Tax & Accounting Blog

In the Shadow of the Panama Papers, US Seeks to Address Weaknesses in Financial Transparency

Blog, International Reporting & Compliance, ONESOURCE May 10, 2016

One month! On May 5, just 32 days after the Panama Papers leaked the identities of shareholders and directors of over 200,000 companies by the Panamanian law firm Mossack Fonesca, the White House signaled their intent to introduce regulations that would provide greater transparency and sharing of data.

In a letter from the U.S. Secretary of Treasury, Jacob Lew, to the Speaker of the House, Paul Ryan, Lew proposed new tools to help crack down on tax evasion. Seeking to establish leadership and counter long held criticism that while the US has taken specific steps to ensure assets of US persons cannot be hidden abroad it has done little to close the gaps that allow foreigners to hide assets from their governments. “Yet gaps remain in our laws that allow bad actors to deliberately use U.S. companies to hide money laundering, tax evasion, and other illicit financial activities.” said Lew in his letter to Ryan.

In the letter, Treasury indicated that it finalized customer due diligence regulations to strengthen the Bank Secrecy Act and ensure financial institutions understand who the beneficial owners are of companies using their services. Most interestingly, Treasury proposes closing a loophole that allows foreigners to potentially hide US assets from their foreign tax authorities. A foreign person who sets up a Single Member LLC (SMLLC) that is a disregarded entity with no employees does not have a requirement to file excise tax forms, does not need an employer identification number and under some scenarios, may not need to file company or personal taxes in the US. This gives rise to the opportunity where a foreigner could set up a business in the US, an online store for instance, manage that business remotely, never establish permanent residence in the US and potentially not pay US taxes. Depending on their nationality, they could face tax liabilities in their home country but you guessed it, there is no way for their home country to know that. Seeking to maintain a position of leadership in global tax compliance and help the very countries who help the US uncover hidden assets, Treasury reaffirmed the President’s view for full reciprocity under FATCA – to have US financial institutions provide the same level of detail foreign financial institutions provide to the US.

While most of what Treasury outlines will require legislation be passed, the measures taken together reveal a willingness and determination by the US to ensure its house is in order and leaves no doubt about its desire to clamp down on global tax evasion.

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