Why the Panama Papers matter

As a primer, this blog discussed the release of documents from the Panamanian law firm Mossack Fonseca, known as the Panama Papers, which disclose a network of shell corporations and entities established by the Panamanian law firm to assist clients in hiding funds and avoiding taxes.

In the news today, as found in this NY times article, the U.S. Justice Department (“DOJ”), through its Kleptocracy Asset Recovery Initiative (for more information about this unit see this NY times article), has begun a forfeiture action against properties in the U.S. acquired by Malaysian individuals whom allegedly embezzled funds from the 1 Malaysia Development Berhad (“1MDB”, Malaysia’s sovereign wealth fund, designed to be used for investment that would return profits to support the Malaysian people).  

The DOJ is trying to seize $1 billion in assets including the $30.6 million penthouse at the Time Warner Center in Manhattan, a $39 million mansion in the Los Angeles hills, and a $17.6 million tear down home in Beverly Hills.  The DOJ is alleging that the individuals diverted over $3 billion funds from 1MDB for their own use.  The key individuals referenced are the stepson, close friends and associates of the prime minister of Malaysia.  There are even allegations that some of the funds diverted were used to fund the film “The Wolf of Wall Street” and also to purchase paintings from Picasso and Monet. 

The DOJ’s seizure action raises two questions:

1. Why isn’t the government getting tough in preventing US Multinational Corporations (US MNCs) from shifting their profits offshore to avoid U.S. taxes; and
2. Why are US banks allowing individuals to hide money in the U.S.

As previously discussed in this Blog, US MNCs have utilized transfer pricing, earnings stripping and inversions to shift profits from the U.S. to low tax jurisdictions to lower the effective tax rates paid by the US MNCs.  This recent news story (DOJ seizure) raises the question why isn’t the government utilizing more aggressive techniques to stop the US MNCs from shifting this income when the government is seizing asset allegedly begotten from embezzled funds of other nations.  Shouldn’t we first stop US tax income from flowing to low tax jurisdictions, then worry about US assets acquired by other nations’ stolen funds?

The Second question goes to the nature of the Panama papers and the uses of shell corporations to mask the identity of the owners of the shell corporations.  There is now an effort by the government to require banks to know the owners of the shell corporations.  See this NY Times article.  According to the article, the US Treasury is requiring US branches of foreign banks to know whom the beneficial owners of the shell corporations.  While the US Treasury’s plans have not actually translated to actual rules requiring banks to obtain the identities of the owners of the shell corporations it appears as if it is likely to get legislation passed through Congress to enact the more stringent requirements on banks. 

If you have specific and credible information about a U.S. MNC shifting its profits offshore using transfer pricing, inversions or earning stripping, or anyone not paying their taxes by using shell corporations through banks, contact our firm to discuss filling a tax whistleblower claim.  As a reminder, the IRS pays between 15-30% of the collected proceeds (tax, penalties, interest, and other amounts collected) based on the information provided and used by the IRS to stop tax violators.

Sports and Taxes Part 2: Update on Messi trial and Kevin Durant's decision to take less money by signing with the Warriors

First:  as noted in a previous post, Lionel Messi, Argentinian soccer star, and his father ("Messis") were on trial for tax fraud.  Now, as reported in Sports Illustrated, the Messis have been sentenced to 21 months in prison for being found guilty of three counts of tax fraud.  However, because Spain suspends sentences for first time offenders if the sentence is less than two years, the Messis will not serve time in jail.  Instead Messi and his father will have to pay a fine in the amount of € 1.7 million and € 1.3 million, respectively.

The Court determined that the Messis evaded paying more than € 4 million in taxes on Lionel Messi's image rights between 2007-2009 by sending income through Uruguay, Switzerland and Belize to minimize taxes.

Kevin Durant

Second: as reported in this SI artcle, NBA superstar Kevin Durant chose the Golden State Warriors and decided to take less money than by staying with Oklahoma City Thunder, or any other suitor.  Why did Durant take less money? Simple answer, state income taxes.  Using the models in the SI article which makes certain assumptions, Durrant would pay $31 million in state income taxes (to California) compared with $0 state income taxes had he signed with the San Antonio Spurs (to Texas) or Miami Heat (to Florida), and compared with $14 million in state income taxes had he re-signed with the Oklahoma City Thunder (to Oklahoma). So why did Durrant choose to take less money? As stated in this SI article, he wanted a more free flowing (ball moving) offense and was frustrated with recurring issues with a now former teammate (Russell Westbrook).

Why are these cases important/interesting?  In the first case (Messis), tax avoidance is not tax evasion, if done properly.  In the second case (Durant), personal desire trumped tax consequences.

MESSI

In the first case, it is interesting that the Messis undertook what in the tax world is known as transfer pricing with the intangible (Messi's image and likeness) and tried, unsuccessfully, to transfer the intangible between Uruguay, Switzerland, and Belize.  This same concept has been utilized by very large US multinational corporations (i.e. Apple, Google, Microsoft, Caterpillar, Medtronic, and others) to transfer their intellectual property ("intangible") to low tax jurisdictions (Puerto Rico, Ireland, Netherlands, Switzerland, etc.) to lower their bills in the U.S.

The simple question is why did it work for Apple, etc. and not Messi? One answer may be that a person's image and likeness are not separable from an individual, whereas the intangibles related to non-living things (i.e. iphones, search data, source code, heavy equipment, medical devices, etc.) can be separated from the individual. Or another possibility is that the U.S. is not attacking transfer pricing with U.S. multinational corporations with as much zeal as Spain.

DURANT

The Durant case is interesting because Kevin Durant chose to pay more state taxes but would be in the type of offense he craved instead of staying in OKC or moving to a tax favorable jurisdiction.  So this raises the question of whether tax motivates people to make a decision or whether it is just an afterthought.  For more information about state taxes and athletes see this Forbes article.  See also this article through Fansided about state taxes and athletes.

If you have specific/credible information about individuals or corporations avoiding the payment of tax through transfer pricing or other methods, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower that provides specific and credible information about the taxpayer’s avoidance of tax.   Contact our firm if you want to discuss filing a tax whistleblower claim.

How to Report IRS Scammers

March 17, 2016 Press Release
TIGTA - 2016-07
Contact: Karen Kraushaar, Director of Communications
Karen.Kraushaar@tigta.treas.gov
(202) 622-6500
 

J. Russell George Urges Taxpayers to Remain Vigilant Against Scammers

Inspector General Sees Progress in TIGTA’s Efforts to Impede IRS Impersonators

WASHINGTON — Noting progress in the counteroffensive against Internal Revenue Service impersonators who make threatening telephone calls to taxpayers, the Treasury Inspector General for Tax Administration nonetheless advised taxpayers to stay on high alert through the end of the 2016 tax filing season.

“Without question, TIGTA’s efforts have impeded these criminals’ ability to victimize taxpayers over the past few months,” the Inspector General, J. Russell George, said. He noted that TIGTA’s four-part strategy to thwart callers is working. “These efforts are producing results,” he said. “Where the perpetrators used to be able to get a victim every 40-50 calls, now they must make 300-400 attempts to claim a victim,” he added.

TIGTA’s counteroffensive consists of: 1) using an autodialer to call the scammers to advise them that their activity is criminal and to cease and desist; 2) working with telephone companies to shut down the telephone numbers used to perpetrate these crimes; 3) publishing telephone numbers associated with the criminal activity on the Internet; and 4) engaging in outreach efforts with the public, the media, Congress, and other stakeholders to educate taxpayers about the scam. In January, TIGTA launched a series of Public Service Announcements on YouTube; this month, they also became available on the IRS’s YouTube channel.

“Criminals view this scam as they do many others; it is a crime of opportunity,” he said in congressional testimony March 8. “While we plan on arresting and prosecuting more individuals, the scam will not stop until people stop paying the scammers money,” he added. “Our best chance at defeating this crime is to educate people so they do not become victims in the first place. Every taxpayer we protect from this crime is a victory.”

TIGTA has received reports of more than one million contacts since October 2013 and has become aware of over 5,500 victims who have collectively paid approximately $29 million as a result of the scam in which criminals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards, money orders or wire transfers from their banks.

“If someone unexpectedly calls claiming to be from the IRS or in a new twist, the Treasury Department, and uses the threat of legal action if you do not pay immediately, that is a sign that it is not the IRS calling, and your cue to hang up,” he said. “Again, do not engage with these callers. If they call you, hang up the telephone.”

Inspector General George noted that the scam has hit taxpayers in every State in the country. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card, money order or a wire transfer. The scammers threaten those who refuse to pay with being charged with a criminal violation, a grand jury indictment, immediate arrest, deportation or loss of a business or driver’s license.

Here is what you need to know. The IRS generally first contacts people by mail – not by phone – about unpaid taxes and the IRS will not ask for payment using a prepaid debit card, a money order or a wire transfer. The IRS also will not ask for a credit card number or your bank information over the phone.

If you get a call from someone claiming to be with the IRS asking for a payment, or your credit card or bank account information, here’s what to do:

• If you owe Federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
• If you do not owe taxes, fill out the “IRS Impersonation scam” form on TIGTA’s website, www.tigta.gov or call TIGTA at 800-366-4484.
• You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam” to the comments in your complaint.

TIGTA encourages taxpayers to be alert to phone and e-mail scams that use the IRS name. The IRS will never request personal or financial information by e-mail, text, or any social media. You should forward scam e-mails to phishing@irs.gov. Do not open any attachments or click on any links in those e-mails.

Read more about tax scams on the official IRS website at www.irs.gov.