Tag Archives: CRS

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

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

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer

Prologue: In the 21st Century, The Most Interesting Thing About A Person Is His/Her Tax Residency

Introduction – So, what’s this “tax residence” stuff about? What does “tax residence” mean?

In 2014, as people started to receive “FATCA letters” I wrote a lengthy post describing “What to do if you receive a FATCA letter“. Information exchange under the Common Reporting Standard “CRS” has begun in 2018. As a result, I am writing this post which is to explain what the CRS is and how it relates to the FATCA letter. It is important to understand that the “CRS letter is actually a combined “CRS/FATCA” letter which is more likely to be received than the original FATCA letter. I urge that those who have received a letter of this type to read this post PRIOR to seeking professional advice!!!

You are reading this post because you have received a letter from your bank that is asking you to identify the countries where you are a “tax resident” and/or whether you are a “U.S. Person”.

The purpose of this post is to help you understand:

– why you are receiving the letter
– what the letter means
– what is the meaning of “tax resident”, “tax residence” and “tax residency” (terms which are used interchangeably)
– why “tax residency” is important to you
– the significance of being a U.S. citizen or Green Card holder
– how to identify where you may be a “tax resident”

Why are you receiving this letter?

The letter is intended to fulfill the bank’s due diligence obligations under both the OECD Common Reporting Standard (all countries of “tax residence” except the United States) and FATCA (whether you are a “tax resident” of the United States).

In other words, the letter is for the purpose of satisfying bank “due diligence” under two separate reporting regimes – FATCA and the OECD Common Reporting Standard “CRS”

This is long post which is broken into the following parts:

Part A – How does FATCA differ from the “CRS”?

Part B – The Combined FATCA/CRS Letter

Part C – “Tax Residency 101”: It’s about where you should be paying your taxes

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?

Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident

Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.

Part I – “Relinquishments of U.S. citizenship and loss of U.S. citizenship for tax purposes

Part J – Beware! You don’t sever “Tax Residency” From Canada or the United States without being subject to massive “Exit/Departure Taxes!” – You may have to buy your freedom!

Continue reading

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.