Category Archives: Attracting foreign capital to the United States

The US “expatriation tax” and the the incentive to apply for a Green Card and/or remain in the USA

America doesn’t really need skilled immigrants, or does it?

The above tweet references a post that references a comment by Victoria Ferauge:
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Physical presence as a necessary condition for being a US “resident” under the Internal Revenue Code

Introduction

Every country in the world with the exceptions of Eritrea and the United States claim tax jurisdiction based on “residence”. Although the tests for “residence” may differ, “residence based taxation” means that it is possible to sever your tax connection to a country by severing residence.

The nations of Eritrea and the United States impose taxation based on citizenship. U.S. citizens (primarily those “Born In The USA”) can NEVER sever their tax connection to the United States as long as they remain citizens. When it comes to U.S. citizenship-based taxation it is possible to NEVER have lived in the United States and still be subject to taxation!
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Part 14: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – FATCA and the rise of @TaxHavenUSA

 

 

 

The USA as the world’s number one tax haven? Well, FATCA does play a role in making it harder for other countries to operate as tax havens. FATCA most certainly operates to assist the U.S. in preventing competition to the USA in the tax haven industry. As a recent article from the Tax Justice Network notes:

Bloomberg is running a story entitled The World’s Favorite New Tax Haven Is the United States, which closely follows the line that TJN has been taking, particularly since our big Loophole USA blog a year ago, and our subsequent USA Report for the Financial Secrecy Index last October.

Expanding on a quote we used in our USA report and in our more recent call for Europe to apply withholding taxes to counter the new global threat emanating from the United States, Bloomberg cites:

“How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

The article is a most useful contribution to the debate. It does quote people spouting the usual claptrap about confidentiality peddled by wealthy wealth-extractors, tax evaders and market riggers:

“Rokahr and other advisers said there is a legitimate need for secrecy. Confidential accounts that hide wealth, whether in the U.S., Switzerland, or elsewhere, protect against kidnappings or extortion in their owners’ home countries.”

You will find the article by Peter A. Cotorceanu here:

Trusts & Trustees-2015-Cotorceanu-tandt_ttv178

See also my complete series: “Tax Haven or Tax Heaven” here.

 

 

Part 8: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – The Canadian “not for profit” and other FATCA Free Entities/Zones

FATCA is about withholding and reporting. The basic principle is that a financial institution will:

1. Withhold payments unless the “RIR” (“Review, Identify and Report”) rule has been satisfied; and

2. The individual or entity has “reported” his or her possible U.S. status.

It’s that simple. That said, there are some “entities” that are NOT required to report. It is possible that a Canadian “not for profit” (that meets certain requirements) may be exempted from the burdens of FATCA compliance.

In other words, it is possible that the world may still include (other than Algonquin Park) certain “FATCA Free Zones”.

This issue was discussed in the following memo from KPMG.

KPMG fatca-and-not-for-profit-entities-v2

The KPMG memo includes:

FATCA Classification

Both the FATCA Regulations and the IGA describe various entities whose obligations under FATCA are reduced or eliminated.

A Canadian not-for-profit entity would generally be classified as one of the following “Excepted NFFEs” under the FATCA Regulations:

1. A “Section 501(c) Entity,” which includes such things as charitable organizations, corporations holding title to property for exempt organizations, civic leagues, social welfare organizations, certain associations of employees, labour, agricultural and horticultural organizations, business leagues, chambers of commerce, real estate boards, social and recreational clubs and certain credit unions;

2. A Canadian non-profit organization (NPO; as that term is defined in the FATCA Regulations) that is established and maintained in Canada exclusively for educational, charitable, scientific, artistic, cultural or religious purposes if:

a.The NPO is exempt from income tax in Canada;

b. The NPO has no shareholders or members with a proprietary or beneficial interest in its income
or assets;

c. With certain limited exceptions, applicable Canadian law or relevant formation documents of the NPO do not permit its income or assets to be distributed to, or applied for the benefit of, a private person or a non-charitable entity; and

d. Applicable Canadian law or formation documents generally require all assets of the NPO to be distributed to another NPO or
the Canadian government on its liquidation or dissolution.

3. An active NFFE. An NFFE is active if less than 50 percent of its gross income for the preceding taxable year (calendar or fiscal) is passive and less than 50 percent of its assets produce, or are held for the production of, passive income (based
on a weighted average percentage of such assets tested quarterly). For this purpose, passive income includes dividends, interest, rents, royalties, and similar amounts, as well as net gains from sales of assets that give rise to passive income.

….

FATCA Obligations

If it qualifies as an Excepted NFFE, a not-for-profit entity may avoid FATCA disclosure obligations (and penal withholding) by providing payors of US-source withholdable payments with a certification of its status as such.

Not-for-profit entities should be prepared to certify their classification on updated documentation (i.e., Form W-8BEN-E)
when requested by a US withholdingagent. For these purposes, the definitions in the Regulations continue to be controlling.

Conclusion:

Yes, it’s true there are “FATCA Free Zones” left in the world. Who could use a “not for profit” for tax evasion?  Certain “non-profits” (like Algonquin Park) may be a “place of refuge” for those “U.S. Persons in our midst” (only kidding, it’s vital that ALL “US Persons” be identified).

Thank God for Canadian “not for profits”!

 

 

Part 7: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Which country decides the nature of the “Entity”?

On May 13, 2014, Calgary lawyer Roy Berg appeared as a witness before the House Finance Committee in Ottawa. His testimony was in relation to Bill C – 31 AKA Canada’s FATCA implementation legislation which was called:

CANADA–UNITED STATES ENHANCED TAX INFORMATION EXCHANGE AGREEMENT IMPLEMENTATION ACT

This legislation was for the purpose of the Canadian Government complying with Canada’s FATCA obligations under the IGA. The text of the proposed laws is at the end of this post.*

I will let Mr. Berg’s testimony speak for itself. It is interesting in at least one significant respect. Mr. Berg’s testimony illuminates the problem when the U.S. and Canada define the same term in different ways. I remind you that under the Canada U.S. FATCA IGA, that each country is free to interpret the agreement. See for example S. 2 of Article I of the Canada U.S. IGA which reads as follows:

Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying this Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

FATCA-eng

Note the problems created by definitions.

Mr. Berg’s testimony included:

Good afternoon, Mr. Chairman and members of the committee.

My name is Roy Berg. I’m a U.S. tax lawyer with Moodys Gartner. I was born, raised, and educated in the U.S. I practised in the U.S. for 17 years in tax law before immigrating to Canada three years ago. Therefore, I think there are very few individuals who have more personally and professionally vested in this issue than I do.

On March 9, 2014 our office submitted extensive analysis and commentary to the Department of Finance regarding our concerns about the draft legislation, and on April 10 we submitted a brief on these concerns to the committee. I will be happy to elaborate on any of the materials we have submitted, as they’re quite detailed and quite specific.

Before I summarize our comments on the draft legislation, however, I want to emphasize that we do agree with the Minister of Finance that entering into the IGA with the U.S. was beneficial to Canada. Had Canada not entered into the IGA, Canadian financial institutions would have faced the unenviable dilemma of either complying with Canadian law and risking FATCA’s 30% withholding tax or complying with FATCA and risking violating Canadian law.

Unfortunately, as FATCA is drafted and the IGAs are designed, there is no middle ground. Those are simply the facts. Life under the IGA is better than life without the IGA. As Senator Patrick Moynihan of the U.S. said, “everyone is entitled to his own opinion, but not his own facts”.

The committee is likely going to be aware of rather jingoistic hyperbolic rhetoric admonishing Finance for ceding Canadian power, ceding sovereignty, and also encouraging Canada to stand up to FATCA. As the committee hears such comments, we encourage it to remember that FATCA is U.S. law, and the way it’s designed, it’s enforced not by the IRS, not by the Treasury, but by the markets themselves. In that, it is like a sales tax. The withholding obligation is on the person making the payments.

While the IGA is unquestionably beneficial to Canadians, the legislation before you requires refinement, specifically in the manner in which a financial institution is defined under the legislation. The definition is actually much more narrow in the legislation than in the IGA, the intergovernmental agreement.

The Department of Finance disagrees with that assertion. The Department of Finance believes that the definition of financial institution under the legislation is consistent with that in the IGA. However, in our briefs and in our submissions to Finance, we go through the legal analysis to support our position.

One thing I believe the Department of Finance does not disagree on is that the definition of financial institution is more narrow in the regulations and the implementing legislation of other FATCA partners. Therefore, the definition of financial institution for certain Canadian financial institutions will be different under Canadian domestic law from what it will be under U.S. domestic law, for example.

This difference will likely lead to unintended and unnecessary withholding of certain Canadian trusts that otherwise have no U.S. connections at all, for example, a spousal trust created at death, where the spouse, the beneficiaries, and the trustees have no U.S. connections whatsoever, and the only connection would be a U.S. bank account.

In that case, under Canadian domestic law, that trust would be defined as a non-financial foreign entity, whereas in the U.S., it will be defined as a foreign financial institution. Payments coming out of the U.S. to that Canadian trust will be subject to withholding, because under U.S. law, when there’s a discordance between the stated classification of the entity and the classification of the entity under U.S. law, there is mandatory withholding.

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*What follows is Part 5 of Canada’s Bill C-31The Canada–United States Enhanced Tax Information Exchange Agreement Implementation Act – the Bill which is the enabling legislation to implement the Canada U.S. FATCA IGA – signed by the Harper Government.

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Part 5: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – The FATCA IGA and the “Entity Inquisition”

Introduction …

The difference between “Individual” and “Entity” accounts

FATCA-eng

If you read Annex 1 of the IGA (starting on page 20) you will that it distinguishes between “Individual Accounts” (held by a living breathing individual person) and “Entity Accounts” (an account held NOT by an individual), but by something that is NOT an individual. An example of an “Entity” would be a corporation. An account held in the name of a corporation will NOT reveal who the shareholders are. As Robert Wood recently wrote:

A key element in many tax prosecutions is the use of shell entities and hidden names. Although celebrities have their own reasons to make their financial affairs opaque, some governments now want to infer tax avoidance. In that sense, secrecy itself is under attack. For example, the U.K. has moved to make company ownership entirely transparent. The topic of company ownership transparency is being discussed in Brussels too.

Nominee ownership used to be common. Nominees are straw-men listed as owners or directors of a company, but who are acting on behalf of someone else. This once common device is now often seen as a problem that triggers others. From Spanish and other authorities, the message has been a stern one. Whatever happens in Spain, secrecy and willfulness may be linked like never before.

To put it simply: in order to know who are the real owners of an “Entity” (for example corporations in Delaware, Nevada and South Dakota and other noted tax havens) one must take specific steps to learn who the real owners are. (Yes, one of the effects of FATCA is to protect the United States from competition in the “Tax Haven Industry”.)

Following the IGA …

Annex 1 of the IGA describes exactly what needs to be done to search for “USness” for both “individual” and “entity” accounts.

The rules are found as follows (you may want to keep the IGA in front of this while you read):

Pre-existing Individual Accounts – page 20
New Individual Accounts – page 26
Pre-existing Entity Accounts – page 28
New Entity Accounts – page 31

In the case of “Individual Accounts” the named individual is presumed to be the owner. In the case of “Entity Accounts” further inquiries must be made (“smoking them out”) to determine who the beneficial/real owners are.

When it comes to an “Entity Account”, the question is:

Q. Are or have the “real/beneficial” owners ever been U.S. persons?

A. Only the accountants, lawyers and shareholders know for sure.

These inquires are made by the bank, to a representative of the “Entity”. The representative of the “Entity” will respond by obtaining the requested information and THEN informing the bank.

The Worldwide “FATCA Rollout” began with “The Great Hunt For USness In Individual Accounts” search.

The Worldwide “FATCA Rollout” continues with the “The Great Hunt For USness In Entity Accounts” search. This will be a FAR MORE intrusive search than the search for individual accounts ever was. From the U.K. PTA, to the New Zealand law firm, to the Canadian Controlled Private Corporation ALL the world is now being asked to identify “USness” associated with its entities. A “U.S. Person” in Canada is far more likely to receive a “FATCA Letter” because he is associated with an “entity”, than because he is suspected of being a “U.S. Person”.

The “FATCA Entity Hunt” is such that, that ordinary people have been deputized to assist the United States in its relentless “Hunt” for “U.S. Persons”.

FATCA Inquisition Stage 1 – Review, Identify and Report – “Individual Accounts”

Canada Day 2014 – “FATCA Hunt” Officially Began …

On July 1, 2014 “FATCA Hunt” – the hunt for those with a U.S. birthplace officially began. “FATCA Hunt” is an important initiative in the 21st century. It was a small step for man, but a large step for mankind.

That said, the rollout is coming in different stages.

The focus has been on the possible U.S. status of the individual who was named on the account. The banks have been focusing their attention on the person whose name was on the account.

In the beginning, the banks, brokerage companies, financial managers and the rest of the Foreign Financial Institutions (“FFIs”) focused (and continue to) on their existing customer base of “Individual Accounts”. In addition, all those who opened new accounts were asked about their “U.S. status”. Most of the pain has been felt in relation to the “pre-existing accounts”. Large numbers of people have been forced to “Self-certify” that they are NOT “U.S. persons”. Canadians (with only a small number of exceptions) have not been subject to “account closures”. Canadians have been able (in contrast to their European counterparts) to retain access to bank accounts in general and their bank accounts in particular.

The situation in Europe has been different. There has been evidence of bank account closures. Their is evidence of banks that are unwilling to deal with “U.S. persons” (do you blame them?).

FATCA Inquisition Stage 2 – Review, Identify and Report on Entity Accounts – The search for the owners of “Entity Accounts” – Are they or have they ever been a U.S. person?

The focus is on the possible U.S. status of the individual, who is a beneficial owner, but who is NOT named on an Entity account. The bank is focusing its attention on the “Entity” whose name was on the account. The bank will require an individual who is the representative of the “Entity” to inform the bank of the “U.S. status” (or not) of the beneficial owner(s). To put it another way: In Stage 2 of the FATCA Inquisition, some Canadians are being asked to disclose any “U.S. person” ownership to the bank. This is a clear escalation of FATCA Hunt. Your business partners are now clearly part of the FATCA Inquisition.

You probably think that this is all an exaggeration …

What follows is a “FATCA Letter” from TD Waterhouse sent to the address on file for an “Entity Brokerage Account”. In other words, imagine that a corporation has a brokerage account. Imagine that the names of the shareholders are not in the file. It’s important for TD Waterhouse to know whether the beneficial owners are “U.S. persons”.

Take a moment to read this letter. Take a moment to read the forms (if you can understand it all). But, of above all else:

take note of the requirement to make inquiries about the possible “USness” of those associated with the entity.

FATCATDEntitySearch

Leaving aside its intent. Leaving aside its intrusiveness. Leaving aside the immorality of “Hunting” people based on the immutable characteristic of “place of birth”, consider the following question:

How could anybody even begin to understand this letter without the benefit of specialized counselling? It’s simply not possible. Therefore, the first thing one must do is bring the  “Entity Inquisition Letter” to an adviser. Expect to pay and expect to pay dearly.

What the adviser must determine is:

1. Does the beneficial ownership of the “Entity” include “U.S. Persons”. On this point I note that the definition of “U.S. person” is determined in accordance with the Internal Revenue Code. Note also that this is a “shifting definition”. That said, “Congress has spoken”.

2. What kind of “Entity” is it anyway? Is it an “FI” or a “NFFE”Remember that the U.S. Internal Revenue Code punishes: (1) all things foreign and (2) all things that involve deferral.

3. If the “Entity” is a “NFFE”, is it “active” or is it “passive”?

If it is either a “FI” or a “passive NFFE”, any U.S. beneficial owners MUST be reported. Those Canadians who use Canadian Controlled Private Corporations (which is one of the primary purposes of the CCPC) to accumulate earnings need to be particularly careful. The investment income in the corporation is reportable on your U.S. tax return

Think of it! It’s bad enough having the banks hunting for “U.S. persons”. The “FATCA Entity Inquisition” means that one group of Canadians will now hunt another group of Canadians to uncover those with a “U.S. place of birth”.

Note that the “FATCA Entity Letter” is sent regardless of whether THERE IS ANY REASON WHATSOEVER TO SUSPECT “USness”. The United States is requiring or reserving the right to make inquiries of ANY entity in the world:

Are you, or have you ever been or associated with a U.S. Person?

It is just an example of the how the United States of American is hunting the world for “U.S. persons”.

The FATCA Entity Inquisition is NOT being carried on directly by governments. The FATCA Entity Inquisition IS being carried by one group of Canadians searching for another group of Canadians that happen to (for the most part) been born in the USA!

To put it simply:

In the new world order, “If you are a “U.S. Person”, you are reportable! You lost the “birth lottery”.

Now, that’s change you can believe in.

Tax Haven or Tax Heaven 9: US Treasury Secretary Lew claims USA is a leader in information exchange!

What follows is Secretary Lew’s rather extraordinary statement. One gets the impression that he lives in a world where, the United States is simply a wise “sage” or perhaps “adviser”, for the rest of the world. In any event, the United States is (as demonstrated by Secretary Lew) clearly NOT required to live by the rules that it wishes to impose on other nations.

In fairness the following excerpt should be read in context. That said the Secretary included the following rather fantastic and incorrect claim – a clear distortion of reality:

“We fully support the call for all countries to automatically exchange financial account information.  The United States led the world in automatic exchange with the enactment of FATCA in 2010.”

What he means that he supports the call for countries other than the United States to provide financial account information to the United States.

As you know:

  1. By the express terms of the FATCA IGAs, the United States is NOT obligated to exchange FATCA  account information of significance with other nations. The exchange on the part of the USA is “aspirational” only.
  2. If there were exchange, the exchange would NOT include “identical information”. It would include “equivalent” information. Presumably “equivalent” information would NOT be identical information
  3. The United States has refused to embrace the OECD Common Reporting Standard.

Here is the Canada U.S. FATCA IGA:

FATCA-eng

To understand why the FATCA IGA’s do NOT obligate the United States to exchange information of significance, read here.

What follows is Secretary Lew’s “statement” in its entirety.

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Part 11: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – But reciprocity?

Introduction and Synopsis …

The United States has entered into FATCA IGAs with a number of countries (including Canada). Regardless of what Government Officials say (and what the IGAs say) about “Review, Identify and Report”, there is NO meaningful “reciprocity” in the FATCA IGAs. The degree of “reciprocity” was discussed was recently discussed in the following post at Forbes (providing an unusally frank evaluation):

There are at least six different aspects of the IGAs that demonstrate a lack of reciprocity.

They include:

1. Human Targets – The United States defines “US Persons” in a far broader way than other countries define their “tax residents”. This is largely the result of U.S. “citizenship-based taxation”. Only the United States claims the right to impose taxation on (1) residents of other nations and (2) on income earned in those other nations.

2. The nature of the information exchanged
– The United States wants far more information (everything) than it is obligated to provide (nothing) under the FATCA IGAs.

3. Due Diligence – The U.S is not required to actively search for the tax residents of other nations. Other nations are required to actively search for “U.S. persons”. But, it is far more than seeking evidence of “USness” in individuals (“Are you or have you even been an American citizen?). Other nations are also required to search for evidence of “USness” in entities (see point 5 below).

4. Penalties – Other nations are subject to penalties for failure to comply with the (“Review, Identify and Report”) provisions of the IGA. The United States is NOT subject to penalties. (If you don’t comply, you are subject to penalties. If we don’t comply: “Too Bad”.)

5. The FATCA Entity Hunt – The United States does NOT and WILL NOT provide information on the beneficial ownership of “entities” (Delaware, Wyoming and Nevada are in the business of providing the secrecy that enables tax evasion). Other countries are required to search for evidence of “USness” in the ownership of entities created under the laws of their countries.

6. The requirement to change domestic laws – The United States is requiring other nations to change their domestic laws to “hunt” for people based “citizenship, national origin” and “place of birth”. The U.S. Treasury may not have the jurisdiction to order state banks to provide information about “foreign accounts”. In other words: You do what we cannot do! As might be expected, the question of jurisdiction is the subject of a lawsuit in the United States courts. In fairness, it is important to note that the “Alliance For The Defence Of Canadian Sovereignty” has brought a lawsuit against the Government of Canada, questioning whether the FATCA IGA is legal under Canada’s Constitution.

That’s the gist of it. If you want to understand why, I invite you to read on.

It’s about reciprocity …

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Tax Haven or Tax Heaven: Introduction – Were the “Panama Papers” about #offshore “tax evasion” or “tax avoidance”?

The above tweet references an article written by Tony Burman, which appeared in the Toronto Star (and other papers) on April 9, 2016.

The article included:

The global aftershocks of the so-called Panama Papers are only beginning to be felt. More revelations are expected in the weeks ahead, and this will only add to the uproar.

The prime minister of Iceland has already been dumped. Other government leaders have been embarrassed. Several countries have announced inquiries into the secretive world of offshore tax evasion. And public anxiety about the corrupt coddling of the world’s superwealthy “1%” is showing signs of turning into red-hot anger.
But we shouldn’t be surprised. It’s not as if we didn’t already know that the world’s political and business elites frequently cheat and steal, that our governments are swindled out of trillions of dollars of revenue and, as a consequence of this greed, the vast majority of people suffer from a painful culture of austerity so these freeloaders can get richer. We already knew that.

However, it is the disgusting detail contained in this week’s revelation of leaked documents that is so revolting — and, of course, the appalling fact that so much of this is technically “legal.”
With their own interests in mind, politicians and business leaders in many countries have worked quietly in the dead of night to make this so. The result is that, more than ever, taxes now appear to be primarily for the little people.
The documents come from an influential Panama-based law firm. They include 11.5 million internal records disclosing the financial secrets of heads of state, billionaires, drug lords, celebrities and others.

While expressing outrage at the part of the “Panama Papers” that represents tax evasion, Mr. Burman identifies that much of the revelations of the “Panama Papers” was the result of clear and deliberate government policies and laws. In other words, the story of the “Panama Papers” is mostly about “legal tax avoidance” and ” NOT illegal “tax evasion”. Therefore, it is entirely unreasonable and counterproductive to focus on “tax evasion” and exclude “tax avoidance” from the discussion.

Nevertheless, when it comes to tax evasion …

The OECD’s Q and A about the “Panama Papers” reveals:
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