Sheppard on Shaxson Book on Tax and Regulatory Havens (6/11/11)

Tax gadfly Lee Sheppard reviews a new book on Tax Havens by Nicholas Shaxson, Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens (Palgrave Macmillan, 2011). See Lee A. Sheppard, A Tax Haven by Any Other Name, 131 Tax Notes 1111 (June 13, 2011). The review and the book are both worth reading for those interested in this area. Sheppard and Shaxson note that the tax havens not serve as tax havens but also regulation havens where risky and often criminal financial behavior can go unregulated.

Some interesting comments from Sheppard's review:

The Tax Justice Network's Financial Secrecy Index ranked the United States as the world's principal secrecy jurisdiction, based on how secretive it is in global finance relative to the services offered. Luxembourg was second, Switzerland third, and the Cayman Islands fourth. The United Kingdom ranked fifth, based on mainland transparency, despite its haven spider web.

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Steven Miller, IRS deputy commissioner for services and enforcement, acknowledged the need for reciprocity at a recent OECD conference. Proposed bank deposit interest regulations require banks to report interest payments to nonresident aliens (REG-146097-09, Doc 2011-320 , 2011 TNT 5-9 ). He dismissed criticisms of the proposed rules as overstated, arguing that the government always had the power to seek that information, which would only be exchanged with a trusted treaty partner for purposes of tax enforcement.

"These are our bona fides. We cannot ask for reciprocity without transparency," Miller said. He emphasized that the United States cannot expect other countries to provide information if it does not provide it in return.

Shaxson depicts the U.S. conversion to tax haven status as a deliberate effort to get criminal, not merely hot, money. He emphasizes that the same secrecy practices that protect a New Jersey physician from his grasping ex-wife also protect drug dealers, mobsters, and terrorists. As Shaxson explains, you can only put $1 million in currency in a briefcase. Drug lords are running billions, and they have been using American banks to launder them.

The American government apparently thinks that the information-on-request model TIEA will allow it to go after criminals and terrorists while leaving your garden-variety tax evader alone. There's some truth to this, in that the requesting country has to have a well-developed case against the tax evader before requesting information that would prove its case. (For discussion, see Tax Notes, Mar. 23, 2009, p. 1411, Doc 2009-6201 , or 2009 TNT 54-7 .)

"You can't prove criminality until you get the information, and you can't get the information until you show the criminality," Shaxson writes, neatly summarizing the Catch-22 of information sharing on request. It's a bit of an exaggeration but not much.

Before Bradley Birkenfeld embarrassed the U.S. government, it was not even terribly interested in tax evasion by its own citizens, let alone the Latin Americans who stash their money in Miami. The difficulty of getting information ensures that tax administrators will not bother to put that kind of work into civil cases unless there is serious money at stake.

Old bank hands express shock at the Birkenfeld affair, despite being jaded about the motives of the parsimonious rich. They point out that the United States has a fair, democratically elected, reasonably transparent government and a low tax burden by European standards. Yet the American rich act like their money is being confiscated by some oppressive regime.