Tax Evasion

Offshore tax evasion is one of the major issues that has faced Internal Revenue Service (IRS) in the United States. This issue has had considerable negative impacts on economic growth and development of the United States with respect to taxation. The existence of multiple tax havens in Switzerland has facilitated massive tax evasion by the super-rich and companies. One of the most commonly used measures for tax avoidance or evasion is corporate profit-shifting. Individuals and companies continue to take advantage of tax havens i.e. countries that enable foreign individuals and companies a minimum tax liability, to engage in tax avoidance. Some of the major tax evasion incidents or cases include the UBS offshore tax evasion and Credit Suisse offshore tax evasion. This paper seeks to examine the history or development of Swiss bank cases and their impact on Swiss bank secrecy laws. This discussion also includes an evaluation of efforts undertaken by IRS to deal with offshore tax evasion through John Doe Summons’s and ODVI initiative as well as new FACTA rules.

Scope of Tax Evasion
As previously indicated, offshore tax evasion is a major issue in the United States, which has been facilitated by the existence and development of tax havens, particularly in Switzerland. While it is not illegal to establish offshore companies, individuals or businesses in the United States are required to report their global income. However, some businesses have capitalized on this in recent years by using their offshore intermediaries to protect them through hiding wealth or engaging in suspicious transactions in the tax havens (Mauldin & Saunders, 2016). For instance, the Panama Papers Scandal highlighted the extent with which individuals and businesses capitalize on the establishment of offshore companies in tax havens to engage in tax avoidance. The scandal implicated 140 public figures, celebrities, and executives worldwide to overseas assets in offshore tax havens. Some of these overseas assets are situated in different countries across the globe ranging from British Virgin Islands to Panama (Mauldin & Saunders, 2016). Credit Suisse recently became the first financial organization to plead guilty for conspiring to facilitate tax evasion (Grossman, Letzing & Barrett, 2014). Moreover, a whistleblower was recently awarded $104 million for revealing tax evasion tactics employed by UBS and its wealthy clients (Saunders & Sidel, 2012). The widespread scope of tax evasion is also evident in the development of fancy storage facilities in airports as tax havens. Super-rich individuals are increasingly spending money on expensive stuff and freeports like in Findel airport in Luxembourg to engage in tax evasion (The Economist, 2013).
History/Development of Swiss Bank Cases
Switzerland has maintained a long history and tradition of bank secrecy that is based on two major pillars. First, the country has maintained bank secrecy as part of measures to foster the normal contractual obligation of confidentiality between banks and their clients. Based on this principle, Switzerland has established laws that provide criminal penalties to forbid banks from disclosing the existence of an account or providing account information to third-parties without the consent of the account holder/owner (Emmenegger, 2014). Secondly, bank secrecy is maintained in Switzerland as part of measures to control or regulate individuals or entities that can access a customer’s account information. However, the country’s regulations allow its authorities to access and probably share all account information under certain circumstances and in line with international agreements such as when dealing with money laundering cases.
Even though bank secrecy has been established and maintained in Switzerland for good reasons, foreign individuals and businesses have continued to capitalize on this to engage in tax avoidance. Swiss banks and other financial institutions have capitalized on pillars of bank secrecy to collude with foreign individuals and businesses to aid tax evasion. Credit Suisse tax evasion case is an example of collision between a financial institution in the country and foreigners to promote tax avoidance. This case developed after the financial institution deliberately assisted American clients to open accounts and hide their assets and income from the Internal Revenue Service (Grossman, Letzing & Barrett, 2014). During this process, the bank failed to undertake basic procedures and steps to promote compliance with relevant tax regulations. On the contrary, UBS offshore tax evasion developed after the bank permitted its employees to even run errands for wealthy clients. The bank also provided rich clients the option on whether monies in their accounts would be hidden from their tax authorities.
Impact on Swiss Bank Secrecy Laws and IRS Efforts
The two Swiss bank cases have had significant impact on bank secrecy laws in the country by demonstrating existing loopholes, which provide avenues for tax evasion by various individuals and businesses worldwide. As a result of these two cases, the Swiss government has embarked on measures to prevent breach of secrecy bank laws to aid tax evasion by Swiss financial institutions. For example, following the UBS offshore tax evasion case, the Swiss government partnered with the U.S. government to disclose the identity of approximately 5,000 account holders to the U.S. Justice Department and Internal Revenue Service (Henning, 2010). The Swiss government has established a new voluntary disclosure program that seeks to close loopholes in its bank secrecy laws through disclosing the identity of individuals who used secret bank accounts to evade taxes. The establishment of this program reflected a shift in Swiss government’s approach in implementing bank secrecy laws and showed its new commitment in preventing tax evasion through secrecy laws.
Credit Suisse and UBS offshore tax evasion cases have also impact measures undertaken by the Internal Revenue Service to curb tax avoidance by U.S. citizens and businesses. These cases have provided a premise for IRS to partner with the Justice Department and other governments, particularly the Swiss government to identify individuals/businesses with secret accounts. In essence, the two Swiss bank cases have boosted IRS’s efforts to curb tax evasion using Offshore Voluntary Disclosure Initiative (OVDI). The formation of partnerships with the Swiss government ensures that IRS adopts a collaborative approach to deal with tax evasion and ease the process of identifying individuals/businesses seeking to engage in such illegal activities.
Additionally, these two Swiss bank cases have improved IRS’s efforts in dealing with tax evasion using John Doe summons’s and OVDI by facilitating the establishment of new rules to enhance transparency and disclosure requirements. These rules would in turn play a critical role in enhancing the capabilities of law enforcement agencies to identify, prevent, and disrupt money laundering activities and terrorist financing (Lee, 2016). Enhancing transparency and disclosing requirements is critical towards improving the effectiveness of measures adopted by Internal Revenue Service in fighting tax evasion.
In conclusion, offshore tax avoidance is a major issue that has affected economic growth and development in the United States as well as generated other security issues facilitated by money laundering activities. Offshore tax evasion is widespread in the U.S. as shown in recent tax avoidance cases by individuals and businesses. These cases such as Credit Suisse and UBS offshore tax evasion have been fueled by existing loopholes in Swiss bank secrecy laws. The two Swiss bank cases and others demonstrate how individuals and businesses continue to capitalize on bank secrecy laws to engage in tax evasion. As shown in this discussion, these two recent cases have had significant impacts on Swiss bank secrecy laws and efforts adopted by IRS to deal with tax avoidance.
References
Emmenegger, P. (2014, May). “A Nut Too Hard to Crack”: Swiss Banking Secrecy and the International Campaign for Automatic Exchange of Information in Tax Matters. Retrieved May 30, 2018, from https://www.alexandria.unisg.ch/231925/1/A_Nut_Too_Hard_To_Crack_Emmenegger.pdf
Grossman, A., Letzing, J. & Barrett, D. (2014, May 19). Credit Suisse Pleads Guilty in Criminal Tax Case. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/credit-suisse-top-brass-dodge-tax-evasion-bullet-1400505829
Henning, P.J. (2010, February 3). What’s Next for Swiss Bank Secrecy? The Wall Street Journal. Retrieved from https://dealbook.nytimes.com/2010/02/03/whats-next-for-swiss-bank-secrecy/
Lee, M.D. (2016, May 9). Today’s Panama Papers Release May Require Immediate Action to Mitigate Risk of Criminal Prosecution. Retrieved May 30, 2018, from https://taxcontroversywatch.com/category/offshore-voluntary-disclosure-initiative-ovdi/
Mauldin, W. & Saunders, L. (2016, April 5). The Panama Papers Scandal. The Wall Street Journal. Retrieved from https://blogs.wsj.com/briefly/2016/04/05/the-panama-papers-scandal-at-a-glance/
Saunders, L. & Sidel, R. (2012, September 11). Whistleblower Gets $104 Million. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/SB10000872396390444017504577645412614237708
The Economist. (2013, November 23). Uber-warehouses for the Ultra-Rich. The Economist. Retrieved from https://www.economist.com/briefing/2013/11/23/uber-warehouses-for-the-ultra-rich