In the last two decades, [After 1989, transparency and privacy became an increasingly topic of investigation and discussion among scholars and professionals. From 1989 to 2015 the number of articles and notes in law journals on “Transparency” reached over 650 units. Before 1989 the number of law review articles that treated the subject is none. On the contrary, privacy has been thoroughly analyzed and debated with the first study on this subject by Samuel D. Warren and Louis D. Brandeis Right to Privacy, 4 Harv. L. Rev. 193 (1890-1891), with reference to the need to protect individuals in their ‘right to be let alone’ (quoting Justice Cooley in Cooley on Torts, 2nd ed., p. 29) because newspapers and photographs intruded in private and domestic life] the issue of transparency in cross border transactions, banking secrecy, corporate governance, capital market, public governance, public procurement, lobbying, public corruption, and tax evasion have increased exponentially [R.E. Oliver, What is Transparency, 2004].
To this end, several jurisdictions across the globe have enacted legislation with transparency as common denominator. “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best disinfectants; electric light the most efficient policemen” [Justice Louis D. Brandeis, What Publicity Can Do], as Justice Brandeis stated more than 100 years ago.
The government management of taxpayer’s information is an issues debated as in Aloe Vera of American Inc. et al. v. U.S. [Aloe Vera of America v. the US, 699 F.3d 1153] concerning a case of misuse of tax information exchanged between the US and Japan used for FATCA [Foreign Account Tax Compliance Act (FATCA), U.S. Dept. of Treasury (Dec. 8, 2014) http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx purposes Matthew Gilleard, The Dark Side of Transparency, International Tax Review, February 2014].
Tax transparency cannot be accomplished without the implementation of an effective communication and exchange of taxpayers’ information plan. To that end, the OECD established the Global Transparency Forum in 2000 with the intent to facilitate the exchange of taxpayers’ information among participating jurisdictions [Additional information is available here http://www.oecd.org/tax/transparency/about-the-global-forum].
At today, we have 131 countries participating in the forum with currently 90 of them committed to implementing the new standard of Automatic Exchange of (tax) Information becoming effective on 2017-2018 [Gerald P. Moran, Tax Amnesty: An Old Debate as Viewed from Current Public Choices, 1 Florida Tax Review 307-332 (1993)]. With the progressive disappearance of the banking secrecy coupled by the limitation of tax havens’ effectiveness, and uselessness of tax amnesties, [Gerald P. Moran, Tax Amnesty: An Old Debate as Viewed from Current Public Choices, 1 Florida Tax Review 307-332 (1993)].
OVDPs have emerged. OVDP are programs created by local revenue services which permits taxpayers to amend or correct their previous tax filing or reveal information to Tax authorities that was not previously reported in their tax returns. The main purpose of these programs is for taxpayers to come forward and amend their tax return without fear or criminal prosecution and high penalties for offshore income and banking activities, and for Tax authorities to collect undetected and unreported revenue [On October 2015 the IRS announced that since its 2009 inception, the OVDP generated $8B. https://www.irs.gov/uac/Newsroom/Offshore-Compliance-Programs-Generate-$8-Billion;-IRS-Urges-People-to-Take-Advantage-of-Voluntary-Disclosure-Programs].
The OVDP programs were sustained by the Organization for Economic Co-operation and Development (OECD) that has always recognized the importance of combating offshore tax evasion and implementing a system of exchange of information while offering taxpayers the opportunity to become tax compliant [OECD, Update on Voluntary Disclosure Programs: A pathway to tax compliance. August 2015, P5. Available at http://www.oecd.org/ctp/exchange-of-tax-information/Voluntary-Disclosure-Programmes-2015.pdf].
Several governments have introduced and implemented programs in their legal systems that encourage voluntary disclosure and thus provide certain incentives to taxpayers who are non-compliant. In addition to general programs, some countries have introduced special temporary voluntary disclosure programs in order to take advantage of the momentum given by, for example, the availability of the foreign savings data or increased cooperation between tax administrations [See id].
These special programs are often limited in time and offer additional incentives, like reduced penalties, taxes, and interest as well as the possibility of exclusion from prosecution and/or criminal sanctions.
US Perspective on OVDP and FATCA
The existence of offshore unreported assets has been known for years [Carl R. Smith, Tax Havens, 37 Taxes – The Tax Magazine – July 1959, 615-632; Sebastien Moerman, The Main Characteristics of Tax Havens, 27 Intertax 368 (Oct 1999); Barry Bracewell-Milnes, Use of Tax Havens, 28 Intertax 406 (2000); Miles Walton, Tax Havens Come under More Scrutiny from World Leaders, 20 International Tax Review 8 (May 2009)].
American taxpayers have sequestered funds outside the territorial limits of the United States [Bruce W. Bean, Abbey L. Wright, The US Foreign Account Tax Compliance Act: American Imperialism? ILSA Journal of International and Comparative Law, P336].
The Tax Justice Network reported in 2014 that total offshore “financial wealth” may range from $21 to $32 trillion [The Price of Offshore, Revisited – supplementary notes June 2014, Tax Justice Network (June 5, 2014), available at http://www.taxjustice.net/wp-content/uploads/2014/06/The-Price-of-Offshore-Revisited-notes-2014.pdf].
Though this estimate seems a hidden wealth, as long as reported and taxed, there is nothing illegal about having funds overseas and there are also multiple reasons for having assets outside the United States [See Nick Giambruno, 10 Reasons Why You Need an Offshore Bank Account, Int’l. Man, http://www.internationalman.com/articles/10-reasons-why-you-need-an-offshore-bank-account].
The IRS has struggled to effectively enforce income tax obligation on citizens with offshore accounts, in particularly identifying the offshore financial assets [Offshore Compliance Initiative, U.S. DOJ, http://www.justice.gov/tax/offshore_compliance_intiative.htm].
In addition to Tax treaties and Tax Information Exchange Agreements, [Tax Information Exchange Agreements (TIEAs), OECD.org, http://www.oecd.org/ctp/exchange-of-tax-information/taxinformationexchangeagreementstieas.ht] to overcome the unreported offshore assets issue, the US introduced in 2009 the Foreign Account Tax Compliance Act (FATCA) becoming effective in 2014 [See generally 78 Fed. Reg. 5873, 5874 (Feb. 5, 2013)].
According to Bruce Bean and Abbey L. Wright, FATCA is the most extraordinary extension of Congressional extraterritorial overreach ever enacted [Bruce W. Bean, Abbey L. Wright, “The U.S. Foreign Account Tax Compliance Act: American Legal Imperialism?” ILSA Journal of International and Comparative Law]. Traditionally, acts of Congress are deemed to apply only domestically unless there is an explicit statutory intention to have an impact beyond the territory of the United States [Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659, 1664 (2013) citing Benz v. Compania Naviera Hidalgo, S.A., 353 U.S. 138, 147].
The basic requirements of FATCA command foreign financial institutions and certain other non-financial foreign entities (NFFE) to disclose information directly to the IRS about financial accounts held by U.S. taxpayers or face harsh penalties [78 Fed. Reg. at 587378 Fed. Reg. at 5873Foreign Account Tax Compliance Act (FATCA), U.S. Dept. of Treasury (Dec. 8, 2014) http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx].
FATCA seeks to require financial institutions with no jurisdictional nexus to the United States, to report account activity of US taxpayers to the IRS [26 U.S.C. § 1471(d)]. The IRS has insured that all potentially qualifying institutions will be accounted for including the broadest definition of “foreign financial institution.” [See id].
To achieve initial compliance, foreign banks must enter into an agreement with the IRS, determine which of their accounts are “US Reportable Accounts” and categorize the individuals and entities [78 Fed. Reg. 5875].
Under the latest special 2014 OVDP, taxpayers may not come forward anonymously to receive indications whether they are in compliance or to disclosing illegal sourced income [See https://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised].
Once accepted into the program, the taxpayer must cooperate in determining the correct tax liability and must make a good faith effort to pay in full any applicable tax, interest, and penalties.
The special 2014 OVDP program has no set deadlines for taxpayers to apply. However, the IRS may increase penalties or limit eligibility in the program for all or some taxpayers or define classes of taxpayers or decide to end the program at any time [See id].
In addition to the OVDP, the IRS announced a streamlined procedure for certain US taxpayers with non-willful conduct [See id].
The streamlined program offers a reduced penalty framework but do not provide protection from criminal prosecution. It is available to taxpayers believing that their failure to report foreign financial assets and pay all tax due did not result from willful conduct. These programs run parallel to OVDP, meaning that taxpayer can choose only one and may not jump from one to another [See at https://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures].
Intergovernmental Agreements and OVDPs
To implement the FATCA, the US Treasury has negotiated and is still negotiating intergovernmental agreements (IGA) with more than 50 countries. These agreements allow the extraterritorial reach of FATCA within foreign sovereigns.
Switzerland has long been a favorite tax haven for the wealthiest of the world and as a result it plays a vital role in tax evasion [U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Homeland Sec. & Governmental Affairs permanent Subcomm. on Investigations 9 (Feb. 26, 2014), available at http:// www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-tax-evasion-the-effort-to-collect-unpaid-taxes-on-billions-in-hidden-offshore-accounts].
Under Swiss law, it is a crime for the bank to release information about its clients and their accounts [Maurice Aubert, The Limits of Swiss Banking under Domestic and International Law, 2 Int’l. Tax & Bus. L. 273, 275 (1984) (“[B]anks must not disclose to third parties, whether private persons or government authorities, information subject to secrecy”].
However, Swiss bank secrecy laws have been subject to scrutiny for decades [Swiss Banking Secrecy: Don’t ask, won’t tell, P19 (“Swiss law entrenched bank secrecy in 1934, making it a criminal offense to reveal a client’s identity”].
After a thorough investigation and negotiations, [See at http://www.justice.gov/tax/offshore-compliance-initiative] in the late of 2009 the US entered into the agreement that has been made between Switzerland and the United States, where the Swiss authorities accepted to provide the names of 4450 clients [Offshore Voluntary Disclosure Program: Swiss Prospective, Pascal de Preux].
In addition, the joint statement aiming to resolve tax issues has been signed between the Department of Justice and the Swiss Department of Finance. The statement contains the program for all Swiss banks and applies to all US related accounts exceeding $50,000 in value at any time during the applicable period [Pascal de Preux, Offshore Voluntary Disclosure Program: Swiss Perspective, see www.depreuxavocats.ch].
The statement also encourages all Swiss banks to inform US Persons and Entities with US related accounts of the OVDP initiative. Now, in order for Swiss banks to participate in program without violating Swiss criminal code, the Swiss authorities grant authorization that allows banks in Switzerland to transfer data to the US government without committing a criminal offense [See id, P3].
In India, one the most important steps that has been made is signing the 2014 Indo-US agreement Model 1 IGA which will mandate financial institutions to report information on the US account holders to India’s General Board of Direct Tax which later has to share with the IRS [India and OVDP, Premthaj Carlose].
Though IGA agreement has not been finalized, India authorities have made additional significant steps to comply with FATCA. The Statement of Financial Transactions and Reportable Accounts (SoFTRA) were implemented that provided more stringent requirements to comply with FATCA [See id, P2].
At this time, India has neither general offshore voluntary program nor special ones for taxpayers who committed tax evasion. These incompliant taxpayers would have to face interest in 1% per month, monetary penalties between 100% and 300% of unpaid taxes, and, depending on amount evading, even imprisonment up to 5 years.
In the contrast, Russia has made further steps to increase tax transparency. The Government reported that it signed the law on June 30, 2014 allowing Russian banks to transfer data relating to FATCA directly to the US authorities upon client consent. If the client does not give such consent, then financial institutions are allowed to refuse to conclude agreement with the client. However certain categories of citizens are exempt from reporting obligations. Such categories include Russian citizens and Russian entities directly or indirectly owned for more than 90 percent by the Russian state or Russian citizens. If the consent is given, Russian banks would have to first report to the Russian Government before submitting this information [See http://www.pwc.com/us/en/financial-services/publications/fatca-publications/intergovernmental-agreements-monitor.html#russia].
Reporting to the IRS is permissible only if the Russian authorities (i.e., Rosfinmonitoring) have not prohibited such reporting within this 10-day period which makes timely reporting dependent upon decision of the Russian state authorities. Currently there is no intergovernmental agreement signed with US and the negotiations with Russia have been suspended due to political tension between Russia and the US. Unlike India, Russia indeed implemented voluntary disclosure programs depended however on certain circumstances. Such law providing voluntary disclosure came into the effect recently. Russian legislature has passed it in summer 2015 and the law came into effect in December 2015 [Federal Law of the RF, N 140-ФЗ “O Dobrovolnom deklarirovanii fizicheskimi litcami aktivov I schetov v bankah,” the text is available http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=191373;fld=134;dst=100008,0;rnd=0.24621956148349494].
As a general rule, the taxpayer has to pay the unpaid amount of taxes, interest and to file with the tax authorities an amended tax return for the previous tax period before the tax authority detects the inadequacy of the tax information in the return or begins a field tax audit. However, to promote compliance of the taxpayers with new regulations by setting a transition period where taxpayers are not penalized for non-disclosure during the first years after adoption of the law with gradual implementation of fines in the subsequent periods increasing from one year to another. In addition, the law provides certain incentives to the taxpayers, such as to be protected from being requested by tax authorities information about the source of income [See id].
Referring back to history, similar voluntary disclosure program was implemented in 2007; however, the results were unsuccessful. According to Rozkazna, only 3.7 billion RUB (~150 million U.S. dollars) were only collected, when over 49 million U.S. dollars were unlawfully transferred from Russia overseas [See the Federal Treasury of the RF, Statistics for March 2007 available here http://www.roskazna.ru/, also see Russian Newspaper available here http://www.gazeta.ru/business/2013/04/18/5261269.shtml].
However, the most unsuccessful experience with OVDPs in the post-soviet space was in Georgia. In 2005, the Georgian Government collected only 35,000 dollars (estimated 4 million dollars) from 8 persons who participated in voluntary disclosure program that run the entire year [See Nalogovaya amnistiya b Gruzii c treskom provalilas’ November 2005 available here http://www.rbc.ru/economics/04/11/2005/84329.shtml].
In Italy significant steps have been made toward compliance with FACTA and international tax compliance. In January 2014, the Italian Treasury Department and US Treasury announced that the US and Italian governments have signed an IGA to implement FATCA [See http://www.pwc.com/us/en/financial-services/publications/fatca-publications/intergovernmental-agreements-monitor.html#italy].
Under the agreement, Italian financial institutions are required to report their information to the Italian Revenue Agency, which automatically exchanges information with the US Internal Revenue Service. There is also a provision for the exchange of information to be reciprocal. Because of this major milestone in tax transparency, voluntary disclosure programs become an important tool for taxpayers with an opportunity to regularize their past non-compliance activities. Unlike in Russian Federation, Italy currently implemented general as well as special programs. Under special program, collaborazione volontaria, [Offshore Voluntary Disclosure Programs, 2015, P73] the taxpayer must disclose before unreported income was identified by tax authorities and therefore fore tax controls started on the taxpayer [See id].
In addition, the taxpayer can only particulate in special disclosure program once.
In cases when taxpayers decide to come forward and disclose the assets unreported, neither Italy, nor Russia, nor Switzerland have policy of waiving tax amount accumulated during the evading years, as well as tax interest. However, monetary penalties are waivable. In Italy, in cases of income generated from assets hidden in countries which have stipulated agreement with Italy, penalties are not doubled [See id].
In addition, 50% of penalties is waived due failure to report assets held abroad. In Switzerland, by contrast, the monetary penalties are waived based on “once-in-time rule,” [See id at 115] meaning only when this is the first in life taxpayer’s voluntary disclosure. Unlike in Switzerland and Italy, in Russia the monetary penalties would be waived only when non-disclosure occurred during the first year after adoption of the law or new changes implemented in the law (See id at 102).