[Congressional Record Volume 142, Number 51 (Friday, April 19, 1996)]
[Senate]
[Page S3740]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                THE USE OF FOREIGN TRUSTS TO AVOID TAXES

  Mr. MOYNIHAN. Mr. President, last evening the Senate adopted a 
proposal I introduced in September of last year to curb the use of 
foreign trusts to avoid U.S. tax responsibilities.
  The Treasury Department first called attention to this problem early 
in 1995. Thereafter, I worked with Representative Gibbons to develop 
legislation to prevent taxpayers from evading taxes by transferring 
assets offshore. Legislation very similar to the bill that I introduced 
(S. 1261) was included in the Senate-passed health insurance reform 
bill late yesterday.
  There is disturbing evidence of the extent of tax avoidance through 
the use of foreign trusts. Although taxpayers are required to report 
the value of their assets held in foreign trusts, only $1.5 billion 
were reported in 1993, according to the IRS. Yet it is estimated that 
total U.S. source funds held abroad in tax haven jurisdictions are in 
the hundreds of billions.
  In 1989, the New York Times reported that financial institutions in 
the Cayman Islands, Luxembourg, and the Bahamas had $240, $200, and 
$180 billion, respectively, on deposit from the U.S. New York Times, 
October 29, 1989, page 10. More recently, Barron's estimated that a 
total of $440 billion was on deposit in the Cayman Islands in 1993, 
with 60 percent of that amount--$264 billion--coming from the U.S. 
Barron's, January 4, 1993, page 14. To put this in some perspective, 
Barron's calculated that there was more American money on deposit in 
the Cayman Islands than in all of the commercial banks in California. 
Although only a portion of U.S. funds abroad are held in foreign 
trusts, the Treasury Department estimates that tens of billions of 
dollars are held in offshore asset protection trusts established by 
U.S. citizens and residents.
  Once assets move offshore, it has been difficult for the IRS to 
enforce the tax laws. Foreign bank secrecy laws preclude the IRS from 
uncovering the information necessary to determine what is owed. Central 
to the legislative solution that I have proposed are provisions 
designed to provide the IRS with better information on foreign trusts. 
The bill would substantially strengthen the obligations of taxpayers to 
report information to the IRS and impose penalties with genuine 
deterrent effect for failure to do so. Among other changes, the bill 
includes new rules designed to lead most foreign trusts established by 
U.S. persons to appoint a U.S. agent that can provide trust information 
to the IRS.
  The bill would also close a number of loopholes in the existing 
grantor trust tax rules. These rules specify when the existence of a 
trust will be ignored for tax purposes because the creator of the trust 
retains sufficient control over the assets transferred to be treated as 
continuing to own the assets. For example, a foreign person; generally 
not taxable in the United States, transferring assets to a trust for 
the benefit of U.S. persons generally would not be treated as the tax 
owner of the assets in the trust unless the trust was fully revocable. 
Instead, the U.S. beneficiary receiving income from the trust would be 
taxed on receipt of that income.
  I am pleased that the Senate has adopted these changes. These are 
practical rules that would dramatically improve tax compliance without 
unduly burdening legitimate financial transactions.

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