Offshore financial centres from Bermuda to Singapore could be facing a problem more threatening than rising seas. The rising tide of international attention on offshore financial centres is gathering steam as governments look for sources of revenue in the midst of a global recession.

Offshore financial centres from Bermuda to

Singapore could be facing a problem more threatening than rising seas. The rising tide of international attention on offshore financial centres, from small islands to large European nations, is gathering steam as governments look for sources of revenue in the midst of a global recession.

In addition to the
US, the United Nations, the Group of Twenty industrial nations and the

UK government have all recently focused on offshore jurisdiction.  This could signal a new international resolve to act against countries perceived to be taxpayer-friendly.

Perhaps the biggest threat has come from US President-elect Barack Obama, who previously pledged to crack down on abusive “tax havens”, targeting more than 30 jurisdictions.  In February 2007, then-Senator Obama co-sponsored the Stop Tax Haven Abuse Act, which was introduced in both houses of Congress but was not enacted.  Mr Obama’s aides have indicated that similar legislation will be considered, possibly in the early months of 2009. 

As it remains unclear whether the US Congress will enact such legislation or what provisions would be included, we outline below key provisions contained in the STHAA and the effects similar legislation could have on those with interests in offshore jurisdictions. 

Tax havens

The STHAA includes a broad list of 34 “Offshore Secrecy Jurisdictions” including Jersey, Guernsey, the Isle of Man,
Switzerland,
Singapore, the Cayman Islands, Bermuda, Hong Kong, and

Costa Rica.  This list is troubling because it fails to separate jurisdictions that conform to international standards from other “rogue” jurisdictions. 

These jurisdictions were targeted because they have rules that “unreasonably restrict the ability of the

US to obtain information relevant to the enforcement” of its tax laws.  Several listed jurisdictions have signed Tax Information Exchange Agreements with the

US but are nevertheless included.  If legislation is to be enacted, additional consideration should be given to which jurisdictions warrant inclusion on the blacklist.

Presumed guilty

The centrepiece of the STHAA is a provision that would force taxpayers to prove that they do not have control over offshore entities with which they contract.  Under this “guilty until proven innocent” approach, US individuals will be presumed to control any entity (including trusts, corporations, and partnerships) created or domiciled in an offshore jurisdiction if the US person directly or indirectly formed, received assets from or is a beneficiary of that entity. 

The STHAA also would create a presumption that transfers from a

US individual to an offshore jurisdiction include untaxed income. Taxpayers could rebut these presumptions with direct evidence that all tax owed on such amounts had been paid.

In order to ferret out abuses, the Stop Tax Haven Abuse Act would require financial institutions that open accounts for US persons or create non-publicly traded entities in offshore jurisdictions to report such transactions to the Internal Revenue Service.  Reporting of such transactions is already required of taxpayers, but the STHAA would place this burden on intermediaries as well.

Trust rules

The STHAA expressly targets offshore trusts by expanding the broad rules setting out when a

US person is treated as the tax owner of an offshore trust’s income and gains.  This would be accomplished by attributing to the grantor any power held by a trust protector and treating any

US person receiving cash or other property from a foreign trust as a beneficiary of such trust.

With respect to personal use property, the STHAA would treat cash, marketable securities, artwork, jewellery or other personal property loaned by a foreign trust to a

US person as a distribution.  Such a distribution would be taxable on the value of the use of such property, although it is unclear how this amount would be calculated.

The STHAA is clearly not intended to be a paper tiger.  It would give the IRS additional time to complete audits and would broaden the use of so-called “John Doe” summonses that are used to obtain information in investigations.  Both provisions would give the IRS a decided advantage in the audit process.

Financial institutions and fiduciaries would not be immune from penalties. 

US banks could be prohibited from opening accounts for non-compliant foreign financial institutions and US financial institutions could be prohibited from accepting credit card transactions involving non-compliant foreign banks.

So-called “tax havens” are easy political targets that provide opportunities for rhetoric and revenue.  Mr Obama has proposed tax cuts as part of an economic stimulus package, and a bill such as the STHAA could be a useful revenue raiser to offset costs.  A key period to monitor will be the first 100 days of the presidency, as Mr Obama may try to make significant and visible policy decisions. 

Accordingly, it would be prudent for intermediaries to consider what effect these proposals could have.