Tax evasion: The United States and the UBS affair

The recent US Internal Revenue Service suit against and settlement with Swiss bank UBS over the identity of potential tax evaders appears to be just the start of a more concerted global effort by the US to crack down on unpaid tax on offshore accounts. See the New York Times article on August 20, 2009.

In the settlement, announced on August 19, 2009, UBS agreed to provide the IRS with details related to an estimated 4,450 American clients that the IRS suspects were evading taxes. The IRS estimates that the related accounts held over $18 billion USD at one point, a potentially significant source of taxes. The agreement comes on the heels of the February 2009 settlement of criminal fraud charges against UBS, wherein UBS agreed to pay a $750 million USD fine and to identify certain US clients whom it allegedly assisted to hide assets and evade taxes.

Will Canada be next? Although to date the CRA has been silent on the issue, it would not be surprising. With respect to UBS, the ongoing US investigation recently revealed that UBS may have been conducting similarly fraudulent activities for Canadians.  Known internally as “the Canada Desk,” it appears UBS ran a Canadian operation similar to the one it ran in the US, whereby it would recruit wealthy clients and encourage them to move their assets to Switzerland.  According to US investigators, as of October 2005, the Canada Desk managed $5.6 billion. See Globe and Mail article on March 4, 2009.

More generally, similar to the US, Canadian taxpayers’ unreported offshore accounts could be a significant source of tax revenue.  Canadian taxpayers generally must report and pay tax on their worldwide income, including income from foreign sources. Thus, CRA may be owed tax on unreported income held in offshore accounts. And, CRA may also be able to collect civil penalties if such income was not reported.

In addition to the US, other countries recently have made efforts to go after unreported offshore assets. For example, Her Majesty’s Revenue & Customs (HRMC), the tax authority of the United Kingdom, recently won a court order to force more than 300 banks to provide details of their customers with offshore accounts – See the Telegraph article on August 12, 2009. HRMC estimates that it will be able to recoup £500 million in unpaid taxes by British offshore investors over the next four years.

These efforts by individual countries coincide with a stronger recent focus on international tax information sharing. The Organization for Economic Cooperation and Development (OECD) recently issued a report on its work on countering international tax evasion, highlighting the fact that all OECD countries now accept the Exchange of Information Article of the OECD Model Tax Convention, including Austria, Belgium, Luxembourg and Switzerland –  see OECD Progress Report.  In a further show of its commitment to the issue, the OECD is currently proposing a new, formal body to replace the current informal tax-information sharing group, the Global Forum on Transparency and Exchange of Information. Members will discuss this new body during the upcoming OECD meeting on September 1, 2009. The proposed institution will provide a formal peer review mechanism “designed to ensure full implementation of international standards developed at the OECD,” and will likely have a permanent staff of examiners.

Although Canada may rely solely on these efforts to improve future access to information about offshore accounts, the success of countries like the US and UK in obtaining information about historical offshore accounts suggests Canada will not ignore this potential source of revenue. Indeed, Canada Revenue Minister Jean-Pierre Blackburn has “asked US justice officials to notify Ottawa if any data that they get from UBS has pertinent information on Canadians.” Canadian taxpayers who may be affected by a crack-down would be wise to consider a voluntary disclosure to the CRA (see Information Circular IC00-1R2 Voluntary Disclosures Program) and seek legal advice. Stay tuned…