If you love studying the U.S. corporate and personal tax ramifications of the Foreign Corrupt Practices Act — and who doesn’t? — here’s news about something special. It’s an article called “Is This Bribe Deductible? Tax Implications of the U.S. Foreign Corrupt Practices Act.” The twenty-page piece appears in Tax Notes International (December 17, 2007, p. 1171). Its author is New York City lawyer and CPA Selva Ozelli of RIA – Thomson, the well known publisher of tax and accounting materials.
Ms. Ozelli says a comprehensive study of the FCPA’s U.S. tax implications was needed. She cites the surge in prosecutions — 400 percent since 2000, with more than fifty additional investigations under way in 2006. The article covers in detail the ways American companies and their foreign subsidiaries can lose deductibility of payments that violate the FCPA. She also explains the more alarming risk of potential criminal consequences — including RICO charges — based on tax evasion:
“The increased global anticorruption scrutiny is subjecting multinational companies to a blizzard of simultaneous or sequential multijurisdictional FCPA investigations that are more aggressive than at any other time since the statute’s enactment, resulting in larger fines. These investigations may also shed light on a U.S. multinational company’s tax evasion if the income that is financing improper payments is excluded from a company’s taxable income, or on the mischaracterized improper payments that can run into the hundreds of millions of dollars are deducted legally for tax purposes under the OECD convention but illegally under U.S. tax laws. Such findings may potentially subject a company to civil or criminal penalties under U.S. and foreign tax laws, penalties under the Racketeer Influenced and Corrupt Organizations Act (RICO) that now applies to a taxpayer that has deprived a foreign government of tax revenue, and potential private FCPA civil claims made under the civil provisions of RICO.”
In language that echoes back to the tactics used to put Al Capone out of business, Ms. Ozelli navigates the important distinctions among the burdens of proof in three settings — an IRS challenge of deductibility, an allegation of fraud leading to tax evasion, and a criminal FCPA prosecution. She says:
“For the disallowance of a deduction . . . no conviction under the FCPA is necessary — the relevant criteria is whether the improper payment violates the FCPA. The IRS, however, has the burden of proving fraud . . . by showing that the company knew its return was false when it made it and intended to evade paying the proper tax by making a false return. The fraud, whether as to deficiencies or for additions to tax (that is, fraud penalties), must be proven by clear and convincing evidence. A mere preponderance of the evidence will not suffice. Because this is a lesser burden than proving guilt beyond a reasonable doubt, which must be established in a criminal case, a company may be found not guilty in a criminal bribery case and still lose the deduction if the IRS is able to meet the lesser burden in the tax case.”
In other words, once a company lands in FCPA trouble, its problems may multiply. Knowingly filing tax returns that mischaracterized illegal payments abroad as deductible expenses can lead to criminal charges. In a footnote — one of 117 that gird the text — Ms. Ozelli makes a passing reference to the current investigations involving the dozen oil and gas service companies implicated in the Vetco / Panalpina affair. Those companies allegedly reimbursed Panalpina for customs clearance and permitting expenses that have now come under FCPA scrutiny. An addendum to the article lists all the currently-known FCPA investigations, the countries involved, and potential multi-jurisdictional enforcement aspects.
Recounting the scandals involving Enron, Tyco, Global Crossing, Refco, and Hollinger, Ms. Ozelli warns of the personal tax implications inherent in the misuse of company funds. She says that “while scrutinizing corporate records for FCPA violations, special attention should be placed on transactions that divert corporate funds that excessively benefit the executive since it might result in charges of both corporate and personal tax evasion.” It’s not a stretch to imagine an executive reaping a compensation windfall by pumping up corporate earnings via bribes to foreign officials.
There’s lots more meat in this article — which manages to combine fine scholarship with practical advice. Those counseling corporations and executives on the importance of FCPA compliance — and the implications of potential non-compliance — will be happy to have Ms. Ozelli’s work product. As of today, the article is available exclusively from Tax Notes International (which is by subscription only here). We’re hoping it will soon see wider (and free) circulation. It’s a bona fide contribution to an aspect of the FCPA that deserves more attention.
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