When we think of tax havens like the Cayman Islands, we imagine wealthy people from around the world enjoying the beach at those tiny islands in the sun. Well, it's about to get hotter.
Both the U.S. and the international community have stepped up efforts to address tax haven abuses and recoup some of the billions of dollars of tax revenue lost each year. In the U.S., it is estimated that the international tax gap (the amount of taxes American companies and individuals should pay on foreign activities but don't) is as much as $100 billion per year.
Some high-income Americans and American corporations are not paying the U.S. taxes that they legally owe because they take advantage of offshore tax schemes. These typically involve transferring assets or income to a country where income taxes are low or non-existent and where bank secrecy laws forbid the disclosure of information about financial institutions' customers. These countries are commonly known as "tax havens." Many of these are small islands in the Caribbean, the Pacific, or off the European coast, but others are more established banking centers like Switzerland.
When corporations and wealthy individuals evade U.S. tax by using offshore tax havens, the rest of us pick up the tab. Meanwhile, those corporations and individuals continue to enjoy the tremendous advantages of living and working in the U.S. and the breadth of services the government provides. While they shirk paying their fair share of the cost, they still have full access to the U.S. market, the legal system, infrastructure, the education system -- the list goes on and on.
Recent reports indicate that the administration and Congress are ready to respond. The Senate Finance Committee held a hearing on March 17 and the Ways and Means Subcommittee on Select Revenue Measures has one planned for March 31. Three major bills have been introduced to impede the use of foreign tax-avoidance schemes. The President's budget included a line item for "international reform," and the Treasury Secretary testified at the Senate Finance Committee hearing that the administration supports the proposed legislation. He also said that the administration is planning to propose a "series of legislative and enforcement measures" to address the use of offshore structures and accounts and reduce U.S. tax evasion and avoidance.
In the international community, several developments also indicate a new resolve to deal with tax havens. Virtually all of the major governments are convinced that billions of dollars of tax revenue are lost because of offshore transactions. Many are convinced that bank secrecy laws allowed risky dealings that contributed to the financial system meltdown. During this economic crisis, governments are spending extraordinary sums to bail out financial institutions and provide for the basic needs of their people. In this climate, there is less tolerance for tax schemes that divert money from the public treasury.
Several of the major European governments and the U.S. have spearheaded an effort to get an agreement to crack down on tax havens at next week's G-20 summit. The European Union, the Organization for Economic Cooperation and Development (OECD), and the leading G-20 nations have called for tough measures, including sanctions on tax haven countries that refuse to follow rules for transparency and international cooperation to combat tax evasion. Since those developments, several tax haven countries have announced their intention to follow the OECD guidelines and many have already begun negotiating new tax treaties with the major nations.