0609_Bank Secrecy Presentation_Alan W. Granwell

Bank Secrecy, Exchange of Information, Voluntary Disclosure: Where Are We Now?

Alan Winston Granwell

6/11/2009 2

Scope of Presentation

This presentation summarizes developments related to:Bank secrecy and exchange of information.

Methods used by governments to identify the improper use of offshore accounts by taxpayers.

The IRS view on international tax administration of high-net worth US individuals.

The Obama Administration’s recent legislative proposals related to tax havens.

The IRS penalty framework for voluntary disclosure of offshore accounts.

6/11/2009 3

Bank Secrecy and Exchange of Information Developments

Industrialized countries have heightened their scrutiny of offshore financial centers (a multi-trillion dollar industry) and the use of offshore accounts in efforts to recoup much needed tax revenues from taxpayers improperly using these centers to evade tax.

Since the beginning of 2009, international tax evasion has been high on the political agenda, reflecting the spotlight thatthe global financial crisis has focused on financial centers generally and recent scandals that have affected countries around the world.

6/11/2009 4


G-20 countries have been working in a concerted manner to prevent abuses of the global financial system in a wide range of areas, including taxation. In the taxation area, G-20 countries have focused on international cooperation of tax authorities and establishing effective exchange of information standards so that countries can ensure compliance with their national tax laws. In the past few months, a fundamental transformation has occurred in international tax cooperation practices. Numerous well-known offshore financial centers that had bank secrecy have endorsed the OECD exchange of information standards and a number of these countries have taken steps to implement these standards.

6/11/2009 5


In the “The Global Plan for Recovery and Reform,” the G-20 leaders agreed “to take action against uncooperative jurisdictions, including tax havens” and to “deploy sanctions to protect our public finances and financial systems.”

The Leaders after their London meeting stated that “the era of bank secrecy is over” and noted that that the OECD has published a list of countries assessed by the Global Forum against the international standard for exchange of tax information.”

The foregoing actions reflect that more activity has occurred in this area in the past two months than in the past 10 years, when this project was initiated.

6/11/2009 6

Bank Secrecy and Exchange of Information Developments (Examples)

Now all OECD countries accept the OECD standard following the withdrawal by Austria, Belgium, Luxembourg and Switzerland of their reservations to that standard. Switzerland has initialed a new bilateral income tax treaty withDenmark and also Luxembourg (to our understanding) that would include information exchange provisions based on the OECD standard, has commenced negotiations with the United States, theNetherlands, Japan and Poland and then will enter into negotiations with other OECD and EU States. 23 OECD countries have expressed interest in renegotiating the exchange of information article of their respective treaty. In addition, Switzerland has announced that international judicial assistance will be extended to cases of tax evasion and not merely tax fraud.Liechtenstein has signed a tax information exchange agreement with the United States in December 2008 and has commenced negotiations with the United Kingdom.

6/11/2009 7


Luxembourg has signed new protocols with Bahrain, Denmark, France, India, the Netherlands the United States relating to exchange of information and, most recently, to our understanding, a new protocol with Switzerland.

Andorra, Liechtenstein and Monaco, identified by the OECD in 2002 as un-cooperative tax havens, have endorsed the OECD standards and indicated their willingness to change their domestic legislation and to enter into agreements for the exchange of information.

Hong Kong (China) and Macao (China) and Singapore have each announced that they will put forward relevant legislation in 2009 to comply with the internationally agreed tax standard.

6/11/2009 8


Costa Rica, Malaysia, the Philippines and Uruguay, originally identified in the 2nd April Global Forum Progress Report as not having endorsed the internationally agreed tax standard, have now done so and have identified concrete steps to be taken this year to implement it.All 84 jurisdictions surveyed by the Global Forum’s assessments have now agreed to implement the OECD exchange of information standard.[1]The Appendix contains the OECD “Progress Report” relating to the countries that are on the “white list” and “gray list.” Currently, there are no countries on the “black list.”

[1] The Global Forum survey covers the 30 OECD countries, countries that participate in the OECD’s Committee on Fiscal Affairs as “Observer” countries (Argentina, Chile, China, Russia, South Africa), jurisdictions that met the tax haven criteria and other financial centers.

6/11/2009 9

Consequences of Exchanging Information (Going Forward)

Upon the adoption of OECD exchange of information standards either by treaty or implementing legislation, offshore financial centers would become obligated (as of the applicable effective date) to exchange information relating to tax evasion upon a specific request where detailed evidence of wrongdoing is furnished (in contrast to either to the automatic exchange of information or broad based “fishing expeditions”), thereby piercing bank secrecy in individual criminal tax probes.The international exchange of information standard requires:

Exchange of information where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner; No restrictions on exchange caused by bank secrecy; Availability of reliable information and power to obtain it; Respect for taxpayer’s rights; and Strict confidentiality of information exchanged.

6/11/2009 10

Consequences of Exchange of Information (The Past)

Tax authorities will continue to aggressively use the various means at their disposal to seek to obtain information, including:

Exchange of information provisions:Bilateral income tax treatiesTax Information exchange agreements.

Domestic disclosure initiatives.For example, compulsory disclosure in the UK and “John Doe”summons in the US (which the IRS uses when it strongly suspects US taxpayers are using offshore bank accounts to avoid paying taxes, but does not know their identities)

Criminal investigations.

“Whistleblower” programs.

6/11/2009 11

Global Tax Administration Cooperation

Tax authorities from 34 countries attending the fifth meeting ofthe OECD's Forum on Tax Administration, held May 28-29, in Paris, announced that have agreed on new international cooperation plans to encourage tax compliance and counter tax evasion and abusive tax avoidance.

There will be a particular focus on:Financial institutions.

Wealthy individuals.

Offshore activities.

As a result, there will be enhanced cooperation by tax authorities to ferret out tax evasion and avoidance schemes.

6/11/2009 12

US Developments

The developments below demonstrate that the United States is prepared to take decisive action to counter, identify and prosecute tax abuse.

UBS prosecution (see next slide for details).

Ongoing criminal investigations and prosecutions:Financial institutions.Taxpayers.

Pending administrative, regulatory and legislative proposals:“FBAR” and other “outbound” reporting changes.Regulatory changes to qualified intermediary (QI) program.Legislation, such as the highly publicized Administration anti-tax haven proposals.

Voluntary disclosure penalty guidelines.

6/11/2009 13

US DevelopmentsUBS Case

On February 18, 2009, UBS and the Department of Justice entered into a deferred prosecution agreement pursuant to which UBS agreed to pay the US government $780 million in fines, penalties, interest and restitution. Under the deferred prosecution agreement, UBS also agreed to provide the US government with the identities of and account information of certain US depositors pursuant to an order issued by the Swiss Financial Market Supervisory Authority. On February 19, 2008, the US government filed a “John Doe” summons in federal district court against UBS for additional information to force the bank to provide the IRS with the identities of the remaining account holders, which number approximately 52,000. This matter is under consideration by the federal district court.To date, UBS has provided the names of about 250 of approximately 52,000 US depositors that maintained accounts at UBS. It appears that these names are depositors UBS advised the IRS it had determined may have committed “tax fraud” (in contrast to tax evasion, which is not a crime in Switzerland) within the meaning of the Swiss-US Income Tax Treaty (the Treaty) and thus the information is exchangeable under Article 26 of the Treaty. The US government continues to press UBS for additional information and is still seeking to compel it to provide the IRS with the identities of the remaining account holders.

6/11/2009 14

US DevelopmentsUBS Case

The US government is wasting little time in bringing criminal actions against individuals whose names and account information were disclosed by UBS to the US government pursuant to the deferred prosecution agreement. The New York Times reported on April 2, 2009, that the Department of Justice has opened approximately 100 criminal investigations against US depositors of UBS. That same day, federal prosecutors brought the first criminal case against a UBS depositor with the arrest of a South Florida accountant who, through a British Virgin Island nominee company, had control over and access to a previously undisclosed account with UBS in Switzerland. On April 14, 2009, a second UBS depositor was the first to pleadguilty to filing a false income tax return in connection with a financial account (a corporate account of which the customer was the beneficial owner) and income earned on such account at UBS. Thisindividual faces up to three years in prison.

6/11/2009 15

IRS International Tax Administration Agenda

IRS Commissioner's View: International tax issues are a major priority.

IRS needs:Additional resources.

Information (from foreign countries and financial institutions).

Regulatory and legislative changes.QI program.Legislative changes.

International tax enforcement of US individuals.“For individuals with overseas income and assets -- if you are a U.S. taxpayer holding overseas assets, you must pay your taxes or we will be very focused on finding you. It's as simple as that. “

6/11/2009 16

Legislative ProposalsIn General

The core of the Administration's proposals is to strengthen and expand the QI system.

The overall goal of the proposal is to make it easy for individuals to comply with US tax law, and make the intermediaries who facilitate the flow of funds across borders partners of IRS in ensuring people pay the right amount of tax.

The other part of the proposal is to create disincentives for those US taxpayers who chose to do business with a financial institution that has chosen not to be a QI.

Note, the OECD has also been studying best practices, data templates, outside auditor requirements, and other guidelines for building QI-type networks.

6/11/2009 17

Administration Proposals

US financial institutions and QIs would be required to determine the true beneficial owner of a particular account.

This issue is similar to the issues the EU has had with enforcing its Savings Directive. IRS has found that many US taxpayers have formed shell entities to hold offshore accounts.

Encourage non-QIs to become QIs. Withholding. Impose significant withholding tax on transactions involving non-QIs by requiring US financial institutions and QIs to withhold 20 percent to 30% of US source payments to individuals or businesses who use non-QIs. To obtain a refund for the amount withheld, investors would be required to disclose their identities and demonstrate compliance with the law. Legal Presumption. Create a legal presumption against users of non-QIs. US citizens who send money to foreign financial institutions would have to provide convincing evidence to prove they are not violating US tax laws. These presumptions will make it easier for the IRS to demand information and pursue cases against international tax evaders.

6/11/2009 18

Administration Proposals

Increase reporting requirements. QIs would be required to report worldwide information on their US customers to the same extent that US financial intermediaries do. US persons, US financial institutions, and QIs would be required to report cross-border transfers to non-QIs.

These proposed changes would require a commitment and resources by financial institutions in the QI program,

Improve the ability of the IRS to successfully prosecute international tax evasion.

The proposal would double certain penalties when a taxpayer fails to make a required disclosure of foreign financial accounts.

Extend the current statute of limitations on international tax enforcement from three to six years after the taxpayer submits the required information.

International tax cases are often highly complex and require additional time to resolve beyond the current three-year statute.

6/11/2009 19

Additional Resources

The Administration's proposed FY 2010 budget for the IRS will allow the IRS to make unprecedented investments in personnel, tools, and overall coverage in the international arena.

As part of the President's budget, the IRS would be funded to hire nearly 800 new employees devoted specifically to international enforcement, such as agents, economists, lawyers and specialists.

6/11/2009 20

US Voluntary Compliance InitiativeBackground

The IRS recently announced a revised penalty framework (the penalty initiative) to encourage US taxpayers with undisclosed offshore accounts to participate in its voluntary disclosure program and subsequently issued a response to Frequently Asked Questions.

The penalty initiative is part of a concerted effort by the IRS to identify those taxpayers who maintain (or have signatory authority over) undisclosed accounts in foreign banks and financial institutions and bring such taxpayers into compliance with regard to their reporting and tax payment obligations.

The government has a stated interest in encouraging taxpayers tocome forward and disclose existing accounts.

The penalty initiative is one result of the ongoing litigation between the IRS and UBS over the disclosure of information regarding its US depositors holding offshore accounts.

6/11/2009 21

US Voluntary Compliance InitiativeIRS Perspective

In announcing the penalty initiative, IRS Commissioner Douglas Shulman said that taxpayers who “come in voluntarily will get a fair settlement…. [and will] avoid criminal prosecution.”

Commissioner Shulman also commented that “any voluntary disclosure program, what you try to do, is have it be attractive enough that people are going to come in and get back into the system, but punitive enough that nobody's getting a free ride,”

Commissioner Shulman added that for “taxpayers who continue to hide their head in the sand, the situation will only become more dire”and that the IRS has instructed its agents to “fully develop these cases, pursuing both civil and criminal avenues and to consider all available penalties, including the maximum penalty for the willful failure to file the [Report of Foreign Bank and Financial Account] and the fraud penalty.”

6/11/2009 22

US Voluntary Disclosure InitiativePenalty Initiative Framework

The taxpayer must file or amend all returns, including the Report of Foreign Bank and Financial Account (FBAR), and pay taxes and interest for the past six years unless the accountor entity was formed within the last six years, in which case the assessment is made from the year of formation of the entity or account;The taxpayer will pay either an accuracy penalty (20% of the underpayment of tax or 40% for a substantial valuation misstatement) or delinquency penalty (up to 25% of tax due) on all years with no application of the reasonable cause exception; andThe taxpayer, in lieu of all other penalties, will pay a penalty of 20% percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value.

6/11/2009 23

US Voluntary Disclosure InitiativeLimited Exception to 20% Penalty

The 20% penalty is reduced to 5% if:The taxpayer did not open or cause any accounts to be opened (i.e., the account was inherited);

There has no been activity in the account during the time it has been held by the taxpayer; and

All applicable US taxes have been paid on the funds in the account (only the earnings have escaped taxation).

Comment. It is unlikely that this exception will have significant application.

6/11/2009 24

US Voluntary Disclosure InitiativeEligible Taxpayers

Taxpayers will only receive the benefits of the penalty initiative if they are eligible.

To be eligible, inter alia, the taxpayer:Cannot have “illegal source income”;

Cannot currently be the subject of a civil examination or criminal investigation; and

Must fully cooperate with the IRS in determining the taxpayer’s correct tax liability and make good faith arrangements with the IRS to pay the tax, interest and any applicable penalties.

Cooperation may include an interview of the taxpayer by the IRS or the Department of Justice.

6/11/2009 25

US Voluntary Disclosure InitiativeEffective Date

The penalty initiative will only apply to those voluntary disclosures made before September 23, 2009.

Comment. At this stage, it is not clear whether the IRS will renew the initiative; thus, taxpayers must act expeditiously.

6/11/2009 26

US Voluntary Disclosure InitiativeComments

Taxpayers should seek the advice of counsel and should share allinformation related to foreign accounts with such counsel in order to receive the maximum benefit of such a consultation. Regardless of an individual taxpayer’s circumstances, counsel can provide guidance as to the best available options. Whether a taxpayer qualifies for voluntary disclosure depends on the individual facts and circumstances involved in each case.Even if a taxpayer is not eligible to participate in the penalty initiative, there may still be a benefit to contacting either the IRS or theDepartment of Justice before being contacted by one of their representatives.A taxpayer may also consider making a “quiet” disclosure by filing amended returns and/or FBARs in limited circumstances, such as when all income has been reported and tax paid but no FBARs have been filed.

6/11/2009 27

US Voluntary Disclosure InitiativeComments

Despite the issuance by the IRS of responses to Frequently Asked Questions, questions remain about the implementation of the penalty initiative (and the voluntary disclosure program generally).

For instance, query how will the government calculate the penalties to be imposed?

6/11/2009 28

US Voluntary Disclosure InitiativeState Tax Implications

Taxpayers with unreported income in offshore accounts should also discuss the state tax ramifications of any disclosure to the IRS with their tax counsel. This is important because disclosure by taxpayers of unreported federal income is likely to trigger state reporting and payment obligations. Taxpayers considering disclosure should be aware that six states, including New Jersey, Maryland and Connecticut, have recently announced their own tax amnesty programs and at least five other states are considering such programs. These programs not only provide an opportunity to report any unreported offshore income, they also provide the chance to disclose any previously omitted items of income. State tax amnesty programs generally involve a waiver of some or all civil and criminal penalties and may also reduce the amount of interest due from taxpayers who participate in such programs.Similar to the IRS penalty initiative, these programs are generally offered only for limited periods of time.

6/11/2009 29

Voluntary DisclosureOther Countries

Other countries have focused on offshore tax evasion and are enhancing their investigations of such activities.

Several countries have initiated voluntary disclosure or comparable programs:

Canada.

France.

German.

Italy.

Netherlands.

United Kingdom.

6/11/2009 30

Thank you

If you have any follow-up questions or comments, please do not hesitate to contact me.

Alan Winston Granwell

Email: [email protected]

Direct dial: +202.378.0344

Address: DLA Piper LLP (US)

500 8th Street, NW

Washington, DC 20004

USA

6/11/2009 31

Circular 230 Notice

In compliance with U.S. Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting,marketing or recommending to another person any transaction or matter addressed herein.

6/11/2009 32

APPENDIX

6/11/2009 33

OECD Progress ReportExchange of Information

6/11/2009 34

OECD Exchange of Information Categories

The OECD has established a so-called “white,” “gray” and “black” lists of countries progress report relating to implementation of international exchange of information tax standards. In order to be on the white list, the country has had to have entered into 12 exchange of information agreements.There currently are no countries on the black list.The OECD progress report has had immediate results, with many previously uncooperative havens suddenly committing to OECD standards.The G-20 agreed to hold periodic meetings aimed at ensuring jurisdictions on the gray list fulfill their commitments. It also listed sanctions for countries that do not honor their commitments, including tax measures, treaty measures, and non-tax measures.

6/11/2009 35

OECD Exchange of Information Progress Report

The OECD on June 8 announced that it is working on a peer-review mechanism that would employ significantly toughened criteria forranking tax jurisdictions into so-called “white,” “gray” and “black” lists of the OECD progress report on implementation of international tax standards.Pascal Saint-Amans, head of OECD's International Cooperation and Tax Competition Division, said the mechanism, which could include an approach proposed by the US Treasury Secretary, will be aimedat enabling the OECD Global Tax Forum to more thoroughly evaluate the “quality and dynamism” of tax information exchange agreements of its 84 member jurisdictions.Mr. Saint-Amans said the new system, which could take effect within month, could result in many jurisdictions being demoted from oneprogress report list to another, in particular because they have not implemented agreements they have signed.

6/11/2009 36

OECD Global Forum Survey

A PROGRESS REPORT ON THE JURISDICTIONS SURVEYED BYTHE OECD GLOBAL FORUM IN IMPLEMENTING THE

INTERNATIONALLY AGREED TAX STANDARD1

Progress made as at 8th June 2009

The internationally agreed tax standard, which was developed by the OECD in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic taxinterest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged

6/11/2009 37

JuridictionsSubstantiallyImplementing Standard

JapanJerseyKoreaMaltaMauritiusMexicoNetherlandsNew ZealandNorwayPolandPortugalRussian FederationSeychellesSlovak RepublicSouth AfricaSpainSwedenTurkeyUnited Arab EmiratesUnited KingdomUnited StatesUS Virgin Islands

ArgentinaAustraliaBarbadosBermudaCanadaChina*CyprusCzech RepublicDenmarkFinlandFranceGermanyGreeceGuernseyHungaryIcelandIrelandGreeceGuernseyHungaryIcelandIreland

*Excluding special administrative regions (Hong Kong and Macau, which have agreed to implement standard.

6/11/2009 38

Tax Havens that have committed but not substantially imlemented standard

82000Cayman Islands*

102002BVI

02002Belize

82001Bahrain

12008Bahamas

42002Aruba

72002Antigua & Barbuda

02002Anguilla

02009Andorra

AgreementsYear of CommitmentJurisdiction

* Caymans have adopted legislation relating to unilateral exchange of information and have identified 12 countries.

6/11/2009 39


02003Nauru

02002Montserrat

12007Marshall Islands

12009Liechtenstein

02007Liberia

12002Grenada

12001Gibraltar

12002Dominica

02002Cook Islands

AgreementsYear of Commitment Jurisdiction

6/11/2009 40


02002Turks & Caicos

02003Vanautu

02000San Marino

02002Samoa

02002St. Vincent & Grenadines

02002St. Lucia

02002St. Kitts & Nevis

02002Panama

02002Niue

72000Neth. Antilles

AgreementsYear of CommitmentJurisdiction

6/11/2009 41

Other Financial Centers that have committed but not substantially complied

02009Uruguay02009Switzerland02009Singapore02009Philippines02009Malaysia62009Luxembourg02009Guatemala02009Costa Rica02009Chile52009Brunei12009Belgium02009AustriaAgreementYearJurisdiction

6/11/2009 42

Notes

Austria, Belgium, Luxembourg and Switzerland withdrew their reservations to Article 26 of the OECD Model Tax Convention.

Belgium has already written to 48 countries to propose the conclusion of protocols to update Article 26 of their existing treaties.

Austria, Luxembourg and Switzerland announced that they have started to write to their treaty partners to indicate that they are now willing to enter into renegotiations of their treaties to include the new Article 26.

6/11/2009 43

The Administration'sTax Haven Proposals

6/11/2009 44

Background

The Obama Administration has provided new details to the proposals contained in its FY 2010 budget.

The details, outlined in the US Department of the Treasury’s General Explanation of the Administration’s Fiscal Year 2010 Revenue Proposals (the Greenbook), contain more detailed explanations of the changes to the tax law which were proposed by the President on May 4, 2009.

The proposal, released on May 11, 2009, contains numerous provisions designed to combat under-reporting of income through use of accounts and entities in offshore jurisdictions.

6/11/2009 45

Central Proposal

The core of the Administration’s proposals in this area would be to strengthen the existing regime for registering financial intermediaries, which hold US securities on behalf of customers, as QIs.

This would be done by increasing the obligations assumed by QIs, and by discouraging intermediaries from acting as non-QIs.

6/11/2009 46

Additional QI Reporting Requirements

The proposal would require that QIs identify all account holders that are US persons. A QI would need to report on Forms 1099 all payments (US and non-US source) received on behalf of US account holders, and to backup withhold on such payments if documentation were not received from the US account holders. The IRS would be authorized to publish a list of QIs, and the Treasury Department would be authorized to promulgate Regulations designed to control abuses of the existing program. For example, Regulations could require QIs to collect information on the “beneficial owner” of a foreign account holder, such as a shareholder of a foreign corporate account holder, and to report to the IRS any US beneficial owners it discovers. Regulations also could require that all commonly controlled financial institutions must either register as QIs, or implement similar reporting procedures as the affiliated QI. The proposal would be effective beginning after December 31 of the year of enactment.

6/11/2009 47

Withholding on US Source Passive Income to Non-QIs

In order to disadvantage non QIs, a US withholding agent making a payment of US source passive income to a non-QIwould be required to presume that it is made to an unknown foreign person, and withhold at the maximum 30% rate, irrespective of the documentation it received from the intermediary.Foreign persons subject to over-withholding, for example those entitled to treaty benefits, would be allowed to apply for a refund of any excess tax withheld. The Treasury Department would be authorized to provide exceptions for payments considered to present a low risk of tax evasion. The proposal would be effective beginning after December 31 of the year of enactment.

6/11/2009 48

Withholding on US Source Capital Gains to Non-QIs

In order to further disadvantage non-QIs, a US withholding agent would be required to withhold tax at a rate of 20% on gross proceeds from the sale of any type of security that would otherwise be reportable to a US non-exempt payee if the agent pays the sales proceeds to a non-QI located in a country that has not entered in a US bilateral income tax treaty that includes a satisfactory exchange of information program. Non-QIs could claim a refund on behalf of their direct account holders if they identify all US direct account holders for the year and report all payments received by all of their US account holders.Foreign persons subject to over-withholding, and on whose behalf a refund claim is not made by a non-Qi, could also apply for a refund of any tax withheld. The Treasury Department would be authorized to provide exceptions. The proposal would be effective for payments made after December 31 of the year of enactment.

6/11/2009 49

Transfers to Foreign Accounts

US individuals would be required to report on their US income tax returns any transfers to or from a foreign bank or brokerageaccount owned by the individual (or by any entity of which the individual owns more than 50 percent). Transfers to or from accounts held at QIs would be exempt. Reporting would be excused if cumulative transfers, and receipts, were each less than $10,000 for the year.Failure to report a covered transfer would result in a penalty equal to the lesser of $10,000 per reportable transfer or 10 percent of the cumulative amount or value of the unreported covered transfers.Exceptions could be made by Regulation, such as for arm’s-length payments for services. The proposal would be effective for transfers made after December 31 of the year of enactment.

6/11/2009 50

FBAR Disclosure

Individual taxpayers would be required to file a Report of Foreign Bank and Financial Accounts (FBAR) and also to disclose similar information on a schedule as part of their US income tax returns.

This schedule would be subject to the tax return filing date, irrespective of the FBAR filing date.

Failure to disclose the foreign accounts under the proposal could give rise to penalties and other consequences separate from the applicable FBAR penalties.

The proposal would be effective for taxable years beginning after December 31 of the year of enactment.

6/11/2009 51

Third Party Information Reporting of Foreign Accounts

To supplement taxpayer reporting obligations, various financial intermediaries would be required to report to the IRS transfers to and from foreign financial accounts, and the establishment of such accounts. Any US financial intermediary or QI would be required to report any transfer to a foreign bank or brokerage account, or any receipt from such an account, on behalf of a US person or its controlled entity, in excess of $10,000.Any US financial intermediary or QI that opened a foreign bank or brokerage account on behalf of a US person or its controlled entity would also be required to report. Transfers on behalf of public companies and their subsidiaries, and transfers involving QIs, would be excepted. The proposal would be effective for amounts transferred and accounts opened beginning after December 31 of the year of enactment.

6/11/2009 52

Third Party Information Reporing of Foreign Entity Formation

The proposal would require any US person or QI that forms or acquires a foreign entity on behalf of a US individual (or on behalf of any entity of which the individual owns more than 50 percent) to file an information return with the IRS about the foreign entity.

Treasury’s regulatory authority could include requiring US withholding agents to attempt to determine whether a US person is the beneficial owner of a foreign entity, and to report any US persons that it discovers.

The proposal would be effective for entities formed or acquired after December 31 of the year of enactment.

6/11/2009 53

Negative Presumption for Foreign Accounts Where FBAR Not Filed

In order to assist enforcement actions, the proposal would create a rebuttable evidentiary presumption in a civil administrative or judicial proceeding that any foreign financialaccount owned by someone otherwise subject to the FBARregime contains sufficient funds to trigger the FBAR reporting obligation.

The presumption would not apply to accounts held through a QI, or other exceptions by Regulation.

The proposal would be effective for FBARs due to be filed beginning after the date of enactment; (FBARs under current law must be filed on or before June 30).

6/11/2009 54

Negative Presumption Regarding FBARReporting for Accounts Over $200,000

The proposal would create a rebuttable evidentiary presumption in a civil administrative or judicial proceeding that the failure to file an FBAR is willful if the foreign account has a balance of greater than$200,000 at any point during the calendar year unless the account is held with a QI.

Under existing law, for willful violations the maximum civil penalty is the greater of $100,000 or 50 percent of the balance in the account at the time of the violation; absent willfulness, the civil penalty for failing to disclose a foreign financial account on a FBARdoes not exceed $10,000).

The presumption would not apply to accounts in which the person has signature or other authority only by virtue of being an officer or employee of a corporation.The proposal would be effective for FBARs due to be filed beginning after the date of enactment; (FBARs currently must be filed on or before June 30).

6/11/2009 55

Negative Presumption Regarding Withholding of US Source Payments

The proposal would require any withholding agent making a payment of US source passive income to a “foreign entity” to treat it as made to an unknown person (and therefore subject to the maximum 30 percent rate of withholding tax), unless the foreign entity provides documentation of the entity’s beneficial owners. Self-certification by foreign entities would be insufficient without evidence of beneficial ownership.Exceptions would apply for public companies and their subsidiaries, foreign governments and pension funds, and other entities such as charities and certain investment funds identified by the Treasury Department.The proposal would be effective for payments made after December 31 of the year of enactment.

6/11/2009 56

Extended Statute of Limitations for Cross-Border Transactions and Foreign Entities

The general three-year statute of limitations on tax assessments does not begin to run for taxes that relate to certain information returns until the information is reported tothe IRS.

The proposal would extend this limitations period to six years, and expand the information returns covered to include the foreign account information returns proposed as part of this package and several others (including PFIC QEF returns).

This exception to the general statute of limitations would be made applicable to the taxpayer’s entire income tax return.

The proposal would be effective for returns due to be filed after the date of enactment.

6/11/2009 57

Double Penalties on Understatements Involving Undisclosed Foreign Accounts

The proposal would double the existing 20% accuracy-related penalty when the understatement arises from a transaction involving a foreign account not disclosed on the income tax return under the proposal that requires taxpayers to disclose FBAR-related information on their returns.

For accuracy-related penalties arising from a reportable transaction understatement involving such an undisclosed account, the reasonable cause exception would not be available.

The proposal would be effective for taxable years beginning after December 31 of the year of enactment.

6/11/2009 58

Changes to Foreign Trust Reporting Penalty

In refinement of existing rules governing information reporting on certain foreign trusts, the proposal would impose a revised initial penalty of the greater of $10,000 or 35% of the “gross reportable amount” if the gross reportable amount is known.

The additional $10,000 penalty for continued failure to report for each 30-day period would remain unchanged.

Even if the gross reportable amount is unknown, the IRS may impose a $10,000 penalty for each 30-day period that the failure to report continues.

The proposal would be effective for information reports required to be filed after December 31 of the year of enactment.

Documents

0609_Bank Secrecy Presentation_Alan W. Granwell