Monday, July 23, 2012

Tax Justice Network: World's Elites Hide Trillions Offshore (7/23/12)

The Tax Prof Blog reports on the Tax Justice Network Study of the amount of offshoring among what readers of this blog often refer to as whales.  See World's Elite Hide $21-32 Trillion From Tax Man in Offshore Accounts (Tax Prof Blog 7/22/12), here.

The Tax Prof Blog quotes the following from the report:
At least $21 trillion of unreported private financial wealth was owned by wealthy individuals via tax havens at the end of 2010. This sum is equivalent to the size of the United States and Japanese economies combined. 
There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals, according to our report The Price of Offshore Revisited, which is thought to be the most detailed and rigorous study ever made of financial assets held in offshore financial centres and secrecy structures. 
We consider these numbers to be conservative. This is only financial wealth and excludes a welter of real estate, yachts and other non--financial assets owned via offshore structures.
The research for the Tax Justice Network by former McKinsey & Co Chief Economist James Henry comes amid growing concerns about an enormous and growing gulf between rich and poor in countries around the globe. Accompanying this research is another study by TJN, entitled Inequality: You Don't Know the Half of It, which demonstrates that all studies of economic inequality to date have failed to account properly for this missing wealth. It concludes that inequality is far worse than we think.
The Tax Prof Blog links to a page on the Tax Justice web site here.  The Tax Prof Blog also has other links on the topic.  The TJN summary report is here.  
See also:

  • Frederick E. Allen, Super Rich Hide $21 Trillion Offshore, Study Say (Forbes 7/21/22), here.
Readers of this blog will know that there is much concern that the IRS is disproportionately penalizing "minnows."  

I am reminded in this regard of the late Janet Spragens with whom I had the honor of serving with at DOJ Tax Appellate Section in the 1970s.  She was a tireless advocate for the taxpayer underdog, often chastising the IRS for going after the smaller taxpayer when there were bigger targets.  (As I recall, she characterized the IRS attitude as being "we have smaller fish to fry," but alas I could not confirm that as an actual quote by a quite Google search.)

Disclaimer:  While with DOJ Tax, I handled a case called Diamond v. Commissioner, 492 F.2d 286 (7th Cir. 1974), here.  That case applied a simple proposition of tax law -- recognized then and now (even if not applied).  Property received for services is taxable income -- either when it was received if it could be valued  at that point or when it could be valued under the open transaction doctrine (usually when some identifiable event occurred that would permit reasonable quantification, like taking the profits out of the partnership).  In a partnership setting, a partner who receives a partnership interest for services is taxable at ordinary income rates at the point of quantification.  Diamond was and, in my opinion, still is the law.  That simple proposition applied to the hedge fund, private equity fund and other industries claiming that profits interests for services is not ordinary income would have solved the problem and avoided the massive revenue raid, undoubtedly in the billions.  To be sure, the problem has complexities, but a smidgen of common sense could have solved that problem a long time ago.  But, as I said, he who has the gold makes the rules.  I would love for Judge Posner (Wikipedia entry here) to get ahold of that problem and reduce it to its essentials.  I can't imagine that, whichever way he ruled, his opinion would be more than a few pages with no footnotes.  (Note, of course, that if Judge Posner addressed the case, it would like be in the Seventh Circuit where Diamond is still the law.)


  1. Small fry indeeed! Is anyone else wondering why we have had no prosecutions of big-time tax operators when tax evasion appears to be rampant?

  2. By going after the "minnows", the IRS can be "successful" more frequently. They don't fight back because they can't afford the lawyer.

  3. You know, my skeptical antenna always goes up, when these types of stories begin to flood the internet largely unquestioned. This is especially so at the time when the IRS is engaged in its offshore jihad OVDI/OVDP programs with their so called claims of "success" which remain un-examined by any investigative journalist.

    Then there is the BIG FATCA push, damn the unintended consequences or collateral damage to the U.S. abroad community. Full speed ahead with the final regulations due out soon. There is the almost monthly drip drip drip of sensational stories about those who renounce their citizenship to supposedly evade taxes, or the monthly trumpeting of some DOJ prosecution success.

    Now, I don't know if this story fits into that larger narrative about why we must have a new International Tax order, or GATCA to stop all of this, but that certainly is the impression that is being created, and is that what we really want? REALLY? Are we sure?

    As another commenter said,

    " What a bizarre report! It rests on the assumption that "offshore" funds never get taxed, which is untrue. Hedge funds and other vehicles incorporated in the Cayman Islands do not pay taxes but most, if not all, of the investors do pay taxes. They just decided that all funds not managed in their country of origin were untaxed... But again, my question is, who funds them? Or is he selling his research?

    There is a case to be made for more efficient, more just, taxation (don't we know it!) but not by ranting about easily disproved numbers. UBS could just turn around and say that those assets under management are all taxable and its the responsibility of the taxpayer to get it done.

    Another obvious flaw: Saudis and Kuwaitis do not pay taxes so this is not capital flight. Many countries also tax upon remittance into the home country. (like the US does for coporate cash which is sitting offshore after being taxed by other countries)"

    End quote.

    So maybe some critical commentary will begin appearing in the press soon to analyse what this author is saying about the "hiding" of funds, and what his agenda is. The headline certainly is written to drive you to a conclusion that fits the OECD and the DC FATCA Fanatic narrative about offshore tax evasion.

    Therefore, I would suggest that we all should be a bit more skeptical when we read these stories, IMHO.

  4. Sally, I am one of these elites. I am a cheap elite, and I am so cheap that I have never used TurboTax to file a return.

    I did not use a CPA/lawyer when I jumped into OVDI hot water. I am now opting-out without one either.

    "There is nothing to fear but fear itself", I am not afraid of going to court to speak the truth without representation.

  5. that is the way and i do not see a reason why they would penalize even $100 in your case. I dont think even a warning letter would be appropriate in you case since you became FBAR compliant as soon as you became aware.

  6. I have visited the "Tax Justice Network" website in the past and the contents are in very brush strokes and not very accurate (I hesitate to use the word "information" to describe it.) Various countries are listed as having bank secrecy and although there are shades of secrecy, the information is just not correct. One example of such "reporting" is what TJN says about US corporations formed in Delaware, Nevada, Wyoming and other states. They simply cannot be used to have anonymous or secret US bank accounts, since US banks will require as part of "Know Your Customer" to know and document the identity or parties operating the account. Info about banking in Switzerland and Israel is likewise not correct.

    More important, there are plenty of legitimate reasons for banking and investment overseas (just as there are for a US resident to have accounts or investments in another US state, another county, or another town) so saying that the universal purpose is "hiding" is simply not correct.


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