November 17,2004

Grassley, Baucus to Appropriators: Drop Item That Would Hurt Tax Shelter, Terrorist Financing Crackdown

WASHINGTON – Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, are urging appropriators to drop a provision that could damage U.S. international competitiveness, impede U.S. initiatives to combat tax shelters, and undermine U.S. efforts to fight money laundering and terrorist financing.

The senators expressed their concerns in a letter sent yesterday to appropriators overseeingthe pending Senate Commerce-Justice-State appropriations bill. The measure would bar the United States from funding the Organization for Economic Cooperation and Development (OECD) if the OECD engages in efforts to encourage information exchange between national tax authorities about the investment activities of foreigners in their country. The bill also would end funding for U.S. agencies that participate in or cooperate with such efforts.

“By encouraging transparency and cooperative agreements between countries, the OECD’s work helps to counter money laundering and the financing of terrorism,” Grassley and Baucus wrote. “Unfortunately, the provision to bar the funding of the OECD if it encourages information sharingruns counter to, and would have a chilling effect on, congressional and executive branch efforts tocrack down on tax evasion and terrorist financing. ... We strongly oppose this measure or anymeasure that would make OECD funding contingent on suspending further discussions regardinginformation exchange agreements.”

Grassley and Baucus have made shutting down abusive tax shelters a high priority. The textof their letter follows.

November 16, 2004

The Honorable Ted Stevens 
Chairman
Committee on Appropriations
S-128 Capitol Building
Washington, D.C. 20510

The Honorable Robert C. Byrd
Ranking Member
Committee on Appropriations
S-126 Capitol Building
Washington, D.C. 20510

The Honorable Judd Gregg Chairman, Appropriations 
Subcommittee on Commerce 
Justice, State, and the Judiciary 
S-146A Capitol Building
Washington, D.C. 20510

The Honorable Ernest F. Hollings
Ranking Member, Appropriations
Subcommittee on Commerce
Justice, State, and the Judiciary
123 Hart Senate Office Building
Washington, D.C. 20510

Dear Senators Stevens, Byrd, Gregg, and Hollings:

We are writing to ask for your renewed diligence in respecting the jurisdiction of the FinanceCommittee. As you know, international tax laws and their underlying tax policies fall within thejurisdiction of the Committee on Finance. The Finance Committee has unique expertise concerningmatters of international taxation and legislates in this area only after a thorough analysis of issuesand possible solutions.

Section 412 of the pending Senate Commerce-Justice-State appropriations bill (S. 2809) would barthe United States from funding the Organization for Economic Cooperation and Development(OECD) if the OECD engages in efforts to encourage information exchange between national taxauthorities about the investment activities of foreigners in their country. The bill would also endfunding for U.S. agencies that participate in or cooperate with such efforts, including informationexchange agreements. While we do not support efforts at tax harmonization, we do supportinformation sharing that furthers our tax treaty network and U.S. tax law enforcement. Accordingly,we are gravely concerned that sec. 412 will damage our nation’s international competitiveness,impede our initiatives to combat tax shelters, and undermine our nation’s efforts to combat moneylaunderingand terrorist financing.

The OECD is an important forum in which the United States presents its views on international taxpolicies and opposes measures that would adversely affect U.S. international competitiveness. Thisis particularly true concerning transfer pricing principles to avoid double taxation and the OECDModel Treaty Convention, which is used to facilitate treaty negotiations between the U.S. and itstrading partners. The OECD is an important tool in implementing the tax policy goals of the UnitedStates.

One of those goals has been expansion of transparency and tax information exchange, particularlyas it applies to U.S. taxpayers that use offshore entities and bank accounts to evade their U.S. taxobligations. We need only recall Enron’s extensive use of offshore entities to hide their tax andfinancial dealings to understand the importance of this goal. In fact, in the last two years the UnitedStates has negotiated and concluded new information exchange agreements with nine significantoffshore financial centers: Antigua and Barbuda, Aruba, The Bahamas, the British Virgin Islands,the Cayman Islands, Isle of Man, Jersey, and the Netherlands Antilles.

The OECD encourages information exchange for the purposes of tax law enforcement, not for taxharmonization. Tax harmonization involves setting uniform tax rates among countries. The OECDhas no power to compel any government to revise its tax rates or to enter into any informationexchange agreement. The OECD is, however, a constructive forum for discussing what could beachieved from information exchange. In this respect, the OECD grants the United States anopportunity to present its own views on achieving information exchange through bilateralagreements.

Congress and the Executive Branch have made progress over the past several years in cracking downon tax evasion. The Finance Committee has held numerous hearings documenting tax evasion bycorporations and individuals using offshore tax havens. One example was last April’s hearing on arecent scam involving credit cards paid from secret offshore bank accounts. Finance Committeehearings have also documented U.S. law enforcement difficulties in combating abusive tax schemesbecause of the information secrecy invoked by uncooperative tax havens. An attempt to suppressprogress in tax information exchange would foster an environment of disrespect for the law andwould sanction safe harbors for financial abuses and terrorist financing activities.

The Federal government is currently losing enormous amounts of revenue each year (in excess of $300 billion) from non-compliant taxpayers. According to the IRS’s most recent estimate, 740,000 taxpayers avoid $20 to $40 billion in taxes annually using offshore bank accounts. These abusivetax avoidance schemes compromise the competitiveness of those U.S. businesses that play by therules and hurt honest taxpayers who must make up the lost revenue. Further, the events of September11th significantly increased our need for detailed financial investigations aimed at terrorist funding.As such, it is important for Congress to continue its efforts to fund improved tax law enforcementthrough greater transparency.

By encouraging transparency and cooperative agreements between countries, the OECD’s work helpsto counter money laundering and the financing of terrorism. Unfortunately, the provision to bar thefunding of the OECD if it encourages information sharing runs counter to, and would have a chillingeffect on, congressional and Executive Branch efforts to crack down on tax evasion and terroristfinancing. The United States has been an influential force in policy development at the OECD. If thisCongress believes that our federal government representatives are pursuing the wrong course ofaction, then our committees should hold oversight hearings and pass legislation urging such changes.We would encourage you to forward to our committee any evidence you may have supporting suchan assertion.

A revocation of funding is the most severe course of action and should not be done without extensiveand thoughtful debate. We strongly oppose this measure or any measure that would make OECDfunding contingent on suspending further discussions regarding information exchange agreements.

We urge you to remove sec. 412 and all related report language from the final conference bill.

Sincerely yours,

Max Baucus 
Ranking Member

Charles E. Grassley
Chairman

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