There have been a few measures put in place this year that have the potential to drastically cut offshore tax evasion. Indeed, a few years from now, 2014 may be called a critical year in the fight against multinational tax avoidance being waged by the world’s governments. It will take a few years for the transparency and information sharing to take hold of course, but the measures have potential.
The Foreign Account Tax Compliance Act will certainly be an important tool for the United States to collect more taxes. Last week, we posted information about FATCA for potential whistleblowers working at foreign financial institutions. Even though there may be a “transition period” before the IRS is willing to hand down large penalties to banks that have entered into an agreement with the U.S. Government to provide information about payments and assets of U.S. account holders, the large sanctions paid by banks this year concerning mortgage misconduct and forex fraud suggest that penalties and bank withholding will be coming.
There have been other developments as well. Perhaps the one with the most immediate effect for the United States was the revision made to the tax treatment of corporate merger inversions. The Treasury Department issued rules in September to restrict inversions after a number of corporations declared their intent to relocate overseas for tax purposes after merging with a foreign company. These companies included Burger King and Pfizer.
However, there has been at least one setback. In the final tax whistleblower rules published in August 2014, the IRS excluded penalties for violations of the FBAR reporting requirements. IRS regulations provide for rewards when the individual’s information leads to collected proceeds. According to IRS guidance, collected proceeds includes only money collected from Title 26. Because FBAR is required under Title 31, money collected for violations is not eligible for a reward. This should leave open the possibility of rewards under FATCA, however.
The United States is not the only country facing tax avoidance by large corporations. It has become an issue in the European Union, Australia, India and other nations. Australia, for example, has more than 100 multinational corporations it believes may be underpaying taxes.
Last week, the G20 countries agreed to implement information sharing about tax avoidance by corporations and individuals by 2018. It will not be easy. It took the United States four years to prepare for FATCA.
The European Union may not wait for a global solution. It is already debating the appropriate tax rules between its member states following Luxembourg. The EU’s probe into the use of Luxembourg as a tax haven led to the release of information concerning its widespread use for tax avoidance. More than 300 companies including Pepsi, Ikea and FedEx have used the country to avoid taxes according to information released earlier this month by the International Consortium of Investigative Journalists.
If the momentum in favor of change continues, there could be substantial progress internationally in limiting the ability of corporations to move income to tax havens to avoid paying countries with higher tax rates.