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Issue Date: September 2010, Posted On: 9/3/2010

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India in focus as IRS widens its range for targeting offshore accounts

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The waves created last year when the U.S. Department of Justice targeted Swiss banking giant UBS for helping individuals evade American taxes with offshore accounts has rippled onto the shores of India. Early this summer, it was reported the Justice department and the Internal Revenue Service turned their eyes toward the subcontinent with letters to HSBC Holdings Plc clients suspected of failing to disclose offshore bank accounts in India.

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The Justice department has already chased at least three of the London-based HSBC’s U.S. clients for evading taxes using offshore accounts. By many accounts the noose may now be tightening even more, especially on India. According to one report about the letters, recipients included people who inherited money from relatives in India or continue to own assets there after leaving the country to come to the United States.

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Attorney Kenneth Rubinstein, senior partner at Rubinstein and Rubinstein LLP, says it makes perfect sense that the focus would turn from Switzerland toward other countries, such as India, following the UBS tax investigation. “We know that the IRS is expanding its investigation to include countries in Asia,” said Rubinstein. “A lot of money left Switzerland and a lot of it went to Asia and Singapore … Basically, the IRS followed the money.

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“Let’s just say that the Asia region is very much on the radar of the IRS right now,” he added. “The important lesson that the tax payers need to learn is there is no real secrecy vis-à-vis the government.” Overall, he believes the recent tactics concerned HSBC clients are just part of an ongoing major initiative of the IRS to look at foreign accounts. However, he added that India is an easy target because the country has a tax information exchange agreement with the United States so the IRS can easily get the information they are seeking about accounts and assets.

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Rubinstein said his New York-based law firm, which provides legal services in the areas of domestic and international asset protection planning and estate and tax planning, has many clients with assets and bank accounts overseas and that it counsels these clients about how to be tax compliant. “Every U.S. tax payer has to understand that the IRS requires they expose any revenue earned any place all over the world … and all foreign accounts,” said Rubinstein, a speaker and author on topics such as estate and tax planning, and domestic and international asset protection, as well as a frequent legal source on television networks such as CNBC-TV, Bloomberg-TV, WABC-TV. “Tax payers should also understand there is nothing illegal about owning a foreign account. What is illegal is not disclosing it.”

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According to Rubinstein, mutual funds, brokerage accounts, prior-owned assets and even shared bank accounts in other countries are all things that individuals need to disclose to the IRS for tax purposes. He points out that if another country has also taxed an individual or company on assets and accounts the United States will give tax credit, so there is no fear of being taxed twice.

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Typical issues that can be prosecuted for tax evasion by the IRS range from the simple oversights – having a name on a parent’s bank account in another country, inheriting and accounting in another country or owning an account in another country and never shutting it down when moving to the United States – to the intentional criminal behavior, such as having an account overseas to handle revenue from business.

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No matter what the level of infraction, Rubinstein said the best bet is to come forward. The IRS has a voluntary disclosure program designed to allow individuals or companies to come forward it they believe they may be in violation of U.S. tax laws. “They need to come forward and make the appropriate disclosures before the IRS gets their name,” Rubinstein said. “Because once the IRS gets their name they will not allow them to come forward and ultimately they will criminally prosecute them for tax evasion.” If it sounds like a tricky landscape to navigate both U.S. and foreign tax law without any infractions – that’s because it is. Rubinstein said lawyers who are familiar with the IRS are the best bet. “You need to get advice before the IRS comes knocking on your door with and FBI agent,” Rubinstein said. “The tax laws are a very complicated maze that has minefields in it. Lay people will get hurt if they are not properly represented.” When it comes to setting up business operations in other countries, Shan Nair, co-founder of consulting firm Nair & Co., agrees that there is no option but to seek professional advice, even if it is costly. “A lot of companies, not just in India, are at the moment trying to expand abroad on a shoestring and I think there are big risks,” he said. “You will probably end up paying more in the long run. “If you don’t have the money, you shouldn’t do it,” he added. Providing human resources, finance, tax, compliance and legal services, Nair & Co. has approximately 700 clients in over 40 countries. The firm was started in 1994 and has operations in the United States, the United Kingdom, China, India, Japan and Singapore, with 400 employees. Nair spends much of his time in the company’s Bonita Springs, Fla., and Sunnyvale, Calif., offices. Beyond a situation in which an individual or company intentionally tries to hide revenue from the IRS in offshore accounts, Nair said there are plenty of commonplace business practices in other countries that can trip up U.S. businesses with foreign operations and subsidiaries. For example, foreign customers may not want to pay money back to the United States and would prefer to pay local. To handle such payments a company may set up a foreign bank account to receive payments and this triggers the need to report that account and revenue going into it to the IRS. “When you have these foreign bank accounts you have to be very careful,” Nair said. In other cases, U.S. companies may have to set up multiple subsidiaries in many countries just to receive payment and even if they are subsidiaries in name only – with no employees or offices – taxes will still need to be paid. Nair also points out that the IRS is not the only tax agency that companies need to worry about because foreign countries can also take a swing with heavy taxes. He said that India is a country that actively pursues foreign companies within its borders, looking for taxes on the profit percentage these companies make in India. “A lot of people think the IRS is very aggressive. In fact, in this particular area, the India tax authorities are actually more aggressive,” said Nair. “India is

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one where the tax authorities are very aggressive at pursuing tax revenue for their country.” According to Nair, the Indian government acts as such for the simple reason that the budget is at a deficit and needs tax revenue. He said the government figures if foreign companies are going to come into India they are going to have to do it at India’s terms and they are going to have to pay taxes. The whole scenario can become quite a seesaw for a U.S. company operating in India. “The IRS is coming at you saying you are paying India too much,” Nair said. “And India is saying you are not giving enough profit to us.”

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Typical issues that can be prosecuted for tax evasion by the IRS range from simple to oversights- having a name on a parent’s bank account i...

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