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Swiss banking secrecy in the news again as germany seeks data

by Linda Beale

Swiss banking secrecy in the news again as Germany seeks data

The Swiss are fighting hard to maintain their edge in providing tax evasion services for the euro zone and the US. In spite of the modest changes to the US-Swiss tax convention, we can expect difficulty in acquiring information from Swiss banks that should be turned over routinely. Germany is experiencing the same problems. But, as many will have read, a whistleblower offered Germany more data on Swiss bank accounts, for a price. And Germany bought it last month for $3.5 million, gleaning the names of 1500 account holders and other information (information that may also be shared with other countries such as the US and provide additional ways to hone in on US tax evaders with secret accounts).

Now starts the internecine wrangling between the two EU countries. Before the deal was finalized, the Swiss authorities and a German Taxpayers Association complained that the German deal would reward a criminal who had engaged in industrial espionage. See, Is It Right to Do Business with Criminals? Feb. 2, 2010.

And now that the deal is done, the Swiss are considering how to get even. See Dempsey, Battle over Tax Data Heats Up between Switzerland and Germany, NY Times Feb 15 2010. At least one Swiss lawmaker has proposed a law that would have Switzerland releasing the names of all German politicians who have secret bank accounts in Swiss banks. Hmmm. That might be a very good idea. The trifle of a breach to the wall of Swiss banking secrecy would be a good start towards a law that does away with it altogether. Having German politicians exposed for speaking out of both sides of their mouths–those who have secret Swiss accounts but are publicly making a big show about Germans who are using the accounts to escape German taxation–might provide enough Schadenfreude to help shame the system back into greater compliance. And once people realize that Swizterland is still intent on maintaining its tax evasion services no matter what it has agreed to in its newer tax treaties, maybe countries will get even tougher on the country and insist on real tax information sharing.

But note the result mentioned for one of the German account holders identified in the earlier LIchtenstein bank information. A court awarded the holder millions of euros, on a finding that the bank should have warned him about the release of his information so that he could have voluntarily come forward to the German authorities. The account holder obviously knew that he had created a secret account and that he was evading German tax lawyers. The bank, of course, must have known that it was facilitating such evasion. The court apparently assumes that the bank owed its co-conspirator notice that its role in the conspiracy had been compromised. That’s a pretty strong dose of due process protection, when an aider of your tax evasion is required to inform you when it can no longer perform as expected, so that you can call short your tax evasion with the least possible damage to yourself! Ends up rewarding the tax evader with the damages. I must admit that seems to challenge common sense. Tax evasion is one “venture” where the co-venturers should all be at risk if one of them falters…..

Switzerland has facilitated tax evasion for decades. It’s time to end this farce and force the Swiss to close down their tax sheltering business.

[editorial comment: sorry for being offline most of the last week, folks; I’ve been ill but now am much better so hopefully can return to regular postings.]
crossposted with ataxingmatter

Swiss banks, hedge funds? assist with tax evasion

by Linda Beale

Two “R”s in the news: Rachel Alexandra and Rudolf Elmer–Swiss banks, hedge funds? assist with tax evasion
Maybe the world is looking up. A filly has won the Eclipse Award for Horse of the Year, by a whopping 130 votes to second runner Zenyatta’s 90 votes. I’ve always had a soft spot in my heart for horses, and especially for fillies. Comes from growing up visiting my country cousins in Tennessee, where my favorite part of the visit was getting to ride old Dan or some other horse.

And Rudolf Elmer is doing his bit, too, to add some cheer to the day. He’s the banker who worked for Swiss bank Julius Baer until he was fired in 2002 and has spent time sense sharing with the world the nefarious deeds of some of the Swiss institutions who have helped clients evade billions in taxes through uses of offshore havens. Says Rudolf “Offshore tax evasion is the biggest theft among societies and neighbor states in this world.” Swiss Banker Blows Whistle on Tax Evasion, New York Times, Jan 19, 2010

Elmer is flying to Germany where he is planning to blow the whistle even louder on Swiss banking assistance for tax evasion. The German authorities are “putting him up in a five-star hotel” but you can bet the U.S. authorities are eagerly probing his show and tell–apparently documents covering more than 1300 individuals and 100 trusts over five years that “detail the undisclosed role of American investment management companies in funneling American, European and South American clients who wished to avoid taxes to Julius Baer.” Elmer’s no saint, obviously, but the IRS strategy is described as “it takes a rogue to catch a thief” (echoes of television’s crime dramas).

The hiding places for all those wealthy tax scoflaws who thought they could just slip their millions into the shadows may not be much good these days. Further, the possible complicity of hedge and private equity firms in assisting tax evasion should, if verified, be the final nail in the coffin of the privileged “carried interest” taxation of hedge and equity fund managers’ compensation.

SILOs –more action needed?

Tax advantaged “sale-leasebacks” with strapped-for-cash municipalities (SILOs, in the ever-present tax acronym set) came back to light when the Washington Metro train crashed a week ago. The cars were ones that were involved in the metro authority’s SILO deals with various banks, and the authority didn’t have any spare cash left to fund replacements. See this A Taxing Matter posting on the Metro SILOs, Jun 25, 2009.

I won’t rehash the entire discussion of SILOs covered there. Just note that the transit SILO deals were contrived to permit banks to “buy” the federal income tax depreciation deductions on municipal equipment. The municipalites couldn’t use the deductions, since municipalities are tax-exempt entities. The buying corporations were subject to US tax (usually, a bank) and they were looking for every way possible to avoid paying tax–they would essentially pay a fee to the municipalities, sharing part of their tax savings, for serving as an accommodation party in these deals. They “purchased” the municipalities’ property with nonrecourse debt, and then had “lease income” that was offset by both interest deductions and depreciation deductions, generating artificial losses from the accelerated depreciation. Most of the purchase price was set aside to defease the seller’s obligation under the lease, with the excess the fee for accommodating the tax shelter.

Jim Lehrer covered transit agency SILOs in the March NewsHour, depicting many of the transit agencies as motivated by their desperate need for capital–and encouraged by the federal Dept. of Transportation to use these means to get some. So there is a vicious double circle of irony here, that as states and localities cut taxes during the GOP years, under the flawed assumption that lower taxes means higher revenues, the states and municipalities also cut back on the funding needed by these important public service agencies, and an arm of the federal government encouraged these transit agencies to enter these deals, and at least 30 of them did, serving as accommodation parties in tax shelter deals with banks, so that banks would pay even less taxes than they already did.

Future SILOs were generally undone by new section 470, one of the few revenue raising provisions in the 2004 tax act. (The 2004 Act otherwise amounted to a pile of tax breaks for US corporations, such as the rate cut on repatriating offshore profits. It was misleadingly labeled the “American Jobs Creation Act” to signal the purported justification for all the corporate tax breaks. It didn’t lead to the creation of many jobs.) The new section disallowed to U.S. taxpayers a “tax-exempt loss”, defined as the excess of deductions other than interest and interest deductions allocable to tax exempt use property over the aggregate income from the property. Exceptions allowed certain “true” leases–essentially, ones in which the obligation of the seller-renter had not been defeased by the payment from the buyer and where the buyer had actually put some equity into the deal (the provision requires only 20% of genuine, at-risk equity). There are fewer tax benefits to true leases, so even with the exception, the provision deters leasing deals.

One hitch–the act only applied prospectively, and the transit deals (just one of the varieties of SILOs that were being done at the time of the 2004 change) got special treatment, in that any deals in the pipeline were allowed to be grandfathered in as long as they were done by 2006!

The IRS pursued the old deals with pre-2004 Act tools and won SILO (and LILO–the earlier “lease in, lease out” deals) cases against Fifth Third Bank, BB&T, PNC and other banks. See, e.g., IRS Wins AWG SILO Tax Shelter Case, TaxProf Blog (May 28, 2008) (dealing with the Ohio court’s decision in 2008-1 USTC 50,370, in favor of the IRS in a SILO case involving two US national banks’ “purchase”, with nonrecourse loans from German banks whose proceeds were used by the “seller” to defease the lease obligation, of a German waste facility used to acquire beneficial tax deductions); Ohio Judge Rejects Tax Claims on $423 Million Alleged Purchase of German Facility Made by Cleveland & Pittsburgh-Based Banks, DOJ (May 30, 2008); DOJ, Ohio Jury Finds Cincinnati-based Bank not Entitled to $5.6 Million Tax Refund (LILO transctions); BB&T Corp, 2008-1 USTC 50,306 (4th Cir.) (striking down tax treatment of financial service company’s lease of Swedish wood-pulp manufacturing equipment as a LILO shelter); DOJ, Statement of Assistant Attorney General Nathan J. Hochman on Today’s Decision in BB&T Corporation v. United States (Apr. 29, 2008).

After the court victories, the IRS offered a SILO settlement for these deals that permitted them to keep 20% of their claimed tax losses and waived the penalties, if they terminated the transactions. IRS Commissioner’s Remarks Regarding LILO/SILO Settlement Initiative (Aug. 6, 2008); Donmoyer, IRS Offers to Settle 45 leasing Tax-Shelter Disputes, (Aug. 6, 2008); Service Launces LILO, SILO Settlement Initiative, J. Acct. (Oct. 13, 2008). It later announced that “hundreds of taxpayers settled similar cases involving tens of billions of dollars.” DOJ, Justice Department Highlights FY 2008 Tax Enforcement Results (Apr. 13, 2009). On leaving office, Korb statedthat “taxpayers representing over 80 percent of the dollars involved have elected to take advantage of the settlement initiative.” See Korb Interview. (Dec. 19, 2008).

The settlement offer required taxpayers to terminate the transactions by Dec. 31, 2008, else they would be deemed terminated by that date, with taxpayers still able to claim the partial loss benefit through the actual termination date if they terminated the transaction by Dec. 31, 2010. That’s a fairly strong incentive for termination, but the municipalities may be on the hook for hefty termination payments under their contracts. Even worse, the AIG situation provided a perfect trigger for causing a technical default to apply. AIG guaranteed these deals, so when its credit rating went down, the transit agencies are in technical default and liable for hefty penalty payments. (see NewsHour video, above).

There are real problems here, including the idea of one agency of the government supporting its “clients” (transit agents of municipalities) entering into deals like this that result in corporate tax cheats robbing the government of important revenues. Another problem is the idea of the banks that were instrumental in causing the fiscal crisis–by risky, speculative behavior that disregarded the systemic risks–using AIG’s collapse because of that fiscal mess as an excuse to get municipalities that are especially cash-strapped because of the fiscal crisis (and finding their ability to borrow or get tax revenues severely restricted) to pay over large penalty amounts under their shelter contracts. It seems like an unfair windfall for tax cheating Big Banks at the cost of the people.

And of course, just extending the 2004 provision to make grandfathered SILO/LILO transactions illegitimate and their tax deductions disallowed doesn’t solve this problem, since these are windfalls that the tax cheaters would get under their “lease” contracts.

Rep. Menendez of NJ has proposed a potential solution–the “Close the SILO/LILO Loophole Act” S. 1341, introduced in late June. His bill, he says, would “help protect WMATA and other transit agencies who are being threatened by banks seeking to gain a windfall from the current economic climate while potentially putting transit agencies at risk.” See press release, As Lease-Back Deals Are Raaised as an Issue in Metro Crash, Menendez Says legislation Can help Unwind Deals, (Jun 26, 2009); Davis, Bill Would Tax Banks that Sue Agencies , Star Ledger (Jun 24, 2009); Letter from Menendez to Hoyer (Jun 26, 2009) (noting a need to “protect transit agencies from banks who are seeking to exploit a technicality that would result in agencies having to pay banks millions of dollars that could otherwise be used to shore up equipment and ensure safe operations, even though they have not missed a single payment to the bank”). The bill imposes an excise tax equal to 100% of any “ineligible amount” collected by “any person other than a SILO/LILO lessee” as a party to a SILO/LILO transaction. Ineligible amounts are proceeds from terminations, rescissions, or remedial actions in excess of those under defeasance arrangements. The bill also would deny deductions for attorney fees and other costs attributable to seeking to recover ineligible amounts.

It’s messy, but it does end up with the right results, it seems. I note, though, that there are no additional co-sponsors at this time. Doesn’t look like Congress is hopping on the bandwagon.