13.07.2010

Could tax amnesties be for you? Here‘s what you should know.

One of the hottest topics currently on each of our desks is whether to go for a tax amnesty. Why? The much-vaunted secrecy of Switzerland and Liechtenstein has been reduced in the last year or so. The United States has forced Switzerland to agree to cooperate with information requests pursuant to the US-Swiss tax treaty, and the Swiss parliament has just ratified that agreement. France, Germany, the UK and others have reportedly acquired bank-customer lists. The OECD has pressured many of the traditional offshore jurisdictions to sign tax treaties, or at least tax information-exchange agreements with at least 12 other countries, to avoid blacklisting.

Once in place, these agreements authorize tax authorities to communicate with each other.

So, if this concerns you, should you knock on the tax authority‘s door before they knock on yours? And what will it cost you? A number of countries have run ‘‘voluntary disclosure‘‘ programs, including the US, UK, Italy and South Africa. Some of these have been successful. Also, as discussed below, tax isn‘t everything; there are also exchange control rules, and the South African Reserve Bank is proposing another amnesty.

United States Last year, against the backdrop of the UBS scandal, the Internal Revenue Service ran a special program for US citizens (including those living in Israel) to voluntarily disclose the existence of any non-US financial accounts. Such accounts are commonly referred to as offshore accounts, but they include Israeli accounts too.

The program provided for immunity from criminal prosecution as well as substantially reduced financial penalties for qualifying taxpayers. It ended last October after the grant of what the IRS stressed would be a onetime extension. Following the expiration of the program, the IRS announced that at least 14,000 taxpayers had filed voluntary disclosures.

The question today is whether voluntary disclosure is still an option if you were not among the taxpayers who voluntarily disclosed their offshore accounts. You may be surprised to learn that the answer is yes.

Over the years, the IRS has encouraged delinquent taxpayers to take the initiative with regard to disclosure of non-US financial accounts and the filing of delinquent tax returns. Indeed, Section 9.5.11.9 of the IRS Manual has long provided guidelines for such disclosure that remain applicable today.

Basically, having initiated the procedure, the individual taxpayer needs to fully cooperate with the IRS to ensure that the voluntary disclosure is, in fact, a full and complete disclosure. In addition, once a settlement has been negotiated, including the amount of liability and the terms of payment thereof, full payment of the liability is of the essence.

Voluntarily coming forward and disclosing the offshore account(s) normally operates to eliminate the danger of a criminal investigation and prosecution. This is true provided that two threshold conditions are met: that the income disclosed was not the result of any criminal activity; and that the taxpayer was not already the subject of an IRS investigation regarding undisclosed offshore accounts.

Normally, a taxpayer will enter into voluntary disclosure after retaining the professional services of a tax attorney rather than attempting to go it alone.

The unique aspect of last year‘s voluntary disclosure program was not the immunity from criminal prosecution. Rather, it was the capping of the civil penalty at 20 percent of the highest balance in the account over the past six years. This cap is probably no longer available, although if the taxpayer has a compelling explanation for why he or she failed to file by last year‘s October 23 deadline, the cap or something close to it may be applied.

Such a case might be established where one became the recipient of a non-US financial account by inheritance only after the deadline‘s expiration. If one can convince the IRS that he or she had no prior knowledge of, or benefit from, the account, then it follows that the penalty would likely reflect that fact.

By the same token, the civil penalties for willful failure include a provision for the imposition of either a $100,000 fine or up to 50% of the highest balance in the account for the past six years.

The IRS‘s FAQs on Report of Foreign Bank and Financial Accounts (FBARs) indicates that it would be possible for the IRS to impose civil penalties in an amount that exceed the account balance. This outcome is probably confined to cases where the taxpayer‘s offshore account(s) has come to the IRS‘s attention under circumstances other than a voluntary disclosure.

In addition, a taxpayer would be liable for the unpaid tax on the interest paid in the offshore account plus interest and penalties as high as 75% of the unpaid tax.

One of the many adverse results of the near financial meltdown of 2008 was and is the reality of US budget deficits in the trillions of dollars. Having shattered the protections previously afforded by the heretofore sacrosanct Swiss banking secrecy, it is clear that the IRS has both the leverage and will to force financial institutions in other jurisdictions to reveal their clients‘ names and holdings.

South Africa An amnesty for those who have contravened exchange control laws is planned for November 1, the South African Reserve Bank (SARB) announced recently.

‘‘There was an amnesty in 2003, but that was only for individuals. This time the amnesty is for both individuals and corporations,‘‘ SARB spokesman Charles Nevhutanda said.

Individuals over the age of 18 will be permitted to take no more than 4 million rand out of South Africa, he said.

While there are no limits on how much corporations can place overseas, they must apply to the SARB if they wish to move money, Nevhutanda said.

‘‘If we approve an amnesty, then 10% must be paid on the amount contravened,‘‘ he said. But this is only if the funds are paid from offshore, he said, adding, ‘‘If people pay from local accounts, then they will have to pay 12% on the amount contravened.‘‘

The SARB has published a draft exchangecontrol voluntary disclosure program and an amendment to the Exchange Control Regulations (1961) for public comment, Nevhutanda said.

‘‘People have 30 days to make comments, and if we have to amend our documentation, then we will do so,‘‘ he said.

The amnesty begins November 1 and lasts for a year, Nevhutanda said.

What do South Africans make of this? Not much yet, the World Cup received more attention. Our view is that the previous amnesty was dealt with by the South African Revenue Service in an exemplary way. We are not aware of any ‘‘witch hunts‘‘ or other negative repercussions with respect to those who took advantage of it (such as targeted audits on such individuals or their businesses).

With the world moving toward greater transparency and disclosure, especially regarding tax havens, it is worth serious consideration for those who, for whatever reason, did not apply for the previous amnesty.

Israel Israel has voluntary disclosure procedures that should be used with extreme care. An amnesty is still being formulated. We will discuss some of the factors to consider at greater length in another article.

Any advice herein is not intended to be used and cannot be used for the purpose of avoiding penalties under any law, or to promote, market or recommend to another party any tax-related matters addressed herein.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon.hcat@gmail.com attorneykahn@hotmail.com adambulkin@wfam.co.za Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd. in Israel. Frank Kahn has practiced law in Israel and the US for more than 35 years. Adam Bulkin is a financial planner at WellsFaber Asset Management in Johannesburg.