Category Archives: offshore tax avoidance

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

Circa 2014 – A trip Down Memory Lane: #FBAR #FATCA And The Use Of Non-US Banks

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This 2014 hearing held by the US Senate on Permanent investigations is very interesting.It features Senators Levin and McCain and includes discussion of tax evasion, Swiss banks, tax treaties, FATCA the Offshore Voluntary disclosure programs and more.

The logic of the United States is approximately this:

Homeland Americans use non-US bank accounts.

Americans abroad use non-US bank accounts.

Therefore, (but not acknowledging Americans abroad) both Homelanders and Americans abroad use non-US banks for the same (nefarious) reasons.

IRS announces the end of #OVDP: Fascinating tweets from the "OVDP Historians" who compose the tax compliance community

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#OVDP: Reactions from the “tax compliance community” (and others who tweeted) to the termination of OVDP
(Note: For the purposes of this post I will use the terms “OVDP” and “OVDI” interchangeably. Each term describes a specific example of one of the “OVDP era” programs, as it existed at a specific point in time.  A particularly good analysis of the evolution of the “OVDP era” programs is found here – of interest only to those who want to “OVDP Historians“!)


On March 14, 2018 Professor William Byrnes reported that:

The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.

I have heard it said:
The good thing about bad things is that they come to an end.
The bad thing about good things is that they come to an end.
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Part 17: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Retirement accounts are exempt from FATCA reporting in all cases

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First, Canadian Retirement Accounts are “deemed to be compliant under S. 1471 and S. 1472 of the Internal Revenue Code
The Canada U.S. FATCA IGA …
FATCA-eng
IGA Article IV describes the “Specific Treatment of Canadian Retirement Plans” as follows:

3. Specific Treatment of Canadian Retirement Plans. The United States shall treat as deemed-compliant FFIs or exempt beneficial owners, as appropriate, for purposes of sections 1471 and 1472 of the U.S. Internal Revenue Code, Canadian retirement plans identified in Annex II. For this purpose, a Canadian retirement plan includes an Entity established or located in, and regulated by, Canada, or a predetermined contractual or legal arrangement, operated to provide pension or retirement benefits or earn income for providing such benefits under the laws of Canada and regulated with respect to contributions, distributions, reporting, sponsorship, and taxation.

Second, because Canadian Retirement Accounts are NOT “financial accounts” as per Annex II of the IGA, they are NOT “reportable accounts” under the definitions section of Article I of the IGA

IGA Article I (definitions) includes …
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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

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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.
 
 

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Part 13: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Colonizing other nations by imposing US taxation on the world

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Introduction – FATCA is really about extending the U.S. tax base into other nations …
In other words, FATCA is more about the “creation of taxable income” than it is about the “taxation of existing income”. This point was also made in my “Tax Haven or Tax Heaven Series“.
 


What follows is a comment that I tried to leave on the following blog post:
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Part 12: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – Including US residents who are citizens of France and other nations!

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Introduction – FATCA and U.S. residents
In Part 10 of this series of FATCA posts, I discussed the meaning of “U.S. Person”. The vast majority of people affected by FATCA are non-U.S. residents. That said, FATCA can affect U.S. residents who are citizens of other nations and have bank accounts in the United States. In some cases, the “due diligence” rules under the FATCA IGAs are making it difficult for citizens of other nations to keep access financial services (including bank accounts) in their country of citizenship. This topic is sure to gain more and more attention.
FATCA and Swiss citizens who are resident in Switzerland
 


FATCA and French citizens resident in the USA
 


The above tweet references a post at Frenchmorning.com which I was alerted on Keith Redmond’s AmericanExpatriates Facebook group. Although the post is in French you can get a rough translation with Google Translate*.
I was first alerted (in hindsight very obvious problem) by a French politician.
Here is the problem:

  1. FATCA forces French banks to hunt for customers with U.S. indicia.
  2. French citizen (and likely permanent resident of France) is living in the United States. He could be living in the United States under a number of different visas, including a “Green Card” (permanent resident visa). In addition, he might be a France/USA dual citizen.
  3. Because of a U.S. address or phone number, he washes up the shores of the “FATCA inquisition”.
  4. He is threatened with account closures and all the other disabilities that are common in Europe.
  5. He may not be able to pay his bills because of the FATCA related bank account problems.
  6. He may or may not be required to file U.S. taxes.
  7. If he is required to file U.S. taxes, he may or not be filing U.S. taxes.
  8. Either way he has a problem with his French bank.
  9. If he has a Green Card and attempts to move back to France, he may be subject to the S. 877A “Exit Tax”.
  10. Which is why the French Politician commented that “Many of our French citizens are currently “in prison in America”.

The time has come for Governments around the world to protect their citizens from the United States of America. Fortunately, France has recently taken the lead. To be specific: France has established an inquiry into how U.S. extra-territorial legislation affects the sovereignty of France.
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* Here is the current attempt by Google to translate the French article:
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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"?

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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-31 – The 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 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

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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”.

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