The US is getting tougher on the use by its citizens of offshore financial services and this article looks at some of the main issues.

Earlier this month, US president Barack Obama laid out his plans for international tax reform. Long perceived as the most abused section of the tax code, the proposals seek to raise $210 billion over the next 10 years. The stated goals of the tax reforms include reducing the amount of taxes lost to tax havens.

In order to "get tough" on tax havens, the proposals include stricter reporting requirements for individuals and financial institutions. The aim is to crack down on perceived abuses of the system by US nationals using certain jurisdictions to hide their wealth from US taxes. Offshore financial institutions with US clients will be coerced to join the Qualified Intermediary scheme.

Under this programme, financial institutions enter into an agreement with the Internal Revenue Service to share information about their US clients and to produce 1099s as any US financial institution would have to do. In order to meet the QI requirements, all commonly-controlled financial institutions will also have to be QIs.

Any financial institution not choosing to join the QI scheme will be assumed to be facilitating tax evasion. US financial institutions will be required to withhold between 20 per cent and 30 per cent on any US payments to customers of non-QI institutions.

In addition, any US person holding an account with a foreign institution which is not a QI, will be assumed to have enough funds in their accounts to require foreign bank account reports be filed. It will then be up to the US person to prove otherwise.

Further, if the account holds a balance over $200,000 at any point in the year, the failure to file would be deemed "wilful", meaning greater penalties and perhaps criminal charges. These proposals represent a drastic change in the legal presumptions. The new legal presumptions would shift the burden of proof from the IRS to individuals and foreign financial institutions to prove they were not sheltering income or aiding in tax evasion.

Both US investors and non-QIs would also be required to disclose transfers of money or property between the US investor and non-QI account, with an emphasis on transfers made by foreign entities on behalf of the US person.

In order to aid the IRS, the US administration proposes to hire 800 IRS agents devoted to international tax enforcement as well as to extend the statute of limitations for investigations and to increase the penalties on US taxpayers failing to adequately disclose their offshore accounts.

Meanwhile, from among the business community, there have been pushbacks against the US administration's attempts to squeeze multinationals that have in the past taken advantage of favourable tax regimes abroad. Cathy Schultz of the National Foreign Trade Council talked of "saddling US based multinationals with tax increases when the desire was to remain competitive".

The concern for US corporates is that they wish to continue to compete as multinational companies and do this as competitively as possible internationally, and that this change in the tax legislation prevents them from doing so. They are used to getting a return on their international profit outside the United States at a lower effective corporate tax rate, thus preserving the businesses they have built and enabling the next generation of products to be built and developed, supporting US jobs and the success of their businesses.