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DOJ and IRS Expanding Offshore Enforcement Efforts: Financial Institutions and Individual Taxpayers Beware

A few months ago, we posited that the DOJ and IRS were expanding offshore enforcement efforts beyond Europe, with a likely new target of those efforts being Singapore. Recent developments confirm as much, and suggest that financial institutions and individual taxpayers alike should take heed.

A DOJ representative recently commented at a meeting of the Tax Section of the American Bar Association that the DOJ and IRS are in the process of identifying new targets and areas with potential criminal tax exposure. No specific jurisdictions were identified, but the data and information at the government’s disposal is vast. It has been amassing information from multiple sources, including the Swiss bank program, the offshore voluntary disclosure program (OVDP), and John Doe summonses.

On top of that, a number of countries have been automatically exchanging information with the U.S. government under intergovernmental agreements (IGAs) to implement the Foreign Account Tax Compliance Act (FATCA). The list of countries with IGAs is growing – Singapore, for example, will soon be among them. In August 2016, the United States and Singapore announced they will enter into a TIEA and an IGA, possibly as early as the end of 2017.

Those U.S. persons with bank accounts in foreign jurisdictions who have yet to come into compliance with U.S. tax filing requirements have very little time.  In addition to the increased level of material being sent to the U.S., the DOJ has announced that it will be adding approximately 40 more “facilitators” to a list of banks and institutions that trigger the higher 50-percent penalty under the OVDP.  As we have previously noted, the IRS has a series of voluntary disclosure programs and other options to come into compliance with U.S. filings, some of which can give rise to zero penalties.  The primary program imposes a penalty at 27.5% – with the higher 50% penalty being associated with the institutions on the list.  According to DOJ, taxpayers can avoid this higher penalty for the 40 new facilitators, if they make a voluntary disclosure by November 15, 2016.

If you have questions about this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Israel Cleared to Implement FATCA and Report on U.S. Persons

A recent decision by the Israeli Supreme Court has cleared the way for FATCA implementation by lifting a temporary injunction on the disclosure of information to U.S. authorities under Israel’s intergovernmental agreement (IGA). In connection with the decision, the Israeli government has agreed to give individual taxpayers at least thirty days to object to the inclusion of their information in data transferred to U.S. authorities under the IGA.

The government also agreed to delay the implementation of the IGA to September 30, 2016. Israeli financial institutions now have until September 20, 2016, to provide the Israeli Tax Authority with the required data on U.S. taxpayers. This is a notable development in Israel where, reportedly, as much as five percent of the population – upwards of 300,000 people – holds U.S. citizenship.

The decision arose from Republicans Overseas-Israel, et al. v. Israel, et al, where the plaintiffs challenged the constitutionality of FATCA implementation under Israeli law, claiming that the IGA’s required reporting to U.S. authorities violated Israel’s sovereignty. Earlier in September, the Israeli Supreme Court issued a temporary injunction preventing the disclosure of financial information to U.S. authorities under the IGA. In its more recent decision, however, the Court rejected the challenge to Israeli sovereignty and analyzed the claim as an issue of privacy. The Court considered whether the privacy of U.S. taxpayers was being infringed and, if so, whether the harm was reasonable. It assumed that there was some infringement on privacy, but found that the privacy concerns were outweighed by the need for Israel to abide by its agreement to provide international financial cooperation, and that Plaintiffs failed to show that the State did not limit the impact on privacy as much as was possible.

For those U.S. persons with Israeli bank accounts who have yet to come into compliance with U.S. tax filings, there is little time remaining. The IRS has announced a series of voluntary disclosure programs and options, some of which can give rise to zero penalties. Should you have questions regarding this post or the IRS disclosure options, please contact Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).

Is the Yates Memo Impacting Internal Investigations? The Importance of Individual Representation

Since it’s release more than ten months ago, the so-called Yates Memo has stirred up its fair share of commentary. The memo, which requires prosecutors to pursue – and companies seeking cooperation credit to identify – individual bad actors, generated concern that the new requirement would make investigations more difficult and even discourage companies from cooperating at all. Now that the Yates Memo is coming out of its infancy, some report that employees are more nervous about cooperating with corporate counsel, and requesting personal legal representation much earlier in the process, such that investigations are, in fact, becoming more challenging and more costly. Others, however, report seeing less of an impact and do not perceive the Yate Memo as (at least as of yet) having had the dire consequences that were feared.

Even with this divide, there seems to be agreement on at least one thing: the Yates Memo has highlighted – and perhaps increased – the need of individual representation in corporate investigations. Cooperation of in-house employees is important to corporate counsel’s ability to conduct a thorough and objective investigation. Since the Yates Memo, companies and their employees are more aware of and sensitive to the possibility that prosecutors will pursue individuals suspected of wrongdoing. It is a tense dynamic, but one that can be allayed by providing employees with individual representation. This has long been a good practice of companies and their corporate counsel, and while it does increase costs, in a post-Yates Memo world, it can go along way toward reassuring employees that their personal interests are being taken into account and foster internal cooperation that will, in turn, help the company pursue its goals.

Next Up: Singapore? Summonses Could Hit More Global Financial Institutions

A recent summons showdown with UBS shows that DOJ and the IRS are far from done with offshore enforcement efforts, and are expanding those efforts beyond Europe Among the most likely of new targets is Singapore, and since there is no Tax Information Exchange Agreement (TIEA) or other tax treaty between the United States and Singapore, foreign financial institutions could see IRS summonses being served on their U.S. branches.

Such summonses often are referred to as Bank of Nova Scotia summons. In the recent case involving UBS, the IRS served a third-party summons on a branch of UBS AG in the United States seeking records for an account at UBS in Singapore held by a U.S. citizen living in Hong Kong UBS refused to turn over the records on grounds that Singapore’s bank secrecy laws prohibited disclosure without permission from the accountholder. The IRS sought to enforce the summons in federal court – and the case was teed up for litigation – until the accountholder consented to release of the records and UBS complied with the summons. The IRS thereafter withdrew the enforcement action.

We cannot know whether UBS or the government ultimately would have won the day in court. Many factors are taken into consideration in such enforcement actions, and past cases have had varied results. What we do know is that the government maintains the summons served on UBS was enforceable, and was willing to go the distance. With Singapore – and potentially other jurisdictions without TIEA’s or tax treaties – on the enforcement horizon, more global financial institutions are likely to see IRS summonses coming their way.

U.S. Country-by-Country Reporting Coming Sooner Than Anticipated – Though Possibility of Local Filing Requirements During “Gap” Period Remains

The Department of Treasury has announced that it plans to finalize its rules on country-by-country reporting by June 30, 2016 – just in time for U.S. companies with tax years beginning in the latter half of the year to start reporting.  Covered U.S. companies meeting the reporting threshold will have to start filing reports for tax years beginning after June 30th, including years beginning on July 1, 2016, and years beginning on September 1, 2016.

With the announcement came urging for other countries to be flexible in their local reporting requirements.  Many countries already have implemented country-by-country reporting.  Others, like the United States, have been slower to do so.  The effect of such staggered implementation for multinational corporations based is that, until their home countries begin to require reporting, their subsidiaries may be subject to local reporting requirements in other countries that have implemented reporting requirements.

Generally, country-by-country reporting obligations fall on parent companies in their country of residence, and not on subsidiary companies, but where a parent company’s home country does not require reporting, its subsidiaries can be required to file local reports in their countries of residence.  Because of this, the possibility that the United States would not have reporting requirements until 2017 had raised concern among U.S. multinational corporations that, during the “gap” period, their subsidiaries could be subject to myriad local reporting requirements in multiple jurisdictions.

Although the announcement of earlier implementation in the United States will help to curb the “gap” problem for U.S. multinationals, the issue remains.The United States is not the only country dealing with the issue of staggered implementation.  Canada has not yet passed any implementing legislation, and Japan will first start requiring reporting for tax years beginning on or after April 1, 2016.

For questions regarding BEPS and related matters, contact Jim Mastracchio (james.mastracchio@dentons.com); Jeff Erney (jeffry.erney@dentons.com) or Jennifer Walrath (Jennifer.walrath@dentons.com).

FinCEN Seeks to Renew Information Sharing Requirements for U.S. Financial Institutions

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is seeking comments regarding the renewal of its program for information sharing between government agencies and financial institutions.

Under the program, U.S. and certain foreign law enforcement agencies can ask FinCEN to request of U.S. financial institutions information concerning any person or entity an agency certifies is engaged in or suspected, based on credible evidence, of engaging in terrorist activity or money laundering.  Foreign agencies can participate in the program only if they are in a jurisdiction that allows the United States reciprocal access to comparable information.  FinCEN sends approved requests to relevant U.S. financial institutions, which then must “expeditiously” search their records to determine whether they have maintained an account or conducted any transaction with the individual or entity identified in the inquiry and report back to FinCEN regarding any such transaction or account.

Approximately 20,134 financial institutions are covered by the program.  FinCEN estimates that that there are 90 requests per year, each usually concerning multiple subjects.  Of the 90 requests, 10 are from FinCEN on its own behalf, 50 are from U.S. state and local law enforcement, and 30 are from European Union countries approved by treaty.

For questions regarding FINCEN filings, please reach Jim Mastracchio (james.mastracchio@dentons.com) or Jennifer Walrath (jennifer.walrath@dentons.com).