Tax Haven or Tax Heaven 3: Why the USA is an attractive place to lure “foreign capital” and keep that “foreign capital” secret

The United States as a “poacher” (AKA Tax Haven) of the capital of other nations

The above tweet references the following article which includes:

Leaving income-producing assets in the US may be advantageous for foreigners. If you are a foreigner who owns financial assets in the United States, you are not subject to the capital gains tax and interest on bank accounts is also tax free. You will, however, be charged at a rate of up to 30% for dividends. If there is a treaty between your home country and the US, then this tax rate could be reduced to 10% to 15%. You may also recover this tax as a credit in your country of residence.

This is found in Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code.

IRC871

The following section of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. Interestingly this part of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Interestingly both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809. It is reasonable to infer that that the enactment of both S. 871 and S. 877 as part of the 1966 Foreign Investors Tax Act, eventually evolved into the S. 877A Exit Tax of today.

For a pdf of the 1966 Foreign Investors Tax Act …

Foreign Investors Tax Act 1966 809

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The definition of “Non-resident alien” is found in S. 7701(b) of the Internal Revenue Code.

What does this mean from the perspective of a “non-resident alien”?

Very interesting. Rather than invest his capital at home (where he is certain to be taxed), he might consider investing in the United States where:

A. His interest and capital gains are NOT subject to U.S. taxation (this is how the U.S. attracts the capital of other nations to the United States); and

B. The U.S. will not (in the absence of a specific treaty) report your investment account information to the tax authority of your country (making it easier to escape any taxation on the investments).

Not bad at all!! It would appear that (1) this is a mechanism to “poach” capital from other nations and (2) make tax evasion (assuming the non-resident alien fails to report the income to his country of residence) much easier!

The United States certainly complained that Switzerland was doing the same thing.

It’s easy to understand why:

But, “Not all Tax Havens are the same!”

Some countries are more “TaxHavenly” (or is that more “Tax Heavenly” than others!

Hmmm …

Voluntary “poaching” of capital – The Tax Haven

Because the United States encourages and facilitates the “poaching” of capital, the United States is most certainly a major “Tax Haven”. Note that “Tax Havens” lure capital to the Tax Haven in question. The “transfer of capital” to the “Tax Haven” is voluntary.

The United States of America:

1. Is a “Public Tax Haven” because, by NOT taxing certain forms of investment income it “lures” capital to the United States.

2. Is a “Private Tax Haven” because it will NOT (with the exception of certain treaties) disclose the identity of depositors to the tax authorities of other nations. This is one of the many problems of FATCA. Although other countries are required to disclose “U.S. Accounts”, the United States is NOT obligated to disclose the accounts of tax residents of other nations.

Involuntary “poaching” of capital – “citizenship-based taxation”

U.S. citizenship-based taxation ALSO results in the direct “poaching of capital” from other nations! A thoughtful post describing the cost of U.S. “poaching” to Canada is here. This topic of – how “U.S. citizenship-based taxation” steals the capital of other nations – is deserving of a separate post!

#YouCantMakeThisUp

John Richardson