Monday, October 21, 2013

Has the U.S. Aided International Tax Evasion? (10/21/13)

I just noticed the following seminar:  International Law Workshop at the University of Michigan School of Law, here.  Several readers of this blog have noted that the U.S. lives in a glass house on the issue of aiding international tax evasion.  So the following subject drew my interest:
October 21, 2013 
4:15 - 5:15 p.m., Room 236 Hutchins Hall 
"What Goes Around Comes Around:  How the US Aided World Tax Evasion and What It Can Do About It" 
Professor Reuven S. Avi-Yonah
Irwin I. Cohn Professor of Law, University of Michigan Law School
There are, of course, a lot of ways that the U.S. policies have rewarded persons playing offshore tax games.  Some have traditionally been viewed as implicating only civil consequences.  These include transfer pricing and such other shenanigans that, if not too egregious, are simply subject to civil adjustment and perhaps some civil penalties.  But the title of the article seems to focus on evasion which is commonly meant to be the conduct that draws criminal sanctions.  Professor Avi-Yonah is a frequent speaker and author on international issues, so his work product is likely to be if interest to readers.  I will post further on this, particularly as is likely if he writes an article or outline than can be linked for readers' review.

Professor Avi-Yonah's bio is here.

Addendum 10/22/13 1:15pm:

Professor Avi-Yonah advises that the following paper is the one used for this address:  Avi-Yonah, Reuven S., What Goes Around Comes Around: Why the US is Responsible for Capital Flight (and What it Can Do about It) (January 23, 2013). U of Michigan Public Law Research Paper No. 307. Available at SSRN: or  The paper is here.  The paper is a good short introduction to the history through FATCA, concluding:
The US learned the hard way that trying to attract foreign capital by not withholding and not collecting information is a recipe for undermining US taxation of Americans. FATCA now offers a way forward to cooperate with other countries that wish to tax their wealthy residents on all income “from whatever source derived.”


  1. Jack,

    A few weeks ago I actually had the privilege of meeting Prof. Avi-Yonah and would definitely say he is quite sympathetic to the views of many of the commentators and posters on this site. What I am going to say is probably more my view than his but from discussing it with him I think he be in broad agreement.

    Going back to the start of the QI Program in 2000/2001 I do think the IRS made some very bad decisions in implementing the program that came back to bite the service big time and occured almost immediately after it was implemented. First people have to understand the difference between a QI and a regular withholding agent. A "regular" agent under US tax law is the last US domiciled entity in a chain US source payment agents. As such it must report payments to US Persons on Form 1099 and must report AND withhold tax on all US source payments to non resident aliens on Form 1042. It is also widely known that the IRS for many years has shared collected Forms 1042 with various treaty and TIEA partners. Under the QI program post 2000 this witholding responsibility that traditionally occurred with a US entity subject to direct IRS control was allowed to be shifted to "foreign" based entities usually foreign banks. As part of the QI program foreign banks were in theory required to issue 1099's to US Persons on any US source income however, with regard to foreign non resident aliens they were required by the IRS to only engage in withholding NOT any form of reporting back to the IRS. The justification for this policy has never been clear to me other than it encourages people from outside the US to invest in the US securities markets through Swiss and other tax haven banks all the while being exempt from the IRS reporting required if the were to invest in the US securities markets directly through a US bank or broker.

    Now there are reasons as to why the withholding procedures in place prior to QI were seen as antiquated and burdensome by the IRS but the way the QI program was created only seems to have been done so to encourage non US tax evaders to invest in US securities markets through third country tax haven banks. Interestingly even with FATCA none of this really changes. Foreign QI witholding agents still do no have to have issue 1042s to the non US clients as US banks have to issue to their non US clients.

  2. Thanks, Tim12278. I only have time now to acknowledge your posting and state my appreciation that you took the time to do it. Not sure I can add materially to your points, but I will think about them overnight.

    Jack Townsend

  3. It is well known that money center banks in cities such as Miami, LA, NY take substantial amounts of deposits from clients in Latin America, ex-USSR, China, etc. and that a share of this is likely unreported to the home government (or worse, as in proceeds of government corruption or other illegal activities.) There is no withholding or reporting of interest to the IRS since the account holders fill out IRS form W8 (instead of the W9 filled out by US persons.)

    Whether what goes around will actually come around is an open question. The US wants info from banks in Switzerland, W Europe, Canada, and the little tax havens. It does not have much to lose by reciprocating with these countries since they are not likely to account for a major part of foreign deposits in US banks.

    However, reciprocity with countries like Mexico, Venezuela, Brazil, Russia and China would be a different matter since those countries do provide foreign deposits to US banks, whereas the US has little to gain from reciprocity since those countries are not exactly places that Americans would bant to deposit their funds in.


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