The catch phrase in the movie Jerry McGuire was “Show Me the Money!”
It now looks like prosecutors are adopting the same mantra and are enjoying success in courts indicting those that attempt to hide money and avoid paying taxes either in the U.S. or abroad.
In the past, it was a given that an individual or organization that stayed within the parameters of its country’s tax laws wouldn’t be prosecuted by another country. For example, an expat whose business was abiding by all the laws in France wouldn’t get any flak from the IRS or the U.S. Department of Justice for violations of U.S. laws.
Think of this as “What Happens in Vegas, Stays in Vegas.”
However, a recent article by Kostelanetz and Fink, a leading tax firm, entitled, “Tax Planning on the Potential Edge: Potential Penalties in the International Tax Arena,” explains that the federal government has been much more aggressive—and creative—in construing and enforcing its tax laws abroad, as well as foreign laws here at home.
The article explains that with increased multinational economic activity, businesses are setting up their production centers in different countries from where they sell their goods—like the expat’s company in France selling its products in America. Every country has its own set of tax regulations, so the interaction between these different regimes creates “gaps and frictions,” according to the article. As a result, international tax planning may now raise questions over the applicable legal standards, causing the potential for violations of U.S. criminal laws when tax planning illegally reduces taxes in the United States or in another country.
U.S. Citizens Avoiding Foreign Taxes
The article asks, “Does the United States care about evasion of a foreign country’s taxes?”
Until recently, the answer had been an unequivocal “no,” as common law said that the U.S. won’t collect the taxes of foreign nations. However, Kostelanetz and Fink point out that the scope of domestic U.S. laws—like mail and wire fraud—are very broad and allow for a wider range of enforcement.
It’s a felony to devise or intend to devise a scheme to defraud someone out of money or property and place anything in any post office or transmit via wire for the purpose of executing that scheme. A liberal reading of the statute, the article contends, could include a scheme to defraud another country out of its taxes. The U.S. Supreme Court held just that in Pasquantino v. United States. The Justice Department indicted individuals in the U.S. who bought liquor from a Maryland distributor and drove it across the border to Canada without declaring it and paying Canadian excise taxes. The DOJ alleged they violated the wire fraud statute by engaging in a fraudulent scheme inside the U.S. and making phone calls as part of the scheme. The defendants argued they had not broken any U.S. laws because the wire fraud statute shouldn’t be given extraterritorial effect to include a scheme to defraud another country’s taxes. However, the Supreme Court held that there’s no limitation on the wire fraud statute, and it could cover any scheme to defraud—including an attempt to defraud another country out of its taxes.
The Supreme Court held that the wire fraud statute covered the conduct at issue, and that another country’s taxes was included “property” within the statute. Although the defendants would have to pay the evaded Canadian taxes, this wasn’t the reason they were being prosecuted: they were being prosecuted for violating the wire fraud statute. Based on this reasoning from the Supreme Court, the article says it’s possible that a tax practitioner in the U.S. could be prosecuted for mail or wire fraud if he or she knew or should have known that his or her tax planning resulted in an improper reduction of another country’s taxes.
So no more “What Happened in Vegas…”
Inbound Tax Evasion That Is Legal in a Foreign Country but Improperly Evades U.S. Taxes
Likewise, the article explains that tax evasion applies to any person who attempts in any way to evade any tax. Also, if two or more people conspire to commit any offense against the U.S. or to defraud the U.S. in any manner, and one or more of these individuals commits any act in furtherance of the conspiracy, they are guilty of conspiracy. Both crimes require a violation of U.S. law, but neither appears to require any additional connection to the U.S. Our courts have already held that the Constitution allows the extraterritorial application of federal criminal law in terrorism cases to noncitizens acting entirely abroad “when the aim of that activity is to cause harm inside the United States or to U.S. citizens or interests.”
Applying these principals, U.S. prosecutors indicted a Swiss bank that assisted American taxpayers in concealing $1.2 billion from the IRS. The bank believed it had a solid defense based on three factors: (i) wasn’t violating Swiss laws; (ii) it was an industry standard implemented by other Swiss banks; and (iii) it had no locations in the U.S.
Although in the past the bank would be deemed beyond the prosecutorial reach of the U.S., be aware that the Department of Justice has been successful in overcoming procedural hurdles with the help of Interpol’s Red Notice system and the exercise of treaties. In the case of the Swiss bank, it felt damage to its reputation outweighed any attempt at vindication at trial. The bank voluntarily submitted to U.S. jurisdiction, plead guilty, paid approximately $75 million in fines and restitution and sold its remaining business.
Kostelanetz and Fink believe that it’s very apparent that U.S. prosecutors now are able to secure indictments in these cases and that those who have leveraged the “gaps and frictions” between the laws of various countries should take notice and plan their taxes accordingly. You’ll need to show the federal government the money to avoid problems.
What Happens here or abroad will no longer Stay there.
Original Post By: Michael DeBlis
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