HSBC Data Theft Affects 24,000 Swiss Accounts

Reuters is reporting that HSBC's private banking arm has announced that a previously reported theft of client data from its Swiss branch involved far more accounts than it had previously acknowledged. The story is here

Stolen data has played a significant role in government crackdowns on tax evaders. Many governments, will pay for stolen data about such taxpayers., e.g., the LGT bank account crackdown by numerous governments including the German and U.S. governments, were propagated primarily based upon stolen data purchased by German tax authorities.

This story could get very dramatic very quickly. Any HSBC customers with Swiss accounts are well advised to consult their tax advisers if they are concerned that they have not correctly reported the income and assets of such accounts.

Redomiciliation of Cayman Island Parent into Switzerland or Ireland

I am quoted a recent article in Portfolio magazine on the Garmin transaction. Garmin was a multinational corporation doing business in the U.S. and elsewhere. Its parent corporation was incorporated in the Cayman Islands. Garmin recently announced that it was changing the jurisdiction of its parent's incorporation to Switzerland. Publicly filed documents gave several reasons for this transaction including the advantageous tax treaty network in Switzerland, a perceived closeness to European customers and the negative public perception regarding Cayman Island companies and the (realistic) possibility of adverse legislation in the U.S. and elsewhere directed at such companies.

International tax practitioners both in-house and outside are noting a trend towards such redomiciliation transactions. The public perception of Cayman Island corporations and potential adverse legislation cannot be dismissed. In the case of many multinationals, the tax treaty network, low corporate tax rates and potential tax holidays could make Ireland or Switzerland even more attractive than the Caymans. It is a worthwhile exercise for multinationals to evaluate whether redomiciliation could work to their advantage.

IRS Announcement 2010-9 Introduces New Tax Reporting Transparency Standards

My recently published article, “Announcement 2010-9 Introduces New Tax Reporting Transparency Standards,” concerns IRS Announcement 2010-9, which proposes additional reporting requirements with respect to uncertain tax positions of certain business taxpayers. This generally includes taxpayers who are subject to Fin 48 or other similar international accounting standards. The IRS is in the process of developing a schedule, which must be filed with such taxpayers’ returns, in which the taxpayers would disclose their uncertain tax positions. Many practitioners have expressed concern that such a schedule could require taxpayers to disclose otherwise privileged information and could create an audit roadmap. The potential application of 2010-9 in the investment funds context could raise additional issues.

Until recently, the IRS has exercised a "policy of restraint" with respect to tax accrual work papers, except in the case of "listed transactions." Many practitioners believe that 2010-9 is a sign that this "policy of restraint" is beginning to change. It is possible that 2010-9 is a result of the Textron decision, which is currently being appealed to the U.S. Supreme Court, which addressed whether tax accrual work papers were privileged.

The article focuses on these issues and poses some additional issues and clarifications that will hopefully be addressed in future guidance.

Levin Bill would exempt most unrelated debt financing income from taxation

I was extensively quoted in an article appearing in the March 4 Hedge Fund Law Report which discusses the Levin bill (HR 3497) to (largely) eliminate taxation on debt financed income of U.S. tax-exempts investing in private equity and hedge funds.

In general, tax-exempts are subject to U.S. federal income tax on their unrelated trade or business income (UBTI.) UBTI includes debt financed income (UDFI.) UDFI arises principally in two ways: (1) the tax-exempt borrows to purchase an investment or (2) in the case of an investment in a partnership, LLC or other tax pass-through, the pass-through itself is leveraged, so that the tax-exempt is deemed to have borrowed its pro rata share of the debt of the pass-through for purposes of the UDFI rules.

Many tax-exempts invest through foreign blocker corporations, which effectively blocks the UDFI. However, as discussed at length in the article, foreign blockers also have their drawbacks. For example, if the fund engages in a U.S. trade or business, the blocker could be subject to U.S. taxation (ECI risk) and blockers are not typically entitled to tax treaty benefits.

The Levin Bill would change the definition of UDFI to render blockers unnecessary solely for UDFI blocking. There are, however, numerous circumstances where blockers are still useful.
In this article, I (and other commentators) discuss typical UDFI blocker structures including master feeder structures, as well as parallel and hybrid structures and the advantages and disadvantages of each.

The article is available here

Islamic Finance Article from today's WSJ

Doing God's Work Islamic finance is meant to reconcile both commercial and religious ideals. It's a tall order.

This article briefly discusses Islamic finance, Islamic Project Finance and the inconsistencies in what different Shariah Boards deem to be Islamic. There is a brief discussion of the Dubai debacle.

Although this article is very brief, it does pose important questions about Islamic finance structures without rigorously analyzing them. A longer follow up article would be a great idea.