The Offshore Portfolio Investment Strategy (OPIS) was an abusive tax avoidance scheme formulated by KPMG, one of the largest accounting firms, between 1997 and 2001. This period saw a proliferation of fraudulent tax shelters across global financial services. OPIS emerged as one of many tax avoidance products offered by accounting firms seeking to reduce clients’ tax liabilities illegitimately.
Key Takeaways
- The Offshore Portfolio Investment Strategy (OPIS) was a tax avoidance product marketed by the accounting firm KPMG.
- In the 1990s, many accounting firms were involved in offering similar tax avoidance schemes.
- Such schemes often created shell companies and falsified transactions and investments, generating fake losses to offset a company’s profits, thereby reducing tax liabilities.
- The IRS declared these tax shelters illegal, emphasizing that they primarily existed to reduce taxes, depriving the government of tax revenue.
- Companies involved faced significant financial penalties and were required to pay large sums in damages.
Understanding the Offshore Portfolio Investment Strategy (OPIS)
The Offshore Portfolio Investment Strategy (OPIS) utilized investment swaps and shell companies in the Cayman Islands to fabricate accounting losses. These fake losses offset taxes on legitimate taxable income, thus defrauding the Internal Revenue Service (IRS). In many instances, these fraudulent accounting losses greatly exceeded actual financial losses.
Although some tax shelters were rooted in legal tax planning techniques, their proliferation led the IRS to crack down on these abusive structures. According to the Government Accountability Office, such tax strategies had deprived the U.S. government of approximately $85 billion between 1989 and 2003.
The Design of the Offshore Portfolio Investment Strategy (OPIS)
Audited Financial Manipulations: Accounting firms employed various accounting practices to manufacture financial losses. These losses were used to offset real profits from operations or capital gains, reducing reported profit and subsequently the amount of taxes owed.
Example: Manipulation of Taxes:
If a company declared $20,000 in profits before taxes and faced 10% tax, it would owe $2,000 ($20,000 x 10%), reducing its post-tax profits to $18,000 ($20,000 - $2,000). However, if an accounting firm introduced an illegitimate $5,000 loss, the company’s pre-tax profit would be reduced to $15,000. The resultant tax would now be $1,500 ($15,000 x 10%), saving the company $500 ($2,000 - $1,500) in taxes owed—a savings unfairly achieved by depriving the government of due revenue.
Mechanism of Creating Shell Companies: Shell companies were established to record false transactions and investments, creating non-existent losses that offset genuine company profits. These artificial losses lowered the taxable income of client companies.
The KPMG-Deutsche Bank Tax Shelter Scandal
In 2001-2002, the IRS declared OPIS and similar tax shelters unlawful, identifying them as having no legitimate economic purpose other than tax reduction. Despite this, internal communications revealed KPMG’s intentions to market similar banned products, coupled with failure to cooperate with investigators.
In 2002, the U.S. Senate Permanent Subcommittee on Investigations launched an inquiry, noting numerous banks and accounting firms promoted abusive, illegal tax shelters. Besides KPMG’s OPIS, the report highlighted Deutsche Bank’s Custom Adjustable Rate Debt Structure (CARDS) and Wachovia Bank’s Foreign Leveraged Investment Program (FLIP), with financing from banks like HVB, UBS, and NatWest aiding the transactions.
PricewaterhouseCoopers settled with the IRS for an undisclosed amount in 2002, with Ernst & Young finalizing a $123 million settlement in 2013. KPMG admitted unlawful actions, paying a $456 million fine in 2005 and agreed to withdraw from the tax shelter business completely. However, nine individuals, including six partners, faced indictment for creating $11 billion in false tax losses, depriving the U.S. government of $2.5 billion in tax revenue.
Subsequent lawsuits against firms aiding these tax schemes revealed Deutsche Bank helped 2,100 clients evade taxes, declaring $29 billion in fraudulent losses between 1996 and 2002. The bank eventually admitted criminal wrongdoing in 2010, settling for $553.6 million.
Related Terms: tax shelters, IRS, shell companies, capital gains.
References
- U.S. Government Accountability Office. “Internal Revenue Service: Challenges Remain in Combating Abusive Tax Shelters”, Pages 10-11.
- Permanent Subcommittee on Investigations. “Tax Haven Abuses: The Enablers, the Tools, & Secrecy”.
- U.S. Government Publishing Office. “U.S. Tax Shelter Industry: The Role of Accountants, Lawyers, and Financial Professionals”, Pages 1-2, 7-15, 63.
- U.S. Department of Justice. “Manhattan U.S. Attorney Announces Agreement With Ernst & Young LLP to Pay $123 Million to Resolve Federal Tax Shelter Fraud Investigation”.
- The New York Times. “Pricewaterhouse and I.R.S. Settle Tax Shelter Dispute”.
- U.S. Department of Justice. “KPMG to Pay $456 million for Criminal Violations in Largest-Ever Tax Shelter Fraud Case”.
- Wall Street Journal. “Deutsche Punished on Bogus Shelters”.
