— Citizenship Lawyer (@ExpatriationLaw) April 15, 2017
The purpose of this post is, as put forth by Tim:
This is a copy of the transcript of the one and only hearing on FATCA in the US Congress many years ago. I once had a copy of this years ago and lost it. I feel there is important information in this that will help the ADCS legal challenge against the government of Canada.
We would like to hear what sections of the testimony (including the non-witness, written testimony) you feel may have some impact on our Charter Challenge. I have tried to make this a little more readable; i.e., the original document is 154 pages, a lot of it in very small print. I have separated where possible, individual letters. It is a lot to take in and I hope this is helpful.All bolding/italics are mine.
NB: Member names that are bolded/italicized still sit on the Ways & Means Committee
U.S. Government Printing Office Washington
Foreign Bank Account Reporting and Tax Compliance Hearing
Before the Subcommittee on Select Revenue Measures of the Committee on Ways and Means
U.S. House of Representatives
One Hundred Eleventh Congress First Session
November 5, 2009
Committee on Ways & Means
Charles B. Rangel, New York, Chairman
Fortney Pete Stark, California
Sander M. Levin, Michigan
Jim McDermott, Washington
John Lewis, Georgia
Richard E. Neal, Massachusetts
John S. Tanner, Tennessee
Xavier Becerra, California
Lloyd Doggett, Texas
Earl Pomeroy, North Dakota
Mike Thompson, California
John B. Larson, Connecticut
Earl Blumenauer, Oregon
Ron Kind, Wisconsin
Bill Pascrell, Jr., New Jersey
Shelley Berkley, Nevada
Joseph Crowley, New York
Chris Van Hollen, Maryland
Kendrick B. Meek, Florida
Allyson Y. Schwartz, Pennsylvania
Artur Davis, Alabama
Danny K. Davis, Illinois
Bob Etheridge, North Carolina
Linda T. Sanchez, California
Brian Higgins, New York
John A. Yarmuth, Kentucky
Dave Camp, Michigan
Wally Herger, California
Sam Johnson, Texas
Kevin Brady, Texas
Paul Ryan, Wisconsin
Eric Cantor, Virginia
John Linder, Georgia
Devin Nunes, California
Patrick J. Tiberi, Ohio
Ginny Brown–Waite, Florida
Geoff Davis, Kentucky
David G. Reichert, Washington
Charles W. Boustany, Jr., Louisiana
Dean Heller, Nevada
Peter J. Roskam, Illinois
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
Subcommittee on Select Revenue Measures
Richard E. Neal, Massachusetts, Chairman
Mike Thompson, California
John B. Larson, Connecticut
Allyson Y. Schwartz, Pennsylvania
Earl Blumenauer, Oregon
Joseph Crowley, New York
Kendrick B. Meek, Florida
Brian Higgins, New York
John A. Yarmuth, Kentucky
Patrick J. Tiberi, Ohio, Ranking Member
John Linder, Georgia
Dean Heller, Nevada
Peter J. Roskam, Illinois
Geoff Davis, Kentucky
The subcommittee met, pursuant to notice, at 10:05 a.m., in Room B–318, Rayburn House Office Building, the Honorable Richard E. Neal [chairman of the subcommittee] presiding.
FOCUS OF THE HEARING:
The hearing will focus on non-compliance by U.S. taxpayers with foreign bank accounts,rules regarding foreign trusts with U.S. beneficiaries, and certain U.S. dividend equivalent payments to foreign persons to avoid U.S. taxes. The hearing will also focus on recently introduced legislation, HR 3933, the Foreign Account Tax Compliance Act of 2009.
According to the most recent tax year data available (2003), more than $293 billion in U.S. source income was sent to individuals and businesses residing abroad.The United States imposes withholding taxes when U.S. source investment earnings are paid to a foreign person. Those withholding taxes were largely designed to collect tax on income earned in the United States even though the income is earned by a foreign person not subject to the jurisdiction of our laws. Those withholding taxes also play a role in preventing non-compliance by U.S. persons holding investment assets in accounts overseas.
The Internal Revenue Service (IRS) has established the Qualified Intermediary (QI) program that authorizes foreign financial institutions to collect withholding taxes on behalf of the U.S. government. The program was implemented to improve compliance for tax withholding and reporting on U.S. source income that flows offshore through foreign financial institutions. The recent UBS case revealed problems with the QI program that permitted tax evasion by U.S. persons. Further, even with jurisdictions in which the United States has a tax treaty, effective information exchange used by tax enforcement agencies may sometimes be undermined by local laws providing for banking secrecy that conflict with U.S. law.
In March of this year, this Subcommittee held a hearing on bank secrecy and tax evasion at which the Commissioner of the Internal Revenue Service testified (Ways and Means Committee Hearing Print, Serial 111-12, Hearing on Banking Secrecy Practices and Wealthy American Taxpayers). In May, the President released a fiscal 2010 budget proposal including a number of new requirements on taxpayers with foreign bank accounts and foreign financial institutions holding those accounts. Last week, Representative Charles B. Rangel filed HR 3933, the Foreign Account Tax Compliance Act of 2009 containing, among other proposals, many of the proposals from the Administration’s budget, including a mandatory 30 percent withholding on payments to foreign financial institutions unless they disclose information to the IRS on accounts owned by U.S. individuals or close the accounts, and a requirement on individuals and entities to report offshore accounts with values of $50,000 or more on their tax returns (see Joint Committee on Taxation Technical Explanation, JCX-42-09).
In announcing the hearing, Chairman Neal stated, ‘‘For many years, I have sought to crackdown on individuals and corporations that are abusing overseas tax havens. With billions of dollars in revenue being lost each year, strengthening our tax compliance efforts is essential. I strongly believe the Foreign Account Tax Compliance Act of 2009, introduced this week in the House by Chairman Rangel and myself, gives the Treasury Department the necessary tools it needs to get tough with those Americans hiding their assets overseas. I welcome the support for this bill offered by President Obama and Treasury Secretary Geithner, and look forward to working with them to turn this proposal into law. It is my hope that this hearing marks the beginning of a vigorous campaign by Congress and the Obama administration to end the practice of offshore tax avoidance by U.S. citizens.’’
Chairman NEAL. Let me call this hearing to order. I apologize
for just being a couple of minutes late. Governor Patrick was here,
and the mass delegation had breakfast with him this morning. And
based on the attendance, I won’t be calling the question on any——
Chairman NEAL. Let me welcome everyone to this hearing of the
Select Revenue Measures Subcommittee on tax avoidance in foreign
bank account reporting.
When we last met on this issue, in March of this year, we were
seeking legislative options to handle the weaknesses exposed by
the UBS case. The IRS and the Justice Department were struggling
to get the names of U.S. account holders from a bank that
had already admitted complicity in a tax avoidance scheme for
which they agreed to pay $780 million, in terms of a fine.
The treaty would only provide tax enforcement information if it
was a crime under local law, and if you had a name. Negotiations,
however, produced a break-through, and more than 4,500 names
were to be divulged.
The IRS announced an amnesty program which has thus far netted
7,500 taxpayers with previously hidden overseas accounts seeking
to avoid the worst penalties. I congratulate the IRS and the Department
of Justice on this hard-fought victory.
Of course, the story does not end there. We never knew that the
tax information exchange would be virtually meaningless because
we didn’t have the names. We didn’t know bank secrecy would
prove such an effective shield for evaders, even when we knew a
crime had been committed.
Following our March hearing, President Obama announced a
number of new enforcement provisions as part of his budget proposal.
Under the leadership of Chairman Rangel, we have spent
months sorting through these issues. And last week Mr. Rangel
and I filed the Foreign Account Tax Compliance Act of 2009.
This bill creates a new reporting regime for foreign financial institutions
with U.S. account holders, whether they are participants
in the existing qualified intermediary program or not. This legislation
casts a wide net in search of undisclosed accounts and hidden
income. It is carefully balanced. And, as we will hear from one foreign
bank today, it is actually supported by one who will bear the
brunt of this new disclosure.
The boxer, Joe Lewis, once told an opponent who proceeded to
outrun him for 12 rounds, ‘‘You can run, but you can’t hide.’’ Lewis
knocked him out in the 13th round. And I believe we are entering
that 13th round, and it will not be long before those individuals
seeking to hide money overseas will be caught. This bill could be
enacted by the year-end.
And just before I recognize Mr. Tiberi, it has become a priority
issue for the G20, as well as the G7. And I think that, in terms
of the economic confrontation that America currently is experiencing,
that it makes good sense, before we talk about raising revenue
elsewhere, that we begin talking about closing down these tax
havens and these loopholes that the American people have justly
come to see being patently unfair.
And with that, I would like to recognize my friend, Mr. Tiberi,
for his opening statement.
Mr. TIBERI. Thank you, Mr. Chairman. Early this year the subcommittee
met to examine issues surrounding banking secrecy and
illegal tax evasion. At that hearing we all agreed that criminal tax
evasion should be aggressively pursued and punished.
I also said that I hoped our efforts in the area would remain focused
on compliance, that the line between illegal tax evasion and
legal tax practices used by U.S. taxpayers around the world is distinct.
And to blur that line may only make our compliance efforts
I am pleased, Mr. Chairman, that you have called this hearing
to discuss legislation recently introduced by Chairman Rangel and
you that seeks to address the issue of illegal tax evasion. During
this—these challenging economic times, honest, hardworking taxpayers
who play by the rules expect others to do the same.
I am anxious to hear from our witnesses about some of the details
of the bill, and certainly hope it is a workable solution to the
problem of offshore tax evasion that avoids unintended consequences.
I will note, however, that I am very pleased the bill does not blur
the issues of tax evasion and legal tax practices, and does not include
the most controversial international tax policy changes proposed
by the Administration. We have heard a lot of rhetoric in recent
months from the Administration and others designed to confuse
the issues, and characterize them as one and the same. I am
pleased to see, Mr. Chairman, that you have cut through that, and
drawn a bright line separating the two.
I look forward to continued work with you on all these issues in
the days and weeks and months ahead. Thank you to our witnesses.
I look forward to your testimony today.
With that, Mr. Chairman, I will yield back.
Chairman NEAL. Thank you, Mr. Tiberi. Let me welcome our
witnesses today. On our first panel, we will hear from Stephen
Shay, the Deputy Assistant Secretary for International Tax Affairs
at the Treasury Department. We were fortunate to have Mr. Shay
as a private sector expert in our March hearing, but even more
pleased to have him today in his official capacity.
We will next hear from William Wilkins, the chief counsel for the
Internal Revenue Service. The legislation we are discussing today
could not have been possible without the thoughtful commentary
from both Treasury and IRS. And we are very appreciative of your
Our second panel will allow us to hear from Mr. Thomas Prevost,
a managing director and America’s head of tax for Credit Suisse.
In his position, he is responsible for all tax matters in the Americas
for the Swiss-owned bank.
Next we will hear from Professor Charles Kingson, from New
And, finally, we will hear from Dick Suringa, a partner at Covington
& Burling, specializing in international tax matters.
I will note for the record that all of these witnesses have put in
their time, either at Treasury or IRS. And we look forward to their
Without any objection, any other Members wishing to insert
statements as part of the record may do so. All written statements
offered by our witnesses will be inserted into the record, as well.
With that, let me recognize Mr. Shay for his opening statement.
STATEMENT OF STEPHEN E. SHAY, DEPUTY ASSISTANT SECRETARY
FOR INTERNATIONAL TAX AFFAIRS, UNITED
STATES DEPARTMENT OF THE TREASURY
Mr. SHAY. Thank you, Mr. Chairman. Chairman Neal, Ranking
Member Tiberi, and Members of the Subcommittee, I appreciate
the opportunity to testify today about foreign bank account reporting
and tax compliance. With the permission of the chairman, I will
ask that my statement be put in the record, and just summarize
a few remarks.
Chairman NEAL. Without objection.
Mr. SHAY. For too long, some Americans have taken advantage
of the system by hiding unreported income in a foreign financial account,
trust, or corporation. When Americans evade their tax-paying
responsibilities, the millions of workers and businesses who do
pay their taxes are forced to pay the price.
The Foreign Account Tax Compliance Act of 2009—I will refer to
it on occasion as H.R. 3933—and its companion bill in the Senate,
S. 1934, represents an important step toward reducing the amount
of taxes lost through illegal use of hidden accounts, and making
sure that everyone pays their fair share.
Before talking about the act itself, I would like to discuss more
broadly how the Administration is addressing the problem of offshore
tax evasion. Because offshore evasion has many facets, the
Treasury Department has developed a multi-pronged approach to
it. This comprehensive approach includes legislative proposals, a
focus on bilateral information exchange agreements, multilateral
initiatives to improve transparency and information exchange in
tax matters, and IRS enforcement actions.
This approach is intended to provide the IRS with the information
from taxpayers, third parties, and other countries, and the
tools needed to tackle offshore evasion. The Administration’s fiscal
year 2010 budget includes a series of legislative proposals to curb
the abuse of offshore accounts and entities. The proposals are directed
at enhancing information reporting, strengthening penalties,
and making it harder for foreign account holders to evade U.S.
Some information that the IRS needs to enforce U.S. tax law can
be obtained only through foreign countries. Accordingly, the Administration
has placed a high priority on concluding tax information
exchange agreements. In the last year alone, we have signed
agreements to exchange tax information with Switzerland, Luxembourg,
Liechtenstein, Gibraltar, and Monaco.
The Administration also seeks to improve international tax cooperation.
Thus, we are working on a multi-lateral basis to make
sure that countries meet international standards on tax transparency
and information exchange. We are committed to preventing
the facilitation of offshore tax evasion.
To further the IRS’s enforcement capacity, the President’s budget
proposes new enforcement tools to crack down on evasion through
offshore accounts and entities, and provides funds to add nearly
800 new IRS employees to combat offshore evasion, and to improve
compliance with U.S. international tax laws by businesses and
The Foreign Account Tax Compliance Act represents an important
step forward in correcting problems within U.S. tax law that
have allowed taxpayers to shirk their responsibilities.
Like the Administration’s proposals, H.R. 3933 would make it
more difficult for U.S. persons to hide assets abroad in foreign financial
accounts by: Enhancing information reporting; increasing
withholding taxes for foreign financial institutions that do not engage
in information reporting; and strengthening the penalties for
taxpayers who do not adequately report their income.
It will also make it more difficult for taxpayers to hide behind
foreign trusts. And it will prevent taxpayers who receive the benefit
of U.S.-sourced dividend payments from avoiding U.S. withholding
Mr. Chairman, we applaud the leadership role taken by you and
Chairman Rangel in the House, and by Chairman Baucus and Senator
Kerry in the Senate, in introducing this legislation. And, additionally,
the work of Senator Levin and Congressman Doggett, in
supporting a strong international tax enforcement agenda.
Mr. Chairman, Ranking Member Tiberi, and Members of the
Subcommittee, the Foreign Tax Compliance Act fits well into the
Administration’s multi-pronged strategy of improving our domestic
tax laws, while increasing global cooperation on tax information exchange
to help narrow the tax gap, and create the fairer tax system
We look forward to working with you and Members of this Subcommittee
on this important subject. I would be pleased to answer
questions when the time is appropriate.
Chairman NEAL. Thank you, Mr. Shay.
Let me recognize Mr. Wilkins to offer testimony.
STATEMENT OF STATEMENT OF WILLIAM J. WILKINS, CHIEF
COUNSEL, INTERNAL REVENUE SERVICE
Mr. WILKINS. Thank you, Chairman Neal, Ranking Member
Tiberi, Members of the Subcommittee. I the opportunity to present
the Internal Revenue Service’s views on H.R. 3933. Like Mr. Shay,
I would like to summarize the key points of my written testimony.
The IRS does support this legislation, because we feel it will provide
significant new tools for our international tax compliance
strategy. Our strategy is a multi-year effort. It is tailored for both
individual and corporate taxpayers. For the strategy to be successful,
it requires guidance for taxpayers and their advisors, legislative
support, adequate resources, more enforcement activities, more
and better information reporting, and stronger international cooperation.
We believe that this strategy is already producing results. Part
of our approach was the initiative that ended October 15th to provide
clear rules for imposing severe civil penalties, back taxes, and
interest, but not imposing criminal penalties on qualifying taxpayers
who came forward to disclose previously undisclosed offshore
The successes of the IRS and the Department of Justice in their
investigation of UBS created a setting under which this kind of initiative
could succeed. Just before the October 15th closing date of
that program, the IRS announced that it expected at least 7,500
people to come forward. I have been told that the final numbers
will be well over that initial estimate. The IRS hopes to be able to
provide additional data later in November.
There will be significant taxes and penalties paid as a direct result
of these disclosures. But just as importantly, these taxpayers
are now back in the U.S. tax system, and will be paying taxes on
their offshore income in the years to come.
In addition, publicity regarding the obligations of U.S. citizens
and residents to report worldwide income and assets has, for a
practical matter, made it impossible for U.S. taxpayers to ignore
the clear mandate of our tax laws, even if they may reside abroad,
or even if they may have derived their wealth from foreign sources.
The IRS will also develop leads that we obtain from voluntary
disclosures. We will be scouring this information to identify financial
institutions, advisors, and others who promoted or otherwise
helped U.S. taxpayers hide assets and income offshore, and skirt
their tax responsibilities at home.
Some weakness in our reporting systems have come to light, as
a result of this enforcement activity, and the valuable investigative
work carried out by Congress. H.R. 3933 would repair these weaknesses.
The particular problem being addressed here is the deliberate
and illegal hiding of assets and income from the IRS by U.S. citizens
and residents. It is true that such law breakers now face significant
civil and criminal penalties. H.R. 3933, however, is still
needed to help the U.S. government detect such activities, and to
enforce applicable penalties.
The problems being addressed fall into certain categories. One
category is the limited scope of current requirements, whether for
qualified or non-qualified foreign intermediaries to report on their
U.S. customers’ investments. There is a limitation on reporting on
investment and foreign securities, because of source rules.
Another category of problem is that intermediaries may be able
to avoid reporting their U.S. customers’ indirect investments that
are made through foreign entities.
Another category of problem is the lack of diligence required for
non-qualified intermediaries to detect a U.S. customer’s false certification
of foreign status, even when investing in U.S. securities.
Another category of problems involves features of the FBAR rules
that create obstacles to enforce penalties for failures and violations.
Finally, the bill would tighten certain existing rules involving
trust, bearer bonds, and dividend withholding, and would require
certain advisors to become part of the diligence and reporting system
when they assist a U.S. person to avail himself of a foreign
On the topic of qualified intermediaries, most international financial
institutions have entered into agreements with the IRS to
be qualified intermediaries, because that status helps them to more
efficiently serve their non-U.S. clients who want to invest in U.S.
However, the obligations of qualified intermediaries to provide
the IRS with reports on their U.S. customers is currently inadequate
in two important respects. First, as I mentioned, there is
generally no obligation to report the non-U.S. source income of a
U.S. customer that’s not paid within the United States, or to report
the gross disposition proceeds of a U.S. customer who does not communicate
with the institution from within the United States.
Second, a foreign corporation or other foreign entity is normally
not subject to Form 1099 and back-up reporting and withholding
rules that apply to U.S. persons, even if that foreign entity is
owned by a U.S. taxpayer who does have the obligation to pay tax
on the entity’s income.
H.R. 3933 would repair both of these inadequacies, and would require
a qualified intermediary to provide reporting to the IRS and
to the customer broadly on financial activities through foreign financial
accounts, including non-U.S. securities activities, and including
activity of foreign entities owned by U.S. persons.
In the area of non-qualified intermediaries, another problem that
we have faced is that a U.S. person who invests in U.S. securities
through a non-QI can falsely claim to be a non-U.S. person. And
there is probably too little that the payer of the securities income
must do to check the certification, and too little that the intermediary
Further, we do not have the ability to verify the information provided
by the non-QI. And this increases the risk that false claims
will remain undetected. To address this problem, the bill would
generally apply a new U.S. withholding tax to U.S. securities proceeds,
dividends, and interest that are paid to a non-qualified intermediary,
unless the intermediary agrees to due diligence and reporting
obligations on its U.S. customers’ worldwide investments,
including indirect U.S. customers who invest through foreign entities.
A customer who is subject to withholding could apply to the IRS
for a refund of withholding that was in excess of its U.S. tax obligation.
It is our expectation that most, if not all, significant international
institutions would undertake the due diligence and reporting
obligations necessary to avoid U.S. withholding on U.S. securities
proceeds of their customers and on their own proprietary U.S.
On the FBAR topic, under current law the penalties applicable
to persons who fail to file an FBAR, a foreign bank account report,
are not imposed through the Internal Revenue Code. They are, instead,
imposed through the Bank Secrecy Act, which is in Title 31
of the U.S. Code.If an individual fails to report income held in a foreign financial
account, on the one hand, the IRS could use traditional tools such
as assessments, liens, and garnishments to collect the taxes and
the tax penalties. However, the traditional IRS enforcement tools
may not be used to collect the Title 31 FBAR penalties that apply
if the foreign account is not reported. The FBAR penalty must instead
be referred to the Justice Department for separate prosecution
H.R. 3933 amends the Internal Revenue Code to create an
FBAR-like reporting obligation as part of the filing of a tax return,
and a separate penalty regime for failure to report the foreign financial
account. This would allow the IRS to enforce the new Internal
Revenue Code penalty by applying traditional IRS enforcement
There would be a new 40 percent penalty that would apply to income
tax deficiencies attributable to unreported assets. And this
would apply not only to unreported foreign investment income, but
also to business and other income that was hidden through the use
of foreign accounts.
The bill would address an important detection issue by amending
the statute of limitations in the case of income admissions attributable
to foreign assets, importantly including a suspension of the
statute, until the asset was properly reported.
Other provisions of the bill—clarifying foreign trust rules would
be helpful in addressing some forms of tax avoidance involving
those entities. There are also provisions affecting use of derivatives
to avoid dividend withholding. And, finally, the withholding exception
for foreign targeted bearer bonds should eliminate the kind of
investment that may have been used for tax avoidance in the past.
To conclude, we believe this bill will be of significant assistance
to the IRS in assuring greater compliance with U.S. tax rules. The
deliberate and illegal hiding of income and assets from the IRS
should not be tolerated, and we believe the bill will help make this
activity easier to detect and punish, and will help deter future such
illegal activity. Thank you.
Chairman NEAL. Thank you, Mr. Wilkins. Mr. Shay, we will
hear testimony today that some are concerned that if this bill becomes
law, that other countries could use it as a model for reporting,
as well. Great Britain, perhaps, the most notable example.
How would Treasury treat such an international effort for greater
information exchange, even if it meant greater reporting for our
Mr. SHAY. Thank you, Mr. Chairman. We can’t—I can’t anticipate
what other countries will do. Countries that operate in the
markets of another country are going to have to be responsible to
the—for the compliance with the laws of that country.
Let me comment a little bit about this bill in relation to other
countries and, you know, multi-lateral activity. This bill is intended
to increase reporting.
And so, what it does is uses the incentive of not having to suffer
a withholding tax to provide for a foreign financial institution to
assist the IRS with respect to providing information to the IRS regarding
U.S. accounts. If other countries were to do the same, it
would be a legitimate action on their part, as I think it’s legitimate
on our part.
What this approach reflects is an effort to use the tools that are
available outside of a multi-lateral context. If at some point in the
future there is an ability to reach multi-lateral agreements to
achieve the same thing, then you would have the potential to calibrate
the nature of the incentive that’s involved.
Chairman NEAL. Okay. Mr. Wilkins, we will hear suggestions
today that the effective date under this bill is too soon, that the
amount of the work that the IRS will need to do in renegotiating
with QIs in establishing relationships with non-QIs will simply
take too much time.
How ready, or how prepared is the IRS for something as bold as
Mr. WILKINS. Well, we are prepared to devote the resources
necessary to implement the legislation. I do think it will be important
for us to continue to work with you on being sure that there
is—the flexibility is there to not impose withholding taxes because
a reporting system is not ready to go yet.
As Mr. Shay said, the idea here is to collect the information,
more than to collect the withholding tax. The withholding tax is
really an incentive to collect the information. So, I do think we
need the flexibility to face—you know, to face realities that may
occur, given the—what’s going to be imposed.
That may be partly recalibrating parts of the effective dates. It
may be providing flexibility for us to address important issues first,
and have the flexibility to address the secondary and tertiary
issues after the—you know, the primary issues of the major international
financial institutions are first addressed.
Chairman NEAL. And let me ask you, Mr. Wilkins. Your amnesty
program sounds as though it’s been quite successful. And I
must tell you I have not received one letter from one constituent
opposing my position on this issue.
And I wonder if the threat of disclosure by UBS made taxpayers
more nervous and more willing to come forward voluntarily. And
can you tell me how this initiative fared, compared to prior amnesties?
Mr. WILKINS. Well, thank you for that opportunity, and including
for the opportunity to point out that it’s really not an amnesty.
There are severe penalties involved. It does provide relief from
criminal prosecution for qualifying applicants.
There is no question that the enforcement activity surrounding
UBS was an extremely important part of the atmosphere that
made this initiative work. We have—there has been a voluntary
disclosure policy within IRS for a very long time. It typically only
produces a handful of disclosures each year. Getting disclosures in
the thousands, like we were getting with this one, is really something
new and different. And I don’t think there is any question,
but that the enforcement activity and the surrounding publicity
was really responsible for making that happen.
Chairman NEAL. Thank you. And, Mr. Shay, some of the criticism
that we will hear today is that this initiative is too bold, and
that we should rely on multi-lateral negotiations for our information
exchange. Might you comment on that?
Mr. SHAY. Well, I don’t think this initiative is too bold. I think
there are great responsibilities, if it’s adopted, on the administration
and on the Internal Revenue Service, to be sure it’s implemented
in a way that the United States gets the information it
wants, that we only have withholding on any circumstances where
there are essentially non-compliant financial institutions—or, if
not, withholding final tax, because there is the ability to reclaim
the tax—and that we do it in a manner that is as respectful of the
burdens on the financial institutions and—but still gets us the information
as we can make it.
We want this to work, and hopefully a win-win for good tax administration
and good, efficient capital markets. It simply is doing
something that cannot be done through a multi-lateral arrangement.
And it certainly reflects, I think, the urgency of this issue
and—by bringing this powerful incentive to move forward. And I
think that actually will probably advance the time when there are
multi-lateral arrangements—get to this and process it.
But as I think we all know, that’s a very, very long process, and
I think this legislation will increase the likelihood of it, but will assure
that information is provided to the IRS before that ultimately
Chairman NEAL. Thank you. With that, I would like to recognize
Mr. Tiberi to inquire.
Mr. TIBERI. Thank you, Mr. Chairman. Mr. Wilkins, can you assure
us and the hard-working, law-abiding taxpayers that we all
represent that the IRS is doing everything in its power to collect
and aggressively go after tax cheats?
Mr. WILKINS. Yes, this is a priority for the commissioner, and
it’s a priority for the whole IRS. There is particular focus on international
tax compliance, which is the subject matter of this bill.
And we are focused on it. That is where our deployment of additional
resources is focused, and we need to balance service and enforcement.
But there is no question that enforcement is key, and bringing
taxpayers into compliance is important. We will likely need assistance
of the congress from time to time in those efforts, such as the
Mr. TIBERI. Thank you. To further go on, with respect to international
tax, would you agree that there is a distinction between
individuals and corporations who are deliberately avoiding taxation,
deliberately hiding assets, not following the Internal Revenue
Code, and a distinction between American, U.S.-worldwide
companies who are doing business internationally, who are working
every day with the Internal Revenue Service on issues of deferral,
and check the box, and other legal measures within the Internal
Mr. WILKINS. Yes. I definitely agree with that statement. What
we are dealing with in this bill is deliberate and illegal hiding of
income and assets, and non-compliance with what the law is today.
Issues of tax policy surrounding multi-national corporations
whose returns are audited every year is a different question, and
requires different strategies.
Mr. TIBERI. And there are IRS officials that are working with
U.S. companies, literally, every day on those issues, correct?
Mr. WILKINS. Yes, that is correct. Most large, multi-national
corporations are constantly under audit, and they frequently have
IRS auditors on site.
Mr. TIBERI. To continuing questioning on just a slightly different
issue, most people seem to agree that international exchanges
of information in particular are key elements of our ongoing
effort to fight tax evasion.
Do you agree that excluding black-listing from the legislation
that Chairman Rangel and Chairman Neal have introduced makes
countries around the world more willing to continue providing the
Internal Revenue Service the critical information needed to combat
tax evasion effectively?
Mr. WILKINS. Well, Mr. Shay may want to comment on this,
Mr. TIBERI. I was going to ask him next.
Mr. WILKINS. I think the approach in this bill was focused more
on institutions than countries. I think the institutions is really
where the activity is, and where the money is, and I think that was
a good choice.
I think, obviously, you need to have the flexibility to go around
country by country and work on information exchange. And that
kind of negotiation and treaty activity is an important part of an
overall strategy. But, as Mr. Shay says, that doesn’t get you all the
way there. I think using this kind of approach to obtain information
directly from institutions is an important part of it, too.
Mr. TIBERI. Mr. Shay.
Mr. SHAY. I think Bill said it all. No, I think we certainly like
the approach in this legislation. It has—it reflects—it is in common
with the approach that was taken by the administration’s budget
proposals, and we’re very hopeful that it, combined with information
exchange together, will be successful.
I want to add one comment, and that is in—during the course
of the—the legislation includes a possibility that the foreign financial
institution will provide not just information on the U.S. person’s
account, but information in the form that’s traditional for a
U.S. bank, what’s called 1099 reporting.
And my understanding is that was actually requested by a financial
institution that had had conversations with relevant staffs, so
that not only does this legislation have the potential to help or address
the evader, help us—help the IRS find the evader, but it also
has the potential, frankly, to make compliance easier and more effective
by the U.S. person with a foreign account that wants to
comply with their tax.
And, frankly, I think for most of us, getting a 1099 from a bank
is a huge help. And we do know, on the compliance side, that we
have the highest rates of compliance where we have 1099 reporting.
Thank you, sir.
Mr. TIBERI. Thank you. Mr. Chairman, on a final note, I think
Congresswoman Schwartz would agree Saturday is a big day in
Happy Valley, where my Ohio State Buckeyes are taking on the
Penn State and Nittany Lions.
I just want to thank—I understand, and I wasn’t going to bring
up the World Series. But, Mr. Shay, I just want to thank you. I
don’t know if it’s subliminal or not, but you are wearing scarlet and
gray. That tie is very nice. I want to thank you for that. I yield
Mr. BLUMENAUER. He needs a bow tie.
Chairman NEAL. It was part of our strategy to disarm you.
Let me recognize the gentleman from Georgia, Mr. Linder, to inquire.
Mr. LINDER. Thank you, Mr. Chairman. I would ask each of
you, how many dollars are offshore in dollar denominated deposits?
Mr. WILKINS. I don’t have that data.
Mr. LINDER. Why don’t you have that data?
Mr. WILKINS. I wasn’t prepared to answer that question. I
Mr. LINDER. Mr. Shay, do you have any idea?
Mr. SHAY. I also don’t have that data. I think just to fine tune
it, I assume that the question would be not just dollar accounts,
but dollar accounts by U.S. persons with respect to accounts held
outside the United States.
Mr. LINDER. The answer is $13 trillion. Three groups, including
McKinsey & Company, did studies in early 2005, and came up with
$10 trillion, growing by about $800 billion a year in dollar denominated
Can you give me any idea how much of that is legitimately there
for reasons other than hiding it?
Mr. SHAY. Thank you for that. And I would be very interested
in seeing those studies.
Mr. LINDER. I’m surprised you haven’t.
Mr. SHAY. I’m not sure we’re—I would have to make sure we
are talking about the same—you know, I haven’t seen what you are
referring to, but I would be very interested in it.
And I am not in a position to answer today the question of how
much of whatever that denominator is would be reported or not. I
think it would be—I think we will know a lot more, and have a lot
more confidence in our ability to answer that question, if this legislation
is adopted. I——
Mr. LINDER. The number is available. This legislation is simply
not going to change it.
Mr. SHAY. Was your question whether it was reported, or
whether—I am sorry. Maybe I misunderstood your question.
Mr. LINDER. There are about $13 trillion in offshore financial
centers in dollar denominated deposits. My question is, do you have
any idea how much of that is there legitimately for purposes other
Mr. SHAY. It seems to me the answer to that question would depend
on whether the—not the account itself, but the income from
the account that is owned by U.S. taxpayers has been fully and
adequately reported on the U.S. tax returns. And I—if people know
the answer to that today, I would be very interested in the data
source for that. Thank you.
Mr. LINDER. Mr. Chairman, I have no further questions.
Chairman NEAL. Thank you, Mr. Linder. Let me recognize the
gentleman from Illinois, Mr. Roskam, to inquire.
Let me recognize—it looks like we’re going to recognize the gentleman
from Nevada, Mr. Heller, to inquire.
Mr. HELLER. Thank you, Mr. Chairman. And I apologize for
running a little late. I had another hearing, testifying on another
bill in another committee, so I didn’t get to hear all the testimony,
and I apologize. So if my questions overlap a little bit, please bear
But based on the comments of Mr. Linder, and the amount of
money that we’re talking about, a large number of accounts that
obviously are at stake here, Mr. Shays, can you give us or explain
to us what your specific methodology is to determine U.S. ownership
of these accounts?
Mr. SHAY. Under the legislation, there are—there is a provision
that the foreign financial institution would identify U.S. owners of
accounts, and substantial U.S. owners of foreign entities that have
accounts. And there is a great—there is leeway given to the Treasury
Department and to the IRS to specify further.
But there is provision in there to look to certifications from the
account owners, and then such additional requirements as may be
required by regulations, I believe, is the approach.
Mr. HELLER. Are these known as know-your-customer rules?
Mr. SHAY. Well, if there is a certification that is in addition to
a know-your-customer rule—the know-your-customer rule refers to
banking practices which vary in different jurisdictions, which are
the standards by which the banks in those jurisdictions are expected
to obtain information about their account holders. And that,
of course, is very helpful and important as a base on which to identify
whether there would be an account holder by a U.S. person.
But this legislation would seek that information in particular,
and would—as I said, there is some regulatory authority to further
elucidate what the requirements would be. And there is a provision
in circumstances for self-certification.
Mr. HELLER. Okay. So I understand you’re prepared to allow
KYC rules in—for this purpose?
Mr. SHAY. I think when the legislation is passed, that would be
part of the analysis. As I said earlier, I think it’s in everybody’s interest
to try and come up with rules that are—work as well as possible
with existing financial institution practices.
So, I think that while that’s a determination that should be made
after we see the final legislation, that certainly is an objective to
get the information, but to do it in a way that is as least burdensome,
but that that achieves the task, as is possible.
Mr. HELLER. Thank you, Mr. Shay. Mr. Wilkins, your time
frame for implementing the FFI agreements, what do they call for
in this particular bill?
Mr. WILKINS. Under this bill, the effective date is at the beginning
of 2011. I think, as I mentioned in response to an earlier question,
we would devote resources needed to at least address the most
important aspects of these rules dealing with major financial institutions.
We will continue to work with the committee, and we would continue
to work in the regulatory process, to try to roll this out in
such a way that it—if certain pieces of it couldn’t be fully implemented
by the beginning of 2011, we would hope to have the flexibility
to have preliminary measures that maybe were not full implementation,
but didn’t impose withholding taxes in areas where
we really didn’t want to get the withholding tax; what we really
want to get is the information.
Mr. HELLER. Will these side agreements be made public?
Mr. WILKINS. Typically not, but they are—they would, if they
follow current practices in the QI area, they would follow a particular
form that is a public document.
Mr. HELLER. Okay. Thank you. Thank both of you for being
here. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Heller. Let me recognize the
gentleman from Oregon, Mr. Blumenauer, to inquire.
Mr. BLUMENAUER. Thank you, Mr. Chairman. And I deeply
appreciate both the work you’re doing and the course of this hearing,
the thrust and direction. It seems to me, for years, Congress—
and sadly, this committee—has been less interested in actually
moving forward aggressively with compliance. And, at times, it almost
seemed like it was tying your hands, denying resources. And
I love the fact that we are now making it a legitimate force of activity
to help you do your job.
I want to say that I too am interested in the answer to Mr.
Linder’s question. I didn’t quite fully understand the grasp—or
grasp, I guess, the nature of it. 2005 data on, for example, volume
of money might have changed pretty radically in the course of the
Mr. LINDER. Would the gentleman yield?
Mr. BLUMENAUER. I would be happy to yield.
Mr. LINDER. Three companies, including McKinsey & Company,
and a Boston group, and a third one I don’t recall now, studied
MasterCard and Visa transactions, and extrapolated that into a $9
trillion to $11 trillion figure, and they said it was growing by about
$800 billion a year, probably growing more than that right now.
The question that it seems to me these gentlemen should have
thought about is how much is there. But a significant part of that
is there for legitimate reasons, and not evasive reasons. And that’s
the number we really ought to know about. Thank you.
Mr. BLUMENAUER. I appreciate the clarification. My point is I
think there has been a—you mentioned the year 2005 for the
study. I think in the last four years there has been a wild roller
coaster, in terms of activity overseas. I know some of us had
401(k)’s that are now 201(k)’s. There have been changes, in terms
of the value of currency and the velocity of it. So I am guessing
that finding current data, I think we would all be interested in.
The notion of what’s there for legitimate or illegitimate purposes
is also curious. I mean, how much of United States deposits are
there for legitimate business purposes, or to help facilitate meth
lab activity? I think there is an issue of intent and activity that is
curious. And I would look forward to finding out how those studies
determined intent, and what you would do to determine intent.
I think the purpose of our hearing is one of compliance with the
law. I would put, I guess, two questions before you—I see my time
is rapidly getting away.
One is whether or not we, in Congress, are doing enough to give
you the tools to actually implement this and other elements of compliance.
Because, in times past, we have talked one story and then
cut back on your resources while we have done things that make
it difficult to do your job.
And I am very interested at getting a sense from you—not necessarily
at this point, but getting a sense of whether or not Congress
is on your side, in terms of things in the budget, and if there
are items that we could employ that would make it easier to more
directly use the resources that you might uncover to make sure
that it’s self-financing.
I hear from tax professionals that there are certain audit functions
where the people earn $5,000 or $10,000 an hour for their undertakings,
in terms of what specific things they do. And not that
I am suggesting that we put them on commission, but if there is
a way to make sure that areas that are generating more money because
it is dealing with compliance, if there is a way to target
money back to that, to be—make sure that we are doing it adequately.
And your help from—to help me think that through would
The second piece I would put on the table seeking your guidance
is whether or not we are doing enough in terms of the actual penalties
against businesses and professionals who are in the business
of, frankly, aiding and abetting evasion. I am just as interested in
the reporting. I am interested in making sure we understand what
the appropriate penalties and sanctions are for people who are engaging
in the facilitation.
I think the evidence is that there are lots of people who can’t do
this alone. And, in some cases, they have been counseled to do this.
And having an assessment from you about the adequacy of those
provisions, and where they might be enhanced, both for individuals
and for organizations, would be of great interest to me.
Thank you very much, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Blumenauer. Let me recognize
the gentleman from Kentucky, Mr. Yarmuth, to inquire.
Mr. YARMUTH. Thank you. I want to expand a little bit on the
questions that Mr. Linder raised. And I recall the statement made
by a former Secretary of Defense who said, ‘‘There are things we
know, things we don’t know, things we know that we don’t know,’’
and all of that continuum.
How much of what—the question that Mr. Linder phrased, how
much of this—these amounts do we know that we know—know
that we don’t know, and how much do we don’t know that we don’t
Mr. WILKINS. Well, you are putting your finger on an issue, in
terms of assessing levels of tax evasion and the tax gap, and so
forth. And part of the problem is that, for example, many, if not
most, of the previously undisclosed foreign accounts that are coming
in through our voluntary disclosure initiative we did not know
And so, part of the issue is because of the efforts to hide offshore
assets, we don’t know what the total number of hidden offshore assets
Mr. YARMUTH. Has the voluntary program given you clues as
to how you might detect things that you don’t know that you didn’t
Mr. WILKINS. The data is still quite fresh. And I am not sure
we are ready to answer that question yet.
Mr. YARMUTH. So you don’t know?
Mr. WILKINS. We will be looking at it to see what it teaches us,
and to see if—first, for enforcement reasons—to see—to go out and
detect additional accounts that didn’t come in voluntarily. But it is
possible that it will be helpful to us for data analysis and projection
reasons, as well.
Mr. YARMUTH. Mr. Shay, a question about the relevance of tax
rates to this whole problem.
I suspect that if the corporate tax rate in the United States or
income tax rate were zero, we wouldn’t have this problem. People
would be happy disclosing everything they made.
Have you done an analysis of how tax rates, relative tax rates
in this country, have affected the non-disclosure rate? Is that something
that would be valuable? I mean, it’s an intuitive response to
it, but I don’t know whether it is a practical response.
Mr. SHAY. Well, actually, I think one needs to be cautious about
the intuitive response, in that, you know, if one viewed tax evaders
as rational, then you would correlate it very closely to how much
you’re making by evading taxes, which would correlate to the size
of the rate.
The literature on non-compliance is still, I think, in my judgement,
fairly weak. In other words, there has not been as much resource
devoted to it academically and otherwise as we would like,
sitting here today, in order to be addressing all the questions we’re
hearing. But I do think there is some evidence in the literature
that non-compliance is not directly correlated to tax rates.
And that may be counter-intuitive, but there are a lot of emotional
and other aspects that go into non-compliance. Now, that is
an anecdotal response. So I think we would all like to have more
work done in that area. And maybe, Bill, if you want to comment?
Mr. WILKINS. I guess the only thing I would add is the anecdotal
observation that many of the most aggressively promoted individual
tax shelters in the tax shelter heyday were devised to
shelter 15 percent capital gains income. So it’s—the rate at which
the incentive stops, at least for some people, has got to be lower
Mr. YARMUTH. I yield back, Mr. Chairman. Thank you.
Chairman NEAL. Thank you, Mr. Yarmuth. Let me recognize the
gentleman from California, Mr. Thompson, to inquire.
Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for
holding this hearing. I would be interested, Mr. Shay, in hearing
if you believe that we are doing enough in this bill to get at the
issue of evasion. And I want to—I guess we have already established
the fact that—the difference between evasion and avoidance.
But on the evasion part, are we doing enough? Are there other
proposals that are out there that we should be including in this to
be able to get a better handle on it?
Mr. SHAY. Thank you. One way to approach that question is to
observe that this bill adopts in a legislative form—in substance, not
in every respect the same way—substantially all of the anti-evasion
proposals that were in this administration’s budget.
I would note there is one proposal in our budget that is not in
the legislation, and that we have been working on, the Internal
Revenue Service, and the Treasury, to develop further. And we
think it does need further work before we bring it back as a proposal.
And that involves reporting on cross-border transfers of cash.
And the reason——
Mr. THOMPSON. Cross-border transfers——
Mr. SHAY. Transfers of cash, cross-border wire transfers from
bank to bank. And the reason for that, and the work we are trying
to do, is the volume is extremely high.
And one of the things that we are working toward is trying to
identify a way that we could take that volume of information and
sort of—if you think of it as a sieve, whittle it down to the information
that will not overburden the Internal Revenue Service, and
allow us to target it to enforcement, so that our use of resources
is efficient and focused.
Do you want to comment any further on that?
Mr. WILKINS. I think that is——
Mr. THOMPSON. Before you do, how long before you have this
thing run out, or able to make a proposal as to what it should look
Mr. SHAY. We’ve been working—we’ve actually been working on
it very actively. I can’t give you a precise answer to that. But one
part of our next step is we also—we do want to be talking to the
elements of the business community that would be the companion
to the IRS in having it implement something.
So, I can’t give you a precise answer, but we are working on it
Mr. THOMPSON. Mr. Wilkins, anything to add?
Mr. WILKINS. I think Mr. Shay said it. I mean, the shaping that
needs to be done is one to identify that kind of information to tax
obligations and taxpayers, and that’s where the work is being done,
to try to shape it that way.
Mr. THOMPSON. Thank you. I yield back.
Chairman NEAL. I thank the gentleman. The gentlelady from
Pennsylvania, Ms. Schwartz, is recognized to inquire.
Ms. SCHWARTZ. Thank you, Mr. Chairman, and thank you for
your efforts in taking action on, you know, the legislation you’ve introduced
to be able to move forward on what I think all of us are
I guess we all might have imagined that, you know, there is tax
evasion. And the amount of money that is overseas, I think, actually—whether
the amounts we know about—almost $1 trillion, I
guess, is something that has been talked about, now maybe much
more than that. It’s outrageous that it’s actually out there and
we’re not collecting taxes on it.
So, I actually appreciate the work the legislation would do, and
the work you have already done in trying to get these dollars back
for the taxpayers and for the Treasury. We could use it, as you
So, I really—you made a couple of comments about ways you’re
moving forward. And I think, Mr. Wilkins, you even used the word
‘‘urgency,’’ in your sense of what needs to be done. So—and I think
we share that.
So, while we want to see movement on this legislation, I did
want to ask what else you could be doing, or are doing now, in two
ways. One is in making sure that other banks, other institutions—
you were sort of suggesting that this is country-to-country and it’s,
you know, the issue of these kind of agreements between nations.
It’s really also getting to the banks.
I mean, UBS, that agreement settlement really did change the
atmosphere. And I am assuming that—a question for Mr. Shay—
how many other banks have—are you—or institutions are you engaging
with, in terms of having similar agreements about reporting
voluntarily? And how much do you think is out there? Do you have
any sense of that?
And, secondly, Mr. Wilkins, whether—you talked about the amnesty,
or people coming through voluntarily now. What else do you
need to be doing, or are you doing, to actually make sure that taxpayers
know that this is no longer acceptable, that we’re going to
go after folks and we have legislation coming down the pike, but
in the meantime we have—we know the money is there, we know
that there are—you say thousands and thousands of accounts?
Tens of thousands of accounts? I mean what kind of volume are we
talking about? And what kind of dollars are we talking about? And
how quickly can you move without additional tools, is sort of my
So, Mr. Shay, if you could, speak to how aggressively you are
moving to engage other financial institutions to give us voluntary
agreements, as we move—so we can move forward more quickly.
Similar reporting to what UBS is doing.
And, Mr. Wilkins, if you could, speak to the kind of volume and
urgency of what you can do, given the information—given the tools
that you will have before we give you extra tools.
Mr. SHAY. The activities of the Treasury that involve expanding
agreements are largely with other countries. And I am going to
turn it back to Bill for the——
Ms. SCHWARTZ. Okay. And I apologize if I’m not asking the
right people the right questions. You can decide who answers them
Mr. SHAY. Yes, I will give that piece to Bill. But let me—as I
mentioned in my testimony, we have recently expanded the range
of countries with whom we have agreements. But I think, as Secretary
Geithner has observed in connection with this broader effort
at the G20 more generally, the number of information exchange
agreements that have been signed internationally in the last 12
months exceeds the number of agreements that was signed in the
And I was in the Treasury Department in the 1980s. I can tell
you that the atmosphere internationally—I was the international
tax counsel—the atmosphere internationally has been transformed,
and a great deal of credit for that goes to the Liechtenstein bank
case and, very importantly, the case that the IRS and the Justice
Department have brought with UBS. It has had, I think, a transformative
effect. Bill, do you want——
Mr. WILKINS. In terms of going forward, investigations are continuing.
I can’t comment on ongoing investigations, but they are
ongoing. I would not be surprised to see additional investigations
be generated from the information that we are collecting this year.
Characterizing the agreement with UBS as voluntary needs to
be—you need to think about how voluntary it was.
Ms. SCHWARTZ. Right.
Mr. WILKINS. It was under pain of indictment.
Ms. SCHWARTZ. Yes.
Mr. WILKINS. That is how these agreements get obtained.
Ms. SCHWARTZ. Yes, right.
Mr. WILKINS. And so we are continuing——
Ms. SCHWARTZ. You’re pursuing that——
Mr. WILKINS. We are pursuing that in other cases.
Ms. SCHWARTZ. Okay. In terms of the—just to follow up on the
international agreements, that’s good to know how many more are
One of the concerns I suppose we would have is that new countries
that have not engaged in this behavior who have been off sort
of the radar screen now may actually become new tax havens. Do
you have any sense of how you anticipate—maybe sort of the opportunity
to actually anticipate where else we might go?
And this is not actually—rather than—there are some obvious
countries, I assume, but then there might be some less obvious that
might actually promote this. Is there more that we’re doing in that
Mr. SHAY. The international process that is currently undergoing
has actually targeted, or looking for or monitoring new countries
attempting to become offshore financial centers. That is one
of the very hopeful aspects of the multi-lateral work that is going
on under the overall oversight of the G20.
And recalling that G20 includes, really, not just European—I
mean the major countries of the world. And the work that’s being
done in what’s called the global forum on tax transparency and information
exchange includes somewhere between 80 and 90 countries.
There are very few jurisdictions left. And they have all
agreed back in this last fall in Mexico, one of their—to monitor and
look for jurisdictions that attempt to become tax havens.
Ms. SCHWARTZ. Thank you. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Ms. Schwartz. The gentleman from
New York, Mr. Crowley, is recognized to inquire.
Mr. CROWLEY. Thank you, Mr. Chairman. I did arrive a little
late. So, a couple of questions that may have been answered before,
and so you can just say that and I can get the record.
In terms of the number of potential accounts that we’re looking
at, we’re looking at possibly millions of accounts overseas. Is that
Mr. WILKINS. We don’t have that kind of data. As I said, the
voluntary disclosure program was projected at around October 14th
to bring in about 7,500 new accounts. I have been told that the
number is significantly in excess of that. But, again, that is that
range of numbers. And for the voluntary disclosures the millions
number would not be right.
Mr. CROWLEY. There are some measurements in place, for instance
a customer—an anti-money laundering legislation in place
already. Are those the tools by which—or the methodologies by
which we use to account for these particular accounts? Or are you
looking at other methodologies to do that?
Mr. WILKINS. I think the answer is both, and Mr. Shay discussed
it earlier. Certainly for banks that are subject to robust
know-your-customer regimes, that information would produce the
data that is needed for them to provide the reports that the legislation
seeks on U.S. investors.
For banks that did not have as robust KYC regimes, they would
need to adopt, you know, additional measures to be sure that they
complied with their diligence obligations for being either a qualified
intermediary or a foreign financial institution that entered into one
of these disclosure agreements.
Mr. CROWLEY. Mr. Shay, do you want to comment, or—it’s covered.
How many FFI agreements do you anticipate you will have to
enter into agreement here?
Mr. WILKINS. I am not sure we know a number to expect. We
do expect the existing qualified intermediaries to, for the most part,
amend their agreements in the ways that are contemplated here.
Mr. CROWLEY. Prior to having to formally enter into, you mean,
Mr. WILKINS. Well, no. I mean there are existing qualified
intermediary agreements with a number of foreign financial institutions.
Really, most of the major international ones.
This legislation would seek to impose some new obligations on
QI’s, with respect to U.S. account holders. And we would expect, for
the most part, those existing agreements to be amended, and we
would look to efficient ways to accomplishing those amendments,
rather than, you know, retail level, one-by-one negotiations.
Mr. CROWLEY. Is it the intent to publicize those—the—when
those agreements are entered into? I guess following a little bit on
Ms. Schwartz’s question before.
Mr. WILKINS. I think individual agreements typically have not
been the subject of press releases, unless the banks decide to do
that on their own, for their own——
Mr. CROWLEY. So the government itself will not——
Mr. SHAY. But the fact that a bank is a party to an agreement
will be public, because it will be necessary information for the U.S.
withholding agent that is dealing with that bank to know that they
have an agreement, and therefore, they will not withhold on payments
to that institution.
Mr. CROWLEY. Okay. The U.S. is the world’s largest market for
foreign portfolio investment. And foreign investment in the U.S. is
good for our economy. I think, Chairman, you would agree with
I have some concerns that the real cost of investment in the U.S.
for non-U.S. investors has increased significantly, as foreign financial
firms complied with the IRC Section 1441, the QI regs. While
I welcome the IRS and Treasury’s goal of identifying U.S. persons,
there is concern in the financial services community that the U.S.
has and could further create an invasive administrative burden
that applies to all recipients of the U.S. income, not just Americans,
by discouraging our shared goal of increased U.S. investment.
Could you just comment on this issue, on the complexity, the cost
of implementing this program, and do you believe it is easier and
less costly than the current system we have in place?
Mr. SHAY. Let me comment, if I may, first. We share the view
that foreign portfolio investment in the United States is important,
and we want to be sure that it is—it continues unabated.
And, as I said in my earlier remarks, part of our objective—and
a very important objective of ours in implementing legislation,
should this legislation be passed—will be to do—work closely with
the affected financial institutions, business community, and to
come out with rules that will balance and achieve the information
reporting that we seek, but at the least burden and cost as possible
to the affected intermediaries.
I—our view is it is going to be possible to do this, to allow Americans
to comply with their tax obligations, and not interfere in an
inappropriate way with cross-border investment, which we view as
Mr. CROWLEY. Thank you. I agree with the intent of the legislation.
With that, I yield back, Mr. Chairman.
Chairman NEAL. Thank you very much, Mr. Crowley. Let me
recognize the gentleman from Texas. While not a member of the
subcommittee, he has certainly demonstrated a consistent interest
in this issue. Mr. Doggett.
Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for
your efforts in this area, those addressed through your most recent
legislation with Chairman Rangel, and those in this general area.
I thank both of you for your testimony and your public service.
Mr. Shay, you have—or Secretary Shay—you have testified before
us over the years on a number of occasions. And I realize that
the views you express now in this new position are not necessarily
those that you have written about in the past. But I would just say,
as a general matter, that I think a good place for Treasury to start
on many of these problems, particularly with reference to international
corporate tax avoidance, would be to go back and read
what you have written in the past, and adopt it as policy in the
My interest today in this, as you know, stems from my having
filed with Senator Carl Levin—and I appreciate your reference to
it—the Stop Tax Haven Abuse Act. I appreciate the fact that Secretary
Geithner, when he was before the full committee in March,
indicated that the administration fully supports that legislation.
And while the primary focus of the hearing today, and the sole
focus of the recent legislation that’s been introduced is tax evasion
by individuals, I believe that much more costly tax evasion is occurring
from corporate individuals, and that that must also be considered.
As I noted when this subcommittee convened on March the 31st
considering these matters, the use of international tax games by
corporations in these offshore tax havens is widespread, and it
drains billions of dollars from the treasury.
I don’t believe that there is any justification for having one
standard for individual taxpayers and another, more permissive approach,
to corporate individual taxpayers. One rule for Wall Street
corporations and one rule for individuals? I think that’s indefensible.
And after years, if not decades of delay in this committee, there
is also no justification for failing to address international tax
abuse, or insisting that this has to be done in a two-step approach,
one for individuals now, and another for corporations some day. We
need a comprehensive approach, not just a vague promise that corporate
evasion will eventually be addressed.
In fact, while some may try to draw a distinction, as has occurred
here today, between illegal tax evasion and tax avoidance,
the real difference primarily is—between individuals illegally hiding
their cash overseas and corporations manipulating the tax
does—the main difference is that the corporations have better lobbyists
to obtain the—legitimacy for some of these questionable
transactions than do some of the individuals.
With reference to some of the ideas that are advanced here by
Professor Kingson today, I hope you will review those. I understand
you can’t take a position on them formally this morning, but I
think he advances a number of ideas about how to handle those.
The whole idea of the stock tax haven approach was to prompt
other legislative response and discussion. And I am pleased that it
has prompted what I think are some improvements on our approach
as it relates to individuals, but a concern that it does not
address the issue of corporate tax abuse.
Let me ask you specifically about one matter, just as an example
of these problems. As you know, we finally, a while back, addressed
this issue of corporate inversions, of companies that are American
but claim, by putting up a post office box somewhere, that they are
no longer American, except to receive all the benefits, and not pay
In addition to the companies that have done that, and the law
that was passed to try to discourage that in the future, does the
current law cover corporations that are formed here in the United
States, or that choose not to be formed here initially in the United
States, to be formed abroad, even though all their management,
most of their operations in the United States—can they simply incorporate
in a tax haven and develop their intangibles from this
foreign corporation, even though doing so may cause them to yield
other tax benefits? And is that occurring with some corporations?
Mr. SHAY. It is permissible under current law to establish a foreign
corporation at the outset. Section 7874, which is the anti-inversion
proposal you were referring to, does not address corporate
formation at the outset.
As you observed, if one is then going to be investing in R&D,
then assuming that they’re not carrying on business in the United
States such that they would be taxed currently, then they would
be losing or deferring the benefit of those deductions. And so that
is one pretty significant drag on doing that from the outset.
Mr. DOGGETT. But there are—that has occurred. And the current
inversion law does not cover that, does it?
Mr. SHAY. That is correct. The current inversion law does not
cover corporate formations.
Mr. DOGGETT. Is there any justification for an American corporation
with a foreign subsidiary retaining passive assets in that
foreign subsidiary that exceed the resources that it needs to compete
Mr. SHAY. There——
Mr. DOGGETT. Any competitive justification. I’m not talking
about tax dodging as justification——
Mr. SHAY. Well, I think without the—certainly a foreign corporation
that, under today’s law, is permitted to accumulate earnings
and retains it in passive form, there are some limits on that.
But they are not very great.
But certainly one would, I think, think that an amount that
would permit what—normal working capital amounts would be acceptable.
To the extent that amounts are accumulated beyond that,
then that’s a question—that’s really a policy question that I think
you’re alluding to. And current law would permit that.
Mr. DOGGETT. Right. Well, I believe that the chairman, Mr.
Neal, got it right at the outset, that we shouldn’t be looking to
raise taxes, to seek revenue from people that are playing by the
rules here at home, working hard, if there are others who are engaged
in tax avoidance, through manipulating international rules
and the Tax Code, and that he also got it right with the famous
Joe Lewis, ‘‘You can run, but you can’t hide.’’
Unfortunately, even if we adopted, just as it has been proposed,
the legislation that he and Mr. Rangel and Chairman Baucus have
introduced, corporate tax avoidance will still be hiding, and some
Americans will be asked to pay more because those multi-nationals
are not paying their fair share. Thank you very much.
Chairman NEAL. Thank you, Mr. Doggett. The gentleman from
Louisiana, Dr. Boustany, is recognized to inquire.
Mr. BOUSTANY. I thank the chairman for this courtesy. I think
the ranking member, at the outset, made the—I think the clear
distinction between tax evasion and legitimate tax planning on the
part of corporations, based on current policy and law. And, gentlemen,
I believe you acknowledged that there is that clear distinction.
Am I correct in——
Mr. WILKINS. Yes, that’s right.
Mr. BOUSTANY. Thank you. I want to focus on a couple of
issues in the bill that’s proposed. Very important to ensure that
dividend withholding rules are not abused. But equally important
is clarity with this.
And the scope of the bill’s proposal on this issue seems to me to
be unclear, because it applies to a broad range of payments that
may be economically similar to a dividend, but excludes any payment
pursuant to any contract which the Secretary determines
does not have the potential for tax avoidance. The statute then lays
out several general factors to use in determining whether a payment
has the potential for tax avoidance.
So, can you explain what types of payments Treasury regards as
having the potential for tax avoidance, or what types of payments
Treasury regards as not having that potential? We need a little
clarity on where you are going with this.
Mr. SHAY. Thank you for that question. This is an important
and highly technical area. And the work of the permanent subcommittee
on investigations clearly brought out that there were
transactions being entered into where—I don’t think there would
be much disagreement—inappropriately avoided dividend withholding
Our task, should this legislation be adopted—and it was—it is a
provision that we also had in the administration’s budget, a very
comparable provision, I should say—will be to identify that dividing
line between the transactions which are dividend avoidance,
and the transactions which do not have that—are part of everyday
commercial activity, which we do not want to interfere with.
I don’t think it—today, particularly before—that will be our objective
during the regulation-writing process, to achieve that. And
we will work with the industry participants, to learn what they are
doing. And then we will make a judgement as to how to draw that
line. It’s not something I think we can do in testimony. Thank you.
Mr. BOUSTANY. I hope we can explore this further as time goes
on, because it is a critically important issue.
My other question pertains to the QI program. And current law
already provides for QI agreements between foreign banks and the
IRS. Can you elaborate on the overlap, if any, between the QI program
and the bill’s proposal to require banks to enter into certain
agreements with the IRS to avoid a 30 percent withholding tax?
Mr. WILKINS. Well, I think there would be two alternative ways
for a bank to avoid that. One would be to enter into a full-blown
QI agreement. The other would be to enter into sort of a QI light,
or a modified agreement with the IRS which would impose information
sharing obligations on the bank, but not imposing the obligation
on the bank to do the work for non-U.S. investors investing
in U.S. securities market that happens with a QI.
Mr. BOUSTANY. Are you looking at a streamlining process?
Mr. WILKINS. Yes. We will be interested in coming up with
processes that are efficient, and are not sort of onesies, if——
Mr. BOUSTANY. Okay. And for banks already part of the QI regime,
might there be a way of bootstrapping into the new regime,
by using practices they have already developed for the QI program?
Mr. WILKINS. Yes. I mean, we do hope to work with the industry,
and learn from our QI experience, in order to make this transition
as effective as possible.
Mr. BOUSTANY. Thank you. I yield back, Mr. Chairman.
Chairman NEAL. Thank you, Doctor. And let me thank our witnesses.
I thought it was most helpful. Always impressed with the
caliber of witnesses that are sent here by Treasury and IRS. And
I must say left, right, or center, I think it’s always well informed
information that they pass on to us.
And, with that, let me call up our second panel. Thank you.
Mr. SHAY. Thank you, Mr. Chairman.
Mr. WILKINS. Thank you.
Chairman NEAL. We are anticipating a vote in the next few
minutes, and I believe that there will be two additional votes after
So—but I would like to proceed with the witness testimony. And
I think that it would be helpful, as we go along, just anticipating
that we might be interrupted.
With that, let me recognize Mr. Prevost.
STATEMENT OF THOMAS PREVOST, AMERICAS’ TAX
DIRECTOR, CREDIT SUISSE, NEW YORK, NEW YORK
Mr. PREVOST . Thank you, Chairman Neal. Good morning. My
name is Tom Prevost, and I am an Americas tax director for Credit
Suisse. I would like to thank you for allowing us to offer testimony
Credit Suisse has always been an active participant in the qualified
intermediary program. The bill makes broad changes that will
have implications for the QI regime, and impact how financial institutions
will deal with both U.S. and non-U.S. customers with foreign
Our comments are not intended to be unique to Credit Suisse,
and will be relevant to tax reporting for all non-U.S. financial institutions,
with the majority of the comments also being relevant to
U.S. financial institutions.
We would like to make three basic points today. First, Credit
Suisse supports the proposed framework for simplified reporting of
accounts under control by U.S. taxpayers. The measure is very
comprehensive, and represents a meaningful improvement over the
administration’s initial greenbook proposal, and previously proposed
measures, which would have been considerably more difficult
to implement, from an operational basis.
We appreciate the committee’s diligence in working through
these issues in its effort to eliminate problematic requirements.
Second, while we support the framework proposed in the bill, we
have concerns about some of the specific details related to FFI tax
reporting, and in certain areas we would like to work with the committee
to garner greater clarity. We express these concerns in an
attempt to ensure that the stated aims of the legislation are met,
rather than falling short due to complications associated with unintended
In considering operational details, we believe that the current QI
program has been a success in allowing U.S. securities to be held
by both U.S. and non-U.S. taxpayers overseas, and suggest that as
new requirements are put in place to deal with U.S. taxpayers,
there needs to be a careful balance struck between the amount of
information that the IRS would like to collect, and the compliance
burden placed on institutions so that the qualified intermediary
program remains attractive to institutions participating outside of
Rightly or wrongly, there are significant fears in the international
banking community that being a QI may lose its appeal
and simply carry too much compliance burden, which could have
negative ramifications for foreign investment into the U.S. We recommend
a practical focus in the implementation stage to ensure
the legislation fulfills its worthy aims.
Finally, Credit Suisse has some concerns and comments relating
to two other provisions of the bills, bearer bonds and equity swaps,
and we would like to offer constructive ideas to ensure the responsible
participants in these markets are not unnecessarily penalized.
With respect to the simplified information reporting approach in
the bill, it is a meaningful improvement over the greenbook and
other proposals, because it eliminates the requirements for foreign
financial institutions to do full 1099 reporting, and a requirement
that all related foreign financial institutions be qualified intermediaries.
We appreciate the tremendous effort made by the committee and
the Treasury Department to thoughtfully address the concerns
raised by financial institutions with respect to the previous proposals.
Regarding the technical issues on reporting, in the interest of
time I will not fully detail the technical implementation issues we
have with the bill, but instead, summarize our concerns. We have
provided considerably more detail in our written testimony.
First, there are effective date issues with a number of provisions
in the bill. The rules have to be fully known and foreign financial
institution agreements have to be executed before systems and procedures
can be established. And it takes time to implement after
the rules are established—probably 18 to 24 months, depending on
the specific provision.
Second, the method of determining U.S. status of financial accounts
is critical. We believe that most foreign financial institutions
will not choose to obtain customer certifications from their entire
customer base, as permitted by the bill. So, the bill should clarify
that foreign financial institutions may, as an alternative, rely
on their existing know-your-customer, anti-money laundering procedures.
Third, the verification process should not be so burdensome that
it dissuades foreign financial institutions from signing an agreement
with the IRS. The concern is that you’re dealing with the
FFI’s entire customer base, versus their much smaller QI customer
base, so the cost could be prohibitively expensive.
Fourth, in an effort to ensure that reporting will always occur,
the bill has created a number of situations where reporting of the
same information happens more than once. We should strive to
eliminate these redundant reporting situations.
With respect to the bearer bond provisions, there is an economic
issue, in that the bill limits access to certain capital markets for
U.S. issuers. For example, the Swiss market and the Japanese retail
With regard to equity swaps, we appreciate the committee’s efforts
to recognize that equity swaps are primarily used for legitimate
business purposes, by having the bill only target abusive equity
swaps. We welcome the opportunity to assist the Treasury Department
in defining non-abusive equity swaps.
Besides an effective date concern, there is also a double-withholding
issue for internal hedging swaps, which is described in our
To close my testimony, I would like to restate our three primary
points. First, Credit Suisse supports the new framework for foreign
account reporting as a thoughtful improvement on earlier proposals.
Second, we would like to see consideration given to certain
technical and implementation issues. Third, we would like to ensure
that responsible parties are not unnecessarily harmed by restrictions
on bearer bonds and equity swaps.
Thank you for the opportunity to appear today, and I will be
happy to answer any questions you may have.
Chairman NEAL. Thank you, Mr. Prevost.
Professor Kingson is recognized to offer testimony.
STATEMENT OF CHARLES I. KINGSON, ADJUNCT PROFESSOR,
NEW YORK UNIVERSITY LAW SCHOOL, NEW YORK, NEW YORK
Mr. KINGSON. I’ve been invited here to discuss avoidance of
U.S. tax by using companies and by—incorporated in tax havens.
And, of course, you know, tax—they are called tax havens, but they
are only tax havens to the extent that we let them be tax havens.
And my comments really concentrate on publicly held companies
where the money is.
And they avoid U.S. tax in two ways. One, they transfer intangibles
to their foreign subsidiaries, and the foreign subsidiaries make
them, and they’re not taxable until the money is brought back into
the U.S. And in the case of U.S. parents that become subs of foreign
parents, the foreign parents are not taxed on any non-U.S. income
ever, and including interest on capital gains.
Now, this can be countered by reasonably effective measures.
One would repeal an obscure provision that was enacted in 1997
in the name of alleviating complexity. And the second would be,
really, Representative Doggett’s suggestion that we say that a company
that is managed, controlled in the United States is a resident
of the United States, and fully subject to U.S. tax.
The—although the former has—the subsidiaries have more revenue
loss, I am going to take up the parent’s technique first, because
it’s more visible and it’s more resented, and also because it’s
the only thing on the table because of Representative Doggett’s bill.
Now, the use of—for both parents and subsidiaries, what is important
is intangibles. We have changed from a world of steel
where Andrew Carnegie was the richest man to a world where Bill
Gates is the richest man, and the wealth is intangibles.
And the United States, too, has intangibles. It has a government—I
mean a great government—it has shared ideals, it has sacrifices.
And we have commercial intangibles. We have great educational
institutions, a skilled workforce, and we have maybe the
best scientific community that ever was. And these U.S. corporations
take advantage of these to make their fortunes, and they then
want to really say, ‘‘Well, you know, I have made mine, and now
I don’t have any more obligations.’’
And as for the parents, they very often want to incorporate
abroad and still live here, and we don’t allow individuals to do
that. If you live here and you want the benefits of civilization, I
mean, you have to pay what Justice Holmes called the price of civilization.
I mean taxes.
And the stuff to deter inversions, I mean, that’s very long and
complex, and I don’t know how well it works. It certainly doesn’t
work, as Mr. Shay said, in the case of start-ups.
But even if you have a U.S. sub of a foreign parent, they can
take the intangibles out of the U.S., and have them forever outside
U.S. tax jurisdiction. Now, you can’t do that with something that’s
legal, because you know, a patent you have to transfer out, and
that’s a realization event. The corporation gets taxes on its value,
and so does the foreign parent on the dividend.
But other things are easier to get out of U.S. tax jurisdiction, and
that’s stuff like know-how, and goodwill, and the workforce. You
can’t put your hand on them. And that’s why—and that gives an
incentive to get these—this stuff that has been done forever.
Now, I would like to say about the foreign subs, they transfer
these intangibles to the foreign subs, and they build up incredible,
incredible amounts of money. The table prepared by the Democratic
House Ways and Means Committee staff said that in 2003
alone, 9 pharmaceutical companies reinvested $26 billion abroad,
and this was in low-tax jurisdictions. And they did it because they
syphoned the intangibles off to their subsidiaries, and so they had
$26 billion, mostly in passive assets they didn’t need in the business.
And if you—the way to combat this really is to, I think, to repeal
an exemption they had, they got in 1997. It said, basically, if you’re
an investment company you have to—a foreign investment company—you
have to economically repatriate all your earnings. And
these companies were going to become investment companies because
more than 50 percent of their assets became—they didn’t
know what to do with them. They had no business reason. And
they were stocks and bonds and bank deposits.
So, the—they got an exemption in 1997 from foreign subsidiaries
of U.S. companies being called investment companies, and characterized
as investment companies. And then, in 1997, the real accumulation
began, because there were no tax penalties.
And then, starting in 2002, they said, ‘‘Well, you know, we really
have to get this stuff back, because this stuff we siphoned abroad,
we have to bring it back tax-free, so we can recreate U.S. jobs.’’
And they got it back. And, you know, to show what happens, a
company like Intel, which brought back $6 billion, as soon as—
you’re supposed to have a plan to create more jobs—and the next
year they cut 10,500 jobs. And Pfizer, which had $38 billion abroad,
the next year they fired 10 percent of their domestic sales force.
And so, I characterize this as really one of the most brilliant, farsighted,
and ingenious rip-offs of the U.S. tax base ever accomplished.
And to counter this, Congressman Rangel’s bill would say,
‘‘Well, you can’t just bring back your high-tax earnings and use
them to wipe out tax on your exports. You have to allocate part of
that against the income that you keep abroad in low-tax earnings.’’
But I think that what would be much more effective would be to
repeal the exemption that these companies got from foreign investment
companies. It wouldn’t hurt their competitive position at all.
Because, by definition, you only count as passive assets, assets that
you don’t need in the business as working capital. So there is no
real justification for this.
And, you know, you have legitimate reasons for doing business
in a foreign country, and a tax haven. Avis can’t rent cars in Florida
and send them—I mean, can’t send them to the Bahamas every
time somebody wants to rent a car, so you have to have a business
there. And if it’s untaxed, it’s untaxed. But that doesn’t mean that
Avis should be—Avis Bahamas should be able to get a huge mutual
fund there going with untaxed income.
And this would—my second thing would be—because, I mean, I
have had experience with what companies do, and they value earnings
much more than they do saving taxes. And if you required
that published income statements couldn’t say that there is no U.S.
tax on these accumulated earnings because you’re never going to
bring it back, that would deter them very substantially. Instead of
showing $100 of income on their balance sheet in Bermuda, they
would show $65 of income. And without earnings per share being
increased, which is the, you know, the summum bonum, I mean,
you don’t really have any—you don’t have that much of an incentive.
It doesn’t show up in your performance to do these tax havens.
And the final thing is really just—I think you—I think one of the
things—although these foreign information things are, I think, valuable.
I haven’t had much experience in the area, but I think it
should be—I think the focus of my testimony has been that you
concentrate on the U.S. activities. If a company has U.S. activities,
and you measure it by where the executives live—because they’re
not going to live in the Cayman Islands, and you don’t do it by
their officers, because they can fool around with titles, you just say,
‘‘Who are the highest paid people,’’ and that’s it.
And when you focus on U.S. activities, and focus on the consequences
to the U.S. parents when they’re—with their foreign subsidiaries,
I think you will—it will do very well.
And, as a coda, I just want to say that I would do the same thing
for—focus on U.S. people with respect to tax evasion. I mean, if a
person—instead of chasing the crooks and the tax evaders, I would
also go after their beneficiaries, because in my experience everybody
who wanted to give up a citizenship, he would never have his
children give up their citizenship. And so, if you just said if
everybody who got more than $10 million
in gifts and bequests had to show that it had been reported
in the Internal Revenue Service—and with $10 billion or some 8-
figure number, you couldn’t say, ‘‘Well, we just forgot to keep
records’’—I mean, if you said that that was income and subject to
an excise tax, you would make law-abiding people—you would—
people would lose the incentive to give money—to take tax evasion,
if they couldn’t give money to the next generation. And that
wouldn’t be involving chasing foreigners.
(Please see document either at link or page for the written statement, which includes more information.)
Chairman NEAL. Thank you. Mr. Suringa, it’s up to you. Do you
want to offer testimony in the next five minutes, or do you wish
to have us reconvene here at approximately noon time, and then
it would give you a better chance? I want to make sure we’re fair.
Mr. SURINGA. Whatever the committee would like. I am happy
to stay within the five minutes, or——
Chairman NEAL. Then do it.
Mr. SURINGA. Okay.
Chairman NEAL. So are we.
Mr. SURINGA. Thank you, sir.
STATEMENT OF DIRK J.J. SURINGA, PARTNER, COVINGTON &
BURLING LLP, WASHINGTON, D.C.
Mr. SURINGA. Chairman Neal, Ranking Member Tiberi, and
Members of the Committee, my name is Dirk Suringa. I am a partner
with the law firm of Covington & Burling. From 2000 to 2003,
I was an attorney advisor in the office of international tax counsel
at the Treasury Department. I appreciate very much the opportunity
to testify before the committee today.
Although I regularly advise clients on how best to comply with
U.S. information reporting requirements, my testimony today is on
my own behalf, and not on behalf of any of my clients.
I would like to make, briefly, three basic points summarizing my
written testimony. First, offshore tax evasion remains a significant
problem, and the committee is right to be concerned about it, and
focused on efforts to stop it.
Although it’s difficult to establish with precision the extent of offshore
tax evasion, it clearly represents a substantial cost to the
U.S., and undermines the basic fairness of our tax system. Put simply,
the IRS needs effective enforcement tools to ferret out and stop
U.S. tax evasion abroad.
Second, the conceptual approach effect, in my view, increased information
reporting and disclosure, gives the IRS exactly the right
type of tool to deal with offshore tax evasion. Disclosure enables
the IRS to bring cases to recover revenue otherwise lost to tax evasion,
and it discourages evasion in the first place, by raising the
risk of detection.
Equally as important, properly structured information disclosure
need not interfere with legitimate business transactions, which is
as essential to our economic recovery as it is to generating tax revenue
for our government.
While the objectives and overall approach of the bill, FATCA, are
clearly correct, my third point is that the legislation may give rise
to certain unintended consequences, largely because it’s a unilateral
The sanction that FATCA uses to obtain foreign bank account information
is a withholding tax imposed on U.S. source investment
income. So, a foreign financial institution or foreign entity can
avoid the sting of FATCA simply by divesting from the United
States. This type of a divestment would be troubling, not only because
it would deprive the IRS of the opportunity to obtain actionable
information, but also because of its potential harmful effect on
the U.S. dollar and on in-bound U.S. investment, and the ability
of U.S. companies to raise capital.
FATCA also could encourage foreign countries to impose a withholding
tax on payments to U.S. financial institutions and U.S. entities,
unless they disclose ownership by those countries’ citizens
and residents. A proliferation of country-by-country reporting and
requirements of withholding taxes would raise, in my view, barriers
to trade that should be avoided.
Last point is that FATCA, as drafted, may have the unintended
consequence of overriding existing U.S. tax treaties. U.S. tax treaties
typically require, as a condition for obtaining benefits, that the
foreign person provide—demonstrate ownership, or demonstrate
qualified treaty residence. In other words, they have to show that
they are a good foreign country resident. Under existing treaties,
that does not depend on whether they demonstrate that they have
a U.S. ownership or now.
Thus, even if a foreign entity satisfies all the requirements of a
treaty, FATCA could deny it the reduced rate of withholding tax
provided by the treaty. In my view, a multi-lateral agreement on
the sharing of taxpayer financial information would better serve
the enforcement objectives of FATCA without these unintended
The more jurisdictions that would join such an agreement, the
less of an incentive foreign financial institutions and foreign investors
would have to divest from the United States, because they
would know that wherever they invest their money in major markets,
they would face the same problem.
At the same time, the less likely foreign governments would be
to adopt conflicting unilateral measures that could end up putting
information about taxpayers in the hands of governments that do
not protect it to the same degree that we protect it under Code Section
Finally, an agreement among our major treaty partners would
reduce the risk of the treaty override effect of the bill.
My written testimony has a couple of technical points on other
aspects of the bill. I am happy to answer questions about that.
Thank you very much for the opportunity.
(Please see document either at link or page for the written statement,
which includes more information.)
Chairman NEAL. Thank you, Mr. Suringa. We have three votes
on the floor. So we will recess until after the last vote. I anticipate
being back here right after noon time. And then we will have an
opportunity to not only resume testimony, but have some questions
answered. The committee stands in recess.
Chairman NEAL. Let me call this meeting back to order. And we
have finished testimony from the witnesses, so there will be now
an opportunity to raise questions with our very good panelists.
Mr. Prevost, let me congratulate you, first of all, on your willingness
to come and testify today. I know it was not an easy decision,
given the strong objections that we have heard to this bill from
some in the international banking community. But you seem to
think, overall, it is a responsible approach to the enforcement problem.
You mentioned that this bill is an improvement over the budget
submission from earlier this year. Would you be specific?
Mr. PREVOST. Sure, Chairman Neal. You know, there were a
couple very fundamental concerns with the greenbook proposal that
this bill fixed, and I think this is going to be helpful to the banking
The first is the elimination of the requirement to do full 1099 reporting.
That was a major concern by a number of foreign financial
institutions. And the other was the requirement that every qualified
intermediary—all of their affiliates had to be qualified intermediaries,
as well. It’s a very big sort of compliance issue to be a
qualified intermediary. So, to have to make every entity be forced
to be one was a concern that a lot of people had.
Chairman NEAL. I was also interested in your comments about
potential duplicative reporting. Maybe you can suggest some ways
for us that Treasury and the IRS limit the potential for this use?
Mr. PREVOST. Sure. I mean, some of this is described in our
written testimony, but you know, there is fundamental things.
Like, if a hedge fund is already providing K1s to the Internal
Revenue Service, to ask them to do this reporting as well, which
actually doesn’t even give you as much information that’s already
on the K1, that seems to us to be unnecessary.
If you have got a bank that has a hedge fund account and the
hedge fund has also got the FFI agreement to have the bank do
the reporting and then have the hedge fund do the reporting as
well, you—basically you’re giving the same information to the IRS
twice. And, if anything, it has the potential to confuse them, because
they’re getting more information than actually what’s really
out there in dollar terms, because they get the same information
more than once.
So, it is things like that that they need to work on.
Chairman NEAL. And, Professor Kingson, I was interested in
your suggestion that companies be required to disclose the U.S. tax
on their foreign earnings that are permanently reinvested. Can you
explain why that would make tax havens less attractive?
Mr. KINGSON. It would not result in their increasing earnings
I can give two examples of this. I went to a conference at Merrill
Lynch years ago where the Internal Revenue Service had offered
to say that they would give a bigger—an interest factor on convertible
bonds, increasing your deductions, if the companies did the
same thing for book purposes. And there were tax lawyers and investment
bankers there, and the tax lawyers said, ‘‘This is great,
you will save a lot of taxes,’’ and the bankers said, ‘‘It will hurt
earnings,’’ and they did not agree.
And you take something like the HealthSouth Corporation. To support their
billion dollars of earnings, they overpaid $300,000 of
taxes. And when they went bankrupt, the trustee got it back. They
were willing to pay taxes in order to really inflate their earning.
Chairman NEAL. And Mr. Suringa, I appreciate the fact that, in
your testimony, you acknowledged that this was a legitimate problem
that we are examining here, and I thought that was very helpful.
Mr. SURINGA. Yes.
Chairman NEAL. You would note that there is very little rancor
here on the subcommittee today. I think much of it has to do with
the fact that this is a serious issue——
Mr. SURINGA. Yes.
Chairman Neal.—and that the American people are focused on it.
Mr. SURINGA. I agree completely. I think it is an important
issue. Individual tax evasion has a corrosive effect on the willingness
of law-abiding taxpayers to pay their fair share. So I think it’s
a very important problem.
Chairman NEAL. Thank you. And let me yield to Mr. Tiberi.
Mr. TIBERI. Thank you. Thank you, Mr. Chairman. First, Mr.
Prevost, thank you for being here. Question to you.
You mentioned the issue of bearer bonds. If I can ask you a question
related to that, I understand that bearer bonds have sometimes
enabled dishonest people to cheat on their taxes. And it’s important
to address that problem. On the other hand, I think that
it’s also important that these—in these troubled economic times, to
broaden the U.S.—the access to U.S. companies and the Treasury
to sources of capital, not to restrict such access, in this particular
Wouldn’t the bill’s bearer bond provision make it harder for the
Treasury Department and American companies to raise capital in
some markets around the world, and wouldn’t the resulting implications—and
what would the resulting implications be for the economy
right now, the U.S. economy right now?
Mr. PREVOST. Oh, you know, I am not an expert on bearer
bonds, but yes, I am aware of the fact that there are some markets
where U.S. companies can only raise money through bearer bond
For example, in Switzerland, we understand that, you know, $40
billion was raised in the 2004 through 2007 period by U.S. companies.
And, you know, if they wanted to tap that market, if they
couldn’t do bearer bonds they wouldn’t be able to raise the money.
So I don’t know what the alternative would be. But there is an
issue that needs to be thought about.
Mr. TIBERI. Mr. Suringa, have you thought about the issue at
Mr. SURINGA. I have. I mean, I think in terms of—we would
be in sort of uncharted territory, if we were to repeal the ability
of issuers to include the TEFRA disclaimer language, and the reason
is that the issuer sanctions, for example, apply, in essence, to
all issuances of debt. So it’s sort of drafted in a way that is an
extra-territorial application of U.S. law.
And the way that foreign issuers, as well as U.S. issuers, deal
with that problem or that potential problem is to include the
TEFRA disclaimer language in all debt issuances. So they basically
can avoid the issue by just putting the foreign targeting requirements
into their issuances of debt. And so we don’t have to encounter
the problem about whether or not, if that language weren’t in
there, if it weren’t effective, that issuance would be subject to a one
percent excise tax, multiplied by the number of years of the
If we take away the ability of companies to be able to do that,
then I think we have to confront the extra-territorial application of
the bill—of the law, as it stands now. And that could have a negative
effect on the ability of U.S. companies to raise capital, and on
foreign companies, as well.
Mr. TIBERI. Taking a step further, as I understand it—and
please correct me if I’m wrong—the legislation would not prevent
a foreign company, my understanding, from using bearer bonds,
which then would put U.S. companies, potentially, at a competitive
disadvantage, while not meeting the objective, I believe, the objective
of removing bearer bonds from the markets entirely.
So, instead of unilaterally—a unilateral U.S. action on the issue,
wouldn’t it maybe be more effective, if we’re trying to get this
more—at it from a global perspective, attempt to address the bearer
bond issues cooperatively, through multi-lateral negotiations
with other countries?
Mr. SURINGA. Well, I do think—I mean, the tenor of my testimony
is that I think a multi-lateral approach is the best way to
avoid the issues that kind of rise——
Mr. TIBERI. If we don’t do that, wouldn’t it put us at a disadvantage,
our folks at a disadvantage?
Mr. SURINGA. Oh, I think that’s right, in terms of where can
we raise capital, where can our companies raise capital——
Mr. TIBERI. Right.
Mr. Suringa [continuing]. If we have this disincentive, or this
sanction. I mean, other companies are going to be able to raise capital
without having to deal with that sanction, I mean, assuming
that they can work out the extra-territorial application——
Mr. TIBERI. Mr. Kingson, you agree?
Mr. TIBERI. Do you agree?
Mr. KINGSON. I’m sorry, I am not—really not qualified to——
Mr. TIBERI. Okay. Mr. Prevost?
Mr. PREVOST. I do agree that that is an issue that has to be
Mr. TIBERI. Want to take a stab at it, Mr. Kingson, even though
you’re not—we’re not experts, either.
No? All right. Mr. Chairman, I will yield back.
Chairman NEAL. Thanks for giving up the disguise.
Let me yield to Mr. Doggett to inquire.
Mr. DOGGETT. Thank you very much, and thanks to each of our
witnesses. I will have some questions for Mr. Kingson.
Doesn’t the revenue loss from corporate manipulation of the Tax
Code far exceed even the very substantial revenue loss from individual
Mr. KINGSON. I think it does.
Mr. DOGGETT. And, given the magnitude of that problem, and
the loss to the treasury from international tax misconduct, do you
agree that a comprehensive approach to international tax abuse
should include proposals that you have advanced, along with managed
and controlled provisions of the stock tax havens, in order to
really deal with the whole problem?
Mr. KINGSON. Yes.
Mr. DOGGETT. And as far as this whole term ‘‘managed and
controlled,’’ I know you talk about it in your testimony. But all
we’re really saying is if you look like an American corporation, you
sound like an American corporation, you’re here as—physically, as
an American corporation with your directors and your management,
maybe you ought to pay taxes like an American corporation?
Mr. KINGSON. That’s—what an individual does, a corporation
should do, too.
Mr. DOGGETT. As I discussed with Mr. Shay, one category of
corporate entities that would be affected by this provision for management
and control are newly formed corporations that start out
by filing a piece of paper somewhere in the Caribbean entitling
them under current law to be treated as a foreign corporation, even
though the company is being run here, from America.
Is it correct that our current inversion provisions do not reach
Mr. KINGSON. I think they don’t, no.
Mr. DOGGETT. And is there a substantial problem in that area
that needs to be corrected, legislatively?
Mr. KINGSON. It depends on how good the idea is. I mean, if
they’re going to be successful, obviously they would get a lot of
Mr. DOGGETT. All right. And I will take that as a yes, is that
Mr. KINGSON. Yes.
Mr. DOGGETT. Some have argued that a managed and controlled
provision would conflict with our tax treaties. Because,
under the treaty, the corporation is considered a resident of the
contracting state, and liable for tax there. Is there any legitimacy
to the argument that the managed and controlled provision from
Stop Tax Havens would lead to double taxation for some corporations?
Mr. KINGSON. I don’t think there should be—title of every tax
treaty says it is a convention for the prevention—for the avoidance
of double taxation. And almost all of our treaty partners use the
management and control test.
And, what’s more, the OECD commentary said it would not be
proper to use the function of just registration. You should use a
management and control test. And that’s the OECD commentary
on their model treaty.
Mr. DOGGETT. And the management and control provision, I believe,
has been used in the Netherlands tax treaty in a little different
form, and it is a factor in the conduct of many other countries,
that we’re just asking the same standard apply here.
Mr. KINGSON. Yes.
Mr. DOGGETT. I will pose one more question to you, and that
is that corporate tax avoidance, as substantial as it is, is usually
defended as just being essential to maintaining American competitiveness.
In fact, don’t these avoidance provisions that are usually available
only to a multi-national with a fleet of lobbyists and CPAs,
aren’t those provisions actually providing a competitive advantage
over small businesses across America who don’t have those opportunities?
Mr. KINGSON. Yes. I think the competitiveness cry is really sort
of the second-to-last refuge of a scoundrel. I mean, I think there is
very little basis in it. I usually don’t believe it. You cannot ascertain
effective rates very, very precisely.
And, for example, years ago, if we exempted real estate from income
tax, there would have been a revenue gain.
Mr. DOGGETT. And as multi-national shenanigans that aren’t
available on Main Street, but are available on Wall Street, I know
you feel they need to be addressed in this legislation, and that they
But let me ask you whether, if we address and try to provide a
level playing field and real competitiveness for all businesses here
within the United States, if we will be—based on your experience,
having worked as international tax counsel for the Treasury, and
having taught this at a number—the whole question of international
tax law—at a number of prestigious law schools—if there
will be any adverse effect, versus foreign companies that we compete
with that are real foreign companies, rather than just madeto-look-like
a foreign company to dodge our tax burden?
Mr. KINGSON. Well, if companies have no tax at all, I think, obviously,
they are getting a free ride. And I think that you raise a
very important issue, that when they’re talking about competitiveness,
there is some significant competitiveness of people who keep
jobs in the United States and who export, from those who say,
‘‘Well, we need to compete abroad by not having any tax.’’
Mr. DOGGETT. Thank you. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Doggett. And I want to thank
our panelists today for their informed testimony. You may receive
some written follow-up questions from Members, and I hope that
you will respond promptly, so that we might include your comments
in the record.
Being no further business before the subcommittee, then the
hearing is adjourned.
[Whereupon, at 12:49 p.m., the subcommittee was adjourned.]
[Submissions for the Record follow:]
American Citizens Abroad, statement
(see actual document pp 66-71)
Chamber of Commerce of the United States of America
(see actual document pp 72-74)
Managed Funds Association, statement
(see actual document pp 75-79)
Prepared Statement of American Bankers Association
Letter of the American Citizens Abroad (ACA)
Statement of the American Institute of Certified Public Accountants
Jo Van de Velde Euroclear SA/NV l, letter
The Securities Industry and Financial Markets Association, letter (SIFMA)
Statement of The Financial Services Roundtable
Graham Cox – International Capital Markets Services Association-ICMSA letter
Letter of Martin Egan, BNP Paribas—Chair, ICMA and Kate Craven, Barclays Capital—Chair, ICMA
Statement of Investment Fund Institute of Canada
Statement of The Investment Industry Association of Canada
Statement of the Organization for International Investment
Clearing House Association L.L.C., letter
European Banking Federation’s Letter
Statement of the U.S. Public Interest Research Group
Swiss Bankers Association, statement
(please see actual document pp 129-130 for letter)
State Street Bank and Trust, letter
(please see actual documentt pp. 134-137 for letter)
Australian Bankers’ Association, Inc., statement
(Please see actual document pp 144-150)