Saturday, January 17, 2009

Using SEC Data, GAO Finds that TARP Recipients Have Subsidiaries in Offshore Tax Havens; Legislation Likely

A new GAO study reveals that an overwhelming majority of the 100 largest U.S. corporations in terms of 2007 revenue reported to the SEC have multiple subsidiaries in offshore tax havens. A number of the companies have received funds under the Emergency Economic Stabilization Act. The report was done at the request of Senators Carl Levin and Byron Dorgan, who have vowed to introduce legislation this year to stop tax haven abuse by companies, financial institutions and hedge funds. Legislation is likely to pass this year given President-elect Obama’s strong pledge to give Treasury the tools it needs to stop the abuse of tax shelters and offshore tax havens.

In the 110th Congress, Senator Levin and then Senator Barack Obama introduced a bill to stop offshore tax haven abuse. The Stop Tax Haven Abuse Act would have allowed U.S. tax and securities law enforcement officials to presume against the validity of transactions involving foreign tax havens identified in the Act. The bill would also have authorized Treasury to take special measures against foreign jurisdictions and financial institutions that impede U.S. tax enforcement.

The bill would also have required hedge funds to know their offshore clients by requiring them to establish anti-money laundering programs under Treasury regulations. The measure would have amended the Securities Exchange Act to impose a penalty for failure to disclose holdings or transactions involving a foreign entity. A companion bill was introduced in the House.

In conducting the study, the GAO used information filed with the SEC to determine where subsidiaries were located. Since the SEC only requires public corporations to report significant subsidiaries, the companies listed in the study could have additional subsidiaries under the SEC radar screen and thus underreported in the study.

While the existence of a subsidiary in a jurisdiction listed as a tax haven does not signify that a corporation established that subsidiary for the purpose of reducing its tax burden, noted the GAO, Treasury takes offshore tax evasion very seriously and has taken strong administrative and regulatory steps to address the problem.

GAO was unable to find a universal definition for a tax haven or an agreed-upon list of jurisdictions that should be considered tax havens. However, there is a consensus on the characteristics used to define and identify tax havens, including: no or nominal taxes; lack of effective exchange of tax information with US and other tax authorities; lack of transparency in the operation of legislative, legal, or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.

The GAO used Form 10-K and Exhibit 21, which are included in the SEC’s EDGAR database to determine the locations of corporate subsidiaries based on the latest filings with the SEC. Since the principal executive officers, the principal financial officers, and a majority of the board of directors must sign the form filed with the SEC that includes the subsidiaries, GAO did not take additional steps to verify the accuracy of information found in EDGAR. Also, since the SEC only requires public corporations to report their significant subsidiaries, GAO was only able to identify the subset of corporate subsidiaries meeting the definition of significant subsidiary. The SEC considers a subsidiary to be significant if, among other things, the parent corporation’s and its other subsidiaries’ investments in the subsidiary exceed 10 percent of the consolidated total assets of the parent corporation and its subsidiaries.