How the U.S. Is a Tax Haven for Mexico's Wealthy

Federal Taxation
8/26/2009 11:37:34 AM EST

News Analysis: How the U.S. Is a Tax Haven for Mexico's Wealthy
By Robert Goulder, Editor-in-Chief - Tax Analysts International Publications
Posted by Tax Analysts Editorial Staff

As if Treasury Secretary Timothy Geithner didn't have enough on his plate, there's one underappreciated problem his department now must address. This latest headache can be summarized in three words: U.S. bank secrecy.

The issue landed on Geithner's desk shortly after he accepted his current job, in the form of a February 9 letter from Mexican Secretary of Finance Agustin Carstens. At first glance, its polite language seemed innocuous. Geithner most likely read the letter, mumbled "ho-hum," and added it to the stack of low-priority items on the back burner.

But six months later, Carstens's letter ­ and how Treasury will respond to it ­ has the potential to become a lightning rod for controversy. That's because the IRS and the Justice Department, after decades of passive acquiescence, decided to pick a fight with Swiss banking giant UBS, the world's largest manager of private wealth.

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What does the letter contain that's so shocking?

It asks the U.S. government to offer Mexico the same exchange of information terms the United States has with Canada. That's significant because Canada is a special case when it comes to cross-border tax enforcement. Despite possessing one of the world's most comprehensive tax treaty networks, the United States has meaningful information exchange with only one country: Canada.

Mexico has now put the U.S. government on notice: It wants in on what's previously been Canada's exclusive arrangement. Should that inclination spread to other governments across the hemisphere, it could have extraordinary consequences for the U.S. financial sector. Think of it as the fiscal equivalent of the H1N1 flu virus.

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Just as the United States spent the last year demanding that Switzerland give ground on its bank secrecy regime, Mexico now wants the U.S. Treasury Department to yield on its own bank secrecy.

Fair is fair, the argument goes, lest Washington be accused of extraordinary hypocrisy.

By now you're probably thinking that something is wrong here; U.S. banks must be very different from Swiss banks. Guess again ­ they're not.

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Mexican residents who hold an account with a U.S. bank ­ just like U.S. account holders at Swiss banks ­ are essentially on the honor system when it comes to declaring bank deposit income for tax purposes in their home countries. As students of the subject have learned, tax law enforcement using the honor system translates to rampant tax evasion.

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To the neutral observer it might seem that America's opposition to bank secrecy is highly selective. Perhaps we object only when it's our tax base that's being eroded.

Geithner now must decide whether Treasury spoke with a forked tongue in the United States' showdown with the Swiss. Mexico City is awaiting a response.

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