Overview
If you have been reading my articles on JD Supra for a while, you will know that I love Afro-Cuban and Brazilian music. Nevertheless, the Hall and Oates song Private Eyes, is a more fitting song to describe the state of offshore planning in Tax Havens than “Oye Como Va.” Many things have continued to come to light that would have much rather preferred to remain hidden in the darkness of night. Since the release of 11.5 million documents hacked from the Mossack Fonseca law firm, the rich and famous have been dancing for their lives as fast as they can.
The irony is that the majority of Mossack Fonseca’s clients were engaged in planning that is perfectly legal. Nevertheless, in the eyes of investigative journalists and public opinion, the verdict is guilty until proven innocent. In the current scenario, if you have to explain yourself and your actions, then you have already lost the public relations battle. As a result, clients engaged in offshore planning in tax havens have been forced to re-evaluate their current planning in traditional tax havens. The consequences of this result as the article will demonstrate, is the surprising result that clients no longer need to hide their money in a chain of offshore corporations designed to hide the shareholders’ identities. The best option may be to hide the money in plain sight in the least likely of tax havens – the United States.
This article will briefly outline how and why the United States may be the best option for structuring wealth not only for Americans for wealthy foreign families. The U.S. may be the new Switzerland for wealth structuring since most of what it is required to provide to foreign governments is virtually useless to foreign governments.
FATCA Overview
FATCA refers to the U.S. Foreign Account Tax Compliance Act. Adopted in 2010, the original construction of FACTA was designed as a one way street benefitting the U.S. Government in regard to financial and tax reporting. Under FATCA non-U.S. financial institutions are required to provide the U.S. government with data about U.S. persons with the U.S. not required to give anything in return to foreign governments. The original construction was met with strong reaction from foreign financial institutions who ultimately faced similar issues with respect to tax evasion.
The United States has entered into numerous reciprocal inter-governmental agreements with the intent of providing foreign governments with reciprocal information except that the information that the U.S. needs to provide is far less than what foreign governments and financial institutions need to provide. Approximately 101 jurisdictions have entered into tax information exchange agreements with the U.S. Government.
The IRS will not provide its reciprocal FATCA partners with any information regarding depository (cash) accounts held by entities, even entities resident in the FATCA partner country. Additionally, the IRS will not provide a FATCA partner country with information whether the account is held by an individual or entity including entities resident in the FATCA partner country unless the accounts earn U.S. source income. The IRS will not provide information about the controlling persons of entities even if those entities are owned and controlled by residents of the reciprocal country.
In order to avoid disclosure under a reciprocal inter-governmental agreement with the U.S., all that that is required holding cash accounts through an entity and non-cash accounts in U.S. securities through an entity. For assets that generate U.S. source income, the income should be blocked.
GATCA
GATCA refers to the Global Foreign Account Compliance Act. GATCA's foundational document is the Convention on Mutual Administrative Assistance in Tax Matters developed in 1988 by the Organization for Economic Cooperation and Development and the Council of Europe. The Convention is the most comprehensive multilateral instrument available for all forms of tax cooperation on tax evasion and avoidance. It provides for exchange of information on request, automatic exchange of information, spontaneous exchange of information, and simultaneous tax examinations. All G20 countries, nearly all OECD countries, major financial centers, and a growing number of developing countries have signed the Convention and its amending Protocol of 2010. Nevertheless, The U.S. is currently a non-participant in GATCA.
The U.S. is unlikely to enter into GATCA in the future due to the fact that the information requested in the exchange agreement is not currently reported to the IRS by U.S. financial institutions. The U.S. Government cannot agree to the GATCA-style reporting requirements without Congressional approval. The political view is that Congress does not want to harm the banking industry by driving money offshore and destroying the competitive advantage of U.S. banks.
The only thing necessary to avoid reporting under GATCA is the transfer of client assets to a financial institution resident in the U.S. for GATCA purposes. A trust with a U.S. resident trustee, but structured as a non-U.S. trust for U.S. tax purposes is the key to solving the problem.
Tax Structuring to Minimize the Pain and Suffering in FATCA and GACTA Compliance and Reporting
A U.S. resident account holder with a U.S. account will not be reportable under GATCA or FATCA. However, an entity that is resident in the U.S. will be subject to worldwide taxation and reporting obligations. As a result, the objective is to use an entity that is resident in the U.S. for GATCA purposes so that it does not have any reporting obligations for GATCA, but is not resident for U.S. tax and reporting purposes. The U.S. will not report non-U.S. persons under FATCA and will not be subject to U.S. tax or reporting obligations. Such an entity would not be subject to U.S. taxation on anything other than U.S.-source income.
The only thing necessary to avoid reporting under GATCA is the transfer of client assets to a financial institution resident in the U.S. for GATCA purposes. The solution is the creation of a trust that has a U.S. resident trustee, but structured as a non-U.S. trust for U.S. tax purposes. A trust with a U.S. trustee is outside of the scope of GATCA and FATCA. The trust should be formed under non-U.S. law and should not have any beneficiaries living in the U.S..
In order to be a U.S. person for tax purposes, a trust must meet the “court” and “control” tests of IRC Sec 7701(a)(30)(E). The easiest method to avoid these requirements is to fail the “control” test, by giving a non-U.S. person control over one substantial decision within the trust. In the event the Trust fails the “control” test, the trust will be a non-U.S. trust for tax purposes under Treas. Reg. 301.7701-7. If a U.S. trust with a non-U.S. resident person as a trust protector, has the ability to make one or more of the following decisions, it will avoid treatment as a U.S. person for tax purposes:
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Whether a receipt is allocable to income or principal.
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Whether to terminate the trust.
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Whether to compromise, arbitrate, or abandon claims of the trust.
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Whether to sue on behalf of the trust or to defendsuits against the trust.
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Whether to remove, add, or replace a trustee.
All of the trust assets should be booked in the U.S. otherwise the non-U.S. bank or financial institution will have its own GATCA reporting obligations. The Trust should not have any reporting obligations under FBAR. Even if the trust has a non-U.S. account, it should not have any FBAR reporting obligations due to the fact the Trust would not be considered a U.S. person for FBAR reporting purposes.
Department of Commerce Form BE-10 is a form designed to obtain economic data on the operations of U.S. parent companies and their foreign affiliates. Trusts are persons for Form BE-10 reporting purposes However, a trust that has non-U.S. individuals as beneficiaries will have no BE-10 reporting obligations.
Form 8938, Statement of Specified Foreign Financial Assets, is a tax form for U.S. individuals to report offshore assets. A trust that is not a trust for U.S. tax purposes will not be required to file Form 8938.
Summary
As the dust continues to settle in Panama over the next few rainy seasons, wealthy international families have no time to delay in weighing their planning alternatives. It seems to be an odd result that the U.S. emerges as the new “go to” jurisdiction in order to dance around the reporting obligations of FATCA and GACTA as well as other U.S. reporting obligations. The trick is a careful balance of avoiding treatment as a U.S. person while being considered a U.S. trust for all other purposes. Additionally, a number of U.S. states do not require an LLC manager or member to be listed on a public database.
Future articles will delve into the structure and planning of these trusts.
