An Internal Revenue Service agreement last week to share tax data with the tax authorities of Australia and the United Kingdom could have wide implications for corporations that do business abroad.
The shared data pool consists of tax information on entities in jurisdictions such as Singapore, the British Virgin Islands, the Cayman Islands and the Cook Islands. Financial institutions routinely establish domiciles in offshore locations to get a more favorable tax rate than what they could typically achieve in the United States.
The IRS, the Australian Tax Office and the U.K.’s HM Revenue & Customs agreed to share data about trusts and corporate structures as well as about the advisers who aid them in setting up the structures. The act of shifting company profits to offshore subsidiaries to benefit from lower tax jurisdictions (transfer pricing) has come under scrutiny lately as regulators seek to ensure that U.S. corporations pay their fair share of tax dollars to the government.
The IRS is looking for more voluntary disclosures of the assets in offshore entities regarding corporate structures. It already has an IRS Offshore Voluntary Disclosure Program for individual U.S. taxpayers where “failure to do so may result in significant penalties and possible criminal prosecution.”
The corporate structure data it just collected, however, has already led to some cases being opened for further investigation, said the IRS.
The tax authorities will share the information to assist other jurisdictions, similar to current arrangements for data sharing that exist now under tax treaty arrangements. Canada, for one, is already interested in the data, said the IRS.
The three-nation pact is part of a global effort to curb tax evasion. The Organisation for Economic Co-operation and Development (OECD), for example, is due to release a global tax action plan in July that targets transfer pricing aimed at tax avoidance in all countries.
In the United States, the Foreign Account Tax Compliance Act (FATCA), which is designed to catch tax evasion involving foreign institutions, becomes effective January 1, 2014. FATCA applies to any U.S. bank making dividend payments or interest payments to a non-U.S. entity. The U.S. bank making the payments would be required to withhold the interest or other payments made to a foreign financial institution that fails to report certain account information to the IRS. And if the U.S. bank fails to withhold as required, it would be liable for the withholding tax plus potential penalties and interest.
U.S. companies today are also at heightened risk stemming from financial reporting fraud by their local staffs in foreign operations that can often lead to tax evasion. An Ernst & Young fraud survey released this month shows that 42 percent of more than 3,000 board members, executives and managers in 36 countries are aware of some type of irregular financial reporting in their companies. The survey includes data from Europe, the Middle East, India and Africa.
“The possibility of inaccurate financial reporting to headquarters, or corrupt payments being made to secure sales, undermines the parent company and could expose it to enforcement action by regulators,” explains Brian Loughman, Americas Leader of Fraud Investigation & Dispute Services at E&Y.
Since the practice of faulty reporting is as widespread as it is in those countries, the report suggests the findings “will be of real concern to management and boards.” More than a third of the respondents said companies in those countries often reported results that were better than what they were in reality.
“The results make for uncomfortable reading,” noted the authors of the E&Y report.“We found that executives and their teams are indeed under increased pressure– and it is being felt personally. They are also bleakly realistic about the market challenges they face.”