Category Archives: Little Red Tax Haven Book

The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA

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Introduction

While millions of people are obsessed with taxation there are apparently people who may (but who knows) wish to simply opt out of the discussion.

I am becoming less and less interested in the intricacies of taxation. At its core the principles of tax are really pretty simple. Tax laws exist for two purposes: (1) To redistribute assets from one person to another person (with the government taking an administrative cut along the way) and (2) to punish (sin taxes) or reward (buying a fuel efficient car) certain kinds of behaviour. Certain cultures are more tax obsessed than others. When it comes to obsession over taxation the USA is certainly a world leader. In fact, what started out as US “citizenship-based taxation” more than one hundred years ago, has created a culture of “Taxation-based citizenship” (Yes, they are different concepts).

The focus on the “intricacies” (and complexities) of how the redistribution of assets works (the text of modern tax codes) often obscures what the overall effect of the tax laws are. For example, in a recent post I suggested that the real impact of the passport revocation laws (found in the Internal Revenue Code) was a recognition that there is no Constitutional right to leave the United States. But, most people don’t care. They pay their taxes. Why should they be concerned that somebody who doesn’t pay their taxes should be prohibited from leaving the country? (It doesn’t occur to them that there may be a broader principle at stake.)

The focus on what tax laws say obscures the broader question of what tax laws mean. The recent “Pandora Papers” revelation (the media is in overdrive trying to demonize people) provides yet another example of how a focus on what a tax law says, obscures the broader effect of what the law really means. There are many examples. The unwillingness of the US to join the CRS (“Common Reporting Standard”) is an interesting example. (The fact that the US has FATCA is part of the reason.) The relationship between FATCA and the CRS has fuelled the rise of Tax Haven USA.

FATCA, The CRS and the differences between them

Forget the technicalities

1. The CRS (“Common Reporting Standard”) is an agreement signed by hundreds of countries, to automatically report to other countries, financial accounts in their country, which are owned by “tax residents” of the other country. For example: if a tax resident of France has a financial account in Canada, the Canada Revenue Agency would report the existence of that account to France. This makes it hard for residents of CRS countries to hide accounts outside that country. The key is that the CRS mandates the automatic exchange of information. All members automatically share with each other. The CRS makes it more difficult (but never impossible) for CRS countries to be used to hide assets. Examples of the general angst associated with the “roll out” of the CRS in Canada are here and here. It’s important to remember that the CRS is based on the principle of exchange of information.

2. FATCA (“Foreign Account Tax Compliance Act”) is a US law (1471 – 1474 of the Internal Revenue Code and the associated FATCA IGAs. FATCA does NOT operate on the principle of “exchange of information”. Pursuant to FATCA the United States demands information from other countries (about US citizens) under the threat of a 30% sanction. In other words, under FATCA the US receives information from other countries but does not provide any information in return. FATCA and the CRS are contextually related only because FATCA preceded the CRS. Because the CRS was created after FATCA and the US already had FATCA, the US had no need to join the CRS. Of course (at least in theory) the US could abolish FATCA and join the CRS. But, the US is unlikely to do this.

Notice the following aspects of FATCA:

1. FATCA is NOT a multilateral agreement. Rather FATCA is a US unilateral assault on the sovereignty of other countries;

2. The US is not required to exchange information under FATCA; and

3. Because it (presumably) receives the information it wants, there is no incentive for the US to join the CRS.

The US is not party to any international agreement pursuant to which it automatically discloses the existence of US accounts held by nonresident aliens!! To put it another way: The US is one of the few countries in the world where nonresident aliens can effectively hide money and other assets (trusts anyone?). Think of the possibilities (that may or may not be related to tax issues …)

This reality was explained by Oliver Bullough in a brilliant 2019 article that appeared in The Guardian.

The article (which includes a fascinating discussion of the history of trusts) summarizes the interaction of FATCA and the CRS with:

That calculation changed in 2010, in the aftermath of the great financial crisis. Many American voters blamed bankers for costing so many people their jobs and homes. When a whistleblower exposed how his Swiss employer, the banking giant UBS, had hidden billions of dollars for its wealthy clients, the conclusion was explosive: banks were not just exploiting poor people, they were helping rich people dodge taxes, too.

Congress responded with the Foreign Account Tax Compliance Act (Fatca), forcing foreign financial institutions to tell the US government about any American-owned assets on their books. Department of Justice investigations were savage: UBS paid a $780m fine, and its rival Credit Suisse paid $2.6bn, while Wegelin, Switzerland’s oldest bank, collapsed altogether under the strain. The amount of US-owned money in the country plunged, with Credit Suisse losing 85% of its American customers.

The rest of the world, inspired by this example, created a global agreement called the Common Reporting Standard (CRS). Under CRS, countries agreed to exchange information on the assets of each other’s citizens kept in each other’s banks. The tax-evading appeal of places like Jersey, the Bahamas and Liechtenstein evaporated almost immediately, since you could no longer hide your wealth there.

How was a rich person to protect his wealth from the government in this scary new transparent world? Fortunately, there was a loophole. CRS had been created by lots of countries together, and they all committed to telling each other their financial secrets. But the US was not part of CRS, and its own system – Fatca – only gathers information from foreign countries; it does not send information back to them. This loophole was unintentional, but vast: keep your money in Switzerland, and the world knows about it; put it in the US and, if you were clever about it, no one need ever find out. The US was on its way to becoming a truly world-class tax haven.

So, one might reasonably ask the question:

Was FATCA a law that contributed to discouraging tax evasion or was FATCA a law that contributed to encouraging tax evasion?

(The answer is that it possibly discouraged tax evasion on the part of US citizens, but clearly played a role in encouraging tax evasion for nonresident aliens.)

FATCA has had a devastating effect on the lives of Americans abroad.

October 2021 – The Pandora Papers

A consortium of investigative journalists has revealed the names of large numbers of people with financial accounts, corporations, trusts and other entities outside their country of tax residence. It’s impossible to know how much of this is related to tax evasion. There are many reasons to have financial accounts outside your country of residence.

The Pandora Papers seemed to focus more on WHO the individuals were than on WHERE the accounts were located.

The Pandora Papers suggested that few Americans were using offshore accounts. But, the same Pandora Papers suggested that US jurisdictions (South Dakota as an example) were becoming the “jurisdictions of choice” for hiding assets. Although this was the subject of media comment, what was NOT the subject of comment was how the US has become a tax haven for a large part of the world.

At a time when Secretary Yellen has gone to the OECD and asked that the world impose higher taxes (to protect the USA from tax competition) the US is playing an evolving role in becoming a tax haven for those who not US tax residents. The media (including the Washington Post) is either unaware of this or refusing to acknowledge it.

Secrecy aside – there are many good reasons for nonresident aliens to invest in the USA

I discussed this in a recent podcast …

John Richardson – Follow me on Twitter @Expatriationlaw

Part 1: CCPCs – Why the Government of Canada is attacking the use of Canadian Controlled Private Corporations as personal pension plans

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Introduction

I have previously written about the “Worldwide trend of attacking the use of corporations as a way to reduce or defer taxation for individuals“. This is a continuation of this discussion. The purpose of this post is, primarily to focus on the proposed changes, to the taxation of passive income earned by Canadian Controlled Private Corporations (“CCPCs”).

Note that “CCPCs” often DO qualify as Controlled Foreign Corporations (“CFCs”) for Canadian residents who are U.S. citizens! In the past, this has meant that Canadian residents with U.S. citizenship have needed to be aware of the U.S. Subpart F income attribution rules. As a result, many people struggling with possible applicability of the U.S. “transition tax” (described here and here) are also experiencing tax changes in Canada.

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The worldwide trend of attacking the use of corporations as a way to reduce or defer taxation for individuals

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Introduction – The war against corporations and the shareholders of those corporations
Corporations as entities that are separate from their shareholder/owners
As every law students knows, a corporation is a legal entity that is separate from its owner. As a legal entity that is separate from its owner, a corporation is capable of holding assets, carrying on a business and investing in a way that results in separation of the shareholder(s) from the business itself. It is a mistake to infer that the corporation’s status as a separate legal entity means that the corporation’s income will not be taxed to its shareholders.
Corporations as legal instruments of tax deferral
When corporate tax rates are lower than individual tax rates, there is incentive for individuals to earn and invest through corporations rather than to earn and invest as individuals. In other words, in certain circumstances, corporations can be used to pay less taxes.
Corporations as instruments of tax evasion
In many jurisdictions is it possible to create a Corporation and NOT disclose the identities of the beneficial owners. Because of this circumstance:
1. Corporations (as was made clear in the “Panama Papers Story”) can be used to hide income and assets for either legitimate or illegitimate reasons; and
2. Corporations can be used to avoid the attribution of income earned by the corporation to the shareholders.
Corporations and the rise of @TaxHavenUSA
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Green card holders: the "tax treaty tiebreaker" rules and taxation of Subpart F and PFIC income

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Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post …

The Internal Revenue Code of the United States imposes (1) requirements for taxation (determining how much tax is payable by various individuals) and (2) requirements for information reporting returns. For “U.S. Persons Abroad” the “information reporting requirements” are far more onerous.
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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

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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