Eyes turn east as US targets avoidance

Tax planners in the US have had a rough time of it recently. The Internal
Revenue Service has moved to wipe out tax schemes using special purpose vehicles
and presidential candidate Barack Obama has thrown his support behind a bill to
tighten rules on tax havens.

The IRS’s intentions to limit the use of special purpose vehicles may cause
particular alarm here in the UK. The IRS is planning to stop US institutions
from setting up structures that avoid tax by partnering with a foreign bank.

The scheme sees the institution and foreign partner pool assets in a special
purpose vehicle (SPV), and pay tax on the assets in the country where they are
held. The US institution then claims a tax credit on foreign tax paid, which
allows the foreign partner to lend money to the SPV at low interest rates.

UK banks are believed to have participated in these types of partnerships,
with Barclays Capital in particular cited as very active in the area. The IRS
crackdown will place a significant restriction on the ability of UK institutions
to participate in such planning.

But perhaps even more important for UK institutions is the fact that shifts
in US tax policy influence the stance of the UK tax authorities. The UK’s
effective tax policy chief, Dave Hartnett, is thought to be particularly close
to IRS chief Mark Everson.

The impact of the US is likely to be especially strong following the Seoul
Declaration, a manifesto drawn up by the tax administration heads of 30
countries at the OECD’s Forum on Tax Administration held in 2006.At the forum
tax authorities agreed to work together to fight non-compliance with tax law.

The thinking was that as business has become multinational, tax collection needs
to develop similar organisation and fluidity across borders.

With the IRS under pressure to raise revenue to plug Budget deficits without
taking the unpopular step of raising rates, tax avoidance has become a priority
and tax havens and special purpose vehicles are in the firing line.

With tax authorities working together more closely than ever before, don’t be
surprised if the UK begins to explore similar courses of action.

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