Innovative reforms combating offshore tax evasion

Tax evaders innovate, but so do government agencies tasked with protecting the tax system for the community. In a series of articles, we'll look at what government agencies here and around the world are doing to develop new ways of combating offshore tax evasion.

Last edition's article, Formula for success in regulatory reform, described the three main strategies that tax authorities are using to protect public revenue against offshore tax evasion: (1) decreasing the benefits associated with tax havens, (2) increasing the likelihood of detection and (3) increasing the consequences of offending. Here are some innovative reforms and actions designed to put this formula into effect and demonstrate to taxpayers the downside of evasion.

How are Australia's advances in obtaining offshore information reducing the benefits previously associated with offshore havens?

In addition to international agreements that Australia currently has in place, the ATO has been able to use information and uncover funds offshore that may previously have remained hidden. In most instances, the ATO is unable to disclose the details of these cases due to taxpayer secrecy provisions. However, the details of two cases have been made public by the courts as a result of legal challenges. They provide an insight into the type of offshore information that is being uncovered:

  • The ATO raised assessments against two taxpayers (a husband and wife) based on information stolen from a Liechtenstein bank by a former employee of the bank. The full Federal Court of Australia held that the ATO had a duty to determine the taxpayers' taxable income and, that when ATO officers used the stolen information in assessing the taxpayers' previously undeclared income, they were acting for the purposes of the tax laws. Therefore, the assessments were held to be valid assessments.
  • The ATO issued notices to an Australian bank requiring it to produce information stored in Australia relating to customer accounts held in Vanuatu. The full Federal Court of Australia held that even if disclosure by the bank might contravene the law of Vanuatu, such disclosure in Australia was governed by the law of Australia and authorised by the ATO's information-gathering powers. These powers override duties of confidentiality that banks owe their customers. The bank was required to provide the information sought by the ATO.

Australians are entitled to hold an offshore bank account or invest overseas - as long as any Australian tax obligations are met. For those who try to evade tax by relying on offshore secrecy, these cases demonstrate that their financial activities / bank accounts may not be secret.

How have international reforms increased the ability of tax authorities to detect those involved in the abuse of offshore havens?

A number of countries offer rewards to members of the public who provide information to their tax authorities that result in undeclared tax being collected. The United States has one of the oldest tax whistleblower reward programs, which started in 1867. In 2006, the United States Congress enacted legislation to streamline the program and provide greater incentives to potential whistleblowers. The prospect of being informed upon also makes tax evaders consider their risk of being exposed.

The most high-profile whistleblower case to date is that of Brad Birkenfeld, a former banker for Swiss bank UBS AG, who blew the whistle on the bank's involvement in helping US citizens to hide their bank accounts from the Internal Revenue Service (IRS). His comprehensive inside information helped the IRS to collect more than US$5 billion in revenue. Mr Birkenfeld was ultimately awarded US$104 million for the information he provided, but he also served two and a half years in jail for his role in a conspiracy. The information that insiders can provide is often very difficult to uncover through more traditional means. The increase in whistleblowing signals a change where citizens are now taking a more active role in society to alert authorities to tax evasion. As Thomas E. Bishop, Assistant Special Agent in Charge at the IRS Criminal Investigation Division in New York has commented, the whistleblower rewards program is a 'game changer' for IRS efforts to combat offshore evasion.

The Australian Government and our agencies are currently working on a range of innovative reforms, which are expected to be discussed with the public in 2013. Get more information about this in upcoming editions, including what other innovative developments are happening to increase the consequences for those caught evading tax.

    Last modified: 25 Mar 2013QC 28154