PSI's Red Flags

Recently, the U.S. Senate Permanent Subcommittee on Investigations held a hearing on dividend tax abuse. In keeping with the PSI's past work, the hearing focused on offshore entities and how they dodge taxes on U.S. stock dividends.

The staff's report to the Subcommittee identified several "red flags" that signal the likelihood of tax abuse. The red flags include:

• U.S. stockholders received dividend distribution through a short term transaction.
• The client and the financial institution agree to an explicit dividend payment exceeding the 70% rate available after applying the 30% dividend withholding tax rate.
• Stock or swap loan fees link to the tax savings amount.
• Shares were sold before the distribution and then re-acquired afterwards.
• The client and the financial institution agree to sell or repurchase stock through a third party.
• The client and the financial institution insert an offshore shell corporation into the middle of a deal, solely for the purpose of using the offshore corporation to avoid dividend withholding.
• The financial institution regards nonpayment of dividend taxes as a risk and then sets a tax risk limit on the aggregate amount of tax withholding that can be incurred by the institution.

Given the recent concerns about the economy, off shore tax schemes will likely receive full attention of the IRS, which may, perhaps, lessen scrutiny of domestic institutions. The PSI's staff report that the U.S. loses about $100 billion per year through offshore tax abuses. To read more about the U.S. Senate's Permanent Subcommittee's efforts, check out the hearing postings on the Senate's Homeland Security and Governmental Affairs web page.