US presidential hopeful Obama targets hedge funds with tax haven bill

Date: Tuesday, February 20, 2007
Author: HedgeWeek

Senator Barack Obama, who has launched a campaign to become the first black US president, has thrown his backing behind a bill that would require hedge funds to establish anti-money laundering programmes under the supervision of the US Treasury Department.

Citing an alleged USD100bn lost to the US Treasury through offshore tax evasion and abusive tax avoidance schemes, Obama has joined senators Carl Levin and Norm Coleman in introducing legislation aimed at stopping offshore tax haven and tax shelter abuses.

Says Obama: 'This is a basic issue of fairness and integrity. We need to crack down on individuals and businesses that abuse our tax laws so that those who work hard and play by the rules aren't disadvantaged.'

Coleman, a Republican, is the chairman and Levin the senior Democratic Party representative on the Senate's Permanent Subcommittee on Investigations. Over the past four years they have led a probe into offshore tax havens, abusive tax shelters, and the professionals who design, market and implement tax avoidance schemes.

The Stop Tax Haven Abuse Act is a strengthened version of a tax reform bill introduced by Levin, Coleman, and Obama in the last Congress. The three senators say the draft legislation has been strengthened the subcommittee investigation which resulted in a hearing and report last August 1, highlighting a series of cases in which US taxpayers have used offshore jurisdictions to avoid taxes.

They cite experts who estimate that the total loss to the Treasury from offshore tax evasion could amount to US100bn a year, comprising USD40bn to USD70bn from individuals and another USD30bn from corporations engaging in offshore tax avoidance. They say abusive tax shelters add tens of billions of dollars more.

'With a USD345bn annual tax gap and a USD248bn annual deficit, we cannot tolerate a USD100bn drain on our Treasury each year from offshore tax abuses,' Levin says. 'Offshore tax havens have declared economic war on honest US taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans.

'This bill provides a powerful set of new tools to clamp down on offshore tax and tax shelter abuses. None of these offshore schemes would work without the secrecy that prevents US agencies from enforcing our laws. Our bill offers innovative ways to combat offshore secrecy.'

Adds Coleman: 'It is simply unacceptable that some individuals are using offshore tax havens and secrecy jurisdictions to shelter trillions of dollars in assets from taxation. These tax schemes cause a massive revenue shortfall. We are introducing this bill to close these loopholes, shut down offshore tax schemes, and ensure that every American pays their fair share of taxes.'

According to its sponsors, the 68-page bill would establish presumptions to combat offshore secrecy by allowing US tax and securities law enforcement to presume that non-publicly traded, offshore corporations and trusts are controlled by the US taxpayers who formed them or sent them assets, unless the taxpayer proves otherwise.

It would also impose tougher requirements on US taxpayers using offshore secrecy jurisdictions by listing 34 jurisdictions that have already been named in Internal Revenue Service court filings as probable locations for US tax evasion.

The legislation would authorise 'special measures' to stop offshore tax abuses by giving the Treasury authority to take special measures against foreign jurisdictions and financial institutions that impede US tax enforcement.

It seeks to strengthen detection of offshore activities by requiring US financial institutions that open accounts for foreign entities controlled by US clients, open accounts or establish entities in offshore secrecy jurisdictions for US clients to report such actions to the IRS.

The bill aims to close offshore trust loopholes by taxing offshore trust income used to buy real estate, artwork and jewellery for US persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets. However, it is not clear how the income of trusts not subject to US jurisdiction would be taxed.

The bill would strengthen penalties on tax shelter promoters by increasing the maximum fine to 150 per cent of gains from abusive tax avoidance schemes, and on corporate insiders who hide offshore stock holdings by increasing the maximum fine on them to USD1m per violation of U.S. securities laws.

Finally, the legislation would require hedge funds and company formation agents to know their offshore clients by requiring them to establish anti-money laundering programmes in the same way as other US financial institutions, under regulations to be issued by the Treasury Department.

It is not immediately clear whether the proposed bill would have the desired effect of increasing the transparency of US-owned assets in offshore jurisdictions beyond agreements to curb tax evasion already in place with most leading offshore jurisdictions.

Over the past six years the US has signed tax information exchange agreements with countries and territories including Aruba, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and the Isle of Man.