Category Archives: Tax Haven or Tax Heaven

Did Mr. #FBAR really pay a surprise visit to Canada?

The FBAR Chronicles continue …

First, A Public Service Announcement – Mr. FBAR Get’s A New Filing Due Date

 

This is one more of my posts about Mr. FBAR. Mr. FBAR is a mean, nasty vicious thug who has no place in any civilized society.

Thomas Jefferson once said:

Were it left to me to decide whether we should have a government without newspapers, or newspapers without a government, I should not hesitate a moment to prefer the latter.

My thoughts are that:

Were it left to me to decide whether we should have FBAR without outlaws, or outlaws without FBAR, I should not hesitate a moment to prefer the latter.

Unfortunately, Mr. FBAR has become the new symbol of American citizenship. Furthermore, Mr. FBAR disproportionately affects the local bank accounts of Americans abroad – becoming (in effect) a form of “domestic terrorism” against U.S. citizens living outside the United States.

Mr. FBAR As Applied To The Canada U.S. Dual Citizen …

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Part 6: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Breaking open the Family Trust one country at a time

Introduction

Part 5 of this series introduced the idea of the “Great FATCA Entity Hunt”. The key is to seek “USness” hiding behind ANY entity anywhere in the world.

Not even the lowly family trust is safe from suspicion of a possible U.S. connection. In fact, FATCA is “breaking open” family trust outside the USA. Gotta make sure that there is NO U.S. involvement. Really, you can’t make this kind of intrusiveness up.

In each of the following two examples, notice how is is local accountants who are carrying the search for “U.S. persons”. All “entities” throughout the world are under suspicion of being American.

First, let’s begin with a family trust in the U.K.

The post referenced in the above tweet includes:

The first Charles and Margaret Stewart knew about FATCA was when, earlier this month, a letter arrived from their accountant, Grant Thornton, warning that a “review” was required into a trust they had established for their daughter in 2004. The letter said: “There are certain steps you need to take. The starting point will be to carry out a detailed review…” It estimated the initial costs would be £350 plus VAT, possibly more, “based upon the time spent on the matter”.

The Stewarts established the trust 10 years ago to buy a property for their adult, dependant daughter, in order to safeguard the property as her home for as long as she needs to live there. The property, near Charles’s and Margaret’s own home in Leicestershire, generates no income. None of Mr Stewart, 74, pictured, his wife Margaret, or their daughter has any US connections.

Although it was established for wholly innocent reasons, this trust along with an estimated 100,000 others now falls within the far-reaching scope of FATCA.

Once the review is undertaken, if the accountant is satisfied the trust does not need to fulfil any further obligations under FATCA, there are no further costs – and no information will be passed on to HMRC or the American authorities. “This whole process seems extraordinary,” said Mr Stewart. “The trust just has a property inside that is not providing any income so I don’t understand why it needs to be reviewed, simply to satisfy regulation introduced by another country.”

In its letter, Grant Thornton is mildly apologetic, saying it “regrets having to write about new compliance requirements and related costs” but adds “this is something that will have to be dealt with.”

It is not alone as other accountancy firms are also carrying out reviews and are charging for their services, with “initial review” fees ranging from £200 to £500. Although most high-profile firms refuse to publicly criticise FATCA, in private they condemn the measures as “indiscriminate” and “blunt”.

Gary Heynes, a tax partner at rival accountant Baker Tilly, said the firm had started mailing affected clients over the past week. Mr Heynes said: “It is extraordinary that a trust with no US assets and no US beneficiaries can be subject to these US reporting requirements and need to be reviewed.”

Ronnie Ludwig, of accountancy firm Saffery Champness, said: “These US regulations are a complete nightmare for trustees to get their heads around. We will be spending a lot of our time reviewing each of our client’s trusts between now and the end of October.”

Second, they have trusts in New Zealand too

The article referenced in the above tweet includes:

FATCA (the Foreign Account Tax Compliance Act) came into force in July 2014. It is far-reaching and may impose a compliance burden on the trustees of New Zealand family trusts, even if no US persons are involved.

IRD has recently issued further draft guidance on the application of FATCA to trusts and in particular, on the circumstances when New Zealand family trusts will be financial institutions for FATCA purposes.

Background

FATCA is a US initiative designed to target US taxpayers who evade US tax by hiding assets offshore. It requires foreign (i.e. non-US) financial institutions (FFIs) to register with the US Internal Revenue Service (IRS) and undertake due diligence to identify and report on accounts that US persons hold with them. FFIs that do not comply are subject to a 30% withholding on US-sourced income.

Under the Intergovernmental Agreement (IGA) signed between New Zealand and the US, New Zealand agreed to implement rules to require and enable all New Zealand FFIs to comply with their FATCA obligations and, in exchange, the US agreed to treat all New Zealand FFIs as deemed compliant.

All FFIs were required to register with the IRS by 31 December 2014. However, notwithstanding this, there has been considerable uncertainty in relation to whether, and if so, how, FATCA applies to New Zealand family trusts that on their face may have no obvious US connection.

Conclusion:

It’s the job of trusts around the world to:

1. Review the trust
2. Identify any U.S. persons
3. Report those U.S. persons to the appropriate authorities.

Every person and every entity is under suspicion of being a “U.S. Person” now! In the new FATCA world, it is no longer possible to have any “trust” in your “trust”.

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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Tax Haven or Tax Heaven 8: The US attempt to “suck and blow” at the same time – keeping corporate profits out of the USA

The previous posts have argued that:

1. The purpose of a “Tax Haven” is to lure or entice capital from “foreign” jurisdictions.

2. The purpose of U.S. citizenship-based taxation is to lay claim to the capital of other nations and transfer that capital to the U.S. Treasury.

The attraction of capital is a good thing and helpful to nations. In fact, the purpose of “citizenship by investment programs” is another way that countries attract capital.

Yet, the United States has an Internal Revenue Code that (leaving aside the tax rates and the narrow circumstances of Internal Revenue Code S. 871) operates to keep capital out of the United States.

Examples include:

A. The rules that keep U.S. corporations from repatriating corporate profits to the United States.

B. The rules that prevent gifts and bequests (yes this is capital) from “covered expatriates” from returning to the U.S. economy.

C. The oppressive corporate tax rules that incentivize corporations to “invert” and effectively renounce their citizenship.

D. The S. 877A Exit Tax rules that incentivize “Green Card Holders” to move from the United States before they become “long term residents” and subject to the Exit Tax.

The problem is NOT tax havens. The problem is NOT tax evasion. The problem is an “Internal Revenue Code” that operates in a way that is contrary to the formation, investment and retention of capital in the United States. Why is this not obvious? Why doesn’t the United States face up to this obvious problem?

Outside looking in vs. inside looking out …

This seems so clear if one is outside the United States looking in. Perhaps it is impossible to see if one is inside the United States looking out.

The biggest threat to the United States is NOT what takes place outside the United States. The biggest threat to the United States is the Internal Revenue Code of the United States.

What follows is an article that I wrote that appeared in Forbes Magazine.

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Tax Haven or Tax Heaven 1: @FranHendy and @BarrieMcKenna see “Panama Privacy Leak” as about more than #offshore witch hunt

The above tweet references the following article by Barrie McKenna of the Globe and Mail. The comments to the article include:

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Tax Haven or Tax Heaven 5: How the 1966 desire to “poach” capital from other nations led to the 2008 S. 877A Exit Tax

Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code is of great interest..

IRC871

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 above subsection of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. It contains rules for how those who are not “U.S. Persons” are taxed under the Internal Revenue Code. As is expected, the Internal Revenue Code imposes U.S. taxation only on those “aliens” who have income sources that are connected to the United States. The previous post explained that S. 871 (in its present form) was enacted in 1966. Internal Revenue Code S. 871 also provides strong incentives for “aliens” to bring their capital to the USA.

Interestingly this subsection of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Significantly, both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809.

The combination of the inclusion of both Internal Revenue Code sections 871 and 877 suggests that the intent of the Foreign Investors Tax Act of 1966, Public Law 89-809, included:

1. The intent to attract “Foreign” capital to the United States by imposing either no or low taxes on that “Foreign” capital lured to the United States, as expressed in S. 871 of the Internal Revenue Code;

2. The intent to give “non-resident aliens” certain tax benefits that were NOT available to U.S. citizens;

3. A recognition that some U.S. citizens might wish to expatriate to avail themselves of the benefits of NOT being a U.S. citizen;

4. A “penalty” expressed in S. 877 of the Internal Revenue Code for those U.S. citizens who expatriated to receive the same tax benefits enjoyed by “non-resident aliens”.

For a pdf of the 1966 Foreign Investors Tax Act (a massive document), see …

Foreign Investors Tax Act 1966 809

My point is a simple one …

It is clear that the U.S.desire to establish itself as a “Tax Haven”, also resulted in the S. 877 Exit Tax, which gradually evolved into the S. 877A Exit Tax that exists today.

To put it another way: the desire to establish the United States as a “Tax Haven”, eventually evolved into the S. 877A Exit Tax rules that:

1. Impose confiscatory taxation on assets that are outside the United States; and

2. Impose confiscatory taxation on assets that were acquired after a “U.S. Person” abandoned residence in the United States.

To illustrate why this is so, please see:

The S. 877A Exit Tax in Action – 5 actual scenarios with 5 completed U.S. tax returns

You will be shocked by what you see!

Like the 1970 FBAR rules, S. 877 of the Internal Revenue Code has gradually evolved into a mechanism to confiscate the assets of Americans abroad. Think I am kidding? See the examples in the link above!

John Richardson

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