Although US citizens may still choose to set up offshore trusts, the rationale will be asset protection rather than tax minimisation. Trusts are caught by the legislation as much as other types of investment structure, and should be considered as tax-neutral at best.
As far as 'passive' income is concerned, international tax planning for US residents is therefore concerned with providing investment structures which are fiscally transparent, so that the gains from higher-yielding international or offshore investments can be taxed in the investor's hands on the same basis as domestic investments. This usually means employing limited partnership or limited liability company structures, which are provided by many offshore jurisdictions, which are usually un-taxed in the offshore jurisdiction, and which are treated as fiscally transparent by the IRS.
Straightforward investments into public offshore investment funds, which may offer superior returns to domestic funds, will be caught by the Passive Foreign Investment Company legislation, and it will often be correct to make a QEF election in order to pay tax year-by-year on the fund's increase in asset value (excluding unrealised capital gains).
Individuals who have significant 'active' business income may be able to make use of offshore corporate tax shelters, although the foreign sales corporation (outlawed by the WTO) has now been abolished.
Under the Bank Secrecy Act 1970, a person who owns or has authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, is generally required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if
- the person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country, and
- The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
According to Shulman, the IRS received some 7,500 applications for the scheme, with disclosures ranging from USD10,000 to as much as USD100m associated with foreign bank accounts in all corners of the globe.
The latest offshore disclosure initiative seems to have been much more successful than a similar scheme administered by the IRS in 2004 known as the Offshore Voluntary Compliance Initiative. Under the 2004 amnesty, only 1,300 individuals came forward and the IRS collected about USD170m in unpaid tax. Shulman, however, has not disclosed how much the 2009 scheme will bring in for the Treasury, but it is certain to be a much higher figure.
The latest amnesty scheme was launched by the agency in March, 2009, and is just one of the many initiatives being used by the Obama administration to ensure that offshore income, both personal and corporate, is taxed in the US. Under the terms of the 2009 scheme, those making a voluntary disclosure about money held overseas face a penalty of 20% of the highest aggregate value of the account on one day in the last six years. The IRS also removed the threat of criminal prosecution. Ordinarily, if a taxpayer is discovered to have undeclared offshore income or assets, they face penalties up to 100% and possible jail time. The original deadline was set for September 23, but the IRS extended the amnesty until October 15 after it received an influx of requests from tax practitioners who themselves have been inundated with enquires about the scheme from their clients. Shulman warned that no further extensions will be granted, and that the agency will be unlikely to run another amnesty program any time soon.
Buoyed by the success of the 2009 amnesty, Shulman has revealed that the IRS is opening more representative offices abroad in places like Panama, China and Australia, and will also increase staffing levels in existing overseas offices, which include Barbados and Hong Kong.
The agency is also to create a dedicated team of enforcement and investigation officers to chase up wealthy individuals with complex, often international-based, financial arrangements, and President Obama’s 2010 budget includes extra resources for the IRS to hire almost 800 additional enforcement personnel.
The Democrat-ruled Congress is playing its part also: in October, 2009, senior Congressional Democrats unveiled legislative proposals that would give the Internal Revenue Service (IRS) new tools to "detect, deter and discourage" the use of foreign bank accounts for the purposes of avoiding US taxes.
The Foreign Account Tax Compliance Act, introduced into both chambers of Congress on October 27, blends proposals included in President Obama’s 2010 budget as well as Senator Carl Levin's 'Stop Tax Haven Abuse Act' and draft legislation published by Senate Finance Committee Max Baucus earlier in the year.
Under the new bill, foreign financial institutions, foreign trusts, and foreign corporations would be forced into providing information about their US account holders, grantors, and owners.
If enacted the Foreign Account Tax Compliance Act would:
- Impose a 30% withholding tax on payments to foreign financial institutions and other entities unless they acknowledge the existence of offshore accounts to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts.
- Require individuals and entities to report offshore accounts with values of USD50,000 or more on their tax returns.
- Extend the statute of limitations to 6 years when offshore accounts are unreported or misreported (the current statute of limitations on tax audits is 3 years).
- Require advisors who help set up offshore accounts to disclose their activities or pay a penalty.
- Require electronic filing of information reports about withholding on transfers to foreign accounts to enable the IRS to better match reports to tax returns.
- Strengthen rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to US beneficiaries and reporting requirements on US transfers to foreign trusts.
- Clarify the definition of outgoing US dividend payments that are received by foreign persons so they cannot be disguised as other types of distributions in an effort to avoid US taxes.
Baucus commented: “Last March, I circulated a preliminary draft of offshore compliance legislation to obtain stakeholder input to make the proposal even stronger, more durable and more likely to become law. The proposal offered today is the culmination of that effort and represents the best ideas from both the House and the Senate."
Rangel predicted that the bill would make banking secrecy "a thing of the past".
“This bill offers foreign banks a simple choice – if you wish to access our capital markets, you have to report on US account holders. I am confident that most banks will do the right thing," he stated.
The new proposals have been welcomed by the Obama administration, with Treasury Secretary Tim Geithner noting that they chime with the White House's aspirations to create a "level playing field" with regard to tax.
"This legislation fits well into the administration's dual-track strategy of improving our domestic tax laws while increasing global cooperation on tax information exchange to help narrow the tax gap and create the fairer tax system we need," Geithner concluded.
www.lowtax.net contains details of the corporate and partnership legal structures available in the 50 most prominent offshore jurisdictions, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.