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Offshore Portfolio Investment Strategy (OPIS) Definition

What Was the Offshore Portfolio Funding Technique (OPIS)?

The Offshore Portfolio Funding Technique (OPIS) was an abusive tax avoidance scheme offered by KPMG, one of many Big Four accounting corporations, between 1997 to 2001. This was a time when fraudulent tax shelters had proliferated throughout the worldwide monetary companies business. OPIS was considered one of many tax avoidance merchandise provided by accounting corporations.

Key Takeaways

  • Offshore Portfolio Funding Technique (OPIS) was a tax avoidance product provided by the accounting agency, KPMG.
  • OPIS was considered one of many tax avoidance schemes provided by accounting corporations within the Nineties.
  • These accounting schemes would create shell corporations and document faux transactions and investments that will end in losses. These losses have been used to offset the income of an organization, leading to a decrease quantity of taxes owed.
  • The Inner Income Service (IRS) finally made these tax schemes unlawful, as they served no function besides to decrease taxes and robbed the federal government of tax income.
  • The businesses concerned within the tax scandals needed to pay thousands and thousands of {dollars} in damages.

Understanding the Offshore Portfolio Funding Technique (OPIS)

Offshore Portfolio Funding Technique (OPIS) used funding swaps and shell companies within the Cayman Islands to create faux accounting losses that have been used to offset taxes on authentic taxable earnings and defraud the Internal Revenue Service (IRS). A few of these faux accounting losses have been considerably greater than the actual monetary loss.

Many tax shelters have been based mostly on authorized tax-planning methods. However they turned such massive enterprise that the IRS started a crackdown on abusive tax shelters and their more and more complicated buildings, which had disadvantaged the U.S. authorities of $85 billion between 1998 and 2003, based on the Government Accountability Office.

The Design of the Offshore Portfolio Funding Technique (OPIS)

Accounting corporations that audit corporations created monetary losses utilizing a wide range of accounting practices. These losses have been then used to offset precise income from operations or from capital gains, leading to a decrease reported revenue and subsequently a decrease quantity taxed.

For instance, if an organization reported $20,000 in income earlier than taxes and needed to pay 10% tax on these income, they might owe $2,000 ($20,000 x 10%) and their income after taxes could be $18,000 ($20,000 – $2,000). Now, if an accounting firm was in a position to generate extra losses by way of false accounting practices, say, within the quantity of $5,000, the corporate’s income earlier than taxes could be $15,000 as an alternative of $20,000.

The tax the corporate would now pay could be $1,500 ($15,000 x 10%), which is $500 ($2,000 – $1,500) lower than what they need to legally be paying. This was $500 that was robbed from the federal government and added to its pockets, or to the pockets of the accounting agency if the corporate was not conscious of the fraudulent apply, which in lots of instances they weren’t, ensuing within the cost of back taxes owed.

The way by which an accounting agency would conduct this tax avoidance scheme was by way of the creation of a shell firm. The shell firm would document a wide range of transactions and investments, all that will end in losses. These losses weren’t after all actual because the transactions and investments weren’t actual. These faux losses have been then used to offset the precise income of an organization.

The KPMG-Deutsche Financial institution Tax Shelter Scandal

The IRS formally declared OPIS and related tax shelters illegal in 2001-2002, as a result of they’d no authentic financial function aside from lowering taxes. Nevertheless, electronic mail messages confirmed that KPMG had subsequently mentioned promoting new shelters that have been much like the banned model and that they did not cooperate with investigators.

The U.S. Senate Everlasting Subcommittee on Investigations started an investigation in 2002. Its report, in November 2003, discovered that quite a few world banks and accounting corporations had promoted abusive and unlawful tax shelters. Together with KPMG’s OPIS merchandise, it singled out Deutsche Financial institution’s Custom Adjustable Rate Debt Structure (CARDS) and Wachovia Financial institution’s Overseas Leveraged Funding Program (FLIP) merchandise. Banks like Deutsche Financial institution, HVB, UBS, and NatWest had supplied loans to assist orchestrate the transactions.

In 2002, PricewaterhouseCoopers reached a settlement for an undisclosed quantity with the IRS whereas Ernst & Younger finalized their $123 million settlement in 2013. Within the meantime, KPMG ended up admitting illegal conduct and paying a $456 million effective in 2005. A part of the settlement Legal professional Normal Alberto Gonzales negotiated was KPMG’s promise to remain out of the tax shelter enterprise. However 9 people, together with six companions, have been indicted for creating $11 billion in false tax losses and depriving the U.S. authorities of $2.5 billion of tax income.

Subsequently, most of the corporations which had helped promote these tax shelters have been sued by shoppers who needed to pay the IRS again taxes and penalties. Buyers who sued Deutsche Financial institution delivered to gentle that it had helped 2,100 prospects evade taxes, reporting greater than $29 billion in fraudulent tax losses between 1996 and 2002. It admitted felony wrongdoing in 2010 and settled for $553.6 million.

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