant penalties. But what seems to be missing from Sullivan’s account is any real sense of disgust for those who do intentionally decide to evade their income tax responsibilities. That’s quite likely criminal fraud.

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Voluntary Disclosure Renewed for Offshore Cheats

by Linda Beale

Voluntary Disclosure Renewed for Offshore Cheats
crossposted with Ataxingmatter

In 2009, the IRS provided a generous voluntary disclosure program for people who had money socked into offshore accounts.  See 2009 Voluntary Disclosure Program, IRS. Ordinarily, the taxes, interest (at 20%), accuracy-related penalty (at 20% of the tax liability) and FBAR penalties –at 50% of the account amount over several years–could add up to considerably more than the amount in the account.  The 75% penalty for fraud is a definitepotential, and criminal prosecution (for tax evasion, failure to file a return, filing a false return, etc.) is a possibility too.   The 2009 voluntary disclosure program required taxpayers to reveal all previously undisclosed foreign accounts, amend their returns, and pay all taxes due.  but the penalty charged was much less than the maximum–20% of the tax liability and 20% of the maximum amount in the account during the relevant period.  See Q & A document.

When the ABA tax section met in Boca Raton Florida in late January, IRS officials announced that there will be a second voluntary compliance program for those persons who still have not come forward.  Many practitioners with clients who may decide to participate in this second program had hoped that another would be offered even after the first program ended.  To maintain credibility for future such programs, of course, the IRS will have to be sure that the penalties for disclosure at this later stage will be higher than the penalties for the earlier disclosure program.  Nonetheless, paying the taxes due and a steep but still lesser penalthy while avoiding criminal prosecution should lead a number of the holdouts to disclose.

Someday we will have sufficent information exchange programs that will make hiding assets offshore close to impossible.  But not yet.  So let’s just hope that the IRS gets enough new information from these additional disclosures that it can pull the lid off even more of the banking secrecy in jurisdictions that have assisted US taxpayers in evading taxes for years.  Each time there are significant new accounts revealed, it should be the case that the IRS will get numbers of leads on key bankers and mechanisms being used to hide assets offshore.  You taxpayers who are gambling that they can get away with tax evasion through their offshore accounts should take notice. This will be your second chance. Now might be a good time to ‘fess up.

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