Category Archives: Tax Haven or Tax Heaven

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

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

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

Update June 19, 2017:
The Department of Justice sued Mr. Pomerantz in Seattle. The purpose of the lawsuit was to get a judgment against Mr. Pomerantz. Interestingly, the Government lost the lawsuit for reasons unrelated to the substance of the issue. The Government failed to plead the facts that it needed to succeed in the lawsuit.
A full discussion of the ongoing adventures or Mr. Jeffrey Pomerantz and Mr. FBAR is here.
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 6: Must read interview with @FranHendy – The movement of wealth transparency and the right to privacy


 

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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