U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

51–950 2009

HEARING ON BANKING SECRECY PRACTICES 

AND WEALTHY AMERICAN TAXPAYERS 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

TUESDAY, MARCH 31, 2009 

Serial 111–12 

Printed for the use of the Committee on Ways and Means 

( 


smartinez on DSKB9S0YB1PROD with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

SELECT REVENUE SUBCOMMITTEE 

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 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to prepare 

both printed and electronic versions of the hearing record, the process of converting between 

various electronic formats may introduce unintentional errors or omissions. Such occurrences 

are inherent in the current publication process and should diminish as the process is further 

refined. 


smartinez on DSKB9S0YB1PROD with HEARING
iii 

C O N T E N T S 

Page 

WITNESSES 

Hon. Douglas Shulman, Commissioner, Internal Revenue Service ..................... 6 

Stephen E. Shay, Tax Partner, Ropes & Gray, Boston, Massachusetts .............. 27 

Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan 

Law Scho ............................................................................................................... 65 

Peter H. Blessing, Partner, Shearman and Sterling, New York, New York ...... 72 

SUBMISSIONS FOR THE RECORD 

Brian G. Dooley & Associates, Statement ............................................................. 96 

Isle of Man Government, Statement ...................................................................... 97 

Lyndon S. Trott, Statement .................................................................................... 101 

Michael J. McIntyre and Robert S. McIntyre, Statement .................................... 107 

Raymond Baker, Statement .................................................................................... 113 


smartinez on DSKB9S0YB1PROD with HEARING

smartinez on DSKB9S0YB1PROD with HEARING
(1) 

HEARING ON BANKING SECRECY PRACTICES 

AND WEALTHY AMERICAN TAXPAYERS 

TUESDAY, MARCH 31, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:03 a.m. in room 

1100, Longworth House Office Building; Hon. Richard E. Neal 

(Chairman of the Subcommittee) presiding. 

[The advisory announcing the hearing follows:] 


smartinez on DSKB9S0YB1PROD with HEARING
2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–5522 

March 24, 2009 

SRM–1 

Neal Announces Hearing on Banking Secrecy 

Practices and Wealthy American Taxpayers 

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal (D–MA) announced today that the Subcommittee on Select Revenue 

Measures will hold a hearing on issues involving banking secrecy practices and 

wealthy American taxpayers. The hearing will take place on Tuesday, March 

31, 2009, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m. 

Oral testimony at this hearing will be limited to invited witnesses. However, any 

individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed 

record of the hearing. 

FOCUS OF THE HEARING: 

The hearing will focus on limitations of the withholding taxes imposed by the 

United States on U.S. source investment earnings received by foreign persons, the 

Qualified Intermediary (QI) program established by the IRS to enforce those withholding taxes, the limitations of our tax treaties, and the extent to which these may 

have contributed to non-compliance by U.S. taxpayers. It will use the current UBS 

case as an example of the problems in the existing system. 

BACKGROUND: 

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 IRS has established the 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 indicates that there are problems with the QI program that permitted tax 

avoidance by U.S. persons. Further, even with jurisdictions in which the United 

States has a tax treaty, effective information exchange can sometimes be undermined by local laws providing for banking secrecy that conflict with U.S. law. 

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. 

Much of this money flows through U.S. withholding agents, but some also flows 

through QI’s. Both U.S. withholding agents and QI’s are responsible for withholding 

taxes, and in the absence of proper identification, must do backup withholding. Recently, the GAO found that withholding on these accounts was much lower. 

In announcing the hearing, Chairman Neal stated, ‘‘This will be our first hearing to address the troublesome issue of international tax avoidance. The 

global economic and financial crisis has put pressure on these interVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00006 Fmt 6633 Sfmt 6621 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
3 

national jurisdictions to be less secretive and more cooperative. The United 

States and other countries simply can no longer afford to lose billions of 

dollars each year in potential revenue to these secrecy jurisdictions. I expect this hearing to be the start of a process that leads to bold and decisive 

action being taken to end opportunities for tax avoidance through foreign 

accounts.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Committee Hearings.’’ Select the hearing for 

which you would like to submit, and click on the link entitled, ‘‘Click here to provide 

a submission for the record.’’ Once you have followed the online instructions, complete all informational forms and click ‘‘submit’’ on the final page. ATTACH your 

submission as a Word or WordPerfect document, in compliance with the formatting 

requirements listed below, by close of business Tuesday, April 14, 2009. Finally, 

please note that due to the change in House mail policy, the U.S. Capitol Police will 

refuse sealed-package deliveries to all House Office Buildings. For questions, or if 

you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman NEAL. Let me call this hearing to order. 

I encourage all to take their seats. I want to welcome all of you 

this morning to this hearing of the Select Revenue Measures Subcommittee on the issue of bank secrecy and tax avoidance. 

President Kennedy noted that the very word ‘‘secrecy’’ is repugnant in a free and open society. Fostered by today’s technology 

those comments are truer than ever, but bank secrecy has long 

held a certain charm. In fact, mystery writers have utilized the 


smartinez on DSKB9S0YB1PROD with HEARING
4 

Swiss Bank as the central focus of intrigue. Where else would you 

think to store the secrets of the holy grail but in a Swiss bank account, as was the case in the novel the ‘‘Da Vinci Code’’. 

But events of the last year have chipped away at this polished 

veneer to reveal some rather unseemly criminal behavior. It’s been 

1 year now since a Swiss banker admitted that he and his bank 

assisted, wealthy U.S. taxpayers in hiding money in offshore accounts that number somewhere between 250 and 50,000 previously 

hidden U.S. accounts. 

The bank has not denied its part and will pay a $780 million 

fine. Despite the best efforts of the IRS and the Justice Department, the names of those U.S. taxpayers have not been divulged. 

Swiss law has prevented the bank from doing so, and the treaty 

is of no help. It seems that there are fewer and fewer willing to 

stand up for such confidentiality in the face of criminal behavior. 

On the eve of the gathering of leaders of the wealthiest nations, 

who, incidentally, generate 80 percent of the world’s wealth, the 

short list of international issues to be discussed includes tax havens. And when Prime Minister Brown, Gordon Brown, addressed 

the congress in a joint session earlier this month, he singled out 

off-shore tax havens as a threat and received bipartisan applause. 

Secretary Geithner just last week stated the Treasury will be 

launching a new initiative on tax havens, one to be underscored by 

the President at the G20 meeting this week. The international effort to pressure uncooperative tax havens will be a diplomatic battle, but Congress must be a partner in this effort, and this hearing 

today will explore issues relating to withholding and reporting, the 

role of foreign banks in the collection of U.S. taxes, and how we can 

better utilize tax treaties and agreements, which I happen to think 

constitutes the key. 

It is my hope that this hearing will provide us some guidance to 

enhance and strengthen the current system, the system, which according to one witness today allows $50 billion of lost tax revenue 

per year. Following this debate, I’m hopeful that we can file bipartisan legislation to implement the recommendations we hear today. 

Now, let me recognize my friend, Mr. Tiberi, for his opening statement. 

Mr. TIBERI. Thank you Chairman Neal. Thank you for your 

leadership. 

I share many of the concerns that you outlined in your statement 

and look forward to working together on responsible, common-sense 

steps that will make our efforts to crack down on individuals who 

commit tax fraud more effective. Thank you also to our witnesses. 

I appreciate your willingness to join us today and look forward to 

your testimony. 

Tax evasion through the use of undeclared off-shore bank accounts or by any other means is a Federal crime. I think we all are 

in agreement here today that criminal tax evasion should be pursued aggressively and punished. Not going after the dishonest few 

who commit criminal acts to the fullest extent possible is unfair to 

honest, hardworking Americans who pay their taxes and strive to 

comply with our country’s tax laws. 

The ongoing events surrounding UBS AG and its admitted criminal role in helping a number of wealthy U.S. individuals evade U.S. 


smartinez on DSKB9S0YB1PROD with HEARING
5 

taxes have brought a spotlight to bear on international tax enforcement and the tools that we have at our disposal to help ensure 

compliance. Among those tools is the qualified intermediary program; and under the QI program, foreign financial institutions 

agree to verify the status of foreign investors and collect and remit 

the appropriate U.S. withholding tax, if any. Recent events have 

demonstrated a number of areas where the QI program may be 

strengthened. I hope that we will discuss some of those today. 

Additionally, the U.S. has entered into dozens of tax treaties, and 

bilateral mutual legal assistance treaties with other nations as well 

as approximately 20 tax information exchange agreements. In 

short, the United States is not alone in the effort to ensure the 

compliance with our tax laws. A number of frameworks currently 

exist across government in the private sector. As we proceed with 

this discussion, we should keep in mind that there are willing partners on the international front and continuing to improve the work 

through our formal network of information exchanges, which is the 

responsible way to move forward. 

Steps that undermine our international standing could threaten 

key information exchanges and invite unintended consequences 

that could do significant harm to our economy’s capital markets. 

This hearing is an important opportunity to examine the serious 

tax compliance issues we face, find out where our current enforcement regime may have fallen short, explore new tools that may 

help us fight tax evasion, and close the international tax gap. As 

we all know the tax gap is defined roughly as what is legally owed, 

but not collected. 

I sincerely hope our efforts today will remain focused on the 

issues of compliance. The line between illegal tax evasion and legal 

tax practices used by U.S. taxpayers around the world is distinct. 

To blur that line may only make our compliance efforts that much 

more difficult. 

Thank you again, Chairman Neal, and thank you for your leadership on this important issue. 

Chairman NEAL. I thank the gentleman for his good comments, 

and let me welcome our witnesses here today on our first panel, 

the Honorable Doug Schulman, Commissioner of the Internal Revenue Service. 

Thank you, Commissioner, for joining us today. 

I want to advise Members that the Commissioner may not be 

able to answer specific questions regarding pending legal matters, 

including the UBS case. I know the Members of the panel here, 

they’re likely to try any way. 

On our second panel, we will hear from Stephen Shay, a tax 

partner at Ropes & Gray in Boston, who was formerly the International Tax Counsel at the Treasury Department. 

And we will also welcome back to the Subcommittee Professor 

Avi-Yonah of the University of Michigan Law School who was a 

recognized expert in international tax issues, and has served as a 

consultant to the Treasury Department and OECD. 

Finally, we will hear from Peter Blessing, a law partner at Sherman and Sterling in New York. Mr. Blessing specializes in international tax issues and we are fortunate to have his expertise here 

today. 


smartinez on DSKB9S0YB1PROD with HEARING
6 

Let me note, for the record, that we did extend an invitation to 

the Swiss government and to UBS to appear before the Subcommittee today, both respectfully declined. 

Without objection, any other Members wishing to insert statements as part of the record may do so. All written statements by 

the witnesses will be inserted into the record as well. I’d like to recognize Commissioner Schulman for his opening statement. 

STATEMENT OF HON. DOUGLAS SHULMAN, COMMISSIONER, 

INTERNAL REVENUE SERVICE 

Mr. SHULMAN. Thank you, Mr. Chairman, Ranking Member 

Tiberi, Members of the Subcommittee. 

It’s a pleasure to be here today to talk to you about the unprecedented focus that the Internal Revenue Service has placed on detecting and bringing to justice those who unlawfully hide assets 

overseas to avoid paying tax. 

In today’s economic environment where the Federal Government 

is necessarily running deficits to restore economic growth, it’s more 

important than ever that citizens feel confident that individuals 

and corporations are playing by the rules and paying the taxes that 

they owe. When the American public is confronted with stories of 

financial institutions helping U.S. citizens to maintain secret overseas accounts involving sham trusts to improperly avoid U.S. tax, 

they should be outraged, as am I. But they should also know that 

the U.S. Government is taking unprecedented measures and there 

is much more in the works. 

As you know, Mr. Chairman, Federal law prohibits the disclosure 

of information about civil and criminal tax investigations. While 

the Subcommittee may have seen press accounts and documents 

entered in the public record about some recent investigations, these 

relate to ongoing civil litigation where the strategies, techniques 

and opinions of the IRS, and I might note specifically the IRS Commissioner, are central elements to the litigation; and, therefore, the 

Department of Justice has asked that I not comment on the UBS 

case specifically. 

With all the recent publicity, the press has also been full of speculation about those who are advising U.S. taxpayers who have 

undeclared offshore accounts and income. My advice to those taxpayers is simple. They should come in under the IRS’ voluntary 

disclosure program. We have been steadily increasing pressure on 

offshore financial institutions that facilitate concealment of taxable 

income by U.S. citizens, and that pressure will only increase. 

The IRS recently issued guidance to its exam personnel who are 

addressing voluntary disclosure requests involving unreported offshore income. We issued this guidance to make sure that our personnel had standard procedures when someone voluntarily came in. 

We believe that this is firm but fair resolution of these cases. Taxpayers who come in will pay a significant price, but they will also 

avoid criminal prosecution if they come in voluntarily. 

Mr. Chairman, there is no silver bullet or one strategy that will 

alone solve the problem of offshore tax avoidance. Rather it’s an integrated approach that we have been developing. My written testimony explores a variety of elements of that approach. Let me highlight a few. First, since becoming Commissioner, I have made interVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
7 

national issues a top priority. I have both increased the number of 

audits in this area and prioritized stepped-up hiring of international experts and investigators. 

We have had some success with some high profile cases that you 

mentioned and we’re getting some other results. Several so-called 

tax haven countries have pledged to reform bank secrecy laws, and 

in the last month have agreed to comply with international standards for tax and data sharing. The President’s 2010 budget will 

allow us to increase our resources in this area and it includes robust funding for a portfolio of IRS–International tax compliance 

initiatives. 

The IRS is also looking at how to improve the qualified intermediary program, or QI program. The QI program is an important 

tool for the IRS, because it gives us a line of sight into the activities of U.S. taxpayers who do business with foreign banks. As with 

any large and complex program, we have to strive to continuously 

improve the program where we see weaknesses. Several measures 

that we are considering now with the Treasury Department include: expanding the information reporting requirements to include 

other income besides just the income from U.S. securities; strengthening documentation rules to ensure that beneficial owners of accounts cannot hide behind sham trusts; subjecting trusts or private 

corporations to U.S. withholding tax, if we don’t have a clear line 

of sight to the beneficial owners; and, additionally, we’ve already 

proposed changes that would shore-up the independent review of 

the qualified intermediary program in substantial ways. 

As you can see, the IRS and Treasury are considering a wide 

range of measures to ensure that the QI program works as intended, but there’s always going to be situations when we discover 

a potential of violation of tax law after the fact. In these cases, we 

need some other administrative and legislative changes. We are exploring increased use of and potentially more information reporting 

requirements around money being transferred in and out of the 

United States. And we’ve also asked Congress in the past, and we’ll 

continue to ask for an extension of the statute of limitations when 

we’re working on cases that involve off-shore tax evasion. 

Mr. Chairman, these are important steps forward, but there will 

be much more to come. The President’s budget committed to identifying $210 billion in savings over the next decade from international enforcement and reforming other tax policies in the international arena. The Administration will have more detailed and 

specific announcements in the near future. 

We are also looking closely at a variety of legislative proposals 

that have been introduced by Members of Congress and we look 

forward to continuing dialog over the coming months. 

Thank you for this opportunity to provide an update of IRS activities to combat illegal tax avoidance schemes. Because this is a 

global problem it will require a closely coordinated strategy among 

nations dedicated to ending this evasion that deprives our country 

of precious resources and erodes citizens’ confidence in the fairness 

of our tax administration system. 

I’d be happy to respond to questions. 

[The prepared statement of Mr. Shulman follows:] 


smartinez on DSKB9S0YB1PROD with HEARING
8 

Statement of The Honorable Douglas Shulman, Commissioner, Internal 

Revenue Service 


smartinez on DSKB9S0YB1PROD with HEARING51950a.001
9 


smartinez on DSKB9S0YB1PROD with HEARING51950a.002
10 


smartinez on DSKB9S0YB1PROD with HEARING51950a.003
11 


smartinez on DSKB9S0YB1PROD with HEARING51950a.004
12 


smartinez on DSKB9S0YB1PROD with HEARING51950a.005
13 


smartinez on DSKB9S0YB1PROD with HEARING51950a.006
14 

f 


smartinez on DSKB9S0YB1PROD with HEARING51950a.007
15 

Chairman NEAL. Thank you very much, Commissioner. 

I read your testimony last night. I thought it was really on target, and like many as I come across data in the last few weeks, I 

was surprised to hear that there were 50,000 previously undisclosed bank accounts that UBS held by U.S. taxpayers; and, I think 

some clarity here would be helpful. It’s been estimated that these accounts hold $14 billion in assets. 

Now, many of those accounts may be simple checking accounts for 

U.S. workers in Switzerland, but those accounts still are probably 

earning interest income. 

Do you support proposals to modify the QI regime so that QIs 

would report on all U.S.-held bank accounts, and not just those accounts which include U.S. securities? 

Mr. SHULMAN. As I mentioned, we are having discussions 

about a variety of issues. That’s certainly one of the issues on the 

table. It would be helpful for the IRS and we’ll be coming out, 

hopefully in the next month or so with a full range of pieces. But 

in general I support a wider range of reporting around the bank 

accounts held by individuals overseas. 

Chairman NEAL. And a year ago the GAO in reviewing the QI 

program found it troubling that there were large sums flowing to 

unknown jurisdictions and unknown recipients with a withholding 

rate at about 4 percent when it should be 30 percent, it makes it 

seem as if the QI isn’t complying with know your customer rules 

if they don’t know where and with whom the payment ends up, 

which I also think is very important. 

What has the IRS done since the program audit by GAO to find 

an answer for this anomaly or to ensure that QIs actually know 

their customers and to collect the tax? 

Mr. SHULMAN. There’s a couple things we’ve done. You know, 

a combination of some of the external auditor reports as well as 

some of our stepped up investigations where we’ve been looking 

closer at banks that are facilitating either legal or illegal accounts 

being held overseas. 

One is we made a proposal in November that the external auditor that audits the QI program for the IRS, a) has to report to the 

IRS if there’s indications of fraud and b) needs to have some nexus 

to a U.S. audit firm so that there can be some supervision of the 

work by an entity which the IRS has some authority over. Those 

proposals are out for comment now. We have received a lot of comments. We are reviewing them. 

Second is what I would refer to in my testimony, which is, I 

think, there’s a real need. In the past we relied on country-by-country ‘‘know your customer’’ rules. It’s clearly the responsibility of a 

financial institution to look at documentation of anyone opening an 

account with them. We’re looking at some substantially stepped-up 

proposals to make sure that when bank accounts are opened by QI 

that have a U.S. taxpayer involved, that there’s more documentation around who are the real owners of those accounts. 

So that we can look through trusts, private corporations, where 

there’s a lot of issues, someone sets up a trust in a foreign jurisdiction, the bank will need to look through. If there’s any indication 

that there’s a U.S. taxpayer that either we are going to need to see 

that information or we’ll have automatic withholding. 


smartinez on DSKB9S0YB1PROD with HEARING
16 

Chairman NEAL. As promised, the nexus between secrecy and 

the number people you believe are avoiding the responsibility, do 

you want to quantify a number for us about how much is out 

there? 

Mr. SHULMAN. You know, let me talk to you about the problems with quantification since we had a conversation about this before. 

First of all, when the IRS quantifies a number it has some 

weight, because we put out the tax cap proposals. The most reliable 

way for us to quantify any sort of gap between taxes owed and 

taxes paid is for us to do randomly selected audits. Usually, our audits are selected based on some criteria that targets people who, we 

think, would have non-compliance. We will also set up research 

programs where we randomly select audits and we go into audits. 

The problem with doing this overseas is we need to work through 

embassies, local law enforcement officials, and when there’s accounts hidden, it’s much harder to find than a U.S. citizen on U.S. 

soil. 

With that said, I’ve challenged our team to do some of the kinds 

of extrapolation that some of the witnesses have done on your next 

panel to see if we are going to come up with our best estimate. 

What I would say, though, is a couple of things. Any enforcement 

program, and especially this kind of an enforcement program, that 

sends a message when there’s somebody who has the means to hide 

assets offshore—sends a message to average U.S. citizens, a teacher, a fireman, a policeman who are paying their taxes—that there’s 

some sort of inequity, that they’re paying their taxes because it’s 

reported on the W–2, and someone’s hiding their assets offshore. 

I think it’s a matter of fundamental fairness that we have risk 

enforcement programs, and we go after people hiding assets offshore. It’s also about protecting the two and a half trillion dollar 

revenue base, and having U.S. citizens feel that there’s fundamental fairness in the system so that they’ll continue to voluntarily 

come forward and pay taxes. And so whether the number is two 

billion, five billion or ten billion, I think we will continue to have 

a focus in this area because it protects the overall revenues for the 

U.S. Government. 

Chairman NEAL. The other witnesses are invited to speculate at 

the right moment as well. 

And with that I would like to acknowledge Mr. Tiberi. 

Mr. TIBERI. Thank you, Mr. Chairman. 

Commissioner, it appears to me that if a U.S. taxpayer was intent on evading taxes, and tell me if I’m wrong on this, the best 

way to do it would be to find a foreign bank that’s not a QI that 

doesn’t have a U.S. presence somewhere in the world, how do you 

together with us prevent that scenario from happening? 

Mr. SHULMAN. Yes, clearly, if we’re going to have a comprehensive approach to the problem of off-shore tax evasion, we need to 

focus on strengthening the QI program and also encouraging people 

to come into the QI program. And so, we need to have the QI program work, and make sure that people are participating through 

the QI program, we have information on them and they pay the 

proper amount of taxes. 


smartinez on DSKB9S0YB1PROD with HEARING
17 

I think we also need to encourage other institutions to become 

QIs. Some of the items under discussion are looking at some disincentives around not being a QI. For instance, more withholding 

if funds are being transferred to a non-QI versus a QI, information 

reporting to the U.S. Government about those kinds of wire transfers that are going out to non-QIs, so there needs to be a comprehensive approach that includes both. I think you’re absolutely 

right on that and I’d agree with you. 

Mr. TIBERI. I mentioned in my opening statement the cooperation that’s out there that currently exists, are you working through 

those channels as well with other foreign counterparts? 

Mr. SHULMAN. Yes, absolutely. I would agree with you wholeheartedly that we need to have bilateral discussions, multilateral 

discussions. This is not just a U.S. issue. You know, a lot of countries are focused and worried about illegal, offshore tax avoidance. 

Clearly, the Treasury Department participates in a variety of forums. As you know, when the Secretary went a few weeks ago to 

the G20 and the President will be at the G20. There’s a forum of 

tax administrators in the OECD, which I’m an active participant 

in. We also have a smaller group called the Leads Castle Group, 

where just tax commissioners come together and discuss these 

issues. And we have something called the Joint International Tax 

Shelter Information Center called JITSIC, which was originally 

formed by the IRS and several other countries to co-locate staff to 

have more open dialog around tax shelter issues. We’ve recently expanded that to look at some other issues including off-shore tax 

avoidance; and so I’m a big fan that this is not a go it alone strategy. That we need to be actively engaging other countries and this 

is part of a diplomatic dialog among nations. 

Mr. TIBERI. Can you expand upon the issue of the tax statute 

of limitations that you talked about extending for how long and 

why? 

Mr. SHULMAN. Yes. There’s a few proposals out there and a 

number of them would work pretty well for us. The proposal we 

have on the table is just simply to extend from 3 years to six years 

the statute of limitations. 

Mr. TIBERI. And why is that important? 

Mr. SHULMAN. The reason it’s important is when we’re conducting an investigation in the U.S. we have all the authority of 

the U.S. And people understand, you know, our ability to go and 

do an audit, do an investigation. We know how to find people. We 

have agents who can go out and see them. And, generally, once you 

cross a border, a) it’s harder to find folks and b) when we’re doing 

exchanges of information or trying to get information, it can take 

longer. 

People who are operating in the international arena generally 

have very sophisticated legal counsel and other advisors who know 

exactly where the statute of limitations end and can play run out 

the clock with us, and it’s just harder to find information. It takes 

longer to do investigations. We sometimes have to work through 

law enforcement agencies in other countries which can take time 

to go through the administrative process to get it done. And so it’s 

really a matter of us having a reasonable amount of time to follow 

the trail, which can be harder to follow once you cross the border. 


smartinez on DSKB9S0YB1PROD with HEARING
18 

Mr. TIBERI. So just to summarize, Commissioner, do you believe 

that together with some tools that we can give you along with some 

things that you can do with some of your counterparts and foreign 

governments and financial services companies around the world 

that we can get out this better? 

Mr. SHULMAN. Yes. 

Mr. TIBERI. Thank you. I yield back. 

Chairman NEAL. Thank the gentleman. 

The gentleman from New York, Mr. Crowley, is recognized to inquire. 

Mr. CROWLEY. Thank you, Commissioner Shulman, for being 

here today and discussing these issues. 

Along with Chairman Neal I recognize the need to address the 

tax gap and ensure all appropriate owed taxes are paid and welcome the hearing today on QI. But that brings me to what I would 

like to discuss with you today. And let me start by saying my office 

has not yet really had the opportunity to fully vet this with you 

and your staff, as this is relatively new to our office as well. But 

this looks like an issue that I would like to work with you and your 

office on and you can agree or disagree, depending on where we go 

with this question. 

I understand that Americans investing abroad for the most part 

are taxed at the maximum withheld rate in most foreign countries 

at first, as those tax collection agencies are not familiar with the 

identity of the investor, the American overseas. A meeting for the 

American invested in the U.K., the U.K. tax authority would withhold the maximum on any dividends earned regardless of any tax 

treaties, as the U.K. wouldn’t know at first what the nationality of 

the foreign investor was. Then the American taxpayer can file a tax 

reclamation form in that foreign country to reclaim any taxes withheld above the limits of any tax treaty between the two nations. 

Afterward, that American can then file an IRS form 1116 to 

claim a U.S. tax credit for any foreign taxes that were legally paid 

abroad. The form 1099 dividend form is the form issued by brokerage houses to U.S. taxpayers that lists the amount of foreign tax 

paid and as the basis for the American taxpayer, that claimed U.S. 

tax credit on form 1116 for foreign taxes paid, my question is this 

form. Form 1099–DIV, issued by the IRS only asks the amount of 

foreign tax paid, not the actual amount of foreign taxes legally 

owed and paid, not taking into account taxes paid and then reclaimed by the taxpayer. 

Therefore, I could be investing in a foreign country, have the 

maximum withheld, reclaim a fair amount of it due to a U.S. tax 

treaty. But, on the 1099–DIV form, I can still report the total 

amount of taxes paid before reclaiming what was owed to me and 

collect a credit based on that total amount paid before reclamation. 

I’m not saying that this is tax fraud by brokerage houses or U.S. 

investors individually, but rather maybe the need for an updated 

1099 dividend form to reflect the actual taxes legally paid. This 

could help us better tailor this U.S. tax credit to apply only to those 

foreign taxes actually paid for taxes actually owed and not reclaimed. 

Could you give us your thoughts on this issue as a possible candidate to help us narrow the tax gap without increasing taxes or 


smartinez on DSKB9S0YB1PROD with HEARING
19 

scaring away investors, both for individual investors and for hedge 

funds and other entities as such. 

Mr. SHULMAN. Well, you know, I think as you noted, the intent 

of a foreign tax credit is to make sure that people aren’t subject to 

double taxation. They’re not paying the same tax in a foreign country and here. Clearly, there’s opportunity, and I haven’t explored 

this issue and would be happy to explore it with your office. 

We’ve talked a lot about foreign tax credit generators in the business context where kind of some of the intent of foreign tax credits 

and the confusion around it can have people not just get rid of double taxation, but actually end up with some sort of tax benefit. So, 

in general, what I would say is the QI program gives us a way to 

work with foreign banks when people invest overseas and allows us 

to set up a set of rules around them doing proper reporting and 

withholding. And so I think strengthening the QI program and the 

avenue you’re going down should help with that. 

Clearly, if people are claiming a credit for foreign taxes paid, but 

then they get money back and not doing that, that’s an issue. It’s 

not one that I’ve explored fully yet. 

Mr. CROWLEY. We’d like to work with you and your office on 

it. 

Mr. SHULMAN. Be happy to work with you on that. 

Mr. CROWLEY. Thank you, Commissioner. 

Chairman NEAL. Thank you very much. 

The gentleman from Nevada, Mr. Heller, recognized to inquire. 

Mr. HELLER. Thank you, Mr. Chairman. Thank you. And thank 

you for the opportunity for the Committee to look into an issue related to international tax compliance, specifically the recent stories 

that have come to light regarding big bank secrecy practices in 

Switzerland. 

I share the serious concerns nearly all Members have that the 

practices that occurred must come to a halt. To do that some 

changes certainly need to be made. Those who broke the law need 

to be brought to justice; however, I do have some concerns that this 

particular issue is being used to advance another agenda, an agenda that’s not really about compliance with the law, more about 

international tax policy. 

While our Committee has jurisdiction and every reason to look 

into issues of international tax competition, I think that someone 

might be trying to use this one example to dramatically alter international tax policy. We do have a problem in our government along 

with the Swiss government. Financial institutions are in a process 

of correcting that problem. Again, those who broke the law should 

face the penalties clearly, but this example should not be the 

springboard to massive new regulations. 

The banking secrecy practice is being examined today, already 

against the law, should not be a platform to creating new blacklists 

and financial enemies right at the time when international financial cooperation is so desperately needed to address our economy to 

continue fighting the drug war that is creeping across our borders, 

and to continue our fight in the global war on terror. 

Commissioner, thank you very much for being here. 

I just want to raise the concerns that have been raised about this 

blacklisting approach. There are some that believe that it threatens 


smartinez on DSKB9S0YB1PROD with HEARING
20 

critical information exchanges with other countries, undermines 

our international standing and invites retaliation that could do 

harm to U.S. capital markets. 

Would you care to give us your opinion and thoughts on this 

issue? 

Mr. SHULMAN. Yes. I think the U.S. is not. You know, there’s 

a broad discussion happening at the G20 about the so-called black 

list. I don’t think you’ve seen anybody, you know, certainly in my 

office or in the U.S. endorse or not endorse it. 

My personal opinion is that where we need to focus is not around 

necessarily names of countries, but are on characteristics that 

could help facilitate evasion. And so bank secrecy, lower tax rates, 

the QI program where there’s not incentives, not having good information exchange agreements, and so we’re very focused on finding 

places where there’s evasion and going after them. 

We haven’t been focused on necessarily naming countries, which 

I fully recognize. You know, I’ve got a view as IRS Commissioner, 

but when you want to get into putting names of country on lists, 

it’s a much broader, diplomatic discussion involving State Department, Treasury, ultimately the White House, and others. 

Mr. HELLER. Would you discuss, just kind of changing directions here a little bit, the voluntary disclosure guidance program 

that you issued on March 26th? 

Mr. SHULMAN. Yes. We issued direction to our field about how 

to handle cases of voluntary disclosure where people are coming in 

with off-shore bank accounts. 

I mean, clearly, we have been seeing some results as we have 

been stepping up the pressure. People have been availing themselves. We wanted to have a consistent approach so that our agents 

in the field who work these cases, know exactly what to do and 

what was supported in getting a resolution. 

We also wanted to have predictability for taxpayers. The way 

this works is taxpayers who come in truly voluntarily—not taxpayers that we’ve contacted or are under criminal investigation— 

will have to pay 6 years in back taxes, plus interest. They’ll have 

to pay either a delinquency or inaccuracy penalty, depending which 

applies, and then they’ll have to pay a penalty in lieu of all other 

penalties of 20 percent of the highest account balance in their bank 

account or their investment or bank account over the last 6 

months. 

We also issue guidance, and, again, we think this is firm. We 

think it’s fair, and any time you’re having a voluntary disclosure 

program what you want to do is make sure that people aren’t getting away Scot free and that regular citizens who have actually 

been paying their taxes all along don’t feel that they’ve been shortchanged and that we’re giving somebody a sweetheart deal. So it 

needs to be tough, but it also needs to be attractive enough that 

we bring people in, because ultimately our goal is to get people into 

the system. 

The other thing we issued in this guidance is that this is 6- 

month guidance, after which we will reevaluate. And people who 

we find who don’t come in voluntarily, we’ve instructed our agents 

to fully work those cases and explore all criminal and civil pursuits 

and investigations that they can. 


smartinez on DSKB9S0YB1PROD with HEARING
21 

Mr. HELLER. Thank you. 

Chairman, I yield back. 

Chairman NEAL. I thank the gentleman. 

Mr. Doggett, the gentleman from Texas is recognized to inquire. 

Mr. DOGGETT. Mr. Chairman, thank you very much, and thank 

you especially for holding this hearing. It deals with a very important topic to every American taxpayer, business, or individual 

who’s playing by the rules and paying their fair share of taxes, 

when other people, as the Commissioner has pointed out in his testimony—the firefighter, the police officer, doing their fair share— 

and some individual or corporation goes off-shore to avoid doing 

their fair share. This hearing as the questions from our colleague 

just indicated, also provides us the first opportunity to look more 

closely at the tools to address this issue that are advanced in the 

stop tax haven legislation that I introduced last session with Senator Levin. 

At that time, Senator Barack Obama was one of our cosponsors 

as was Rahm Emanuel, and you, Mr. Chairman, here on this Committee, we’ve refilled that legislation joined by Chairman Neal and 

sitting Commissioner in the same chair you are, Treasury Secretary Geithner endorsed the legislation when he was here testifying to us a few weeks ago. 

That would of course be consistent with your own testimony 

when you testified earlier this month in front of Senator Levin’s 

Subcommittee on permanent investigations; and, I believe your testimony, sir, would be good news for the IRS to have the enforcement tools available that are included in the stop tax havens legislation. Is that correct? 

Mr. SHULMAN. That is correct. 

Mr. DOGGETT. And you believe it would be good for the IRS to 

have stop tax havens adopted? 

Mr. SHULMAN. It certainly would give us a variety of more 

tools. And as I mentioned before, that bill is out there. Senator 

Baucus has just introduced a bill, and we’re working pretty aggressively now to make sure that the Administration is going to come 

forward with a full package. So we very much welcome it. 

Mr. DOGGETT. And so since little or nothing had been done in 

the prior Administration, I am delighted to hear that you are, I believe, the approach Senator Baucus has, who’s far different than 

stop tax havens, but it is important for us to work together to try 

to get the strongest tools possible. 

I applaud your comments about fundamental fairness and inequity to American taxpayers and the way this jeopardizes our system when some individuals and some multinational corporations 

engage in these kind of shenanigans. As it relates to specifically to 

the inquiry that you just received about so-called black lists, I want 

to explore with you. As you know, the original countries that are 

listed in the stop tax haven legislation grow out of enforcement actions by the IRS by your office. 

What circumstances, generally, cause you to go in and question 

the use of an off-shore account in a place like the Cayman Islands 

or Panama, or some other tax-dodging place? 

Mr. SHULMAN. Well, the lists that you mention came out of an 

initiative that we did where we issued a John Doe summons. 


smartinez on DSKB9S0YB1PROD with HEARING
22 

Mr. DOGGETT. What is that? 

Mr. SHULMAN. I’m sorry. A John Doe summons is when we 

think there’s a class of taxpayers, we have no other way to get at 

it, and we have some evidence that there’s a class of taxpayers. 

And rather than naming a taxpayer by name; you know, Mr. 

Doggett, we’re looking for your information. We have an identifiable class of taxpayers, and so we’ve actually recently issued a 

John Doe summons on a class of taxpayers in the case that was 

mentioned before, just saying we think there’s a bunch of people. 

We don’t have their names, but we’re looking for a bank to come 

forward with that information. 

The list was never really intended to say these countries have 

problems all the way across the board. So whether they do or not, 

it was intended for a very specific credit card initiative where we 

had evidence there were credit cards being issued from those jurisdictions and we’re looking in general for all the names of the credit 

card holders. 

Mr. DOGGETT. As you know, the stop tax haven legislation that 

Secretary Geithner endorsed authorizes the Treasury to take countries on and off that list. Are there any of those John Doe summonses that involve countries where you have subsequently seen 

improvement under bank secrecy laws and a John Doe summons 

would no longer be necessary? 

Mr. SHULMAN. Well, those John Doe Summons are closed. We 

don’t have any kind of broad, open John Doe summons around with 

countries named that are open right now. You know, I guess what 

I’d say I think the world has paid attention to, both the legislative 

interests in this issue, the international focus on this issue and the 

IRS has stepped up enforcement in this issue. 

In the last month, you’ve seen a number of jurisdictions that either had bank secrecy or didn’t have good information exchange 

agreements step forward and say that they’re going to start working on information exchange agreements. And so I’m quite hopeful 

with some of the progress. That progress alone isn’t going to solve 

this problem, but is certainly a step in the right direction. 

Mr. DOGGETT. Mr. Chairman, may I pose just one more question about qualified intermediaries? 

Under the program I’d like to know if any institution has ever 

been kicked out of the program, what the procedures are for expelling someone from the program; and, specifically, given all that we 

know that has occurred, why UBS has not been kicked out of the 

program. 

Mr. SHULMAN. Yes. As I mentioned in my opening statement, 

I can’t speak specifically about UBS, but let me answer the rest of 

your questions. 

Institutions can be kicked out, and the two criteria are material 

failure and no remedy. My goal is to actually protect the integrity 

of the system, keep people in the system, because once you’ve 

kicked them out of the system, then we don’t have necessarily a 

line of sight and agreement between the IRS and that institution. 

We have terminated a number of QIs, close to a hundred in the 

past, and the specific question you asked about UBS I just would 

refer you to the deferred prosecution agreement with the Justice 

Department that actually has a number of issues around the QI 


smartinez on DSKB9S0YB1PROD with HEARING
23 

program in there. But, again, when there’s a material failure and 

there’s no remedy, we will kick people out. The goal though is actually to get remediation, keep people in the system, so we keep the 

line of sight on U.S. taxpayers. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

Thank you, Commissioner. 

Chairman NEAL. Thank you, Mr. Doggett. 

The gentleman from Illinois, Mr. Roskam. 

Mr. ROSKAM. Thank you, Mr. Chairman. 

Commissioner, could you just elaborate a little bit more. I sensed 

sort of healthy, honest tension in the exchange and I don’t want 

to over interpret it. But can I give you a couple of minutes to highlight for us what some of the concerns may be about what some 

people are characterizing as a black list for countries and how that 

has an impact on your job as a commissioner that’s interacting 

with other nations seeking cooperation. 

Can you speak to that generally? 

Mr. SHULMAN. Well, I mean, sure. 

I think, you know, the issue of black lists have been played out 

pretty accurately and well in the press. I mean some will tell you 

a black list is great, because it shames the country into compliance. 

Some will tell you that a black list is horrible because, you know, 

there’s a lot of other diplomatic issues. There’s a lot of cooperation. 

You don’t want to put countries on a list. 

My view is that what’s important is that we need to have a 

whole integrated set of tools to combat off-shore tax avoidance. I 

mean, the first most important one, as I’ve said it’s a priority for 

the IRS, and the President said it’s a priority for the Administration. People take notes. 

Second is we’re in the process of stepping up and hiring more examiners, more lawyers, more agents, more special agents for criminal investigations, placing more people in other countries. We need 

to use data better, both data exchanges from other government 

agencies, third party data, as well as data from other government 

agencies. 

We need to strengthen the QI program. We need to look at legislation, and there’s a variety of legislative proposals on the table. 

We need better coordination amongst nations, both formal dialog, 

but also increased informal dialog and discussion, so we’re seeing 

trends that are happening. And we need to keep focused on our litigation and our enforcement efforts that have been having some impact. 

And so I guess what I’d say is I think this will be continue to 

be a discussion at the G20. It’s a discussion that’s happening now 

at the level of the President. It doesn’t need to happen at the level 

of the IRS Commissioner. But regardless of the outcome of that discussion there’s really a whole suite of things we need to do to tighten the net around those using the international capital markets to 

hide assets overseas. 

Mr. ROSKAM. Fair enough. Thank you. 

You mentioned earlier that part of the approach here is in the 

voluntary program, the imposition of a special penalty and so forth. 

Can you walk us through sort of the IRS thinking about penalties? 

Now, in the interest of disclosure I asked Secretary Geithner about 


smartinez on DSKB9S0YB1PROD with HEARING
24 

his own tax situation and he told this Committee that he was encouraged by the IRS to seek a waiver of the penalty. 

I’m not asking you to comment on the secretary’s individual situation, because I know you can’t, but can you give us a glimpse into 

the decisionmaking at the IRS about generally how you make decisions about imposing penalties and not imposing penalties as it relates to other policy questions or other compliance issues. 

Mr. SHULMAN. Yes. I mean at the end of the day, for instance 

in the off-shore case, this is going to be a broader initiative, and 

I’m a big fan. You know, we have limited resources. We have to 

triage those resources. We have to decide where we’re focusing both 

on our service agenda, on our technology, on our enforcement agenda. I’m a big believer that when we can set up a unified program 

with a group of taxpayers it brings them back into the system and 

has them be compliant taxpayers in the future, that settlement initiatives are a good idea. 

What you’re seeing now in this off-shore case isn’t really a public 

settlement initiative. It’s guidance to the field that was then made 

public. There, what we’re doing is we’re trying to say, ‘‘Come in.’’ 

It will be predictable, and you will avoid criminal prosecution. And 

that’s the kind of thing you’ll see when we’re doing broad initiatives for sets of taxpayers. 

For penalties in general, obviously, Congress sets the penalties, 

but the IRS is given administrative discretion. I’m a believer that 

each individual taxpayer that comes in needs to be looked at individually. We have no discretion about waiving taxes or interest, but 

when it comes to penalty, our agents—and the discretion is put 

into the hands of individual agents who are looking at those 

cases—have the ability to look at facts and circumstance; look at 

whether actions were willful or not willful, whether they were honest mistakes or whether someone was trying to evade taxes, and 

they have the ability to abate penalties in individual circumstances. 

They can abate or not abate. There are avenues for appeals, both 

within the chain of command of the agent as well as to go to our 

appeals function. And then there’s obviously tax court and litigation where these issues can get played out. And so the penalty regime is an important part of tax administration. 

We’ve got some discretion, and taxpayers have a variety of avenues they can go to if they think that discretion isn’t being used 

properly. 

Mr. ROSKAM. Thank you, Mr. Chairman. 

I yield back. 

Chairman NEAL. Thank the gentleman. 

The gentleman from Florida, Mr. Meek, is recognized to inquire. 

Mr. MEEK. Thank you, Mr. Chairman, and Commissioner it’s 

good to see you again and I enjoyed the discussion we had last 

week on this topic. And I know that just by this hearing today we 

will be able to zero in more on those individuals who are putting 

us in this room at this particular time to talk about this issue. 

You know, in 2003, some $293 billion was sent to individuals and 

businesses residing abroad, and I think that’s something that especially in these very hard times we have companies that are here 

in the United States of America that have obtained their share of 


smartinez on DSKB9S0YB1PROD with HEARING
25 

taxes by U.S. law, that we make sure that we level that 

playingfield. 

I just want to change the channel here, not too far, but on a recent action that you were able to take; and, as it relates to the 

theft loss of those that have been victims of these Ponzi schemes 

that have been going on, especially brought to light in recent days, 

we know that there has been some confusion, because we know 

that there’s been a lot of action in the stock market. Many investors lost great sums of money based on the stock market and the 

reaction that it’s had to this economy. 

But, as it relates to some 13,000 plus Americans that found 

themselves in the situation, not only in the well-known case of the 

Madoff case, but several other Ponzi schemes that had been uncovered since the regulators have been looking at these individuals a 

little closer now have lost their entire life savings in many cases, 

giving statements that they had a certain amount of money, paid 

taxes on those dollars. And, many of those individuals reside in 

Florida and throughout the country. 

I know that you have taken action recently and I had an opportunity to read your testimony from the March 17th hearing that 

took place over in the Senate and you addressed some of the issues 

that you found that were wrong and that needed to be dealt with. 

And you dealt with them, I believe, with a 5-year theft loss, which 

I think looking at that is a step in the right direction. 

But there’s still work that’s undone. The reason why I’m homing 

in on this is because 2,000 of these individuals reside in Florida, 

and 562 of them reside in the two counties that I represent in 

south Florida. And we have a number of seniors, Commissioner, 

and I don’t need to tell you. But we have a number of seniors, even 

with the five-year theft loss that IRS has ruled on that’s in play 

in this particular case. But we have a number of seniors at 85, 90 

years old, finding themselves in a situation of having to move out 

of their homes. 

I have legislation that is H.R. 1159 that’s going to set it back by 

10 years to allow them to be able to claim theft loss on those dollars that they paid taxes on. They thought they had, but was not 

necessarily there. Also, their issues as it relates to foundations that 

were not addressed in the ruling that are providing services to 

many of these seniors that found themselves in a very bad situation, I was hoping if you could elaborate and clarify a little further 

on the action that you took and as it relates to the seniors with 

a 10-year. And that’s an act that the Congress is going to have to 

move on, which I’m pushing a legislative hearing on soon, and also 

talking with the Administration on. 

How would it assist seniors to move it from five versus ten 

years? I guess that’s my question. 

Mr. SHULMAN. Yes. The actions we took were really making 

sure that the Treasury and the IRS lawyers give clear interpretation of the current laws on the books around investment theft 

losses. We thought this was important, because when you’re having 

a declining stock market, when you’re in a serious economic slump, 

that’s when Ponzi schemes come to light, because there’s no longer 

money flowing in, so they can’t be paying out money to old investors. 


smartinez on DSKB9S0YB1PROD with HEARING
26 

What we did was just interpret the law, said it’s investment theft 

loss. Once you have an investment theft loss, you go into the typical NOL carry-back language, which is three years generally. The 

American Recovery Act actually provided for five-year carry back, 

if you have less than 50 million of income, and so our interpretation said that that was the case. We also put out a revenue procedure that put a safe harbor in place, because a lot of times it takes 

many years to litigate these cases to find out how much you’re 

going to actually recover from the trustees and etcetera; and, really, the place people get money back is from SIPIC and from the 

IRS. And so our safe harbor said that you could take 95 percent 

of your loss, minus SIPIC and what you reasonably expected to regain. 

And so ours was pure interpretation. As we had a chance to talk 

about, we’ll obviously follow whatever law Congress puts in place; 

and, you know, I can’t really opine on, you know, we don’t have the 

authority to do a 10-year carry back. We have an authority just to 

interpret the laws as they’re on the books. 

Mr. MEEK. But, if I can, Mr. Chairman, basically Commissioner 

what I’m trying to get to the 10 year carry back will assist seniors 

at a greater level to be able to recover, because if you’re in your 

50s and 40s you have an opportunity to do so. Will I be correct in 

saying that? 

Mr. SHULMAN. I mean I would think so. I mean, obviously, 10- 

year carry back can go back from 10 years instead of five. All I’m 

saying is it’s kind of not in my bailiwick to make the call on. 

Mr. MEEK. I understand. 

Mr. Chairman. Thank you so very much, Commissioner. 

Mr. Chairman, as you know, this is an issue and concern of 

many of us that represent people of age and I’m hoping that we can 

work with Administration and work with others, but I would like 

to commend the Commissioner and IRS for making the ruling that 

they have under this situation; and, I look forward, Mr. Chairman, 

to working with you on the reason why we’re here today in getting 

to the bottom of some of this off-shore business. 

Chairman NEAL. Thank the gentleman, and part of this hearing 

today was scheduled based on Mr. Meek’s prompting. 

So, the gentleman from Kentucky, Mr. Davis, is recognized to inquire. 

Mr. DAVIS. We just call it the Kentucky seat now after the three 

Members. Thanks, Mr. Chairman. 

Commissioner, I appreciate you coming in and the time you’ve invested in getting to know us, as well as talking about a number 

of issues. I think as my colleague from Illinois said, there is occasionally a bit of creative tension on the Committee, on a variety of 

issues, and certainly on this one. 

But I think there is unanimity across the board on really dealing 

with tax evasion and effective compliance mechanisms so the agency can function, and legitimate revenue can be gotten into the 

agency. 

To the extent that you agree that international exchange of information in particular are a key element of the ongoing efforts to 

fight tax evasion, do you feel it’s reasonable for us to be concerned 

about a blacklist, in the sense that it might make listed countries 


smartinez on DSKB9S0YB1PROD with HEARING
27 

willing—or less willing to provide the IRS with information that 

you need to combat this evasion effectively? 

Mr. SHULMAN. You know, I guess I don’t have a lot to add to 

what I’ve said in general about blacklists. I always focus on characteristics of jurisdictions where we might see tax evasion, rather 

than listing those jurisdictions, things like bank secrecy, things like 

lack of information exchange, things like non-transparent laws and 

cooperation with the U.S. 

And so clearly there’s pieces of a blacklist that could be quite 

useful to the IRS, because you could then change some presumptions and target specific rules around there. And I fully understand 

the diplomatic issues around a blacklist, which are pretty large. 

Mr. DAVIS. Well, I guess the reason that I was asking is I was 

wondering if you could confirm for the record. The U.S. currently 

has tax information exchange agreements with several countries 

that are included on the Levin-Doggett proposal proposed blacklist, 

including the Cayman Islands and New Jersey. 

And I guess taking this just one step further, could you also confirm for the record, in that same vein, that our Nation actually has 

full-fledged tax treaties with at least three countries that are on 

that proposed blacklist, Switzerland, Luxembourg, and Cypress. 

Mr. SHULMAN. You know, I don’t want to get this wrong, so if 

you’d let me just come back to you, and I’ll give you the list of all 

the countries that we have, and submit it for the record, I would 

be happy to do that. 

Mr. DAVIS. Okay. Thank you, Mr. Chairman. I yield back. 

Chairman NEAL. Thank you, Mr. Davis. 

I want to thank the Commissioner for the time that he has spent 

with us, and also the time that he spent preparing for the hearing 

today. 

And we look forward to working with you on these issues. You 

can see that there was pretty good attendance this morning. 

There’s a lot of interest. Media accounts, I think, day after day, indicate the nature of the problem, and we hope you will continue to 

be part of the narrative as we seek to solve it. 

And with that, I’d like to call our second panel. 

Mr. SHULMAN. Thanks for your leadership on this, Mr. Chairman. 

Chairman NEAL. Thank you. 

Let me thank our second panel, and the Chair recognizes Mr. 

Shay. 

STATEMENT OF STEPHEN E. SHAY, TAX PARTNER, ROPES & 

GRAY 

Mr. SHAY. Thank you, Mr. Chairman, Ranking Member Tiberi, 

and Members of the Committee. My name is Stephen Shay. I’m a 

partner at the law firm Ropes & Gray in Boston. 

With the Chairman’s permission, I will submit my testimony for 

the record, and just summarize my principal observations. I also 

want to make clear I’m appearing in an individual capacity, and 

what I’m going to say does not represent the views of my law firm 

or my clients. 

The key points I’d like to make with respect to the focus of this 

hearing are that in order to attract foreign capital, and for historic 


smartinez on DSKB9S0YB1PROD with HEARING
28 

administrative reasons, the United States taxes very little U.S. 

source investment income paid to foreign persons. 

We exempt from withholding tax most capital gains of non-residents on sales of securities, and U.S. interest paid to unrelated 

non-resident lenders. Our source withholding tax principally imposes tax on payments of dividends to non-residents. We do not impose U.S. withholding tax on payments of foreign source income to 

foreign persons. 

Our source withholding regime for U.S. source income payments 

is designed to determine whether the owner of the income is a foreign person and, if so, what withholding rate should apply. 

Generally, the United States does not have enforcement jurisdiction over a foreign financial institutions— that is not owned by 

U.S. persons and that does not carry on business itself, in the entity, in the United States. 

The QI system was developed to overcome these jurisdictional 

limitations, and allow a U.S. withholding agent, that is, a U.S. institution making a payment to what it thinks is a foreign person, 

to rely on documentation received from foreign banks that are acting as qualified intermediaries. 

The QI system relies on the foreign bank that has the direct relationship with the foreign customer to exercise normal banking 

know-your-customer disciplines in assuring that the documentation 

it received, and that it provides the U.S. withholding agent in turn, 

was correct. 

The QI regime prescribes audits by the bank’s external auditors 

to confirm that its processes are being used appropriately. 

Because some of the income that we exempt is exempted on a 

unilateral basis, not just to residents and other treaty countries 

that have given reciprocal exemptions, it is not possible to rely on 

the other countries’ governmental audits to check the QI system. 

So this is a feature of the extent of our unilateral exemption, particularly of portfolio interested source. 

As noted by others, the qualified intermediary regime is a optin system, and—where the foreign bank elects to participate—applies to accounts that are designated as QI accounts. 

Accordingly, under current law rules, it is possible for a QI to act 

as a QI and also have accounts that are not covered by the QI requirements, including accounts for U.S. persons. 

The cross-border withholding system for payments to foreign persons is not designed itself to provide information reporting on U.S. 

persons. It is just designed to screen for and apply the appropriate 

withholding tax rate to foreign persons. 

In this regard, one of the key decisions made in implementing 

these rules was to follow traditional tax rules and respect a foreign 

corporation under U.S. principles. As a non-transparent beneficial 

owner of income without regard to whether it was owned by U.S. 

persons. 

When a payor of these payments is within the U.S. tax jurisdiction, payments of interest, dividends and gross proceeds from sales 

of securities to a U.S. person are subject to domestic information 

reporting and back-up withholding rules. These have become a very 

important part of our compliance system. 


smartinez on DSKB9S0YB1PROD with HEARING
29 

It is possible, however, for a U.S. person to have an account at 

a foreign financial institution that is not subject to third party information reporting. 

Under the structure of the rules just described, some U.S. persons are able to masquerade as foreign persons, or hide behind foreign corporations, without reporting this income. 

As a jurisdictional matter, the United States can only obtain information on U.S. persons’ foreign accounts at foreign financial institutions if the foreign financial institution agrees to participate, 

for example, through a QI system, or through information requests 

on a bilateral basis with other countries. 

In my testimony, I have set out a series of proposals, some of 

which have been made by others—many of which have been made 

by others, that I think would be feasible ways to overcome the limitations I’ve described. 

In the interest of time, I’ll be happy to answer any questions on 

those. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Shay follows:] 


smartinez on DSKB9S0YB1PROD with HEARING
30 

Statement of Stephen E. Shay, Tax Partner, Ropes & Gray, Boston, 

Massachusetts 


smartinez on DSKB9S0YB1PROD with HEARING51950a.008
31 


smartinez on DSKB9S0YB1PROD with HEARING51950a.009
32 


smartinez on DSKB9S0YB1PROD with HEARING51950a.010
33 


smartinez on DSKB9S0YB1PROD with HEARING51950a.011
34 


smartinez on DSKB9S0YB1PROD with HEARING51950a.012
35 


smartinez on DSKB9S0YB1PROD with HEARING51950a.013
36 


smartinez on DSKB9S0YB1PROD with HEARING51950a.014
37 


smartinez on DSKB9S0YB1PROD with HEARING51950a.015
38 


smartinez on DSKB9S0YB1PROD with HEARING51950a.016
39 


smartinez on DSKB9S0YB1PROD with HEARING51950a.017
40 


smartinez on DSKB9S0YB1PROD with HEARING51950a.018
41 


smartinez on DSKB9S0YB1PROD with HEARING51950a.019
42 


smartinez on DSKB9S0YB1PROD with HEARING51950a.020
43 


smartinez on DSKB9S0YB1PROD with HEARING51950a.021
44 


smartinez on DSKB9S0YB1PROD with HEARING51950a.022
45 


smartinez on DSKB9S0YB1PROD with HEARING51950a.023
46 


smartinez on DSKB9S0YB1PROD with HEARING51950a.024
47 


smartinez on DSKB9S0YB1PROD with HEARING51950a.025
48 


smartinez on DSKB9S0YB1PROD with HEARING51950a.026
49 


smartinez on DSKB9S0YB1PROD with HEARING51950a.027
50 


smartinez on DSKB9S0YB1PROD with HEARING51950a.028
51 


smartinez on DSKB9S0YB1PROD with HEARING51950a.029
52 


smartinez on DSKB9S0YB1PROD with HEARING51950a.030
53 


smartinez on DSKB9S0YB1PROD with HEARING51950a.031
54 


smartinez on DSKB9S0YB1PROD with HEARING51950a.032
55 


smartinez on DSKB9S0YB1PROD with HEARING51950a.033
56 


smartinez on DSKB9S0YB1PROD with HEARING51950a.034
57 


smartinez on DSKB9S0YB1PROD with HEARING51950a.035
58 


smartinez on DSKB9S0YB1PROD with HEARING51950a.036
59 


smartinez on DSKB9S0YB1PROD with HEARING51950a.037
60 


smartinez on DSKB9S0YB1PROD with HEARING51950a.038
61 


smartinez on DSKB9S0YB1PROD with HEARING51950a.039
62 


smartinez on DSKB9S0YB1PROD with HEARING51950a.040
63 


smartinez on DSKB9S0YB1PROD with HEARING51950a.041
64 

f 

Chairman NEAL. Thank you. In fact, during the questioning period, I’ll have an opportunity to raise that with you. 

Professor. 


smartinez on DSKB9S0YB1PROD with HEARING51950a.042
65 

STATEMENT OF REUVEN S. AVI-YONAH, IRWIN I. COHN 

PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN LAW SCHOOL 

Mr. AVI-YONAH. Chairman Neal, Ranking Member Tiberi, and 

honored Members of the Committee and the staff, thank you very 

much for inviting me today to testify before you again on this issue. 

I think the UBS method shows that there are serious problems 

with the QI initiative as it is currently drafted. Basically, though, 

as we all know, UBS enabled American citizens to hide behind 

sham corporations in various other secrecy jurisdictions other than 

Switzerland, and thereby for a while escape the notice of the IRS. 

And to some extent still, because they claim that under Swiss 

bank secrecy law, they can’t disclose the identity of the other new 

American accountholders, even when specifically requested by the 

IRS to do so. 

Now stepping back for a moment, what is the basic problem with 

the QI program from my perspective? The QI program was set up 

in order to enable foreigners to invest in the U.S. through the QI, 

without the U.S. withholding agent knowing the identity of those 

foreigners. 

If a foreign person invests directly into United States, then the— 

in principle, the U.S. withholding agent has the ability to collect information about that foreign person. The U.S.—in the end the payments come from the United States. 

There is a U.S. withholding agent, and when the U.S. withholding agent makes a payment, even a payment that is exempt, 

let’s say, under the portfolio interest exemption, there is the potential of collecting information about—and the Form W–8BEN, from 

that person to know the identity of that person, whether or not 

there is a treaty. 

And then—if there is a treaty, then there is the potential for the 

IRS to get that information from the American financial institution, in exchanging under the treaty information exchange. 

Now the QI program was essentially set up so that this would 

not happen. Under regulations proposed by the Clinton Administration, but not yet finalized, American banks were supposed to collect information about payments that are exempt under the portfolio interest exemption. 

And under the version proposed by the Bush Administration, 

that would still apply, but only to 16 designated countries. I think 

it should apply to every country and that these regulations should 

be finalized. 

But under the QI agreement, once you go with the QI—once a 

foreigner goes with the QI, then the QI only reports to the American withholding agents, essentially summary or pooled information about all the beneficiaries that it knows are eligible for let’s 

say, the reduced withholding tax and dividends. 

And the American withholding agent knows only that, only the 

pooled information, and therefore there’s no information available 

for treaty information exchange. 

And I think that this is a problem, and what it enables, is essentially for Americans to pretend that they are foreigners, submit 

Form W–8BEN to the QI. 


smartinez on DSKB9S0YB1PROD with HEARING
66 

Now here’s—they should—Mr. Shay identifies the QI is not supposed to look behind this corporation to see whether there’s an 

American behind it. 

Now there’s some debate in the background material about 

when—if the QI has actual knowledge that the corporation is 

owned by an American, whether they should be—my view is that 

if a QI has actual knowledge that there’s an American, then it 

should treat it as an American and do back-up withholding and information reporting. 

But it’s not entirely clear that under the current regulations and 

the modern QI agreement, they have the obligation to do that. 

Maybe they can just accept the corporate form as hiding the American sufficiently. And I think to that extent, that should be 

changed. 

Now the fundamental issue, though, is that I think that we are 

doing this wrong, in the sense that—the reason that we’re doing it 

the way we’re doing it, is that we want to essentially enable residents of other countries to evade those countries’ taxes. 

And that’s how the QI agreement is set up. And the idea is they 

will not invest in the United States if they are subject to residence 

based taxation. 

And I think that the solution to this, and in general to the issue 

of source based withholding, is that we will prevent people—capital 

from flying away from the United States, if we are willing to cooperate with other residence countries and they are willing to cooperate with us. 

We should have under the G–20, let’s say, full information exchange with other countries. We should not try to cooperate with 

tax evasion by residents of other countries. We should expect other 

countries that have income taxes to cooperate with the information 

exchange with us. 

Fundamentally the whole tax haven and secrecy jurisdiction 

issues is about cooperation by the rich countries in the world. It’s 

not really about the tax havens themselves. 

Thank you very much. 

[The prepared statement of Mr. Avi-Yonah follows:] 

Statement of Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, 

University of Michigan Law School 

My name is Reuven S. Avi-Yonah. I am the Irwin I. Cohn Professor of Law and 

Director of the International Tax Master of Law Program at the University of Michigan Law School. I hold a JD (magna cum laude) from Harvard Law School and a 

PhD in History from Harvard University. I have twenty years of full and part time 

experience in the tax area, and have been associated with or consultant to leading 

law firms like Wachtell, Lipton, Rosen & Katz and Cravath, Swaine & Moore. I 

have also served as consultant to the U.S. Treasury Office of Tax Policy and as 

member of the executive committee of the NY State Bar Tax Section. I am currently 

Chair of the ABA Tax Section Committee on VAT, a member of the Steering Group 

of the OECD International Network for Tax Research, and a Nonresident Fellow of 

the Oxford University Center on Business Taxation. I have published thirteen books 

and over 80 articles on various aspects of U.S. domestic and international taxation, 

and have fifteen years of teaching experience in the tax area (including basic tax, 

corporate tax, international tax and tax treaties) at Harvard, Michigan, NYU and 

Penn Law Schools. 

I would like to thank Representatives Neal and Tiberi and the Subcommittee staff 

for inviting me to testify today on the issues underlying the recent dispute involving 

Swiss banking secrecy and American taxpayers. Some of the following testimony is 


smartinez on DSKB9S0YB1PROD with HEARING
67 

1See Joseph Guttentag and Reuven Avi-Yonah, Closing the International Tax Gap, in Max 

B. Sawicky (ed.), Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administration 

(EPI, 2005), 99. 2 BANKER PLEADS GUILTY TO HELPING AMERICAN REAL ESTATE DEVELOPER 

EVADE INCOME TAX ON $200 MILLION, http://www.usdoj.gov/usao/fls/PressReleases/080619- 

01.html. 

based on an article I co-authored with Joe Guttentag, but I remain solely responsible for what follows.1

1. The UBS Case. 

On June 19, 2008, Bradley Birkenfeld, a senior banker in UBS’s private banking 

division, pled guilty in U.S. District Court, Southern District of Florida, to conspiracy to evade U.S. taxes. Mr. Birkenfeld, a U.S. citizen who worked at Zurichbased UBS’s private banking unit from 2001 to 2006, told a judge he helped real 

estate developer Igor Olenicoff dodge $7.2 million in U.S. Federal income taxes on 

$200 million in assets hidden in Liechtenstein and Switzerland. 

The Press Release by the IRS stated that: 

According to statements and documents filed with the court, Birkenfeld’s services 

to American clients violated a 2001 agreement that the Swiss bank entered into 

with the United States. Under the terms of the agreement, the bank would identify 

and document any customers who received reportable U.S. source income or would 

withhold and anonymously pay a 28 percent withholding tax. This agreement was 

a major departure from historical Swiss bank secrecy laws under which Swiss banks 

concealed bank information for U.S. clients from the IRS. 

When the bank notified its U.S. clients of the requirements of this agreement, 

many of the bank’s wealthy U.S. clients refused to be identified, to have taxes withheld from the income earned on their offshore assets or to sell their U.S. investments. These accounts were known at the Swiss bank as the United States 

undeclared business. 

In evidence provided by Birkenfeld to the court, managers and bankers at the 

firm, including Birkenfeld, assisted the U.S. clients in concealing their ownership 

of the assets held offshore by helping these wealthy customers create nominee and 

sham entities. This was done to prevent the risk of losing the approximately $20 

billion of assets under management in the United States undeclared business, which 

earned the bank approximately $200 million per year in revenues. To this end, 

Birkenfeld, managers and bankers at the Swiss bank, and U.S. clients prepared 

false and misleading IRS forms that claimed that the owners of the accounts were 

sham off-shore entities and failed to prepare and file IRS forms that should have 

identified the true U.S. owner of the accounts.2

Subsequently, On February 18, 2009, UBS entered into a deferred prosecution 

agreement on charges of conspiring to defraud the United States by impeding the 

IRS. UBS agreed to pay $780 million and to provide the IRS with the identities and 

account information of 250 U.S. residents. However, UBS refused to provide any information about the identity of an estimated 52,000 other U.S. clients holding bank 

accounts with $14.8 billion in assets in Switzerland, citing Swiss bank secrecy law. 

It claimed that the terms of its 2001 ‘‘Qualified Intermediary’’ (QI) agreement with 

the IRS protected it from having to reveal the identity of its U.S. clients. The IRS 

is currently in litigation with UBS over this matter. 

The Extent to Which U.S. Residents Move Assets Offshore. 

UBS’s U.S. clients relied on four simple realities: First, in today’s world, anyone 

can open a bank account in Switzerland for a minimal fee over the internet, without 

leaving the comfort of their home. Second, the account can be opened in the name 

of a Caymans corporation, which can likewise be set up long-distance for minimal 

transaction costs (as evident from any perusal of the back pages of the Economist 

magazine, where law firms advertising such services abound). Third, money can be 

transferred into the account electronically from the U.S. or from abroad, and in most 

cases there would not be any reporting of such transactions to tax authorities. Finally, the funds in the Swiss account can then be used for investments in the U.S. 

and in other high tax jurisdictions, and there would generally be no withholding 

taxes on the resulting investment income, no Swiss taxes, and no information on 

the true identity of the holder available to the IRS or any other tax authority. Significantly, other than the use of Switzerland, both the underlying funds that were 

deposited in the UBS accounts, and the investment income, were generally purely 

domestic transactions, and the tax evaded was U.S. income tax on U.S. source income beneficially owned by U.S. residents. 


smartinez on DSKB9S0YB1PROD with HEARING
68 

3 Internal Revenue Service, The Tax Gap, www.irs.gov/pub/irs-utl/tax_gap_facts-figures (2005). 4Testimony of Treasury Assistant Secretary for Tax Policy Eric Solomon before Senate Finance Committee on Ways to Reduce the Tax Gap (April 18, 2007); Henry J. Aaron and Joel 

Slemrod (eds.), The Crisis in Tax Administration. Washington, DC: The Brookings Institution 

(2004). 5See TIGTA, IRS Lacks Estimate for International Tax Gap, 2009 WTD 28–25 (Feb. 12, 

2009). 6 Boston Consulting Group, Global Wealth Report, www.bcg.com/publications/PUBID=899 

(2004). For consistent figures see also Merrill Lynch, World Wealth Report, www.ml.com/media/ 

18252.pdf (2004). 7Martin A. Sullivan, U.S. Citizens Hide Hundreds of Billions in Cayman Accounts, 103 Tax 

Notes 956 (2004). 

The ability to use offshore tax havens to evade income taxes is a relatively recent 

phenomenon. Since about 1980 there has been a dramatic lowering of both legal and 

technological barriers to the movement of capital, goods and services, as countries 

have relaxed their tariffs and capital controls, much of the world economy has shifted from goods to services, and electronic means of delivering services and transferring funds have developed. At the same time, the tools used by tax administrations 

to combat tax evasion have not changed significantly: Most tax administrations are 

limited to enforcing taxes within their jurisdiction, and for international transactions, can only rely on outdated mechanisms like exchange of information under 

tax treaties with other high-tax countries, which are unavailing for income earned 

through tax haven corporations. Simply put, we have the technology which enables 

people to conduct their affairs without regard to national borders and without transparency, while restricting tax collectors to geographic borders, meaningless in today’s world. 

The U.S. legitimately boasts one on the world’s higher compliance rates for tax 

collections. However, most of the taxes collected by the IRS are from income that 

is subject either to withholding at source (e.g., wages) or to automatic information 

reporting to the IRS by financial institutions (e.g., interest or dividends from U.S. 

payors). The IRS has recently estimated that in 2001 there was a total ‘‘tax gap’’ 

(i.e., a difference between the taxes it collected and the taxes it should have collected under existing law) of between $312 and $345 billion, or about 16 percent of 

total taxes owed.3 A large portion of this gap results from income that is subject 

to neither withholding nor information reporting, such as most income of small businesses and income earned from foreign payors. For these types of income, the compliance rate falls from over 90 percent to under 50 percent.4

No one, including the IRS, has a good estimate of the size of the international 

tax gap.5 This is not surprising given that the activities involved are illegal, but one 

can make an educated guess based on a few publicly available numbers. In 2003, 

the Boston Consulting Group estimated that the total holdings of cash deposits and 

listed securities by high net worth individuals in the world were $38 trillion, and 

that of these, $16.2 trillion were held by residents of North America. Out of these 

$16.2 trillion, ‘‘less than’’ 10 percent was held offshore (as compared with, for example, 20–30 percent offshore for Europe and 50–70 percent offshore for Latin America 

and the Middle East).6

If one translates this estimate into approximately $1.5 trillion held offshore by 

U.S. residents, and if one assumes that the amount held offshore earns 10 percent 

annually, the international component of the tax gap would be the tax on $150 billion a year, or about $50 billion. This figure is in the mid range of estimates of the 

international tax gap in 2002 by former IRS Commissioner Charles O. Rossotti ($40 

billion) and by IRS consultant Jack Blum ($70 billion).7

3. The Potential for Offshore Entities to Serve as a Vehicle for Circumventing U.S. Tax Laws. 

U.S. Tax Law currently includes several provisions designed to prevent U.S. residents from using offshore entities to circumvent U.S. tax law. In particular, the 

anti-deferral rules (primarily Subpart F, IRC secs. 951–964, and the PFIC rules, 

IRC secs. 1291–1298) provide for current taxation of U.S. shareholders on certain 

types of income (primarily passive income) earned through foreign corporations. 

However, it is unclear to what extent the IRS is successful in enforcing these rules. 

In particular, the PFIC rules apply to any U.S. share ownership in a foreign corporation that earns primarily passive income. Since the U.S. shareholder does not 

have to control the foreign corporation, it is difficult for the IRS to adequately monitor how many U.S. citizens or residents own shares in a PFIC, especially in situations in which treaty information exchange is not available (e.g., when the PFIC is 

located in a tax haven and bank secrecy provisions apply). 


smartinez on DSKB9S0YB1PROD with HEARING
69 

4. The Effect of Foreign Jurisdiction Secrecy Rules on the Efficacy of Tax 

Law. 

Foreign tax haven jurisdictions typically have strict bank secrecy laws that prohibit release of depositor information. The U.S. currently has bilateral information 

exchange agreements with several tax haven jurisdictions. However, most of the existing agreements are restricted only to criminal matters. Criminal matters are a 

very small part of overall tax collections, and pose very difficult evidentiary issues 

in the international context. Moreover, the agreements sometimes require the subject matter to be criminal in both the U.S. and the tax haven, which would never 

be the case for pure tax evasion. In addition, they typically require the U.S. to make 

a specific request relating to particular individuals, and they also typically do not 

override bank secrecy provisions in tax haven laws. These limitations mean that existing tax information exchange agreements, while helpful and important in some 

cases, are of limited value in closing the overall international tax gap. 

5. The Adequacy of Reporting and Withholding Rules. 

Under current U.S. rules, withholding is required (under IRC secs. 1441–1442) if 

the U.S. payor knows (or has reason to know) that the payment is subject to withholding. Similar rules apply to information reporting. However, if a U.S. payor receives a Form W–8BEN from a payee certifying that it is a foreign corporation, it 

may not withhold or submit Form 1099 (information report) to the IRS, even if it 

knows that the foreign corporation is a shell that is de facto controlled by a U.S. 

person. 

The problem is exacerbated by the ‘‘Qualified Intermediary’’ (QI) program, set up 

by the IRS in 2000. This program is described by Shay, Fleming and Peroni as follows: 

Generally, a U.S. withholding agent that makes payment of income subject to 

withholding to a foreign person reports the amount of the payment and the identity 

of the payee to the Service on a Form 1042–S attached to the withholding agent’s 

own return on Form 1042. The information from Form 1042–S is one of the most 

important elements of information provided to certain treaty partners under the 

Service’s program for routine exchange of information under income tax treaties. 

Under the current QI regime, the QI does not pass on to the withholding agent 

the identity of beneficial owners claiming treaty relief but does retain the information. Assuming, as is the case most of the time, that the QI has not assumed withholding responsibility, the withholding agent makes payments to accounts grouped 

according to withholding pools and files a single Form 1042–S for the pool without 

identifying the individual payee. Thus, for example, the withholding agent files a 

single Form 1042–S for the pool of accounts eligible for the 15 percent treaty dividend rate. In this case, the identity of the payee remains unknown unless 

the Service makes a specific request for the identity of payees. The pooling 

approach, which is central to the efficiency and attractiveness of the QI regime to 

a foreign financial institution, cuts off the potential practical utility of pooled information for exchange under income tax treaties. This is because the information is 

not broken down by taxpayer and therefore is unsuitable for exchange with a treaty 

partner. Similarly, the United States for years limited its information exchange of 

bank deposit interest to accounts held by Canadians and, after strong lobbying by 

banks, recently proposed only a limited extension of collection of this information 

from foreign persons resident in a limited number of selected treaty countries. Why 

is this significant? Domestically, the United States relies on comprehensive information reporting for payments of interest, dividends, and gross proceeds from the sale 

of securities to individuals and other nonexempt recipients. If a taxpayer does not 

supply a correct taxpayer identification number, the threat of a back-up withholding 

tax on the payment, currently at a rate of 30 percent, provides a significant backstop to the information reporting rules. The final withholding tax regulations integrate the domestic information reporting and back-up withholding rules with the 

Chapter 3 withholding rules so that payments to foreign intermediaries acting for 

U.S. persons are covered by the domestic information reporting system. There are 

limits on the reach of these rules, however. Generally, U.S. persons, controlled foreign corporations, and foreign corporations more than 50 percent of whose income 

is effectively connected with a U.S. trade of business must apply the information 

reporting and back-up withholding rules. The QI regime also preserves Form 1099 

reporting with respect to U.S. persons that are not exempt from information reporting under domestic rules. As a practical matter, however, the comprehensive 


smartinez on DSKB9S0YB1PROD with HEARING
70 

8Stephen E. Shay, J. Clifton Fleming Jr. and Robert J. Peroni, The David R. Tillinghast Lecture, ‘‘What’s Source Got to Do With It?’’ Source Rules and U.S. International Taxation, in The 

Tillinghast Lectures 1996–2005, 301–302 (2001) (emphases added). 9The U.S. currently has one of the most extensive tax treaty networks in the world, comprising of 67 full fledged treaties and 23 Tax Information Exchange Agreements. John Venuti 

et al., Current Status of U.S. Treaties and International Tax Agreements, 38 Tax Management 

Int’l J. 174 (March 2009). 10 In addition to these recommendations, Congress should enact and the President should sign 

S. 506/H.R. 1265, the Stop Tax Havens Abuse Act, introduced on March 2, 2009 by Sen. Carl 

Levin, D–Mich., Sen. Sheldon Whitehouse, D–RI, Sen. Claire McCaskill, D–Mo. and Sen. Bill 

Nelson, D–Fla. in the Senate and by over 40 Members led by Rep. Lloyd Doggett, D–Tex. and 

Rep. Rosa DeLauro, D–Conn in the House. 11 Charles O. Rossotti, Letter to Senators Charles Grassley and Max Baucus (March 22, 2004). 12 Committee for Economic Development, A New Tax Framework: A Blueprint for Averting a 

Fiscal Crisis (2005). 

U.S. regime for enforcement of tax on income from capital stops at the water’s edge.8

Fundamentally, the QI regime represents a bargain: The QI agrees to verify the 

identities and residency status of the beneficial owners of its accounts. In exchange, 

the U.S. agrees to trust the QI and as a result neither the U.S. withholding agent 

nor the IRS (unless it specifically requests) gets any information that can be transmitted to our treaty partners under the exchange of information provisions of our 

tax treaties.9

Essentially, the U.S. was telling foreign investors that instead of putting their 

money into the U.S. directly, in which case it might be subject to exchange of information and revealed to their country of residence, they could use the QI program 

to ensure that neither the U.S. withholding agent nor the IRS has the information. 

Thus, the IRS could tell the treaty partner with a straight face that it did not have 

the information the treaty partner needed to enforce its tax laws on its own residents, even though it was the IRS itself that entered into the agreement that prevented it from having the requisite information. 

As the UBS case shows, however, the QI program can easily be abused. Since the 

IRS does not have the information on beneficial ownership from the QI, it has to 

trust the QI to either report accounts held by U.S. residents on Form 1099 or perform backup withholding. Not surprisingly, a QI like UBS is tempted to accept 

funds from U.S. residents and not comply with information reporting or backup 

withholding, since it knows the IRS will in all likelihood not audit it (since an audit 

may give the IRS the information on foreign residents that the QI program was designed for it not to have). 

In my opinion, a better way to deal with our treaty partners is to help them enforce their tax laws on their own residents, and expect them to help the U.S. enforce 

its laws on its residents. Cooperation, not competition, is the solution to the offshore 

tax abuse problem. 

6. Recommendations to Address Offshore Tax Abuses.10

a. Increased IRS enforcement. 

It is well known that the IRS has in recent years faced an increased workload 

with diminished resources. From 1992 to 2001, IRS ‘‘full time equivalent’’ staff decreased by about 20,000 positions. This trend has been reversed more recently, but 

as former Commissioner Rossotti has written, the increase is not enough to keep 

up with the increase in complexity of the tax system and the size of the economy.11

Congress has repeatedly in recent years increased the complexity of our tax law 

without adding funding to the IRS. Bipartisan groups like the Committee for Economic Development have called for more resources and political support to be given 

to the IRS.12

I believe the IRS should dedicate more resources to attempting to close the international tax gap. In particular, the IRS should give more priority, and be given 

more resources, to audit compliance with existing laws requiring U.S. taxpayers to 

report ownership of foreign bank accounts and stock in foreign corporations. If the 

UBS case is any indication, such increased attention may generate many dollars in 

tax revenue for every dollar spent on enforcement. 

b. Bilateral information exchange. 

The Organization for Economic Cooperation and Development (OECD) has recently modified Article 26 (Exchange of Information) in its model income tax treaty, 

and has adopted a model Tax Information Exchange Agreement (TIEA), both of 

which are intended address the problems with current exchange of information 

agreements discussed above. Under the new Article 26 and model TIEA, exchange 


smartinez on DSKB9S0YB1PROD with HEARING
71 

13 Cynthia Blum, Sharing Bank Deposit Information with Other Countries: Should Tax Compliance or Privacy Claims Prevail, 6 Fl. Tax Rev. 579 (2005). 14See Reuven S. Avi-Yonah, The OECD Harmful Tax Competition Report: A Tenth Anniversary Retrospective, forthcoming in Brooklyn J. Int’l L. (2009) 15See IRC section 871(h)(6). If this step is taken, Treasury should adopt Limitation on Benefits regulations to ensure against abuse of the portfolio interest exemption by nonresidents in 

cases that it does apply. For a model, see Treas. Reg. 1.881–3 (the conduit financing regulations). 

of information relates to civil as well as criminal tax liabilities, does not require 

‘‘dual criminality’’ or suspicion of a crime other than tax evasion, and overrides bank 

secrecy provisions in domestic laws. These are the principles that underlie the vast 

majority of U.S. TIEAs, and where they fall short, the U.S. should renegotiate the 

TIEAs to incorporate these principles. 

I will discuss below the steps I believe are needed to induce tax haven jurisdictions to negotiate such agreements with the US. For other jurisdictions that are not 

tax havens, the inducement is the information they can obtain from the U.S. on 

their own residents. To ensure such information is available, the Treasury should 

finalize regulations proposed by the Clinton Administration that require U.S. banks 

and financial institutions to collect information on interest payments made to overseas jurisdictions when the interest itself is exempt from withholding under the 

portfolio interest exemption.13 The Treasury has proposed to limit such regulations 

to 16 designated countries, but as Blum writes, there is no legitimate privacy or 

other reason to impose such limitations. The banks should collect all the information, and the Treasury should use its existing authority not to exchange it in situations in which it might be misused by non-democratic foreign governments (e.g., 

when freedom fighters use U.S. bank accounts). 

c. Cooperation with OECD and the G20. 

Current Treasury policy is to focus on bilateral agreements to obtain needed information exchange cooperation. However, the OECD has been at the forefront of persuading tax haven jurisdictions to cooperate with information exchange, and is an 

organization that the U.S. had traditionally played a leading role in and whose work 

benefits both governments and the private sector. The U.S. should cooperate with 

the OECD and other appropriate international and regional organizations, such as 

the G20, in their efforts to improve information exchange and in particular to persuade the tax havens of the world to enter into bilateral information exchange 

agreements based on the OECD model. The OECD has made significant progress 

since it began focusing on this issue in 1998, but more needs to be done, both on 

persuading laggard jurisdictions to cooperate and on increasing the level of information exchange available from cooperating jurisdictions.14

d. Incentives to tax havens. 

The U.S. should adopt a carrot and stick approach to tax havens in order to provide incentives to cooperate with information exchange. In particular, the U.S. and 

other donor countries, multilateral and regional organizations should increase aid 

of a type which would enable those countries to shift their economies from reliance 

on the offshore sector to other sources of income. 

It should be noted that the common perception that the benefits of being a tax 

haven flow primarily to residents of the tax haven is misguided. The financial benefits of tax haven operations, while funding a minimal level of government services, 

often flow primarily to professionals providing banking and legal services, many of 

whom live in rich countries, rather than to the often needy residents of the tax havens. Thus, with some transitional support, it is likely that most of the tax havens 

would see the welfare of their own residents improve as they wean themselves from 

dependence on the offshore sector. 

3. Sanctions on non-cooperating tax havens. 

In the case of non-cooperating tax havens, I support the U.S. Treasury using its 

existing authority to prospectively deny the benefits of the portfolio interest exemption to countries that do not provide adequate exchange of information.15 This step 

is necessary, in my opinion, to prevent non-cooperating tax havens from aiding U.S. 

residents to evade U.S. income tax. 

A principal problem of dealing with tax havens is that if even a few of them do 

not cooperate with information exchange, tax evaders are likely to shift their funds 

there from cooperating jurisdictions, thereby rewarding the non-cooperating ones 

and deterring others from cooperation. Thus, some jurisdictions have advertised 

their refusal to cooperate with the OECD efforts. 


smartinez on DSKB9S0YB1PROD with HEARING
72 

16 EU Directive 2003/48/EC on Taxation of Savings (2003). 

However, if the political will existed, the tax haven problem could easily be resolved by the rich countries through their own action. The key observation here is 

that funds cannot remain in tax havens and be productive; they must be reinvested 

into the rich and stable economies in the world (which is why some laundered funds 

that need to remain in the havens earn a negative interest rate). If the rich countries could agree, they could eliminate the tax havens’ harmful activities overnight 

by, for example, refusing to allow deductions for payments to designated non-cooperating tax havens or restricting the ability of financial institutions to provide services 

with respect to tax haven operations. 

The EU and Japan have both committed themselves to tax their residents on foreign source interest income. The EU Savings Directive, in particular, requires all 

EU members to cooperate in automatic and comprehensive exchange of information 

or impose a withholding tax on interest paid to EU residents.16 Both the EU and 

Japan would like to extend this treatment to income from the US. Thus, this would 

seem an appropriate moment to cooperate with other OECD and G20 member countries by imposing a withholding tax on payments to tax havens that cannot be induced to cooperate in exchange of information, without triggering a flow of capital 

out of the US. 

f. Withholding and Information Reporting. 

The IRS should revise its regulations (under IRC secs. 1441–1442) to provide that 

U.S. payors may not accept W8–BEN as evidence of foreign status, and must issue 

Form 1099s, when they know (or have reason to know) that payments to foreign 

corporations in fact inure to the benefit of U.S. persons. In addition, the QI program 

should be revised to require QIs to automatically provide information on actual beneficial ownership of all accounts to the IRS. 

7. 7. Conclusion. 

The UBS saga indicates that the international tax gap is a significant component 

of the overall tax gap. In order to maintain any kind of tax system, the U.S. public 

needs to be confident that current law can be enforced and that tax evasion will 

be caught and prosecuted. Thus, I hope that bipartisan support can be found for 

taking the steps identified above to close the international tax gap. These steps offer 

the potential of raising additional revenue without raising taxes, and of leveling the 

playing field between ordinary Americans who pay their fair share of taxes and others who do not. 

f 

Chairman NEAL. Mr. Blessing. 

STATEMENT OF PETER H. BLESSING, PARTNER, SHEARMAN 

AND STERLING 

Mr. BLESSING. Chairman Neal, Ranking Member Tiberi, and 

Members of the Subcommittee, thank you for asking me to testify 

today. 

I will focus on two issues in respect to detecting unreported investment income in overseas accounts, in particular tax treaty information exchange agreements and the qualified intermediary procedures. 

There are two principal types of bilateral agreements that are 

chiefly used by the tax authorities for information exchange. These 

are the comprehensive income tax treaties and secondly, the tax information exchange agreements, which are stand alone agreements. 

However, under each of these, typically the information that’s required to be exchanged is limited to what’s available in the normal 

course of the tax administration of the requested country as a matter of sovereignty and domestic law, but this can include bank secrecy provisions. 


smartinez on DSKB9S0YB1PROD with HEARING
73 

Very recently, in response to the pending G–20 blacklist of uncooperative countries and pressure from particular countries, including the United States and France and Germany, a number of countries that previously had relied on their bank secrecy provisions 

have announced they’ll override their domestic limitations, and not 

claim bank secrecy as preventing production, subject to implementing this in new agreements. 

This experience shows that used carefully, multilateral action by 

countries, including blacklists or threatened blacklists, can be an 

effective tool to convince certain countries that information exchange in is their best interest. 

I’m not suggesting that every blacklist necessarily is helpful. The 

Stop Tax Haven Abuse Act contains a proposed unilateral blacklist 

of 34 countries for a very different purpose. One concern is that the 

safeguards be there for designating countries. 

Furthermore, the Act would be—the Act would represent a substantial shift in enforcement burden onto financial institutions, 

which would be required to report voluminous information covering 

virtually all financial transactions involving an offshore secrecy jurisdiction. The benefits of the provision must be weighed against 

the compliance cost. 

Turning now to the QI program, of great interest is a report on 

withholding procedures released in January of this year, which was 

prepared by the informal consultative group established by the 

OECD Committee on fiscal affairs. 

Notably, the group’s report recommends a system that looks very 

much like the U.S. QI system. In that system, a foreign financial 

institution enters into an agreement with the IRS, pursuant to 

which it may accept primary withholding and documentation obligations subject to external audit, in exchange for a simplified 

pooled reporting and non-disclosure of client identities to the IRS, 

and to—most importantly, to its competitors down—upstream in 

the chain of information. 

A significant difference from the QI system is that the identities 

of beneficial owners of payments would be disclosed to the source 

countries, something Professor Avi-Yonah was just suggesting 

would be a good thing. 

This would address the flip side of information exchange, namely 

the needs of a country to obtain information about its residents. 

The United States would benefit from another country affirmatively apprising the U.S. tax authorities of accounts beneficially 

owned by U.S. residents and citizens. 

The United States in turn would be expected to do the converse. 

However, there’s a problem here. For example, the IRS W–8BEN 

is not currently required to be filed with the IRS under the QI program, so the IRS has no—or otherwise, for that matter, so the IRS 

has no record of the identity of payees of the QI system. 

For non-QI payments, there is reporting to the IRS in 1042–S, 

but as the GAO report noted, the IRS is not currently able to process that effectively for use. 

The U.S. Government Accounting Office reported in the QI program in December of 2007. While it concluded that the QI program 

contains features that give the IRS some assurance that QIs are 

more likely to properly withhold and report tax on U.S. source inVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00077 Fmt 6633 Sfmt 6602 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
74 

come than other withholding agents, it suggested that the audit 

standards be enhanced by requiring the external auditor to report 

any indications of fraud or illegal activity that could significantly 

affect the results of the review. 

In response, the IRS issued proposed changes to the model QI 

agreement and the audit procedures in November of 2008, as Commissioner Shulman noted, to broaden the requirement and the required self-reporting by the QI and increase the procedures required to be performed, and documentation required to be examined by the auditor. 

The IRS has received comments on the proposal from certain 

audit firms and QIs. Clearly, a balance will be needed to be struck 

between the interests of a viable review and audit procedures, and 

the increased costs associated with the proposed procedures, which 

may be beyond the ability of smaller QIs to meet. 

In conclusion, I believe that the QI program overall is well conceived, plays a key role in the U.S. withholding tax system, and 

should be supported, including with adequate funding. Attention is 

appropriately being paid to strengthening the external review process. 

A particular limiting factor is that external ‘‘audits’’ are required 

only to be in accordance with the agreed upon procedure standard, 

which means that they do not constitute an audit or review, and 

therefore are not an expression of an opinion by the auditor. 

I would be happy to take any questions. Thank you very much. 

[The prepared statement of Mr. Blessing follows:] 


smartinez on DSKB9S0YB1PROD with HEARING
75 

Statement of Peter H. Blessing, Partner, Shearman and Sterling, New York, 

New York 


smartinez on DSKB9S0YB1PROD with HEARING51950a.043
76 


smartinez on DSKB9S0YB1PROD with HEARING51950a.044
77 


smartinez on DSKB9S0YB1PROD with HEARING51950a.045
78 


smartinez on DSKB9S0YB1PROD with HEARING51950a.046
79 


smartinez on DSKB9S0YB1PROD with HEARING51950a.047
80 


smartinez on DSKB9S0YB1PROD with HEARING51950a.048
81 


smartinez on DSKB9S0YB1PROD with HEARING51950a.049
82 


smartinez on DSKB9S0YB1PROD with HEARING51950a.050
83 


smartinez on DSKB9S0YB1PROD with HEARING51950a.051
84 


smartinez on DSKB9S0YB1PROD with HEARING51950a.052
85 


smartinez on DSKB9S0YB1PROD with HEARING51950a.053
86 


smartinez on DSKB9S0YB1PROD with HEARING51950a.054
87 


smartinez on DSKB9S0YB1PROD with HEARING51950a.055
88 

f 

Chairman NEAL. Thank the panelists. 


smartinez on DSKB9S0YB1PROD with HEARING51950a.056
89 

Mr. Shay, you and others have suggested that QIs need to know 

more about the beneficial owners of foreign corporations than is 

currently required, which results in QIs basically accepting it at 

face value. 

What exactly would you require of QIs in order to be in compliance with this additional mandate? 

Mr. SHAY. I think, Mr. Chairman, that in fact QIs often do know 

a fair amount about beneficial owners of corporations, because of 

the know-your-customer rules when they’re closely held. 

But for purposes of this discussion, I think what I would recommend is, subject to working through with the IRS fairly carefully, is consideration of requiring a QI to provide information 

about thresholds U.S. owners of foreign corporations. In my testimony we said 10 percent or more owners of U.S. corporations—for 

a couple of reasons. 

If that information is provided to the IRS, then it can then cross 

check and be sure that those U.S. persons have complied with their 

income tax obligations with respect to those corporations. 

If those corporations were either closely controlled or hold primarily passive assets, under our existing U.S. rules, they should 

have included income currently in their U.S. taxable income, so 

this would be an effective check. There may be circumstances 

where it would make sense to go beyond that. 

One other comment I would make. In my testimony, I have highlighted the important role that QIs play in the withholding system. 

This would be an additional burden for a foreign corporation that’s 

participating. 

It is a judgement call, but my judgement is that being a qualified 

intermediary now is sufficiently important for foreign banks in the 

international capital markets, that they would be willing to take on 

some additional burden. 

I urge the Committee to give the IRS flexibility to work out the 

detail, so that the system doesn’t cause QIs to leave the system. 

Chairman NEAL. Thank you, Mr. Shay. 

Mr. Blessing, you nuanced part of this—in your testimony, you 

nuanced part of this question that I’m about to raise. I’m interested 

in the EU Savings Directive that is explained in your testimony, 

and you did speak to this issue. 

Do you think that the U.S. could participate in such an automatic reporting regime, or would it overwhelm our banks and financial institutions, so that it would be deemed overburdensome? 

Mr. BLESSING. The EU Savings Directive is a very different 

type of system, which requires the reporting of interest to EU—by 

EU participants to external parties, to non-EU parties. 

In the U.S. reporting system, I don’t think that there’s anything 

quite comparable. We do require reporting of most payments. We 

have declined to require reporting of bank payments by domestic 

banks. That was not—at the time, there was some concern that 

that would be a burden on the systems. 

But the primary concern, I believe, was that there would be a impact on the capital flow to banks. In other words, U.S. domestic 

banks lobbied against that provision, because they were concerned 

that they would not receive the same deposits if they were required 


smartinez on DSKB9S0YB1PROD with HEARING
90 

to report the interest. I don’t think the systems is a problem anymore, my own view. 

Chairman NEAL. And Professor Avi-Yonah, you seem to be the 

lone voice against the QI system today. We’ve heard your testimony 

that the dark secret before the QI system was implemented was 

that no one had any idea where the payments were going, and at 

least with QI they have some idea. 

Would you support this system with modifications that were outlined by the Commissioner today? 

Mr. AVI-YONAH. Yes. I didn’t mean to imply that I think the 

QI system is worthless. I think there is a world imaginable in 

which we would not need the QI system, and I think that would 

be a preferable world, in which we in fact withhold on all payments 

that are not, for example, to treaty countries, that is we would repeal the portfolio interest exemption, or at least the Treasury Secretary applies his ability to suspend it to all payments to countries 

that don’t participate in full exchange of information. 

But that—I appreciate following Mr. Blessing’s testimony just 

now, we can’t really under current circumstances, do that unilaterally without triggering a capital outflow for the United States. 

I think that can only be done in cooperation with the Europeans, 

with other Members of the G–20, because they are already on 

record, because of the Savings Directive and other initiatives, 

OECD initiatives, that they would be interested in extending such 

a regime to fundamentally deal with the tax haven problem. 

But as long as that is not done, I think we need something like 

the QI program, but I think that the issue with the QI was always 

about, to some extent, sharing information—not sharing information from the QI to the foreign—to the U.S. withholding agent, who 

may be a competitor. 

And that I accept. But when we had the previous hearing where 

the GAO presented the QI report, the QI representatives all said, 

‘‘We are fully willing to share information with the IRS. That is, 

this is not about not sharing information with the IRS.’’ 

Well, lo and behold, UBS is not willing to share information with 

the IRS, even when asked—even when given a John Doe summons. 

And the other QIs also, I don’t think they’re really willing to share 

information with the IRS. 

I think we could live with the QI program if the QIs have to 

share all the Forms W–8BEN with the IRS, and if they provide information about U.S. people that they know about, and provide— 

and also share the information about foreign people, in which case 

it’s available under the shared information, and that I don’t think 

will kill the QI program. 

Chairman NEAL. Thank you, Professor. Mr. Tiberi. 

Mr. TIBERI. Thank you, Chairman. Mr. Blessing, in your testimony the tax information exchange agreements, and if we look at 

those and other agreements that we have with other foreign entities, whether they be foreign governments or financial institutions, 

would you predict any backlash if we pursued a policy of blacklisting specific countries, rather than maybe strengthening those 

agreements and adding folks to those agreements? 

Mr. BLESSING. I think that a unilateral blacklist is a very different concept than a multilateral—— 


smartinez on DSKB9S0YB1PROD with HEARING
91 

Mr. TIBERI. And that’s what—— 

Mr. BLESSING [continuing]. Blacklist. 

Mr. TIBERI [continuing]. I’m talking about. Yes, that’s what I 

mean. 

Mr. BLESSING. I think what I’d comment on was that the G– 

20 approach, which was a multilateral approach, was very effective. 

It represents 80 percent of the economies of the world in terms of 

trade. 

Mr. TIBERI. Right. 

Mr. BLESSING. And together, countries can do a lot. Together, 

the pressure was enormous, and the facts speak for themselves. A 

number of countries that previously had relied on their banks—EU 

Chrissy—dropped their objections, under that pressure. 

A unilateral blacklist could—well, the first thing is it’s not going 

to raise revenue. It may have some other benefits, for example, the 

benefit of changing the burden of proof and so forth, but it’s not 

going to raise revenue, because obviously the deposits will go to another country. 

And it’s very hard to administer. It’s one thing to threaten. It’s 

another thing to actually select the countries in a fair way, have 

a system that permits them to be added and taken off. 

And it’s a very onerous process, and much of a sledgehammer. 

So I’d be very cautious about blacklists. 

Mr. TIBERI. Thank you. And to just extend that a little bit. We 

had heard earlier about the number of countries that don’t apply— 

that aren’t involved in the Q1—the QI program. I keep saying Q1, 

the name of a band back home—the QI program, and the number 

of foreign banks that aren’t involved. 

How do we get them engaged more, either through these agreements, or other mechanisms? Because obviously, very easy for 

someone who wants to break the law, to try to go outside one of 

these participating countries, or participating financial institutions. 

How do we expand the scope? 

Mr. BLESSING. It is a bit of a Catch-22, because on the one 

hand, we’re trying to tighten—we as a country are trying to tighten 

the reporting, rightfully so, and the audit procedures, and so forth, 

which imposes additional expense—will impose additional expense. 

And I do fear that, at least for smaller QIs, at least what I have 

heard, is that they may not be able or willing to continue to participate. 

For the larger QIs, I think it’s still beneficial. Certainly, Steve 

Shay has just testified to that effect as well. I think it’s—what we 

can do to encourage more? It’s—I think the process that’s taking 

place in the OECD generally, may lead in that direction. 

I referred to this OECD report by the informal consultative 

group. Now that’s a number of years away from any real action, 

but it is very, very, telling and interesting that they have selected 

the type of program that we have—is our QI program—as the 

model going forward that countries would optimally implement. 

Right now it’s just a discussion draft, but it was put together by 

Members of a number of OECD countries and, most importantly, 

the financial community as well. 

Mr. TIBERI. Can you comment on that, sir? 


smartinez on DSKB9S0YB1PROD with HEARING
92 

Mr. SHAY. It is—as a number of us said in testimony, the QI 

is an opt-in system. Let me take a slightly different approach to 

your question. 

I think it’s fair to say that until recently, efforts to make coordinated international attack on cross-border evasion have been frustrated by lack of interest by countries, politics, and basically a general lack of urgency. 

Today, after what has been happening in the last several 

months, if a bank, even if it’s not a QI, is found to have a U.S. tax 

evader, I think there’s a sense of obloquy that is attached to that, 

that may not have been as true not long ago. And I think that’s 

a very positive development. 

So I think part of—and this goes to Commissioner Shulman’s 

multi-strategy approach—part of this is simple shaming. What 

happened in a major bank did not pass what we in the practitioner 

community call the Wall Street Journal test. It showed up on the 

front page of the Wall Street Journal, and it was extremely—— 

Chairman NEAL. You should know I have failed that test many 

times. 

Mr. SHAY. Well, we can also call it the Boston Globe test. Thank 

you, sir. 

Mr. TIBERI. Thank you. Thank you, Mr. Chairman. I yield back. 

Chairman NEAL. Thank you, Mr. Tiberi. The gentleman from 

Nevada, Mr. Heller. 

Mr. HELLER. Thank you very much, Mr. Chairman, and I want 

to thank the gentlemen for being here this morning. 

Questions were asked specifically, and you can tell, the four out 

of five questions that have been asked, at least on this side, have 

dealt with specifically the blacklisting. 

You heard the Commissioner’s response to Mr. Davis’ question as 

to whether tax information exchange agreements with several companies are included in the Levin-Doggett blacklist, and I think I 

can confirm that there are. 

Also, I think I can confirm for the record that there are actually 

full-fledged tax treaties with at least three countries, that are on 

the Levin-Doggett blacklist. 

So I guess my point is, and Mr. Blessing, you did answer that 

question, but I share the concern that the blacklisting approach 

could invite retaliation from listed countries that could do significant harm to our struggling economies’ capital markets, given that 

the U.S. itself sometimes is described as a tax haven, with respect 

to its treatments of non-residents, especially considering the fact 

that the U.S. does not impose tax on U.S. Treasury Bond interest 

paid to foreign investors. 

Do you think that there could be potential backlash from other 

countries that could disrupt our capital markets at this delicate 

time for our economy? And I’d like the Professor and Mr. Shay to 

answer this question. 

Mr. Blessing, thank you for answering the question earlier. 

Mr. AVI-YONAH. Well, I mean, let me say a couple of things 

about blacklists in general. First of all, we are not the inventor of 

blacklists, not even of unilateral blacklists. 

Lists in general are employed by most other countries in the 

world, for example, in the context of their so called CFC regimes, 


smartinez on DSKB9S0YB1PROD with HEARING
93 

stuff like that. Most countries, unlike us, designate countries that 

are eligible to be exempted from their anti-deferral regimes, and 

other countries that are specifically included, that is that income 

from those countries will be subject to the anti-deferral measures, 

because of their judgement that these countries are ‘‘tax havens.’’ 

So we haven’t invented this at all. In addition, of course the history of this goes back to the OECD list from 1998, 1999, and that 

list was remarkably effective. It started with, I think, 42 countries, 

and ended up with four countries, and that is because the other 

countries all agreed to participate in the OECD standards about 

sharing information. 

The problem is that they said they would, and then they didn’t. 

And this is why the G–20 now proposes to put a lot of these countries back on the list. And I think that those efforts are all to the 

good, and this the only tool that would really make countries cooperate, is listing them. I mean, not the only tool, but this is a 

pretty effective tool, as has been shown historically. 

Now frankly, I don’t think that that’s where they show the capital market comes from at all. The capital—investors cannot leave 

their money in tax havens. That’s the basic point. The money has 

to go to the rich countries, the big countries, because that’s where 

the investment opportunities are. 

If you leave your money in the tax havens because you are a 

money launderer or a drug lord, it earns a negative interest rate, 

because you have to pay the bank interest in order to keep the 

money there, and not have it disclosed. 

If the money goes into one of the rich countries, the rich countries, the G–20, you know, 85 percent of the world economy are all 

in agreement about this. And I don’t see that making further 

progress on this, even unilaterally, would have any negative impact 

on the United States at all. 

Mr. HELLER. So Professor, can I interpret from your answer 

that you support blacklisting? 

Mr. AVI-YONAH. I support the Levin-Doggett bill, and I think 

it should be enacted tomorrow and signed by the President. 

Mr. HELLER. Mr. Shay. 

Mr. SHAY. I would note, as a matter of history, that tax information exchange agreements first were authorized in the Caribbean 

Basin Initiative in the early eighties. A carrot approach was used. 

Countries that entered in to a tax information exchange agreement were given a more favorable treatment of deductions by 

Americans who attended conventions in those countries. 

There was second carrot, which has since gone away, which was 

an advantage under the foreign sales corporation legislation. And 

that did encourage a number of Caribbean countries to enter into 

tax information exchange agreements. 

More recently, the efforts of the OECD, in the harmful tax competition exercise in the late ’nineties also encouraged countries both 

to become parties to tax information exchange agreements, and to 

provide information under them. 

So I think both those have brought about a lot of progress. 

I also would just note that real progress in this area will call for 

international cooperation, and not just at the level of exchange 


smartinez on DSKB9S0YB1PROD with HEARING
94 

agreements, at the level of collecting information, including by the 

United States. 

I endorse the proposals, I think of both my colleagues here,to expand the collection of information on non-resident bank accounts, 

so that it can be exchanged with treaty partners, so that we can 

get them to give us information. 

But all of that will only work effectively if we create a system 

that will allow us to do it electronically, and to bring it into the 

IRS electronic matching systems. 

This is difficult stuff. It’s going to take real work. It’s not going 

to happen in the short term, but directionally, I can see a lot of— 

particularly in Peter’s testimony, things that he is highlighting 

that are very favorable, and I encourage this Committee to support 

it. 

Mr. HELLER. Thank you, Mr. Chairman. 

Chairman NEAL. Thank the gentleman. 

Mr. Doggett is recognized to inquire. 

Mr. DOGGETT. Mr. Chairman, thank you. And thank you. I 

think the testimony that each of you offered is important as we 

craft this legislation. Since the most ringing endorsement for my 

proposal was Senator Levin joining Secretary Geithner and Senator 

Obama endorsing that proposal was from you, Professor Avi-Yonah, 

I want to direct most of my questions to you. 

One thing we haven’t really explored fully yet in the hearing that 

I think is important, the immense dimensions of the problem we’re 

dealing with. And you address this in your written testimony, but 

do I understand that the best estimates are that about one and a 

half trillion dollars is kept offshore by U.S. residents? 

Mr. AVI-YONAH. That is an estimate that was done by the Boston consulting group and Merrill Lynch some six years ago, so it’s 

not up to date. 

Mr. DOGGETT. So it’s a very conservative estimate. Six years 

ago, Merrill Lynch estimates one and a half trillion dollars offshore 

by U.S. residents. Is that individuals only, or corporations as well? 

Mr. AVI-YONAH. This is high net worth individuals. 

Mr. DOGGETT. All right. 

Mr. AVI-YONAH. So it’s not corporations. 

Mr. DOGGETT. And your conservative analysis using that data 

and other studies, is that what we’re talking about for individuals 

only, not corporations, is $50 billion of tax evasion every year? 

Mr. AVI-YONAH. Yes. I mean, this is conservative because what 

I did was simply take the one and a half trillion, assume 10 percent, you know, income on that, which seems reasonable, so that’s 

150 billion, and then apply the U.S. tax rate, so that’s about 50 billion. 

But that assumes that the one and a half trillion are all aftertax 

income—— 

Mr. DOGGETT. Right. 

Mr. AVI-YONAH [continuing]. That has been subject to tax already. If it was some earned overseas, transferred, you know, to 

Switzerland or the Caymans, and never disclosed, then part of the 

one and a half trillion principal is also—— 

Mr. DOGGETT. Exactly. And I think that is why Senator Levin, 

Senator Carl Levin, has estimated that when you add in the corVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
95 

porations to these individuals, and recognize that data is—that 

we’re using is 6 years old, that the amount may be a 100 to 150 

billion dollars every year that is lost in tax evasion. 

Mr. AVI-YONAH. The truth is that nobody knows. I mean, 

there’s a whole range of estimates. 

Mr. DOGGETT. It’s hard to get a precise number. 

Mr. AVI-YONAH. Right. 

Mr. DOGGETT. But what we do know is that it’s big. It’s very 

big. And my reaction, and I think the reaction of that firefighter 

or that police officer, or that small business on main street in 

Bastrop, Texas, is that if there’s that much tax evasion, we don’t 

just need a sledgehammer, we need something bigger than that, because it’s very unfair. It does strike to fundamental fairness, as the 

Commissioner of the Internal Revenue Service said. 

Now let me ask you as well, while your testimony has focused 

on individuals, we know that with the click of a mouse, an individual can become a corporation. And that’s one of the ways, as 

several of you mentioned, through hiding behind corporations, that 

individuals can dodge their tax liability. 

It is also particularly galling, I think, that some of the biggest 

recipients of taxpayer money in the bailout that has occurred over 

the last few months—Morgan Stanley, 158 of these subsidiaries, 

Citigroup, 90 of these offshore tax-dodging entities, Bank of America, 59. Now that doesn’t compete with the over 300 that Enron 

had before it failed, but it’s a very significant amount of use of 

these international tax subsidiaries to dodge taxes. 

Let me ask you if you agree that there is a serious problem, not 

just for individuals, but for corporations using foreign subsidiaries 

to dodge their tax responsibilities, which my business on main 

street in Bastrop or Lockhart or Smithville cannot do? 

Mr. AVI-YONAH. Well, there is a difference that I do want to 

draw between things that are clearly illegal tax evasion, and things 

that are tax avoidance using legal loopholes. 

I think what most corporations, certainly the ones that you’ve 

mentioned do, is not illegally hide their taxes. I mean, as was mentioned before, there are rules on the—in the codes that say that 

any foreign corporation that’s owned by an American over certain 

thresholds subjects that American to taxes in one way or another. 

Mr. DOGGETT. Well, I couldn’t agree with you more. It’s not 

only what’s illegal, but what’s legal that should not be legal because it’s inequitable to businesses here in the United States. 

While most of the questions that you have received this morning 

have been about the blacklist portion as it is termed of the Stop 

Tax Haven bill, I want to ask you about another very important 

part of it that relates to corporations. 

One of the provisions of the bill is to treat a corporation that is 

incorporated abroad as a domestic United States corporation, if 

substantially all the executive officers and senior management are 

located primarily here in the United States. 

I think this is an important provision to restore tax fairness, by 

recognizing that if you have a shell corporation abroad, and it’s 

really a United States company, that just having a paper certificate 

and a sunny tax haven, is not enough to make you foreign. 


smartinez on DSKB9S0YB1PROD with HEARING
96 

Do you agree that this type of provision is needed to restore tax 

equity, by not letting corporations play these type of illegitimate 

games to avoid taxes? 

Mr. AVI-YONAH. Yes, I personally think that this is a very good 

improvement on existing law. I first made this suggestion back in 

2001 in response to the so-called inversion transaction, when American corporations set up shell parent corporations in Bermuda, 

without changing anything in terms of the actual place of managing control of the corporation. And this was done in joint—endorsed by the Joint Committee on taxation as one of their options 

of reforming the law. 

Most countries in the world have some kind of management control standard. And I think under the limitations that are in the 

bill, this is a very sensible provision that will add greatly to the 

enforcement of our tax laws. 

Mr. DOGGETT. Thank you, Mr. Chairman. 

Chairman NEAL. I thank the gentleman. I want to also thank 

our witnesses today for their commentary, it was very thoughtful. 

There may be some written questions, and we would hope that you 

would be able to answer promptly if requested. And if there are no 

other comments? Hearing none, then the hearing stands adjourned. 

Thank you. 

[Whereupon, at 11:44 a.m., the Subcommittee was adjourned.] 

[Submissions for the Record follow:] 

Statement of Brian G. Dooley & Associates 

As a certified public accountant assisting the small business owner and legal immigrants located in Orange County, California, I am concern that the large tax penalties for late filing foreign trust information returns and late filing of the FBAR 

causes non-compliance. 

In California, literally million of legal residents and citizens have family in foreign 

countries. Often their inheritance is held in a foreign trust, which has a foreign 

bank account. 

Most of these legal immigrants are unaware of the reporting requirement. They 

often prepare their own returns using computer software or have a general 

practioners without knowledge of the reporting requirements. 

Many tax compliant taxpayers discover that they failed to file a FBAR, a Form 

3520 or a Form 3520–A. Voluntary disclosure does abate disproportionately harsh 

tax penalties. A thirty-five percent to fifty percent penalty of principle far exceeds 

the tax liability. 

Abatement of penalties requires both ‘‘reasonable basis’’ and lack of ‘‘willfulness.’’ 

The courts have held that lack of knowledge of a tax law is not a ‘‘reasonable 

basis.’’ 

Thus, the other wise compliant taxpayer remains non-tax compliant in future 

years fearing discovery of a past year tort. 

I am writing to respectfully request that the IRC be amended to allow abatement 

of the penalties if the taxpayer can show lack of willfulness with no requirement 

for reasonable basis. 

Economic Substance Statue 

The Stop Tax Haven Abuse Bill prevents the preparation of complete and accurate 

tax returns by not allowing taxpayers and their tax preparers to apply the statue. 

Further, the Bill may avoid such activities as an IRA, which are only formed and 

funded for tax reasons. Most tax election has no purpose other than the tax benefit. 

The change is important to allow taxpayers that discover that they are in a tax 

shelter to not report an abusive transaction; and instead to report the transaction 

under the economic substance doctrine. 


smartinez on DSKB9S0YB1PROD with HEARING
97 

1This list is posted at: http://www.oecd.org/document/57/0,3343,en_2649_34487_42496569_1_1 

_1_1,00.html 

2The Isle of Man has, for example, signed agreements giving effect to the European Commission’s Taxation of Savings Interest Directive with all 27 Member States. Likewise, it has so far 

negotiated and signed 14 TIEAs with partner countries inside and outside the EU. 

Imposing a penalty after forcing a taxpayer to improperly report a transaction appears to be an abuse by the government. 

Respectfully submitted, 

Brian Dooley 

Brian G. Dooley, CPA, MBT 

f 

Statement of Isle of Man Government 

Chairman Neal, Ranking Member Tiberi and Members of the Subcommittee, 

thank you for the opportunity to share with you information about the Isle of Man. 

The Isle of Man is pleased to provide facts about the regulation of its financial services industry and its practices regarding transparency and international co-operation in tax matters to guide the Subcommittee in its review of offshore U.S. tax 

evasion. 

I. Summary of Statement 

The Isle of Man is a well-regulated, co-operative and transparent jurisdiction. It 

is not a ‘‘tax haven’’ or an ‘‘offshore secrecy jurisdiction’’ and does not condone, encourage or facilitate tax evasion by U.S. citizens or any other foreign or domestic 

taxpayers. The Isle of Man has been evaluated by international organizations including the International Monetary Fund (‘‘IMF’’), Financial Action Task Force 

(‘‘FATF’’) and the Organisation for Economic Co-operation and Development 

(‘‘OECD’’) and commended for being compliant on all matters of financial regulation 

and international co-operation to prevent evasion of taxes. In fact, on April 2, 2009, 

the G20 noted the OECD list of countries assessed by the OECD Global Forum 

against the international standard for the exchange of tax information. This listed 

the Isle of Man alongside the United States as having substantially implemented 

the internationally agreed tax standard, which requires the exchange of information 

on request in all tax matters for the administration and enforcement of domestic 

tax law without regard to a domestic tax interest requirement or bank secrecy for 

tax purposes.1 The Isle of Man respectfully requests that if the Subcommittee does 

proceed with legislation that includes any blacklist of tax havens or offshore secrecy 

jurisdictions, such a list should not include those jurisdictions, such as the Isle of 

Man, that the OECD has determined have substantially implemented the internationally agreed tax standard. 

II. About the Isle of Man 

Located in the middle of the Irish Sea at the centre of the British Isles, the Isle 

of Man has a total land area of 227 square miles. The resident population is just 

over 80,000 (2006 interim census). 

Constitutionally, the Isle of Man is a self-governing British Crown Dependency 

with its own ancient parliament (Tynwald), government and laws. The United Kingdom, on behalf of the Crown, is ultimately responsible for the Isle of Man’s international relations, although in recent years, reflecting significant differences in UK 

and Manx law and policies, the Isle of Man has—in agreement with the United 

Kingdom and its international partners 2—represented its own interests internationally, notably by concluding a significant number of bilateral tax agreements. The 

Isle of Man is financially autonomous and receives no financial assistance either 

from the United Kingdom or the European Union (‘‘EU’’). The Isle of Man is not 

represented in the United Kingdom or European Parliaments. 

The Isle of Man’s relationship with the EU is set out in Protocol 3 to the United 

Kingdom’s Act of Accession (1972). In essence, in accordance with Article 299(6)(c) 

of the treaty establishing the European Community, the Isle of Man is outside the 

EU except for EU law and policy on the customs union and the free movement of 

goods. In all other matters, including tax and financial services, the Isle of Man is 

in the position of a ‘‘third country’’ or non-Member State with respect to the EU. 

III. The Isle of Man Is Well-Regulated, Co-operative and Transparent 

The Isle of Man takes seriously its role as a world-class location for financial services and investment. 

• A. Isle of Man Regulation of Financial Services 


smartinez on DSKB9S0YB1PROD with HEARING
98 

3http://www.gov.im/lib/docs/cso/iominternationalidentityframework.pdf 

Business is attracted to the Isle of Man by local expertise in professional services, 

a supportive government, a world-class telecommunications infrastructure, sound financial regulation and a competitive tax system. New growth areas include e-commerce, the film industry, international shipping, aviation, and space and satellite 

businesses, whilst traditional sectors, like tourism (including the famous Tourist 

Trophy motorcycle races) remain important. 

The Isle of Man has enacted legislation covering all financial services sectors, as 

well as related areas such as audit, accounting, company law and anti-money laundering. The Isle of Man’s legislation in these fields is modern and based on the highest international standards. Although the Isle of Man is outside the EU for financial 

services and related fields, its legislation in all these areas is based broadly on corresponding EU secondary legislation. 

The Isle of Man’s Financial Supervision Commission (‘‘FSC’’) was established in 

1983 as an independent statutory body to license and regulate financial activities 

in the Isle of Man. The FSC regulates and supervises all deposit-taking, investment 

business, services to collective investments, trust services, company services, fiduciary services and money transmission services in or from the Isle of Man. These 

powers include the maintenance and development of the regulatory regime for regulated activities, the oversight of directors and persons responsible for the management, administration or affairs of commercial entities, and the operation of the 

Companies Registry. 

A number of international organisations have assessed the Isle of Man’s regulatory practices against global standards and have determined that the Isle of Man 

is well regulated, co-operates fully in the pursuit of international financial crime 

and that its money laundering legislation complies with the highest global standards, including those applied by the EU and its Member States. 

• B. Isle of Man Co-operation in Tax Matters and Financial Crime 

The Isle of Man’s co-operative approach is based on openness and ‘‘constructive 

engagement’’ with its partners around the world. As a non-sovereign Crown Dependency of the United Kingdom, an important G20, OECD and EU Member State, the 

Isle of Man cannot represent its own interests on a basis of sovereign equality, either with G20, OECD or EU Member States. Formally, therefore, the Isle of Man 

must rely on the United Kingdom to represent and defend its interests and reputation in these organisations of sovereign states. 

Increasingly, however, by agreement with the United Kingdom under a ‘‘framework for developing the international identity of the Isle of Man’’ signed in May 

2007, the Isle of Man is ‘‘entrusted’’ to represent and defend its own laws and policies internationally, in full consultation and co-operation with the United Kingdom.3

It is in this context that the Isle of Man has adopted a policy of constructive engagement with all its major international partners, including the EU and the United 

States. 

Within the context of the OECD’s work on transparency and effective exchange 

of information, the Isle of Man is at the forefront of the development of a comprehensive network of Tax Information Exchange Agreements (‘‘TIEAs’’), based on 

mutual economic benefit. 

To date, the Isle of Man has 14 TIEAs, based on the OECD’s Model Agreement 

on exchange of information on tax matters, 12 of which are with OECD members, 

including the United States. These agreements are ratified by Tynwald, the Isle of 

Man’s parliament. The Isle of Man is in TIEA negotiations with a number of other 

countries, including members of the OECD and the G20, in respect of further 

TIEAs. 

The Isle of Man believes its consistent and long-standing actions in respect of tax 

agreements and its commitment to adhering to internationally accepted standards 

of financial regulation provide tangible evidence of its co-operation with the international community. This is supported by the statement of Jeffrey Owens, Director 

of the OECD’s Centre for Tax Policy and Administration, who welcomed the Isle of 

Man’s TIEA with Germany (March 2009) as a further step in efforts to bring greater 

transparency and fairness to cross-border financial transactions. ‘‘The time has now 

come for all jurisdictions that have made commitments to the international standards of transparency and exchange of information to follow the Isle of Man’s lead 

in implementing them,’’ Owens said. ‘‘I am particularly pleased with the excellent 

progress the Isle of Man has made in extending its network of these agreements.’’ 

• C. Isle of Man Transparency 


smartinez on DSKB9S0YB1PROD with HEARING
99 

The Isle of Man has no bank secrecy laws, customs or practices that impede the 

ability of the United States or other TIEA partners to request and receive tax information. The Isle of Man has access to the beneficial ownership information that 

makes tax information exchange an effective tool for other countries to enforce their 

domestic tax laws. The Isle of Man has successfully responded to all requests for 

information by the United States under the TIEA between the Isle of Man and the 

United States. 

As noted earlier, all company and trust service providers are licensed and regulated pro-actively to ensure that high levels of due diligence are applied in all areas 

of the business. The Isle of Man’s customer due diligence (‘‘CDD’’) regulations as set 

forth in its Anti-Money Laundering and Countering the Financing of Terrorism 

Handbook require both identification and relationship information. Licenceholders 

must collect relevant CDD information to identify: (i) the customer; (ii) the beneficial ownership and control of the customer; (iii) the nature of the customer’s business and the customer’s economic circumstances; (iv) the anticipated relationship 

with the licenceholder; (v) and the source of funds. Licenceholders must, in all cases, 

know the identity of underlying principals and/or beneficial owners at the outset of 

a business relationship. This is irrespective of the geographical origin of the client, 

or of any introducer or fiduciary, or of the complexity of a legal structure. 

When requested, regulated intermediaries must provide relevant information to 

the regulators and law enforcement authorities who have appropriate powers to assist in domestic and cross-border investigations. Access to this beneficial ownership 

information ensures that the Isle of Man can provide the United States with accurate and usable information under the TIEA. 

The regulation of corporate and trust service providers is also a clear example of 

the Isle of Man’s proactive effort to identify a potential threat to its reputation and 

enact pioneering legislation to prevent financial fraud. In so doing, and in regulating 

business that still remains unsupervised in most major jurisdictions, the Isle of Man 

has acted to ensure that its reputation as a well-regulated and transparent jurisdiction is protected. 

IV. International Assessments and Recognition of the Isle of Man 

A number of international organisations have assessed the Isle of Man’s regulatory practices against global standards and have determined that the Isle of Man 

is well regulated, co-operates fully in combating international tax evasion and financial crime, and that its anti-money laundering legislation complies with the highest 

global standards, including those applied by the EU and its Member States. 

On April 2, 2009, the OECD issued a detailed progress report on jurisdictions’ efforts to implement the OECD’s internationally agreed standard requiring the exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement 

or bank secrecy for tax purposes. In this report, the Isle of Man was listed alongside 

the United States as having ‘‘substantially implemented the internationally agreed 

tax standard.’’ 

Just prior to the publication of this new OECD report, Jeffrey Owens, Director 

of the OECD’s Centre for Tax Policy and Administration, issued a statement on 

March 27, 2009 further commending the Isle of Man’s co-operative efforts. ‘‘At a 

time when many countries have been promising change, Guernsey, Jersey and the 

Isle of Man have been delivering,’’ Owens said. ‘‘I am particularly pleased that the 

Isle of Man now has 12 TIEAs with OECD countries in accordance with the OECD 

standard. This is an important milestone in implementing its commitment to international co-operation.’’ 

In 2003, the IMF conducted a full assessment of the Isle of Man’s compliance with 

all of the international standards referred to above. The Isle of Man was found to 

have a ‘‘high level of compliance.’’ The IMF report commended the Isle of Man for 

its attention given to: ‘‘upgrading the financial regulatory and supervisory system 

to meet international supervisory and regulation standards in banking, insurance, 

securities, and anti-money laundering and combating the financing of terrorism.’’ 

A further review by the IMF was undertaken in September 2008 as part of its 

ongoing programme of assessment. The results are to be published shortly, and the 

Isle of Man is confident that the IMF will again confirm positive findings. 

Under the auspices of the FATF, the Isle of Man has been assessed on two occasions in respect of anti-money laundering measures and has been found to be cooperative and in compliance with all key FATF recommendations. The Isle of Man 

has never been listed as non co-operative by the FATF. All anti-money laundering 

actions on the Isle of Man are co-ordinated through an industry-wide Joint AntiMoney Laundering Advisory Group. 


smartinez on DSKB9S0YB1PROD with HEARING
100 

4Particularly the IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers. http://www.iaisweb.org/_temp/17_Guidance_paper_No_3_6_on_regulation_and_supervision 

_of_captive_insurers.pdf 

The Financial Stability Forum (‘‘FSF’’) has considered the effect that offshore centres generally can have on global financial stability. The Isle of Man was placed in 

the top group of centres reviewed based on responses from FSF members (Group 

1 Category of offshore jurisdictions). 

The Isle of Man Financial Supervision Commission is a member of the International Organisation of Securities Commissions (‘‘IOSCO’’) and is a full signatory 

to the benchmark IOSCO Multilateral Memorandum of Understanding. As such, the 

Isle of Man has been judged fully competent in having the legislative ability to provide full co-operation in dealing with market manipulation and abuse, insider dealing and other securities malpractices. The Isle of Man Financial Supervision Commission has established a strong track record of co-operation in this area. 

The Isle Man Financial Supervision Commission is a member of the Enlarged 

Contact Group, which is a discussion forum for global regulators of collective investments that considers policy developments and market issues and is a member of the 

Offshore Group of Banking Supervisors (of the Basel Committee on Banking Supervision). 

The Isle of Man Insurance and Pensions Authority is a member of the International Association of Insurance Supervisors (‘‘IAIS’’) and the Offshore Group of Insurance Supervisors. Its regulation has been assessed against the IAIS Insurance 

Core Principles, as part of the IMF’s assessment. In addition, the Isle of Man has 

made contributions to the development of IAIS guidance papers.4

The Isle of Man’s regulators have also exchanged individual memoranda of understanding (‘‘MOUs’’) with international regulators in a number of international jurisdictions which underpin its ability to co-operate on supervisory, regulatory and enforcement matters, including in the cross-border supervision of international financial services groups. 

The Financial Supervision Commission, which regulates financial services activities in and from the Isle of Man (with the exception of insurance and pensions) has 

entered into MOUs with equivalent regulators in Bahrain, Bermuda, Cayman Islands, Cyprus, Czech Republic, Dubai, Gibraltar, Guernsey, Iceland, Ireland, Jersey, 

Malta, Mauritius, Qatar, South Africa, United Arab Emirates, United Kingdom and 

the United States. 

The IPA has entered into MOUs with regulators in Bahrain, Dubai, Hong Kong, 

Malta, Qatar, and the United Kingdom. In addition, the IPA will, in due course, also 

become a signatory to the IAIS Multilateral Memorandum of Understanding, which 

is currently in the early stages of implementation. 

In addition, the Isle of Man’s financial services legislation includes extensive powers for its regulators to exchange information with other regulators’ relevant 

organisations. These powers ensure that information can be exchanged whether or 

not specific MOUs are in place. 

The UK Treasury has granted the Isle of Man ‘‘designated territory’’ status, which 

provides the legal basis for the marketing and sale of Isle of Man investment funds 

in the United Kingdom. This status is subject to regular review by the UK Financial 

Services Authority (‘‘FSA’’) on behalf of the UK Treasury. 

The Isle of Man has been placed on a list of jurisdictions approved by the U.S. 

Internal Revenue Service under its Qualified Intermediary (‘‘QI’’) program. Broadly 

speaking, the legislation requires local financial institutions to apply for QI status 

if they wish to invest in U.S. securities and claim exemption from U.S. withholding 

tax for their clients. 

The Isle of Man operates compensation programs for depositors, investors and policyholders, as well as a financial services ombudsman program within the Isle of 

Man’s Office of Fair Trading. 

V. Legislative Solutions 

The United States is rightly concerned that it collects the taxes owed by its citizens. The Isle of Man shares this concern and does not seek to impede legislative 

efforts to improve compliance and enforcement of U.S. tax law. 

As a TIEA partner with the United States, the Isle of Man is, however, concerned 

that some proposals under discussion in Congress would incorrectly ‘‘blacklist’’ the 

Isle of Man as an ‘‘offshore secrecy jurisdiction’’ or a ‘‘tax haven.’’ In particular, the 

‘‘Stop Tax Haven Abuse Act,’’ introduced by Representative Lloyd Doggett and cosponsored by several members of the Ways and Means Committee, was discussed 

at several points during the Subcommittee’s hearing on March 31, 2009. This bill, 

enrolled as H.R. 1265 in the House and S. 506 in the Senate, uses a list of jurisdicVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00104 Fmt 6633 Sfmt 6621 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
101 

1Letter from Deputy Assistant Treasury Secretary (International Tax Affairs) Michael 

Mundaca to General Accountability Office (‘‘GAO’’) Director (Tax Issues) James R. White, commenting on GAO report: Large U.S. Corporations and Federal Contractors with Subsidiaries in 

Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, December 18, 2008. 

tions in a 2005 IRS ‘‘John Doe’’ summons, which includes the Isle of Man, to identify 

jurisdictions that are treated as ‘‘offshore secrecy jurisdictions.’’ Such a provision ignores the previously stated facts about the Isle of Man and runs counter to the recent OECD determination. 

It is important to note that Internal Revenue Service Commissioner Douglas 

Shulman, the Administration’s chief tax enforcer, declined to endorse the blacklisting approach in the Stop Tax Haven Abuse Act when asked at the hearing. He 

instead expressed a preference for identifying the characteristics of jurisdictions 

that could help facilitate evasion. Commissioner Shulman identified these characteristics as bank secrecy, lack of information exchange, non-transparent laws, and 

nonco-operation with the United States. The Isle of Man strongly endorses this approach, which takes into account current facts and would properly target U.S. compliance and enforcement efforts, ensuring that co-operative partners like the Isle of 

Man are not mislabeled as rogue jurisdictions. Placement on a blacklist, however 

temporary, would harm the rightfully earned reputation of the Isle of Man without 

justification. 

Commissioner Shulman also criticized the source of the list in the Stop Tax 

Haven Abuse Act, stating that the ‘‘John Doe’’ summons list was never intended to 

say these countries have problems. Rather, the summons list was intended for a 

very specific credit card initiative where the Internal Revenue Service had evidence 

there were credit cards being issued from those jurisdictions. 

The Isle of Man would again respectfully request that if the Subcommittee does 

proceed with legislation that includes any blacklist of tax havens or offshore secrecy 

jurisdictions, such a list should not include those jurisdictions, such as the Isle of 

Man, that the OECD has determined have substantially implemented the internationally agreed tax standard. 

Respectfully submitted by: 

James Anthony Brown 

Chief Minister 

Isle of Man Government 

Government Office 

Bucks Road 

Douglas 

Isle of Man 

IM1 3PG 

April 14, 2009 

f 

Statement of Lyndon S. Trott 

1.1 Guernsey is a well-regulated financial centre committed to maintaining international financial stability and transparency. Guernsey has consistently demonstrated this commitment through international co-operation and information exchange. 

1.2 As a general principle, Guernsey does not support the use of ‘‘blacklists’’ and 

endorses the views of the U.S. Department of the Treasury that the use of such lists 

‘‘to simplify what is a complex area—can lead to misunderstanding and mistakes.’’ 1

Guernsey has consistently argued that each jurisdiction should be considered on its 

own merits as assessed against internationally recognised standards. Guernsey is 

not a ‘‘tax haven’’ or an ‘‘offshore secrecy jurisdiction.’’ In any event, there is no 

internationally agreed definition of either. 

1.3 By any objective measure, Guernsey is not a ‘‘tax haven’’ or an ‘‘offshore secrecy jurisdiction’’ for the following reasons: 

• Guernsey has never had any form of banking secrecy legislation; 

• Guernsey has entered into 13 Tax Information Exchange Agreements (‘‘TIEAs’’) 

so far, including one with the United States, and is committed to continuing to 

be a leader in this field; 

• Guernsey has well-developed powers to investigate financial crime and tax evasion and regularly assists other jurisdictions in such investigations; 

• Guernsey has had mutual legal assistance legislation in force since 1998 and 

regularly exchanges information under that legislation; 


smartinez on DSKB9S0YB1PROD with HEARING
102 

2This list is posted at: www.oecd.org/document/57/0,3343,en_2649_34487_42496569_1_ 

1_1_1,00.html. 3This section is drawn from Ogier, D, The Government and the Law of Guernsey, 2005. Further information on Guernsey is available at: www.gov.gg/aboutguernsey. 

• Guernsey provides assistance to jurisdictions so that requests for information 

comply with Guernsey law and does not attempt to obstruct investigations; and • Guernsey has a well-developed regulatory regime which complies with all 

recognised international standards. 

1.4 Guernsey is a participant in the Global Tax Forum, an initiative of the 

Organisation for Economic Co-operation and Development (the ‘‘OECD’’). The OECD 

recognises that Guernsey has substantially implemented the OECD standard on information exchange in tax matters by entering into 13 TIEAs. Further agreements 

are under negotiation and Guernsey intends to continue to conclude such agreements in the near future. The OECD published a list of co-operative jurisdictions 

on 2 April 2009, which places Guernsey alongside jurisdictions such as the United 

States, France, Germany, and the United Kingdom in having effective tax information exchange.2 Guernsey is delivering on its international commitments to transparency and co-operation. 

1.5 In the event that the Subcommittee on Select Revenue Measures decides to 

develop anti-tax haven abuse legislation that uses a list of ‘‘tax havens’’ or ‘‘offshore 

secrecy jurisdictions,’’ then Guernsey respectfully suggests that the only appropriate 

list to follow is the list most recently issued by the OECD, the leading global authority on international tax practices, of jurisdictions that have not substantially implemented the OECD standard for effective exchange of tax information. 

1.6 Guernsey’s reputation as a premier provider of international financial services 

has been built on a number of foundations, including: 

• an effective regulatory regime that meets or exceeds all international standards 

on financial regulation, anti-money laundering and combating the financing of 

terrorism; 

• international co-operation on regulation and the investigation of financial crime; 

• regular, external, and independent reviews—in the majority of cases at Guernsey’s express invitation and in all cases with Guernsey’s full co-operation and 

assistance; 

• a highly skilled and educated workforce; and 

• proximity to the European mainland. 

1.7 The authorities in Guernsey have substantial investigatory powers. They work 

closely with their counterparts in other jurisdictions in investigating regulatory, taxation, and criminal matters and assisting in freezing and recovering the proceeds 

of crime. Guernsey has consistently provided assistance to the United States in investigating crime, freezing assets, and recovering the proceeds of crime. 

Lyndon S. Trott 

Chief Minister 

States of Guernsey 

14 April 2009 

BACKGROUND INFORMATION

A. Guernsey’s Status and International Relationships 

1. The Government of Guernsey 

1.1 Guernsey is the principal island of the Bailiwick of Guernsey, a British Crown 

Dependency.3 It has never been a colony or a British dependent or overseas territory. Its status constitutionally is, and always has been, distinctly different from 

that of the British Overseas Territories. Guernsey has its own directly-elected legislative assembly, the States of Deliberation, comprising 47 independent members, 

and its own administrative, fiscal and legal systems. Its government, the States of 

Guernsey, is principally conducted through 10 Government Departments overseen 

by the Policy Council, constituted by the Chief Minister and the 10 Ministers. 

Guernsey’s right to raise its own taxes is a long-established constitutional principle. 

2. Guernsey’s Relationship with the United Kingdom 

2.1 Guernsey is not, and never has been, represented in the UK Parliament, 

which therefore does not legislate on behalf of Guernsey without first obtaining the 

consent of Guernsey’s administration. The extension to Guernsey of an Act of Parliament by Order in Council is occasionally requested. However, the usual practice 

is for the States of Deliberation, which always has been legislatively independent 

from the United Kingdom regarding insular affairs, to enact its own legislation. PriVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00106 Fmt 6633 Sfmt 6621 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
103 

4For example, co-operation agreements with the 27 EU Member States (in relation to Directive 2003/48/EC on taxation of savings income) and agreements for the exchange of information 

relating to tax matters. 

mary legislation (‘‘Laws’’) requires Royal Sanction from Her Majesty in Council (‘‘the 

Privy Council’’). 

2.2 The British Crown acts on behalf of Guernsey through the Privy Council on 

the recommendations of Ministers of the UK Government in their capacity as Privy 

Counsellors. For example, the UK Ministry of Justice acts as the point of contact 

between Guernsey and the British Crown for the purpose of obtaining Royal Sanction for Laws, but is not otherwise involved in Guernsey’s internal affairs. The Judicial Committee of the Privy Council is Guernsey’s final appellate court. 

3. Guernsey’s International Affairs 

3.1 The United Kingdom is responsible for Guernsey’s external relations and 

defence. In recent years, Guernsey has increasingly acted internationally on its own 

behalf, particularly in relation to matters for which it has complete autonomy.4 The 

UK Government has recognised the appropriateness of Guernsey further developing 

its international identity. 

B. Guernsey’s Taxation System 

1.1 Guernsey has a well-developed taxation system. Taxes in Guernsey are set on 

the basis of the need to fund public services and the need to ensure that Guernsey’s 

economy remains strong. Taxation in Guernsey is managed by the Director of Income Tax who is responsible for administering legislation relating to Income Tax 

and Foreign Retention Tax in support of the European Union (‘‘EU’’) Directive on 

the Taxation of Savings Income (2003/48/EC). There is no capital gains or any other 

taxes on capital in Guernsey. Guernsey’s personal income tax is set at 20 percent, 

a rate which has remained unchanged for over 40 years. Guernsey does not have 

a Value Added Tax but does have a range of indirect taxes and duties. As part of 

its commitment to eliminating harmful tax competition, Guernsey has complied 

fully with the EU Code of Conduct on Business Taxation. Guernsey’s tax system is 

relatively uncomplicated and effective, which minimises the compliance costs on 

business. 

C. Guernsey’s Economy and the Financial Services Sector 

1. Development of the Finance Sector 

1.1 Guernsey’s financial services sector began to grow in the 1960s with the establishment of operations in Guernsey by UK merchant banks and the establishment 

of investment funds which they sponsored. By 1987, the banking, insurance and collective investment fund sectors had developed to such an extent that the States of 

Guernsey acted to establish an independent regulatory body staffed by dedicated 

professionals. This was in accordance with internationally accepted best practices at 

the time. The Guernsey Financial Services Commission (the ‘‘Commission’’) was established in 1988. During the 1990s, Guernsey emerged as one of the world’s largest 

captive insurance centres. Today, Guernsey is Europe’s largest captive insurance 

centre, and the fifth largest in the world. The Channel Islands Stock Exchange 

(‘‘CISX’’), which is based in Guernsey and is the only stock exchange in the Channel 

Islands, commenced operations in 1998. The CISX has been recognised by the U.S. 

Securities and Exchange Commission, the Financial Services Authority (‘‘FSA’’) and 

Her Majesty’s Revenue and Customs (‘‘HMRC’’). As the sector continues to develop, 

an increasing number of professional firms exist to service the finance industry, particularly in the accounting, legal and actuarial professions. There are presently more 

than 8,000 people employed in financial services in Guernsey. 

1.2 Financial services account for approximately 35 percent of Guernsey’s Gross 

Domestic Product. Guernsey also has well-developed industries in business services, 

electronic commerce, information technology and light manufacturing. 

1.3 Guernsey’s financial services industry is diverse and includes banking, collective investment funds, insurance and fiduciary services. The workforce in Guernsey 

is highly skilled and provides a full range of services, including administration of 

funds, corporate administration, public listing of companies on European stock exchanges, investment advice, and insurance brokerage services. In many respects, 

Guernsey’s success as a financial service centre exists because many of Guernsey’s 

professionals are recognised as world leaders in their particular fields with a high 

level of skills and expertise. 

1.4 Due to its long-established financial services industry, Guernsey has developed 

considerable expertise in administering collective investment funds, captive insurance, and trust and company structures. In addition, Guernsey operates a ‘‘full-service’’ finance centre. It does not merely provide a domicile for activities undertaken 

elsewhere. 


smartinez on DSKB9S0YB1PROD with HEARING
104 

5See letter at www.oecd.org/dataoecd/61/13/2067884.pdf. 

1.5 Guernsey has been ranked 12th in the latest Global Financial Centres Index 

(‘‘GFCI’’), released in March 2009. Since the previous survey published in September 

2008 the Island has moved up four places. The report is produced by the Z/Yen 

Group for the City of London and ranks financial centres based on external 

benchmarking data and current perceptions of competitiveness and resilience in the 

face of the global financial downturn. 

2. Regulation of Financial Services in Guernsey 

2.1 The Commission was one of the world’s first unitary regulatory bodies, and 

is responsible for the regulation of banks, insurers and insurance intermediaries, investment firms, trust companies, company administrators and professional company 

directors providing directorship services by way of business in Guernsey. It has been 

given wide-ranging powers to supervise and investigate regulated entities under a 

variety of regulatory laws. It also takes appropriate enforcement action when necessary. The Commission considers that the prevention of financial instability is a 

key function of effective regulation. 

2.2 Guernsey is one of the few jurisdictions in the world to regulate trust and 

company service providers in a manner consistent with the prudential regulation of 

banks, investment firms and insurance companies. It has regulated trust and company service providers in this way since 2001. 

2.3 In performing its regulatory and supervisory work according to international 

standards, the Laws and Regulations administered by the Commission comply with 

those established by: 

• The Basel Committee on Banking Supervision; 

• The International Association of Insurance Supervisors (‘‘IAIS’’); 

• The International Organization of Securities Commissions (‘‘IOSCO’’); 

• The Offshore Group of Insurance Supervisors (‘‘OGIS’’); 

• The Offshore Group of Banking Supervisors (‘‘OGBS’’); and 

• The Financial Action Task Force (‘‘FATF’’). 

2.4 The International Monetary Fund (‘‘IMF’’) conducts a regular independent and 

external review of Guernsey’s compliance with those international standards. The 

next IMF review is likely to occur later this year. 

2.5 The Commission is actively involved with international regulatory and supervisory organisations. Guernsey was a founding member of IAIS, OGIS, and OGBS. 

The Commission is also a full member of IOSCO and a member of the enlarged contact group on the Supervision of Collective Investment Funds. 

D. Co-operation on Taxation, Regulation, Financial Intelligence and Anti-Money 

Laundering 

1. Information Exchange 1.1 On 21 February 2002, Guernsey publicly committed 

to complying with the OECD’s principles of effective exchange of tax information.5

Guernsey signed its first TIEA, with the United States, on 19 September 2002. It 

has been fully operative since 2006. Guernsey has subsequently concluded TIEAs 

with the Netherlands (25 April 2008), the seven Nordic Council countries (Denmark, 

the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden) (28 October 

2008), the United Kingdom (20 January 2009), France (24 March 2009), Germany 

(26 March 2009) and Ireland (26 March 2009). Guernsey is actively pursuing TIEA 

negotiations with other countries with a view to finalising agreements as soon as 

practicable. 

1.2 Guernsey’s commitment to transparency and international co-operation has 

been recognised by the OECD and the European Commission. The OECD published 

a progress report listing co-operative jurisdictions on 2 April 2009, which places 

Guernsey alongside jurisdictions such as the United States, France, Germany, and 

the United Kingdom in having effective tax information exchange. At a press conference held on 7 April 2009 the OECD recognised: 

‘‘Guernsey . . . [has] made a real commitment, not just before the G20, but years 

ago and they have implemented those commitments.’’ 

1.3 Guernsey currently has two double tax arrangements, one with the United 

Kingdom, signed in 1952, and the other with Jersey, signed in 1955. The agreements provide for the exchange of information in order to prevent fiscal evasion or 

avoidance. For many years, Guernsey has been able to provide information from its 

tax files to the UK tax authorities, and has done so on a regular basis, both spontaneously and as requested by the United Kingdom. Exchange of information under 

the double tax arrangement with the United Kingdom has led to the opening of investigations or advancement of existing investigations by HMRC. 


smartinez on DSKB9S0YB1PROD with HEARING
105 

6See Income Tax (Guernsey) Law, 1975, Part VIA (inserted by the Income Tax (Guernsey) 

(Amendment) Law, 2005). 

2. Mutual Legal Assistance 

2.1 The European Convention on Mutual Legal Assistance (1959) and the Council 

of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1990) have both been extended to Guernsey. 

2.2 Mutual legal assistance is provided by the Law Officers of the British Crown 

under a range of Guernsey Laws. Between 1999 and 2007, over 90 requests for information specifically related to taxation matters were received, of which 46 were 

from the United Kingdom, 28 from other EU Member States, 7 from the United 

States and 9 from other foreign jurisdictions. In 2008, there were 34 requests of all 

types. Guernsey does not approach requests to see if they can be rejected but rather 

offers assistance to other jurisdictions to enable them to perfect their requests so 

they comply with the form required by the relevant Guernsey Laws. 

3. Banking Secrecy and Transparency 

3.1 Guernsey has never had banking secrecy laws and does not perpetuate a regime of banking secrecy. As in the United Kingdom, general principles of Guernsey 

law preserve the confidentiality of information properly regarded as private. Against 

such due respect for privacy, however, must be balanced compliance with domestic 

law provisions requiring persons to divulge information to relevant authorities (e.g., 

the Director of Income Tax has extensive information-gathering powers and the 

Commission has wide-ranging powers of supervision and investigation).6 Relevant 

authorities in Guernsey then share appropriate information with partners internationally. 

3.2 Guernsey’s company law has introduced a new requirement that all private 

companies in Guernsey appoint a local resident agent who is under an ongoing duty 

to identify the beneficial owner of that company. That information must be made 

available to law enforcement and regulatory bodies upon request. Guernsey believes 

that it is the first jurisdiction in the world to introduce such a regime. This further 

strengthens the pre-existing Anti-Money Laundering and Combating the Financing 

of Terrorism (‘‘AML/CFT’’) regime which requires corporate service providers to 

identify the beneficial owner of the companies they administer as part of the antimoney laundering regime. 

3.3 Guernsey has a long-standing commitment to transparency and international 

co-operation. This was recognised by U.S. Treasury Secretary Paul O’Neill at the 

signing of the TIEA between Guernsey and the United States in 2002. Treasury Secretary O’Neill said: 

The United States and Guernsey already have a close and cooperative relationship on law enforcement matters, including criminal tax matters. We are well aware 

of Guernsey’s commitment to cooperation in targeting criminal abuse of the world’s 

financial systems. 

This new agreement will formalize and streamline our current cooperation in 

criminal tax matters and will allow exchange of information on specific request in 

civil tax matters as well. This agreement is an important development, and further 

demonstrates Guernsey’s long standing commitment to cooperating with the United 

States on law enforcement matters and to upholding international standards in this 

area. 

Today’s agreement with an important financial centre of Europe demonstrates our 

commitment to securing the cooperation of all our neighbours, not just those near 

our shores but those more distant too. I hope that Guernsey’s cooperation with the 

United States in negotiating this tax information exchange agreement will serve as 

an example to other financial centres in its region and around the world. 

4. Regulatory Transparency and Information Exchange 

4.1 The Commission has the legal authority to disclose information to other supervisory authorities. It can also disclose information to other authorities for the purposes of preventing, detecting, investigating and prosecuting financial crime. In addition, the Commission may obtain information from licensees on behalf of foreign 

supervisory bodies. The Commission shares information with supervisory authorities 

and other bodies spontaneously, as well as on request. Although it has 15 Memoranda of Understanding (‘‘MoUs’’) with international partners (including the U.S. 

Commodity Futures Trading Commission, U.S. Federal Deposit Insurance Corporation and the FSA), an MoU is not required to allow information exchange. In light 

of the links between UK financial services businesses and Guernsey, it is common 

for the Commission to co-operate and exchange information with the FSA. 


smartinez on DSKB9S0YB1PROD with HEARING
106 

7See the FIS website available at: www.guernseyfis.org. Also available at that website are the 

FIS annual reports which provide data on the FIS’ activities in each year. 

4.2 Regarding transparency of transactions, the AML/CFT legislation and rules 

made by the Commission require financial services businesses to undertake customer due diligence on their potential customers and to look through legal persons, 

such as companies, legal arrangements and trusts to undertake customer due diligence on beneficial owners, settlors, beneficiaries and other underlying principals, 

and to maintain both customer due diligence and transaction records. In addition, 

rules made under the Protection of Investors Law require investor transaction 

records to be maintained (for example, contract notes). The Attorney General (HM 

Procureur) and the Commission have powers under the legislation they administer 

to obtain that information on behalf of foreign authorities and to disclose it to those 

authorities. 

5. Guernsey’s Financial Intelligence Service 

5.1 The Financial Intelligence Service (‘‘FIS’’) is responsible for the collation and 

dissemination of intelligence relating to financial crime in Guernsey.7 Formed in 

2001, the FIS is operationally independent, although it is staffed and funded by the 

law enforcement agencies of the Guernsey Police and the Customs and Excise, Immigration and Nationality Service (‘‘Customs’’). The strategic aims of the FIS are: 

• The provision of quality intelligence with regard to all financial crime, with a 

special emphasis on combating money laundering and countering the financing 

of terrorism; 

• The provision of full international co-operation, within the law, to competent 

and relevant overseas authorities; and 

• The provision of services to enhance the co-ordination and the development of 

criminal intelligence to combat financial crime. 

5.2 The staff of law enforcement (the FIS, the Fraud and International Team, and 

the Commercial Fraud and International Affairs Team) are highly skilled specialists 

and experienced in the investigation of financial crime. The FIS also is the point 

of contact for those seeking assistance in relation to financial crime and receives requests for assistance from both local law enforcement and overseas agencies. Since 

1997, Guernsey’s law enforcement team has been a member of the Egmont Group 

of Financial Intelligence Units. Where the FIS receives intelligence enquiries of a 

criminal nature that are proportionate and justified, the FIS does not require an 

MoU in order to exchange information. However, where an authority in another jurisdiction does require an MoU to allow information exchange, the FIS will enter 

into such an agreement if there is an operational need. At present, the FIS is party 

to 13 MoUs with international partners, including the UK Serious Organised Crime 

Agency (‘‘SOCA’’). 

5.3 The FIS is the designated authority to receive suspicious transaction reports 

(‘‘STRs’’) in Guernsey. The FIS investigates all STRs with most being disseminated 

to relevant local and overseas agencies. In 2008, there were 519 disclosures and 465 

requests for assistance received, of which 63 percent came from outside Guernsey. 

STRs largely relate to suspicions of tax evasion, large cash transactions, and unexplained lifestyles. STRs relating to suspected terrorism are relatively rare and comprise only a small portion of reports received. The high number of reports demonstrates the high level of awareness of AML/CFT obligations in the finance industry in Guernsey. Over 75 percent of STRs do not relate to local Guernsey residents. 

Where there is evidence of tax evasion, it is Guernsey policy to disseminate all STRs 

to the appropriate jurisdiction as it would any other STR relating to any other 

criminal activity. Recent legislation allows intelligence to be disseminated to the 

SOCA to assist civil investigations in the United Kingdom (and elsewhere). The FIS 

also regularly provides STRs to EU Member States and OECD countries. 

5.4 To counter the significant threat posed by sophisticated international money 

laundering, Guernsey has introduced new legislation to give law enforcement even 

greater powers to freeze and recover the proceeds of crime through both criminal 

and civil action. The laws also make it easier for law enforcement to prosecute 

money laundering offences. Guernsey regularly assists other jurisdictions that request assistance in obtaining evidence, tracing and freezing assets, and recovering 

assets related to criminal proceedings. Guernsey has had considerable success in 

freezing and recovering assets on behalf of many other jurisdictions, including the 


smartinez on DSKB9S0YB1PROD with HEARING
107 

8The number of requests from the United Kingdom amount to 49 percent of the total number 

requests for assistance. 9The number of requests from other EU Member States amount to 30 percent of the total 

number of requests for assistance. 

United Kingdom,8 other EU Member States 9 and the United States. In many cases, 

substantial sums were involved and repatriated to the requesting nation. A significant portion of matters in which Guernsey provides assistance relate to taxation. 

6. AML/CFT Framework 

6.1 Guernsey’s AML/CFT regime complies with the FATF standards. The Guernsey authorities are committed to ensuring that money launderers, terrorists, those 

financing terrorism and other criminals, including those seeking to evade tax, cannot launder those criminal proceeds through Guernsey, or otherwise abuse Guernsey’s finance sector. The AML/CFT authorities in Guernsey endorse the FATF’s 40 

Recommendations on Money Laundering and the FATF’s Nine Special Recommendations on Terrorist Financing. Guernsey has introduced new legislation, 

amended existing legislation, and the Commission has introduced rules and guidance in order to continually keep compliant with the FATF’s developing standards. 

6.2 All businesses and individuals are required by the AML/CFT legislation to report possible money laundering when they suspect or have reasonable grounds to 

suspect that funds are the proceeds of criminal activity. This includes tax evasion. 

The same obligation to report suspicion applies to assets where there are reasonable 

grounds to suspect or they are suspected to be linked or related to, or to be used 

for terrorism, terrorist acts or by terrorist organisations or those who finance terrorism. Businesses and individuals reporting suspicion are protected by law from 

any breach of confidentiality. 

6.3 Extensive AML/CFT countermeasures apply to all financial service businesses 

operating in Guernsey, plus trust and company service providers, all of which are 

subject to regular on-site inspections by the Commission. The international standards set by the FATF did not apply to trust and company service providers until 

June 2003. However, the revised AML/CFT framework that entered into force in 

Guernsey on 1 January 2000 subjected trust and company service providers to AML/ 

CFT regulation well before the FATF requirements. As a result, since 2000 trust 

and company service providers have been required to identify the beneficial owners 

of companies, the identity of settlors and beneficiaries of trusts and the identity of 

any other underlying principals. 

7. Stolen Asset Recovery Initiative 

7.1 In March 2008, the World Bank and the United Nations Office on Drugs and 

Crime invited Guernsey to participate in the Stolen Asset Recovery Initiative (‘‘StAR 

Initiative’’), a project endorsed at the G20 meeting in Washington in November 

2008. The StAR Initiative is an integral part of the World Bank’s anti-corruption 

strategy and will enhance co-operation, build relationships and help developing 

counties recover stolen assets. Guernsey has a continuing involvement in the project 

and has been asked, and agreed, to participate in two further projects under this 

initiative. 

f 

Statement of Michael J. McIntyre and Robert S. McIntyre 

We thank the subcommittee for the opportunity to present our views on how the 

United States can reduce international tax evasion by wealthy Americans. One of 

us, Michael J. McIntyre, is a professor of law at Wayne State University in Detroit. 

He has written extensively on international tax matters. The other of us, Robert S. 

McIntyre, is the Director of Citizens for Tax Justice. 

The recent revelations of aggressive facilitation of tax evasion by the Swiss banking titan, UBS, has given a public face to the longstanding suspicion that a major 

segment of the international banking community is fundamentally corrupt. Of 

course, no knows for sure how many banks have engaged in the types of practices 

for which UBS has been called to account. The widespread tax fraud by Liechtenstein banks, widely reported in the press, makes clear, nevertheless, that UBS 

is not just a special case. We believe that the United States and its major trading 

partners have a major systemic problem of bank fraud that requires major systemic 

solutions. 

We will discuss here three important ways that wealthy Americans evade taxes 

on their investment income. The first is by transferring assets to offshore tax havens that maintain secrecy to avoid IRS detection. The second is by fraudulently 


smartinez on DSKB9S0YB1PROD with HEARING
108 

taking advantage of the exemption provided under Internal Revenue Code Section 

871(h)(1) for portfolio interest paid to foreign persons. The third is by posing as foreign persons and taking advantage of U.S. income tax treaties, typically treaties 

with countries that maintain bank secrecy rules. After our discussion of each problem area, we offer solutions that the Congress could pursue to reduce tax evasion 

in that area. 

1. Transfer of Assets to Offshore Tax Havens 

A. Statement of the Problem 

Abusive tax avoidance typically involves complex transactions. In contrast, taxevasion transactions are unambiguously illegal. Under U.S. tax laws, American citizens and residents are required to report all of their income from whatever source 

derived, including income earned through deposits in banks located in offshore tax 

havens. There is no ambiguity or confusion about the applicable law. Yet it is widely 

suspected that hundreds of thousands of wealthy Americans are moving assets offshore and are failing to report the income earned on those assets. They are not relying on some obscure or ambiguous provision of the law to justify their conduct. They 

simply are hoping not to get caught. 

The Internal Revenue Service has significant powers to ferret out tax evasion that 

is accomplished by holding assets within the United States. It is understaffed, and 

its ability to cope even with domestic tax evasion has been compromised over the 

past decade. Still, the tools for combating domestic evasion are in place and work 

reasonably well when they are applied. Those tools include withholding at source, 

information reporting by third parties, and easy assess to records of banks and 

other financial institutions. 

None of these tools is available to catch tax cheats who move their assets to offshore tax havens. These tax havens have strict bank secrecy laws that shelter their 

financial institutions from any effective reporting requirements. There is no obligation of these banks or other investment agents to withhold taxes due to the United 

States or to provide the United States with periodical information reports on income 

paid to American taxpayers. In some cases, the Internal Revenue Service (IRS), 

through tips or otherwise, may discover that certain American taxpayers appear to 

be engaging in tax fraud. In some such cases, the IRS may be able to get some limited assistance from the government of an offshore tax haven. In general, nevertheless, the Internal Revenue Service is being asked to locate the proverbial needle in 

the haystack. 

In 1998, the OECD, with support from the United States, sought to pressure offshore tax havens into offering cooperation to OECD member states seeking to combat international tax evasion and abusive avoidance. This initiative had some success. For example, as a result of the initiative, the Cayman Islands negotiated a Tax 

Information Exchange Agreement (TIEA) in 2001 with the United States, which 

went into force in 2006. The OECD initiative slowed considerably after 2001, due 

in part to lack of support from the United States. It has recently been revived, and 

the revised initiative has already borne fruit. Several tax havens that are infamous 

for their collusion with tax cheats have signed TIEAs or have promised to do so. 

Even Switzerland had signaled a willingness to depart from its strict bank secrecy 

rules in special cases, although it apparently expects the process of agreeing to the 

terms of any TIEAs to be drawn out over a lengthy period. 

The U.S. experience with TIEAs is highly secret. No reports on the use of those 

agreements are provided to the public. Our general impression, nevertheless, is that 

the TIEAs have been ineffective in curtailing tax evasion. Some commentators have 

suggested that they may have a negative value in some cases by giving the appearance of propriety to a government that is fully engaged in the business of attracting 

and protecting tax cheats. That claim was made, for example, with respect to the 

executive agreement between the United States and Liechtenstein. The Liechtenstein banks have been in the news of late, due to the discovery that they were 

facilitating tax evasion by German citizens and, it was soon learned, by citizens of 

many other countries, including the United States. 

TIEAs are not useless. They are a useful first step in encouraging offshore tax 

havens to cooperate with organized efforts to curtail international tax evasion, and 

even without further progress can be helpful in a few isolated cases. However, they 

have not provided a systemic solution to international tax evasion and cannot be 

expected to do so. As illustrated by the agreement with the Cayman Islands, an exchange of information is limited to cases in which the U.S. tax authorities have already targeted an individual for tax evasion and can ‘‘demonstrate the relevance of 

the information sought’’ by providing the Cayman tax authorities with the name of 

the suspected taxpayer, the reason for believing the information requested is within 

the possession of a person under the jurisdiction of the Cayman government, and 


smartinez on DSKB9S0YB1PROD with HEARING
109 

1 In the interests of full disclosure, it may be noted that one of us (Michael McIntyre) prepared 

the initial draft of the UN Code of Conduct when he served as interim chair of the Committee’s 

subcommittee on information exchange. 

so forth. That is, the Cayman government has agreed to be of assistance when the 

U.S. government has already fingered the tax cheat. It is unwilling to be helpful 

in identifying U.S. tax cheats in the first instance. 

B. Suggested Solutions 

i. Provide IRS with the resources and legal protections it needs to detect and prosecute tax evaders 

Virtually all independent observers agree that the IRS does not have the resources needed to fight international tax evasion effectively. It is underfunded in 

this area by several orders of magnitude. We do not offer advice on what the revised 

budget should be, since budget recommendations ought to be based on specific proposals for how the requested funding would be used. We simply join those who say 

that the current level of funding is ridiculously low. One data point suggesting inadequate resources is that the IRS, when it does uncover widespread tax fraud, is led 

to offer some form of amnesty from fines and criminal prosecution to the offenders 

who admit their guilt without the need for a trial. Amnesty for tax cheats obviously 

undercuts the penalties that were devised by Congress to discourage tax evasion. 

The IRS should be given the resources it needs to make decisions to prosecute taxevasion cases on the merits. 

Congress also needs to make sure that IRS agents working in the field are not 

subject to personal suit for legitimate actions taken to combat international tax evasion. Stopping tax evasion is a rough and tumble business. Agents often act on tips, 

and tips sometimes are wrong. Many taxpayers engaged in evasion are belligerent 

and litigious. There is little doubt that morale at the IRS has been low in recent 

years, partly due to fears that they would be subject to prosecution and litigation 

just for doing their job. That fear is due in significant part to a few noxious provisions in the Internal Revenue Service Restructuring and Reform Act of 1998 (H.R. 

2676), enacted after the infamous Senate Finance Committee hearings in late 1997. 

Congress needs to revisit those provisions in an atmosphere less hostile to enforcement of the nation’s tax laws. 

ii. Broaden TIEAs to include automatic information exchanges 

What makes U.S. banks a poor choice for the American tax cheat is that banks 

regularly provide the IRS with information reports about the income earned by their 

depositors. It is that kind of regular information flows that the United States needs 

to receive from the financial institutions in the offshore tax havens. Getting agreement from these countries will not be easy. The United States will need to work 

with the OECD and other groups to fashion a policy that rewards governments that 

cooperate and imposes penalties on governments that continue to facilitate international tax evasion. The OECD, by extracting TIEAs from some of the world’s 

greatest scofflaw countries, has demonstrated the value of the stick. Practical experience in other areas suggests that the carrot can be even more effective. 

iii. Impose greater reporting requirements on U.S. financial institutions, accounting firms, and law firms 

Many Americans engaging in offshore tax evasion are assisted by U.S. financial 

institutions, international accounting firms and law firms. These facilitators of evasion should be required to provide the U.S. tax authorities with information reports 

on transfers to any jurisdiction that is not cooperating with international efforts at 

curtailing international tax evasion and abusive tax avoidance. 

iv. Endorse the United Nations Code of Conduct on Cooperation in Combating 

International Tax Evasion 

At its meeting in October of 2008, the United Nations Expert Committee on International Cooperation on Tax Matters endorsed in principle a code of conduct that 

would charge participating governments with a moral obligation to take various 

steps to curtail international tax evasion and abusive tax avoidance. The code, as 

revised, is expected to be ratified by the committee by June of this year. The code 

codifies an emerging international standard on transparency and cooperation. One 

objective of the code is to put moral pressure on rogue governments that refuse to 

provide information exchange or that actively promote tax evasion by allowing the 

owners of legal entities to remain anonymous.1

2. The Exemption for Portfolio Interest 

A. Statement of the Problem 

The exemption for portfolio interest was added to the Code by the 1984 tax act. 

Under that exemption, nonresident alien individuals and foreign corporations receiving interest paid on qualifying bonds issued by U.S. persons are not subject to the 


smartinez on DSKB9S0YB1PROD with HEARING
110 

2 Regulations have been issued that specify the requirements that U.S. issuers must meet in 

order for interest on their bonds to be deductible. Reg. § 1.163–5(c)(2) (1997). These regulations 

are effective January 1, 2001. For tax years before 2001, see Temp. Reg. § 35a.9999–5 (1990) 

(questions and answers) and Reg. § 1.163–5T (1990) 3See ‘‘Statement of Robert S. McIntyre and Michael J. McIntyre,’’ Hearings Before the Subcommittee on Savings, Pensions and Investment Policy And the Subcommittee on Taxation and 

Debt Management of the Senate Committee on Finance Concerning S. 1557, a Bill to Exempt 

Foreign Individuals and Corporations from the 30 Percent Withholding Tax on Interest Income,’’ 

September 19, 1983 

30-percent tax under Code section 871(a). The bonds may be in bearer form or in 

registered form. A qualifying bond must be issued in a fashion that reduces the risk 

that it will to be held by U.S. persons. The issuer does not need to have actual 

knowledge, however, of the identity or even the nationality of the holder for the exemption to apply.2

Congress enacted the exemption for portfolio interest to expand access of U.S. borrowers to the Eurobond market and other international capital markets. Interest 

rates on bonds traded in the Eurobond market have tended to be lower than U.S. 

interest rates. The Treasury Department was particularly keen to gain access to the 

Eurobond market in order to reduce the cost of financing the large Federal deficits 

that were incurred during the 1980s. The reason for the lower interest rates was 

quite simple—those lending money in that market were not reporting the income 

on their investments to their home country. Whether by design or otherwise, the 

Eurobond market has provided an ideal investment environment for tax evaders. 

Congress and the Treasury Department were aware that many of the purchasers 

of portfolio-interest bonds sold on the Eurobond market would be tax cheats. Indeed, 

the portfolio-interest rules were designed to facilitate tax evasion by investors in 

portfolio-interest bonds. As noted above, the beneficial owners of the bonds were not 

required to identify themselves to the bond issuers. 

In addition, the beneficial owners of portfolio-interest bonds were allowed to invest in those bonds through so-called ‘‘qualified intermediaries.’’ A qualified intermediary typically was a bank or other financial intermediary that consolidated the 

investments of various tax cheats and purchased the portfolio-interest bonds on 

their behalf. The rules were designed to make it difficult for the U.S. government 

to learn who the tax cheats were. Such ignorance was important because the United 

States is obligated to provide information about the investment income of residents 

of countries having a tax treaty with the United States under the treaty’s exchangeof-information article. 

Code section 871(h) provides some weak rules intended to prevent American taxpayers from holding portfolio-interest bonds. As the UBS case illustrates, these 

rules are not effective in preventing Americans from acquiring such bonds. We 

warned Congress of that danger when the portfolio-interest exemption was first 

adopted.3 In brief, the rules designed to make the portfolio-interest bonds attractive 

to foreign tax cheats by making their invests anonymously make it difficult to prevent Americans from using the cloak of anonymity to become the beneficial owner 

of portfolio-interest bonds. 

In adopting the portfolio-interest rules, the United States actively recruited financial institutions to help foreigners evade the taxes imposed by their government on 

interest income derived from the United States. This evasion was intended to benefit U.S. borrowers by allowing them to borrow from the tax cheats at a reduced 

interest rate. The United States also adopted rules intended to prevent these same 

financial institutions from extending their fraudulent behavior to assist Americans 

in evading U.S. taxes. The legal rules applicable to these financial institutions were 

clear. The moral underpinning of those rules was not. 

The Treasury Department was given the authority in the 1984 legislation to impose rules that might limit the opportunities for qualified intermediaries to assist 

Americans in evading U.S. taxes. It waited, however, over a decade to issue regulations governing the withholding obligations of qualified intermediaries. The resulting regulations seemed to assume that the financial institutions that were facilitating foreign tax evasion would act in good faith to prevent evasion by Americans 

of U.S. taxes. The regulations did not accomplish their goal, as the UBS fraud has 

illustrated. 

The bank secrecy rules of countries such as Switzerland, Belgium, and Luxembourg complicate the problem of determining whether Americans have been investing illegally in portfolio-interest bonds. These countries might provide information 

to U.S. tax authorities under their tax treaty with the United States if the U.S. tax 

authorities are able to produce compelling evidence that one or more identified 

Americans had engaged in tax fraud. As a practical matter, however, it seems highVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00114 Fmt 6633 Sfmt 6621 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
111 

ly unlikely that the U.S. tax authorities have obtained any useful information from 

treaty partners that have strong bank secrecy rules. 

B. Suggested Solutions 

i. Eliminate the portfolio-interest exemption 

The world have changed a lot since the portfolio-interest exemption was adopted 

in 1984. Today, most tax professionals recognize that a country cannot solve its 

problems of international tax evasion and abusive avoidance without some rather 

high level of cooperation with its major trading partners. It is unrealistic for the 

United States to expect other countries to help it police its tax system when it is 

actively encouraging the residents of those countries to invest ‘‘tax free’’ in the 

United States. The United States must end is sordid deal with foreign tax cheats 

by limiting the exemption for portfolio interest to foreign persons who are complying 

with the laws of their home country. 

The easy way, from a technical perspective, for the United States to get out of 

the tax evasion business would be for Congress to simply repeal the portfolio-interest exemption. That way is also the best way in our view. 

ii. Limit the portfolio-interest exemption to complying taxpayers 

Although the portfolio-interest exemption was designed to attract investment by 

tax cheats, it also may attract investments from taxpayers who are not subject to 

tax on foreign income in their country of residence. For example, residents of oilrich countries, such as Qatar and Saudi Arabia, do not impose an income tax on 

their residents. Congress may decide to revise the portfolio-interest exemption so 

that it is unattractive to tax cheats but remains attractive to complying taxpayers. 

To make the portfolio-interest exempt unattractive to tax evaders, Congress 

should take two steps. First, it should require withholding agents, including financial intermediaries, to verify the true residence of taxpayers claiming the exemption. 

If the withholding agents cannot do so, they would be required to withhold tax at 

a rate of 10 percent. That money would be held in escrow by the U.S. Treasury Department for a reasonable period and would be paid out to claimants able to substantiate their residence claim. 

Second, the Internal Revenue Service should establish procedures for the automatic exchange of information about payments of portfolio interest to residents of 

countries with which the United States has an tax treaty with an exchange of information article. As noted above, the United States seems to have structured the 

‘‘qualified intermediary’’ rules to reduce the likelihood that it would be able to provide treaty partners with information about the tax evasion of their residents. The 

qualified-intermediary regulations need to be modified substantially, perhaps with 

a new congressional mandate. 

3. Treaty Shopping by American Investors 

A. Statement of the Problem 

The United States has entered into over 60 bilateral income tax treaties, almost 

all of which significantly reduce the 30 percent withholding rate otherwise imposed 

by Code section 871 (individuals) and 881 (corporations) on investment income derived from the United States. The typical tax treaty reduces the withholding tax on 

interest and royalties to zero. 

In principal, the reduced treaty rate applies only to persons who are not U.S. persons and who are bonafide residents of the U.S. treaty partner. In practice, the 

United States has difficulty verifying that those claiming treaty benefits are entitled 

to those benefits. When the treaty partner has adopted strict bank secrecy rules, 

it typically offers the United States little help in ascertaining the true residence status of those claiming treaty benefits from the United States. A significant number 

of these so-called foreign investors are thought to be American citizens. 

Treaty shopping is often engaged in by foreign persons who are actually resident 

in a country that does not have a treaty with the United States. In addition, residents of a country having a tax treaty with the United States may engage in treaty 

shopping if the treaty entered into with the United States by their country of residence is less favorable than the treaty of some third country. American citizens and 

residents may engage in treaty shopping by posing as foreign persons entitled to 

treaty benefits under a tax treaty between the United States and the country in 

which they are claiming residence. In all of these cases, the U.S. Treasury loses tax 

revenues to which it is entitled. 

The United States has attempted since the late 1970s to curtail treaty shopping 

by including a ‘‘Limitation on Benefits’’ article (typically Article 22) in its tax treaties. In some cases (e.g., the U.S.-Netherlands treaty), that article is long and complex. How effective the anti-treaty shopping articles have been is unclear. As best 

we can determine, the Internal Revenue Service has not litigated a single case in 


smartinez on DSKB9S0YB1PROD with HEARING
112 

which it sought to prevent a taxpayer from obtaining treaty benefits under the 

‘‘Limitation on Benefits’’ article. 

What is clear is that the United States cannot enforce its anti-treaty shopping 

rules without obtaining rather detailed information about the status and financial 

affairs of the persons claiming treaty benefits. Such information is generally difficult 

to obtain. It may be nearly impossible to obtain when the treaty partner at issue 

is enforcing strict bank secrecy rules. 

The United States has been nearly alone in its efforts to combat treaty shopping, 

which began in earnest during the Carter Administration. Countries have agreed to 

include a limitation-on-benefits article in their treaties with the United States, but 

they rarely do so in their treaties with other countries. The OECD has taken some 

action, primarily at the urging of the United States, to deal with treaty shopping 

through its Commentary on its Model Tax Convention. The tax guides available 

worldwide make clear, nevertheless, that treaty shopping is widespread and implicitly condoned by many governments. 

Governments seem willing to condone treaty shopping for two reasons. First, they 

may be indifferent to tax evasion that does not diminish the tax revenues of their 

country. Second, they may believe that they may obtain some investments in their 

own country from tax cheats engaging in treaty shopping. They are either unaware 

or unconcerned that their own residents may be engaging in treaty shopping to earn 

income tax free in their own country. 

B. Suggested Solutions 

i. Tentative withholding tax on payments to uncooperative states. We recommend that Congress adopt legislation that would impose a tentative 

withholding tax of 2 percent on all interest, dividends and royalties paid to persons 

claiming treaty benefits under a treaty with a country that does not engage in an 

effective exchange of information. An effective exchange would entail not only the 

provision of information on specific request but also automatic exchanges of information. To avoid abrogating U.S. treaty obligations in violation of international law, 

the legislation should make clear that the 2-percent withholding tax is refundable 

in full, with interest, if the taxpayer claiming the treaty benefit proves that it is 

actually entitled to a zero rate of withholding. 

In response to widespread pressures to curtail international tax evasion by banks 

and other financial institutions, a number of countries, including Switzerland, Luxembourg, and Singapore, very recently have agreed to provide for an exchange of 

information, notwithstanding their bank secrecy rules. Switzerland, however, has 

indicated that it will not break with its bank secrecy regime unless the requesting 

state provides solid evidence that tax evasion may have occurred by a named individual or entity. Other states may impose similar or additional limitations on their 

willingness to cooperate with foreign taxing jurisdictions. 

A withholding tax, even at a rate as low as two percent, will raise some revenue 

and, more importantly, will trigger a record-keeping obligation on the persons responsible for withholding. In addition, by watching which taxpayers seek to claim 

the proffered refund, the U.S. tax authorities will get some clues as to the extent 

of tax evasion that is occurring. 

ii. Eliminate zero rate in new and revised treaties 

The United States has been a leader in encouraging countries to agree to impose 

a zero rate on interest and royalties and even on certain related-person dividends. 

This policy was thought to increase U.S. tax revenues because the tax forgone in 

the foreign source countries would reduce the amount of the foreign tax credit that 

the U.S. would need to give to its residents investing abroad. That policy was never 

effective in augmenting U.S. tax revenues. Now that the U.S. is a net importer of 

capital, it clearly is a revenue loser. It is also bad policy. The source country ought 

to be given a fair share of the income derived from investment within its borders, 

as the League of Nations acknowledged nearly 90 years ago. 

The rules on withholding rates are central to any treaty negotiation, so the United 

States cannot unilaterally change its treaty rules on withholding rates without violating international law. But it can decline to continue the failed policy of offering 

zero rates at the negotiating table. 

iii. Terminate bad treaties 

The United States has a few treaties that are widely viewed as bad treaties that 

do not serve the interest of the United States. The Treasury Department from time 

to time has tried to revise these treaties without success. The proper action now is 

simply to give proper notice of termination. It is possible that such a notice will 

prompt negotiations that would result in a treaty beneficial to the United States. 

If so, all to the good. The more likely result, however, is that the United States 

would have one additional country with which it does not have a tax treaty. That 

result is clearly better than the status quo. 


smartinez on DSKB9S0YB1PROD with HEARING
113 

4See Michael J. McIntyre, ‘‘A Program for International Tax Reform,’’ 122 Tax Notes 1021 

(Feb. 23, 2009). 

4. Conclusion 

The ability of Americans to tax themselves and fund government programs has 

declined over the past two decades—and precipitously in the past eight years. To 

regain the lost power to tax, the government needs to take action to fix its international tax rules and procedures. In particular, it needs to strengthen its system 

for taxing American citizens and residents on income stashed in tax havens.4

Effective action against tax evasion and abusive avoidance schemes requires countries with conflicting economic interests to cooperate in fairly sophisticated ways. In 

the past, countries have made a show of stopping tax evasion and abusive avoidance 

only to settle for formal arrangements with little practical effect. Fortunately, the 

prospects for international tax reform have never been better. This opportunity is 

the result of several factors, most significantly the major decline in the traditional 

power of the international financial community and the discrediting of the market 

as the appropriate mechanism for regulating banks and other financial institutions. 

Also, the reputation of the big accounting firms has never been worse. 

The movement to curtail international tax evasion will not occur without leadership in high places. The Obama Administration will need to lead the way in negotiations with its OECD partners and with the many developing countries that are excluded from the OECD. 

Congress also has a major role to play in combating international tax evasion. It 

must repeal beggar-thy-neighbor policies intended to attract investment in the 

United States by foreign tax cheats. It needs to provide funds and legal protection 

to the IRS so that the IRS can ferret out the tax cheats and bring them to justice. 

It needs to encourage the Administration to revise tax-treaty policies that currently 

facilitate international tax avoidance and evasion. Finally, it needs to take the 

moral high road by promoting transparency and cooperation in the struggle to contain international tax evasion. One step in that direction would be to endorse the 

UN’s forthcoming code of conduct on that topic. 

f 

Statement of Raymond Baker, Director of Global Financial Integrity 

The U.S. is at a critical juncture. Recent events have underscored the severity of 

the problem of offshore financial centers, banking secrecy, and loopholes in current 

U.S. laws as well as how these enable illicit financial practices such as tax evasion 

and fraud. 

Abusive offshore schemes are depriving the U.S. of approximately $100 billion a 

year at a time when the economy is in a recession and the resources are strained. 

President Barack Obama has stated that he firmly supports action to crackdown 

on tax havens and illicit financial practices and has endorsed the Stop Tax Haven 

Abuse Act sponsored by Senator Carl Levin (S. 506) and Congressman Lloyd 

Doggett (H.R 1265) introduced March 2, 2009. 

Calls to confront tax havens have come from several quarters, including the IMF, 

the Vatican, and leaders from Germany, France, and the UK. The G–20 has also 

issued strong words of intent to address the economic crisis when it convenes April 

2nd in London. 

This presents the U.S. with the dual task of working as part of a global coalition 

to address a global economic crisis, while also attending to legislative and regulatory 

reform at home. President Obama’s announcement of a new Task Force to review 

and offer recommendations for changes to the U.S. tax code which would reduce tax 

evasion and substantially close the estimated $300 billion per-year tax gap signals 

that this second task is indeed a priority for the new Administration. GFI applauds 

those efforts. 

In considering measures to improve compliance by U.S. taxpayers and improve 

the overall system of tax collection, Global Financial Integrity recommends the following provisions be included in legislation being considered by Congress aimed at 

curtailing tax haven abuse. The following measures are crucial to achieving success 

in improving tax assessment and collection and in curtailing fraud. 

Automatic Information Exchange 

1) Section 101 of the Stop Tax Haven Abuse Act states, ‘‘a jurisdiction shall be 

deemed to have ineffective information exchange practices unless the Secretary determines, on an annual basis, that—‘(i) such jurisdiction has in effect a treaty or 

other information exchange agreement with the United States that provides for the 

prompt, obligatory, and automatic exchange of such information as is forseeably relVerDate Nov 24 2008 02:36 Oct 21, 2009 Jkt 051950 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 E:\HR\OC\51950.XXX 51950

smartinez on DSKB9S0YB1PROD with HEARING
114 

evant for carrying out the provisions of the treaty or agreement or the administration or enforcement of this title.’’ (emphasis added). 

Beneficial Ownership Requirement 

2) The Incorporation Transparency Act (S. 659) would require States to obtain a 

list of the beneficial owners of each corporation or limited liability company (LLC) 

formed under its laws, conduct annual updates of beneficial ownership information, 

and provide this information to civil or criminal law enforcement upon receipt of a 

subpoena or summons. 

Close Loopholes in the Existing Tax Code 

3) Section 108 of the Stop tax Haven Abuse Act would ensure that non-U.S. persons pay U.S. stock dividends by ending the practice of using complex financial 

transactions to recast taxable dividend payments as allegedly tax free dividend 

equivalent or substitute dividend payments. 

Deterrence 

4) Section 102 of the Stop Tax Haven Abuse Act would expand Treasury Department authority under section 311 of the Patriot Act (31 U.S.C. 5318 (a) to impose 

sanctions on foreign jurisdictions, financial institutions or transactions found to be 

‘‘impeding tax collection.’’ 

5) Section 301–302 of the Stop Tax Haven Abuse Act would strengthen penalties 

for promoting abusive tax shelters and knowingly aiding or abetting a taxpayer in 

understating tax liability by specifically: 

1. Increasing fines for promotion of abusive tax shelters from 50 percent of the 

promoter’s gross income from the activity to an amount ‘‘not to exceed’’ 150 percent 

of the promoter’s gross income from the prohibited activity. 

2. Increasing the maximum fine of $1,000 ($10,000 for a corporation) to an 

amount ‘‘not to exceed’’ 150 percent of the aider-abettor’s gross income from the prohibited activity. 

Æ 


smartinez on DSKB9S0YB1PROD with HEARING