Tax Planning On The Edge

Ride Or Die In The International Tax Arena

The U.S. economy has become more global, lining up in the race to the top. However, with multinational economic activities revving their gears, some tax practitioners are growing fast and furious. To them, it doesn’t matter if you win by an inch or a mile; winning is winning. As a result, some choose to violate U.S. laws as long as their advice is legal abroad while others evade taxes in foreign countries without breaking rules in the U.S. However, if you’ve been exploiting the legal arbitrage opportunities resulting from the gaps created by the interaction of different regimes, expect the IRS to go ‘ejecto seato, cuz’ on you and your clients very soon.

Most tax practitioners who juggle differing tax regimes abide by the same rules they use for everyday planning. However, international tax planning has some gray areas where no clear, applicable legal standards exist. While there are certain established ethical standards, these apply to aggressive international tax planning. On the other hand, there are laws that can apply, but are avoided because they violate the laws of another country. Through the following lines, you’re about to discover how practitioners can go against U.S. criminal laws when their plans illegally reduce taxes both locally and internationally.

“You Might Wanna Keep Your Eyes on the Road.”

Many question if the U.S. cares about the evasion of a foreign country’s taxes. The answer is traditionally ‘no’ because of the Revenue Rule, which states that the U.S. won’t collect the taxes of a foreign nation. The Revenue Rule is a corollary of the Penal Rule, which indicates that“[t]he Courts of no one country execute the penal laws of another country.” If you need more convincing, reflect on the Restatement (Third) of Foreign Relations §483, which confirms the fact that“[c]ourts in the United States are not required to recognize or to enforce judgments for the collection of taxes, fines or penalties rendered by the courts of other states.”

Regardless, you need to take into consideration the scope of domestic U.S. laws like mail and wire fraud statutes. According to these, individuals who devise or intend to devise plans to defraud someone out of money or property will be guilty of a felony. Under a broad reading of these statutes, a scheme or artifice to defraud can encompass schemes to defraud other countries out of their taxes. In fact, the Supreme Court endorsed such a broad reading in the case of Pasquantino, et al, where a group of Americans purchased liquor from Maryland, drove it across the border, and didn’t declare it to avoid paying Canadian excise taxes.

According to the judge, they violated the wire fraud statute by engaging in a fraudulent scheme inside the U.S. Now the defendants argued that they hadn’t broken any U.S. rules and even quoted the Revenue Rule. However, the Supreme Court disagreed, stating that there’s no limitation to the wire fraud statute and that it could cover any fraud schemes. The Court also held that another country’s taxes included property within the ambit of the statute. As for the defendant’s argument that the Revenue Rule should preclude the prosecution, the Court rejected it stating that it wasn’t the reason they were under prosecution despite the Mandatory Restitution Act demanding that they pay Canada the evaded taxes. The reason the liquor smugglers were prosecuted because they violated the U.S. wire fraud statute while paying Canadian taxes was an ancillary consequence rather than the purpose of the prosecution.

In short, if you make choices and you don’t look back, re-consider your position since you may be prosecuted for mail or wire fraud if you knew or should have known that your tax planning affected another country’s tax claims.

“And Your Mistake? Thinking You’re in America. You’re a Long Way from Home.”

The other scenario is when tax practitioners in a foreign country construct a plan that’s legal in a foreign country but evades U.S. taxes. If you’re concerned about the U.S. trying to prosecute you, you may be on to something. The classic crime of tax evasion applies regardless of whichever way you decide to evade taxes. You may even be tried for conspiracy if you and at least another person conspire to defraud the U.S. or commit an offense against it. The same applies if you or the other person doesn’t act to prevent this conspiracy. In both cases, however, there isn’t a need for additional U.S. nexus.

The U.S. Constitution permits the extraterritorial application of federal criminal law to non-citizens acting abroad if their aim is to harm the U.S., its citizens or interests. American prosecutors relied on this law to indict Wegelin & Co., the oldest private bank in Switzerland. The indictment alleged that Wegelin conspired to defraud the United States by helping U.S. account holders hide assets from the IRS in undeclared accounts. How so? By allowing U.S. taxpayers to open accounts in Switzerland despite knowing that they weren’t reporting their income to the U.S. government. Claiming that this was a standard practice in the industry, Wegelin argued that it wasn’t violating Swiss law. The fact that other Swiss banks did the same made it believe that it was beyond the U.S.’s abilities to prosecute it.

One issue which U.S. prosecutors had to overcome was that the Federal Rules of Criminal Procedure didn’t cover arrests in a foreign country. In fact, Federal Rule of Criminal Procedure 4 requires the arrest warrant or summons to be within the U.S. unless authorized elsewhere. However, the Department of Justice stepped in and, using an international treaty, requested Switzerland to enforce a warrant against the bank. Now not all treaties cover extradition for tax-related offenses or activities; but the Department of Justice can contact Interpol and ask it to post a Red Notice to arrest fugitives and imprison them in their own home country. In the end, Wegelin became the first foreign bank to be inducted into the Department of Justice’s “hall of shame.” Battered, beaten, and bruised, Wegelin threw in the towel, pleading guilty to felony tax charges and paying a whopping $75 million in fines. Due to the irreparable damage caused to its once stellar reputation, the bank was forced to sell its remaining business.

Wegelin’s fall from grace had a ripple effect that affected more than just the bank itself. It was also felt by U.S. taxpayers who held unreported accounts at Wegelin. Very simply, the federal district court gave the IRS permission to issue a “John Doe” summons that would allow the United States to determine the identity of any U.S. taxpayer who had been suspected of opening an account at Wegelin for the purpose of evading federal income taxes.

“Maybe You’re Not the Good Guy Pretending to be the Bad Guy.”

If you’re intentionally violating a foreign country’s taxation laws or willfully violating U.S. tax laws, your race may come to an end soon. The law has evolved over the past decade, allowing U.S. prosecutors to tail you and prosecute you according to different laws. So don’t expect national borders to protect any illegal schemes you have in mind. Consult with our tax attorneys to find out where you stand; after all, you don’t know how much you appreciate something until someone takes it away.

Original Post By:  Michael DeBlis

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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