How US nabbed its tax evaders

The Government of India is seriously considering declaration of Amnesty for such of those Indians who have chosen to stash away moneys in foreign tax havens. It would appear that leading industrialists have been urging the Finance Minister to bring such an Amnesty scheme so as to find funds for infrastructure development in India. Indian money secreted in offshore banks is estimated to be of the order of $1,456 billion.

It has been calculated that this staggering amount will wipe out India's foreign debt some 13 times over. This is not a problem peculiar to India alone. The following data collated from World Bank reports indicates the seriousness of the situation even in the OECD countries. Even the US and the UK have around 9 per cent to the GDP in the parallel economy. It is interesting to note how these countries are tackling the challenges posed by secret offshore accounts in tax havens.

The American experience

The American IRS offered partial amnesty for Americans who reported previously undisclosed Swiss bank or other foreign bank accounts. The scheme was simple. A foreign account holder who had not reported the offshore account to the IRS had to surrender in order to avoid high penalties and prosecutions. The penalty was less severe than in a case of being found out by the IRS. The offer was made in February 2011 and it ended on August 31, 2011.

The IRS is confident that the risk to individuals hiding assets offshore is clearly increasing. The scheme itself was announced after a widespread crackdown by federal authorities on offshore accounts sold to wealthy Americans by Swiss and Swiss-style banks. There was no halt into the investigation of foreign accounts. It was made clear that while it may be legal for Americans to own foreign bank accounts, not declaring their contents to the IRS constituted tax evasion. The scheme envisaged a penalty of 25 per cent of the amount in foreign bank accounts in the year with the highest aggregate account balance over eight years from 2003 through 2010. The taxpayer would pay a 50 per cent penalty on the highest amount in each account for each year over six years. In addition, back taxes, interest and possible criminal penalties may also be levied if discovered. Under the new programme, there is hope for reducing penalties if the back taxes and interest are paid up.

A previous programme in 2009 offered a reduced penalty of 20 per cent or even less depending on whether the wealth was inherited or self-acquired. The older programme attracted 15,000 Americans with hidden foreign accounts. The terror stuck by the IRS investigators made it appear that after the amnesty scheme, there would be no place to hide.

The investigation was not confined to the Alpine region. Banks in West Asia and the Far East also came under scrutiny. The US Government had obtained the names of 4,450 Americans with unreported accounts at the Swiss bank UBS. At one point, these Americans had $18 billion in their accounts. Many of them faced prosecution and landed in jail. Under American law, any American keeping more than $10,000 in offshore accounts must report the money to the IRS. More than 14,700 declarations were received for the latest American amnesty offer in 2011.

Deal with UBS

The American Government gave widespread publicity to the agreement it entered into with the Swiss banking giant UBS to pay $780 million and admit to criminal wrongdoing in selling offshore banking services that had enabled tax evasion. The IRS Commissioner Douglas H. Shulman boasted, “we have now gained access to thousands of taxpayers and bank accounts that we have never had before.” The boast resulted in a flood of American dollars coming into the US treasury.

The IRS also announced secret criteria were used by UBS to release the names of account holders suspected of offshore tax evasion. The criteria provided a road map to the IRS and the Justice Department to pursue tax evasion cases at the major banks. UBS would disclose the names of American clients who had unreported accounts of at least a million Swiss francs. The names of Americans owning secret offshore sham company accounts would also be disclosed from the year 2001 onwards.

The IRS made it clear that the number of voluntary disclosures would not affect UBS' obligation to disclose names hitherto not known. UBS gives its clients' names to the Swiss tax authorities, who, in turn, forward them to the IRS. America has taken advantage of the tough stance adopted by the OECD and the G-20 countries with regard to the exchange of information on tax avoidance schemes in tax havens.

It appears to be working well for the US because of a tough administration. The British Government has taken a different route to tax Amnesty.

(The author is a former Chief Commissioner f Income-Tax.)

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