Governments around the world are having problems balancing their books. This is more than a clerical problem. The Greek government deficit threatens to bring down the euro. The US government deficit resulted in a lower credit rating sending stock markets down. And UK government cutbacks triggered riots and looting on the streets of many English cities.
So what should responsible governments do?
One obvious solution is to attack tax evasion (which is illegal) and anti-avoidance (which is legal until made illegal). But that has had mixed results.
The US experience
On September 15, the US Internal Revenue Service (IRS) issued a ‘‘Newswire‘‘ (IR-2011-94) claiming that it continues to make strong progress in combating international tax evasion. The recently completed offshore voluntary disclosure initiative (OVDI) pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed this September 11.
The IRS also announced it has collected $2.2 billion so far from people who participated in an earlier 2009 voluntary disclosure program, reflecting closures of about 80 percent of the case in that program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program – a figure that will increase because it doesn‘t yet include penalties.
‘‘By any measure, we are in the middle of an unprecedented period for our global international tax-enforcement efforts,‘‘ said IRS Commissioner Doug Shulman. ‘‘We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.‘‘
According to the IRS, the 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.
It is interesting to note that the IRS originally sought information on more than 50,000 bank accounts at UBS AG bank alone, so were some innocent? That is not yet clear. The IRS merely point out that UBS AG, Switzerland‘s largest bank, agreed in 2009 to pay $780m. in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the US government.
The UK experience
UK Exchequer Secretary David Gauke announced on September 9 that taxtreaty anti-avoidance proposals contained in a consultation document published on August 1 are to be dropped. ‘‘Treaty shopping‘‘ is the slang expression for tax planning based on the use of tax treaties.
In his written statement Gauke said: ‘‘The responses so far received have made it clear that the proposed legislation, as drafted, could cause significant uncertainty for compliant UK businesses and overseas investors about its intended scope and its practical effect.‘‘
The proposed legislation would have allowed UK domestic legislation to override the UK‘s bilateral tax treaties with many countries, including Israel. This is the opposite of the normal constitutional position in most countries that international agreements prevail over purely domestic legislation.
When did you last see a major country back down from controversial tax proposals?
What about Israel?
Section 86 of the Income Tax Ordinance enables the Israel Tax Authority to disregard ‘‘artificial or fictitious transactions.‘‘ False transactions are usually a criminal matter, while far-fetched or unreasonable transactions are usually a civil matter.
Suppose someone wants to come clean on some unreported income?
Israel has a voluntary disclosure procedure. Under this procedure, the individual approaches his local tax office, which will check if he is already under investigation. If the individual is not already under investigation, he may proceed to negotiate an outcome with his local tax office.
As always, consult experienced professional advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.