A major international bank is ending its cooperation with the Internal Revenue Service’s efforts to prevent investors from investing money in foreign countries with more favorable tax structures and policies, such as Ireland and Switzerland.
During a November 2014 speech in Zurich, Switzerland, Barclays bank executive Francesco Grosoli announced the firm had “recently exited the program” after evaluating its legal options.
Grosoli declined to reveal additional details, but said the bank had decided to end compliance with the U.S. extraterritorial enforcement actions within the last “three or four months.”
The program, organized under the Foreign Account Tax Compliance Act (FATCA), requires foreign banks to provide confidential information to the IRS. Noncompliance carries heavy penalties levied upon foreign firms, with fines exceeding half the assets kept secret.
Announcing the law’s passage in 2010, President Barack Obama warned the world’s banking industry if they do not “cooperate with us, we will assume that they are sheltering money in tax havens and act accordingly.”
Since the law’s passage, U.S. authorities have accused 25 international bank employees of helping clients evade taxes. Two of Switzerland’s top banks, UBS and Credit Suisse, have paid fines of more than $3 billion combined, and dozens of other banks are still under investigation.
‘Deputy Enforcers’ for IRS
Although Barclays is currently the only Swiss bank to have announced its noncompliance with the program, Cato Institute Senior Fellow Dan Mitchell says a foreign bank’s refusal to hand over its customers’ data to the Internal Revenue Service (IRS) is understandable.
“Banks are subjected to very costly regulations and are put in an unpalatable position of acting as deputy enforcers for the IRS, even though that may violate the human rights laws on privacy in other countries,” Mitchell said.
Lack of cooperation between high- and low-tax jurisdictions is not a new economic development, Mitchell noted, as countries such as Switzerland have traditionally respected investors’ privacy.
“Low-tax, privacy-respecting jurisdictions have always existed. They first became ‘havens’ for human rights or political freedom,” Mitchell explained. “Successful people in some European nations put their money in places like Geneva to avoid confiscation, expropriation, or discrimination in their home countries.”
Instead of trying to generate additional tax revenue by increasing the difficulty of placing money in other countries, the U.S. should instead make its own tax structure more attractive to investors, Mitchell said.
“The entire issue is solved with the right kind of tax reform,” he explained. “If we no longer double-taxed saving and investment, and no longer had extraterritorial taxation, then it wouldn’t matter if people had their money in a bank in in Georgetown, Cayman Islands, or Georgetown, Kentucky.”
Neighbors Also Benefit
In addition to providing more investment options for individuals, empirical evidence shows investor-friendly tax rules have significant positive economic benefits for the nation as a whole.
In 2004, University of Michigan Richard A. Musgrave Collegiate Professor of Economics James R. Hines Jr. reviewed empirical data on economic indicators of high-tax and low-tax countries and found, “tax haven countries as a group exhibited 3.3 percent annual per capita GDP growth from 1982-1999, whereas the world averaged just 1.4 percent annual GDP growth over the same period.”
Good Ideas, Bad Ideas
Hines’ study concludes “countries are not randomly selected to be tax havens; tax policies are choices that governments make on the basis of economic and other considerations”—an observation with which Mitchell agrees.
“In other words, so-called tax havens exist because of bad policy choices—with taxes just being part of the mix—in other nations,” Mitchell said.
In addition to benefitting investors and haven countries’ economies, academic studies have found the benefits of friendly tax policy spill across borders, boosting the economic health of countries neighboring haven countries.
In 2004, Harvard University Business School Mizuho Financial Group Professor of Finance Mihir A. Desai, examined data from American multinational firms’ tax haven usage and found “use of tax havens indirectly stimulates the growth of operations in non-haven countries in the same region,” because “careful use of tax haven affiliates permits foreign investors to avoid some of the tax burdens imposed by countries with high tax rates, thereby maintaining foreign investment at levels exceeding those that would persist if tax havens were unavailable.”
Alexander Anton ([email protected]) writes from Palatine, Illinois.
“Do Tax Havens Flourish?” James R. Hines Jr., http://www.heartland.org/policy-documents/do-tax-havens-flourish/