US Attorney Denis Kleinfeld reveals how 52,000 Americans are suspected of hiding US$14.8 billion of wealth.
Filings on 20 May in the UBS case pending in Miami brought into question the US as a reliable treaty partner. The UBS case involves the United States government seeking to force UBS to identify some 52,000 Americans who are suspected of using the bank to hide some US$14.8 billion of wealth and evade taxes owed to the United States. The Amici Curiae (or friends of the court) briefs filed with the court focuses on whether the issue of the United States is violating the treaty that it signed with Switzerland.
The Swiss government has filed a petition in the federal court in Miami which supports the legal position taken by UBS in its litigation. The US government focus is on its need to get information about American clients who may be tax evaders. However, the Swiss government said: “If the Court were to order UBS to produce evidence from Switzerland, then back that order with coercive powers, the Court would be substituting its own authority for that of the competent Swiss authorities, and therefore would violate Swiss sovereignty and international law.” One case with two distinct competing points of view.
This legal battle arose when the US government decided to employ a manoeuvre known as the John Doe Summons. Effectively, it allows the government to investigate tax fraud by individuals where their identities are unknown because of bank secrecy. The showdown in the Federal court in Miami came about a year after the Justice Department and UBS agreed to settle a parallel criminal investigation. In that case UBS agreed to pay a fine of US$780 million and identify about 320 of its American clients. UBS thought that this settlement ended the matter. The Justice Department did not agree and sued UBS to enforce the John Doe Summons resulting in the current proceedings.
The lawsuit by the United States was backed up by internal UBS e-mails, memos, and other relevant material which the IRS argues shows wrong doing. The substantive issue is that UBS, they claim, was engaged in a systematic and long-term scheme by UBS bank employees to help rich Americans evade income taxes to the United States. And tax evasion is wrong.
The Swiss government does not condone tax evasion but takes the position that procedurally handing over the names would be a violation of Swiss banking secrecy law, as well as a violation of the treaty between the United States and Switzerland governing the exchange of tax information. The Swiss government also claims that because of this case, the negotiations for a new treaty with the US are in jeopardy.
Switzerland is currently negotiating a number of new treaties with major countries since it agreed to adopt international standards on exchanging tax information. Concurrently the highest administrative tribunal in Switzerland has allowed three US citizens permission to question the handover of their UBS bank data to the Justice Department. The consequence of these three cases as test cases will then determine the legality of future tax information exchanges between Switzerland and other countries.
On May 20, 2009 the Amici Curiae brief was filed by five banking and business groups in support of UBS. Their primary argument is that the enforcement of the John Doe Summons is inconsistent with the Switzerland-US tax treaty and that the summons, if allowed, would violate Swiss law.
The Amici Curiae who filed the briefs supporting the Swiss government position and that of UBS with regards to the treaty, made it clear that they don’t support tax evasion. As the brief stated, “Amici do not in any way condone the wrong doing to which UBS AG has admitted as part of its recent settlement with the US Department of Justice. Nor do Amici take any position on any factual disputes between UBS and Internal Revenue Service. The essential question that Amici address is whether the US may enforce a summons which is contrary to established treaty protocol and the principals of comity.” And that pretty well sums up the differing views that are presented in the case.
In the broader sense this UBS case also raises questions as to the attack by the United States Congress on offshore financial centres as well as the taxation, or should I say deferral of taxation, by multi-national US corporations.
The pending Stop Tax Haven Abuse Act sets up effectively a blacklist with 34 foreign named jurisdictions and others that will be added later by designating them as “offshore secrecy jurisdictions”. This was the focus of an article by Marshall J. Langer in the Daily Tax Report of March 26, 2009. Mr Langer points out that many of the countries that are on the potential blacklist already provide full cooperation with information and assistance to the IRS under existing tax treaties or tax information exchange agreements. Some of these have been in force for many years. A number of the potential jurisdictions already provide cooperation in criminal tax matters under mutual legal assistant treaties. Some are also parties to the Organization of American States MLAT although none of them has yet signed the protocol to the OAS MLAT requiring assistance with respect to tax crimes. Mr Langer also notes that some of the designated countries also provide cooperation with the United States and other countries in civil tax matters under The Hague Evidence Convention.
One of the questions that have arisen from the UBS case and the Stop Tax Haven Abuse Act is the legitimacy of the statement that the United States loses an estimated $100 billion in tax revenues due to offshore tax abuses. This amount appears to be endlessly repeated and forms one of the basis upon which the attack on offshore tax havens has taken place. The action against UBS is directly related to the increasing vigilance of the US government with regard to US taxpayers using secret accounts outside the United States to evade US tax. However, the two issues are inter-related along with the question as to whether the United States is a good treaty partner or not. So, where does the $100 billion number come from?
The source of the $100 billion tax loss comes from a staff report from the Permanent Sub Committee on Investigations of the United States Senate. The report entitled, “Tax Haven Banks and US Tax Compliance” cites as a footnote that, “This $100 billion estimate is derived from studies conducted by a variety of tax experts.” None of the articles contain a mathematical methodology for how any of the estimates have been reached.
Basically, these are articles whose authors seemed to have made up the numbers out of thin air. It would make sense that if the accounts offshore are secret then two things follow from that. First, is that the amount held offshore is secret; and second, that the tax on investments earned by the unknown amount offshore would also be secret. On this basis the $100 billion figure appears to be based on nothing more than myths and fallacies. This just gives an indication that there is a question as to the extent of tax abuse but does not legitimize more or less tax evasion.
The UBS raised other concerns that go to the heart of the tax evasion case. Clearly, 52,000 people did not wake up one morning and say to themselves that they could not live another day without being an evader of US tax. This is not to say that tax evasion is permissible behavior, but it does make one wonder that if there are 52,000 people, just at one bank alone, who find the need to protect their wealth from US tax then perhaps it is possible that the tax system now being employed is wrong and the people are right. There are other tax systems that may be more efficient and not have the side effect of creating thousands of tax criminals.
As underscored by the US Swiss treaty, if the United States unilaterally acts when it doesn’t like the treaty agreements it has reached and signed, then what’s the validity of any offshore financial centre or any other jurisdiction entering into a tax information related agreement with the United States? The briefs filed by Amici Curiae in the UBS case clearly show that the issues being raised are broader and with greater international implications than the narrower focus of whether or not a group of US taxpayers are evading US tax.
Denis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses. He is co-author of the two-volume treatise, “Practical International Tax Planning,” 4th Ed. published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.