Offshore tax havens costing US Treasury $100 billion a year

Maybe I should take my money out of that Bermuda fund? Nah!

Only the Little People
Only the Little People - It's a small thing, really.
By Robert Weissman
08.01.2006

But so long as the Bush administration is going to help the super-rich out by lowering and lowering and lowering tax rates on the rich -- income tax, capital gains tax and the estate tax rates -- is it too much to ask the rich to actually pay those taxes?

Apparently so.

"Tax Haven Abuses: The Enablers, the Tools and Secrecy," a report issued today by the Senate Permanent Subcommittee on Investigations, cites evidence suggesting individuals evade $40 billion to $70 billion in payments to Uncle Sam every year through use of tax havens. This figure is for individuals only -- the IRS estimates at least $30 billion in lost corporate taxes thanks to tax haven manipulation.

The complexity of the tax haven scams can boggle the mind. Corporate lawyers make good money dreaming them up, and the rich are willing to pay -- because the tax savings can be extraordinary.

Here's a summary of one of the scams identified in the report released today:

POINT: Offshore Securities Portfolio. This case history examines a complex securities transaction used to shelter over $2 billion in capital gains from U.S. taxes, relying in part on offshore secrecy to shield its workings from U.S. law enforcement. In contrast to the case histories examining offshore structures used over a period of years, this inquiry focuses on the use of offshore secrecy jurisdictions to facilitate one-time tax shelter transactions. The tax shelter was designed, promoted, and implemented by a Seattle-based securities firm, Quellos Group, LLC, ("Quellos"), with the assistance of lawyers, bankers, and other professionals. Quellos sold the shelter, called POINT (Personally Optimized Investment Transaction), to five wealthy clients in six separate transactions. Together, the tax shelters were used in an effort to erase over $2 billion in capital gains that would otherwise have been taxed, costing the U.S. Treasury lost revenue of about $300 million.

The Subcommittee found that the POINT tax strategy was based upon billions of dollars worth of fake securities transactions that were used to generate billions of dollars in fake capital losses to offset real taxable capital gains of U.S. taxpayers so they could avoid paying taxes to the U.S. Treasury. The fake securities transactions were undertaken by two offshore shell corporations in the Isle of Man, Jackstones and Barnville, whose ownership has been kept secret. The transactions were carried out by compliant offshore administrators and trustees, since the corporations had no employees of their own. Using circular transactions and offsetting payments that cancelled each other out, these offshore corporations created a paper portfolio of over $9 billion in U.S. high tech stocks that appeared to suffer price drops and generated the fake capital losses used in the POINT transactions. The fees charged by Quellos depended upon the amount of tax loss generated in each transaction for the taxpayer who bought the shelter; the more money the taxpayer "lost" from the transaction, the more Quellos charged for the scheme.

Five U.S. taxpayers, including Haim Saban and Robert Wood Johnson IV, purchased the tax shelter, paying fees totaling approximately $65 million. Prominent law firms, such as Cravath, Swaine & Moore and Bryan Cave, provided written tax opinion letters affirming that it was "more likely than not" that the Quellos plan would produce the favorable tax consequences promised, and collaborated with Quellos on its design or implementation. The factual statements used to support the legal analysis in the opinion letters inaccurately described the nature of the securities transactions generating the capital losses. The law firms accepted the representations of Quellos on these matters without inquiring behind them. Prominent U.S. and foreign financial institutions, including HSBC, provided financing for the POINT transactions, without conducting adequate due diligence into the underlying transactions. Some communications involving persons who helped design, promote, and implement the tax shelter indicate that they may have deliberately hidden key aspects of the POINT transaction from the clients, lawyers, and financial institutions who participated in them.

These aren't yokels involved in this scheme.

Haim Saban -- he's a Democratic Party fundraiser who got rich promoting Mighty Morphin Power Rangers.

Robert Wood Johnson IV -- that's the owner of the New York Jets.

Cravath Swain -- among the whitest of white shoe law street firms, Cravath's website grandiosely proclaims, "For nearly two centuries, OUR FIRM has been widely recognized as the premier American law firm."

Saban and Johnson are described in the report as duped by their lawyers and advisers. Indeed, the report makes clear that what might be termed the tax avoidance industry deserves much of the blame for the tax haven scams.

The Senate Permanent Subcommittee makes some serious proposals to prevent tax haven abuse.

"Offshore tax havens hold trillions of dollars in assets supplied by high-net-worth individuals around the world," said Subcommittee Ranking Minority Member Senator Carl Levin of Michigan. "Our investigation blows the lid off tax haven abuses that use sham trusts, shell corporations, and fake economic transactions to hide the fact that U.S. citizens are controlling offshore assets, circumventing U.S. legal requirements, and dodging taxes. These outrageous tax haven abuses are eating away at the fabric of our tax system, and it is long, long past time to shut them down. Tax havens have, in effect, declared war on honest U.S. taxpayers, and we've got to fight back utilizing the full legislative, executive, and administrative powers of the United States government."

Levin rightfully told the New York Times that the law "should assume that any transaction in a tax haven is a sham."

Even though the Republican Subcommittee chair Norm Coleman of Minnesota says, "Using offshore jurisdictions to shelter income is unfair and I intend to fix this problem," the odds on reforms getting enacted, one would have to surmise, are bleak.

There is no legitimate purpose served by tax havens. And, if governments are serious about cracking down on them, the job is easily done. Explained William Brittain-Catlin, the author of Offshore: The Dark Side of the Global Economy, an examination of the pervasive phenomenon of financial offshoring, in an interview in Multinational Monitor:

The government can simply prohibit any company or individual that has an offshore connection from doing business in its jurisdiction. Onshore you're in, offshore you're out, simple as that. You could phase in such a policy over a 10-year period. During that time, corporations and individuals that had an offshore connection would pay an offshore tax. A proportion of this revenue could be directed to offshore tax havens in order to develop their economies away from the provision of offshore financial services.
For corporations, the problem is more complicated. As Brittain-Catlin says, "There is no way the U.S. would give up the offshore 'rights' of its corporations unless other nations were to do so too."

So, although the tax haven business is almost impenetrably complicated, the solution is not. The issue is political will.

Unfortunately, there is a lot more political will to eliminate the estate tax -- President Bush and the Republican Congressional leadership's current obsession -- than to make the rich pay what they do owe.

BBB
Text of the committee report:

http://hsgac.senate.gov/_files/TaxHvnAbRPT.pdf

How the US Super-Rich "Dodge" Taxes
How the US Super-Rich "Dodge" Taxes
Agence France-Presse
Monday 07 August 2006

If you had a billion dollars in the bank and lived a jet-set lifestyle out of a string of luxury homes filled with valuable artworks, your taxes would be pretty hefty, right?

Well not entirely, according to a Senate probe that has examined hundreds of documents and issued 74 subpoenas as it turns a spotlight on the murky tax dealings of some of America's richest citizens.

The Senate's subcommittee on investigations has spent a year tracking the finances of several billionaires and discovered they funnelled hundreds of millions of dollars to tiny Caribbean islands and the Isle of Man.

Named in a subcommittee report are Robert Wood Johnson IV, the owner of the New York Jets American football team, Haim Saban, the billionaire behind the Mighty Morphin Power Rangers TV show, Texan tycoons Charles and Sam Wyly and telecoms entrepreneur Walter Anderson.

"Our investigation blows the lid off tax haven abuses that use sham trusts, shell corporations and fake economic transactions to hide the fact that US citizens are controlling offshore assets ... and dodging taxes," Senator Carl Levin fumed as the panel released its findings last week.

Investigators claim Johnson and Saban used a strategy to shield billions of dollars out of sight of the Internal Revenue Service (IRS), while the Wyly brothers allegedly have not paid tax on over 100 million dollars in stock options compensation held offshore.

The billionaires engaged "an army of attorneys, brokers and other professionals" to set up their offshore corporations and trusts, according to investigators.

Vast amounts of cash were transferred to the offshore corporations or trusts, which sometimes traded among themselves or granted huge "loans" back to some of the billionaires and their families in the United States.

Between 1999 and 2004, about 85 million dollars in "offshore dollars" was credited to US accounts and used by the Wylys to buy and outfit luxury homes in Aspen, Dallas and Malibu, according to the report.

One five-million-dollar "loan" was made to a "trust" for the purchase of an iconic Norman Rockwell painting, "Rosie the Riveter."

Because the entities were based in such places as the Isle of Man, the Cayman Islands and the British Virgin Islands, and not registered in the United States, the billionaires avoided filing onerous tax returns to the IRS.

However, lawmakers claim many of the complex deals were designed to hoodwink the US taxman.

The offshore deals, the report said, enabled Johnson and Saban to "shelter" hundreds of million of dollars through an opaque deal called POINT, or "Personally Optimized INvestment Transaction."

Saban blamed his tax advisors for the transactions, telling Senate investigators, "You have a very disappointed person, who feels misled, lied to, cheated."

Lawmakers estimate that such transactions cost the US taxpayer up to 70 billion dollars a year and they are demanding a radical reform of the law.

Levin, a Democrat, said cash stashed by an American in an offshore haven should be taxed as it would be domestically.

Republican lawmakers also criticized tax advisors, financial brokers and prestigious law firms, including the New York firm of Cravath, Swaine and Moore, for designing and marketing the schemes.

IRS commissioner Mark Everson told lawmakers that "offshore tax shelters are robbing the American treasury of billions of dollars," and vowed to prosecute their improper use.

Johnson may face a 17-million-dollar tax bill, Saban is in negotiations with the IRS, the Justice Department is investigating the Wylys, and Anderson, who shipped over 450 million offshore, is awaiting trial.