Category Archives: Tax Haven or Tax Heaven

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

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.
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
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!
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?

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 7: Senator @PercyDowne, the "tax gap" and the need to "close" it

Senator Percy Downe of Prince Edward Island has long been concerned with offshore tax evasion. You can keep up with his contributions to the discussion by following him on Twitter.
FATCA, Canada’s “Tax Gap” and Closing that “Tax Gap” …
This week’s “Panama’s Disclosures” have generated significant discussion about “taxation”, “fairness” and the “fair administration of taxation”. The “Panama Disclosures” suggest that the business of “keeping money outside one’s country of residence” is alive and well.  The response in the media (well the “Panama Disclosures” were instigated by the media) and various commenters suggest that the “public and political appetite” to “go after” those tax evaders (particularly the “offshore” type) is alive and well.
There are two themes to the public response.
Theme 1 – The need to close the tax gap …
On April 6, 2016 the Globe published an interesting article by Senator Percy Downe of Prince Edward Island. Senator  Downe speaks of the need to “close the tax gap” – that is the difference between what Governments are owed under their tax laws and what they are paid. Senator Downe notes the significant role played by “offshore” tax havens in aggravating the tax gap. He notes:

“The federal budget has earmarked $444.4-million over five years for the Canada Revenue Agency to “enhance its efforts to crack down on tax evasion and combat tax avoidance.” Let us hope that some of this money will go to the fight against overseas tax evasion, a problem that has cost the Canadian economy untold millions of dollars.”

The fight against “offshore” tax evasion has resulted in new world of information exchange (reflected in the OECD “Common Reporting Standard” (CRS) and the U.S. “Foreign Account Tax Compliance Act” (FATCA). Both are designed to facilitate information exchange and make it difficult to keep money “offshore” on an anonymous basis.
That said, both FATCA and the OECD Common Reporting Standard impose huge administrative costs on financial institutions, erode privacy rights and (in the case of U.S. citizens) make it difficult for them to access normal financial products outside their country of residence.  Let’s not kid ourselves. The fight against “offshore” tax evasion (and not all “offshore” accounts are used for improper purposes) has created huge problems for “everyday folk” and “everyday banks”. In other words, although “offshore” tax evasion is one issue, it is NOT the only issue. Senator Downe recognizes that the tax system must (1) be fair but (2) be fairly administered. He notes that:

“Measuring the tax gap is about the right of Canadians to know that their tax system is fair and fairly administered.”

Theme 2 – The “fair administration” of the tax system …
The way the tax system is administered affects ALL Canadians. The efforts to punish the guilty “few” should NOT result in unreasonable costs and burdens to the law abiding “many”.
On April 4, 2016 Barrie McKenna writing in the Globe and Mail, in agreeing that tax evasion resulting in the “tax gap” is a problem noted:

“There are other inherent tradeoffs in any tax crackdown, including potential intrusions on privacy and individual freedoms.  The extent of those trade-offs depends on how targeted the crackdown is. It’s not unlike the fight against global terrorism.  Authorities can impose sweeping security measures on everyone to stop the few, or it can target suspected individuals through better intelligence.  Just look at the U.S. approach to fighting tax evasion. The U.S. Foreign Account Tax Compliance Act, or FATCA, is one of the most sweeping and intrusive regimes ever put in place. The law is based on the idea that if the Internal Revenue Service can locate every dollar Americans (and dual citizens) have stashed away anywhere in the world, they can also tax it.  And they’ve bullied virtually every developed country to help them in the effort, including Canada, where taxes are generally higher than in the United States.  The crackdown has forced thousands of Americans living in Canada to spend small fortunes to come out of the shadows, even though they owe little or no taxes. They include so-called accidental Americans, whose only crime was being born in a U.S. hospital.”

FATCA and tax administration in Canada …
FATCA is a U.S. law that the Government of Canada has legislated into Canadian law. Pursuant to FATCA, the Government of Canada has changed Canadian law to force the Canadian banks to proactively search for and identify Canadian residents (including Canadian citizens) who were born in the United States. Think of it: the most important thing about a person is where they were born. The purpose of FATCA is to assist the U.S. to locate individuals who were born outside the United States and happen to live in other countries. The purpose is to force them into the U.S. tax system. (The United States imposes taxes based on a U.S. place of birth). The effect of this initiative is two-fold:
First, one group of Canadians is being singled out (based on place of birth) and then turned over to the U.S. Internal Revenue Service. The purpose is to force them to comply with U.S. tax laws which WILL for many people result in the payment of taxes to the U.S.  Canada has agreed to allow the U.S. (at its sole discretion) to define who is a “U.S. person” and therefore subject them to these rules of “search and seizure”.
Second, the result of “U.S. Person” Canadians paying taxes to the United States is that “after tax” Canadian capital is being siphoned out of Canada into the United States. This is a consistent U.S. tax on the Canadian economy, which will continue into perpetuity. In other words, Canada has allowed the U.S. to impose a permanent tax on Canada because some Canadian citizen/residents were born in the U.S.
FATCA aggravates the “tax gap” in Canada …
Therefore, I propose a new aspect to the meaning of “closing the tax gap”. This aspect would include a recognition that:
No “offshore country” can be permitted to siphon “after tax” Canadian capital to that country. Canada must end its FATCA agreement with the United States! This is in the interest of  having a tax system that is (1) fair and (2) fairly administered!
Speaking of “offshore country” tax havens …
The consensus is that the United States of America (because it has not signed on to the CRS and provides no meaningful information exchange under FATCA) is now the world’s number one tax haven! “Do as I say, and not what I do!”
John Richardson
Co-Chair and Legal Counsel:
Alliance For The Defence of Canadian Sovereignty

Tax Haven or Tax Heaven 2: Tax Havens and the "poaching" of capital – theft or competition?

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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