Category Archives: offshore tax evasion

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

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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.

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Part 4: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons") – Imposing FATCA on the world in two steps

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In previous posts I have described how the FATCA Inquisition has been used to determine whether the beneficial owners of various associations (PTA) small businesses (New Zealand law firms) are U.S. persons. I note that the great American FATCA Inquisition is being used to target the world. To put it simply:
All of the world is required to:

  1. Review their affairs for “U.S. Persons”
  2. Identify those “U.S. Persons” in their midst
  3. Report those “U.S. Persons” to the IRS.

Yes, the “RIR” objective really is that simple.
This post is somewhat more technical. In this post I am going to explain exactly how and why the Canada U.S. FATCA IGA requires that “U.S. Persons” be subjected to the “RIR Inquisition”. I will then show how the principle applies to U.S. “smoking them out” methodology which is the purpose of the IGA. But, first things first.
Implementing the objective – A two step process
Step 1 – Signing the IGA: Establishing the terms of the relationship between the Government of Canada and the Government of the United States
The IGA provided the legal framework and objectives for the U.S. imposition of FATCA on Canada. It was signed on February 5, 2014. Under the IGA Canada agreed to assist the United States in its hunt for “U.S. persons”. The IGA is a broad agreement which provides the general rules for the relationship between Canada and the United States. A key provision of the IGA is that Canada will change it’s domestic laws to make the hunt for “U.S. persons” (as defined from time to time by the U.S. Internal Revenue Code) mandatory.
It is the IGA that provides the framework for “FATCA Hunt”. Those who have not read the Canada U.S. FATCA IGA can read it here.
FATCA-eng
Step 2 – Establishing the terms of the relationship between the Government of Canada and it’s financial institutions – Canada changes it domestic laws to force Canadian banks to hunt for those with a U.S. place of birth
In May 2014 the Government of Stephen Harper added Part VIII to the Income Tax Act of Canada. In general terms, Part VIII of the Income Tax Act was to:

  1. Require Canadian Financial Institutions to search for both “Individual” and “Entity” U.S. accounts
  2. Require individuals and entities to disclose the “U.S.ness” of accounts to the Financial Institutions
  3. Authorize Canadian Financial Institutions to disclose “U.S. accounts” to the CRA
  4. Impose penalties on “Individuals” and “Entities” who refused to disclose the information requested by the financial institution

For example S. 162(6) of Canada’s Income tax reads:

Failure to provide identification number
(6) Every person or partnership who fails to provide on request their Social Insurance Number, their business number or their U.S. federal taxpayer identifying number to a person required under this Act or a regulation to make an information return requiring the number is liable to a penalty of $100 for each such failure, unless

  • (a) an application for the assignment of the number is made within 15 days (or, in the case of a U.S. federal taxpayer identifying number, 90 days) after the request was received; and

  • (b) the number is provided to the person who requested the number within 15 days after the person or partnership received it

To summarize – Part VIII of Canada’s Income Tax Act:

  • requires the banks to hunt for “Individuals” and “Entities” that are or are owned by “U.S. persons”; and
  • requires the “Individuals” and “Entities” to be captured. The “terms of their capture” require them to:

A. Answer all questions that are part of the “FATCA Inquisition”
B. Answer all questions truthfully
C. Either ADMIT to being a “U.S. person” or DENY being a “U.S. person”.
Once again, I remind you that the fact that someone is a Canadian citizen residing in Canada is NOT a defense to the accusation of being a “U.S. person.
How does Canada comply with Part VIII of the Income Tax Act of Canada? What are the “made in Canada” rules for  the FATCA Inquisition?
Paragraph 2 of Article 1 of the Canada U.S. FATCA IGA allows (in general) for each country to interpret various provisions of the IGA. To be specific it reads:

2. 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.

The Canada Revenue Agency created its own set of guidelines for precisely how the financial institutions are to implement the broader objectives of FATCA Hunt. Those guidelines are here.
FATCA Canada Guidance gdnc-eng
Never forget that the guidelines are made pursuant to the broad terms of the IGA. Canada’s domestic laws that are to assist the United States with the implementation of the IGA.
Summary: Understanding FATCA …

When in doubt about how to interpret the Canada’s domestic laws, one should look to the provisions of the IGA. As a reminder, here is the Canada U.S. IGA which was signed on February 5, 2014.
FATCA-eng

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

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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?

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

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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 3: Why the USA is an attractive place to lure “foreign capital” and keep that "foreign capital" secret

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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

Tax Haven or Tax Heaven 4: Why bother "poaching capital" as a Tax Haven, if you can steal the capital using citizenship-based taxation?

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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.


 
Through “citizenship-based taxation” the United States has turned U.S. citizens residing in other nations into “Weapons of Capital Extraction”. By imposing direct taxation on U.S. persons in other nations, the United States transfers the capital of other nations to the U.S. Treasury.
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Tax Haven or Tax Heaven 2: Tax Havens and the "poaching" of capital – theft or competition?

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Introduction …

On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 business — businesses claim this building as their headquarters.  And I’ve said before, either this is the largest building in the world or the largest tax scam in the world.
President – Barack Obama – May 4, 2009

What about Nevada, Delaware, Wyoming and S. 871 of the U.S. Internal Revenue Code?
“Tax Haven” or “Tax Heaven” – it’s a question of perspective …


This is the second of my posts about the “Panama Papers” and the question of “Tax Havens”. The first was:
Tax Haven or Tax Heaven 1: Fran Hendy and Barrie McKenna see “Panama Privacy Leak” as about more than #offshore witch hunt
The “Panama Papers” has generated discussion about “tax havens”, “tax evasion” and “international tax policy”.  The revelations included (“surprise, surprise”) that many of the accounts were NOT held by residents of Panama, but by residents of other nations. There is nothing that is “per se” illegal about having “offshore accounts”. In fact “offshore accounts” are (even for U.S. citizens) perfectly legal. U.S. citizens are required to report these accounts (FBAR anyone?) to the U.S. Government. The failure to report these accounts may (but not must) result in the imposition of draconian penalties.
Given that the “offshore accounts” are (in general) legal, the problems arising from “offshore accounts” are NOT the result of a lack of compliance with the law, but rather WITH compliance with the law. In other words, “For Good and Evil“, the use of offshore accounts  is the result of compliance with existing law. Perhaps the problem (if you agree that there is one) is the result of the system itself and NOT with bad actors in the system.
The system, the participants and participants in the system


The above tweet references an article that appeared in the Globe and Mail on April 9, 2016 by University of Montreal Professor Peter Dietsch. The article is interesting (whether you agree with the author or not) because the author equates the concept of a “Tax Haven” with the concept of “capital poaching” (the attempt to attract capital).
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