Bizarre though it may sound, the interplay of FATCA and CRS rules may have turned the US into a bit of a tax haven – provided you’re not a US Person, of course.

FATCA came fully into force for 55 countries on 1st July 2014. Only 4 countries opted to require the US to report reciprocally on their citizens by adopting Model 1A of the Intergovernmental Agreement (‘IGA’) that sets out how FATCA will operate between the US and another country. If you’re a tax evader from Costa Rica, The Netherlands, Malta or the UK then you’d be ill-advised to stash your gains in the US. Tax evaders from the other 51 FATCA signatories plus the other 138 non-FATCA countries should read on.

Just a quick reminder for anyone who’s been away from earth for the past few years, FATCA is the US Foreign Account Tax Compliance Act of 2010 – enacted by a grumpy Congress in the wake of a number of scandals including a major Swiss bank ‘assisting’ 19,000 US Persons to stash their cash in a good, old-fashioned numbered Swiss and forgetting to mention the fact to the IRS.

FATCA requires Foreign Financial Institutions to tell the IRS if they have any US Persons as customers. A US Person is a US citizen or a US Lawful Permanent Resident (‘Green Card’ holder). It can also include some types of non-immigrant visa holders but things begin to get lawyer-complicated in that area so we’ll move briskly along. FATCA initially resulted in a lot of smaller financial institutions jettisoning American customers as “more trouble than worth” – though this exodus has now slowed.

The OECD’s Common Reporting Standard (‘CRS’) is similar but different in lots of ways to FATCA:

FATCA

CRS

55 countries

93 countries

Started 1 July 2014

Starts 1 January 2016

US Persons only (except Costa Rica, Malta, Netherlands, UK)

Based on tax residence

Reporting de minimis US$50,000 individuals / US$250,000 entities

No reporting de minimis

Exemption for certain products

No product exemptions

Exemption for ‘deemed compliant’ funds

No ‘deemed compliant’ funds

30% tax withholding

No tax withholding

Institutions issued with unique ID

No IDs for institutions

Responsible Officer at institutions

No responsible officer

Entity sponsorship (e.g. fund manager over multiple funds)

No entity sponsorship

US IRS EIN or SSN used for account holders

No agreement over use of unique account holder identifiers

 

So the point of all these details is that FATCA and the CRS while born from similar intentions are quite different in many respects and both the data collected and what you do with it as a financial institution vary between them. If you are really late and have not yet set up a CRS program to drive your CRS compliance (for instance you might be in one of the 38 CRS countries that are not also FATCA) then you really need to get a move on. A future article will cover what you need to be doing to get your program up and running. But for now back to the er … fun stuff – tax evasion.

So a major unintended consequence of the varying footprints of FATCA and CRS is that it has created a gap that the US can fill both as a legitimate tax planning and privacy ‘haven’ but more worryingly as an excellent location for tax evasion.

As a legitimate tax planning haven the US provides all manner of exciting tax-free options to a Non-Resident Alien (not a US Person and not resident in the US for more than 182 days in any year – there’s also a complicated multi-year factoring equation but we’re ignoring that here). Investments in bank deposits, CDs, insurance policies, bonds and mutual funds generally are free of all tax withholding – including both income and capital gains taxes. A taxpayer may also be able to take advantage of any tax treaty between the US and their home country. Of course you will almost certainly need to ensure that when you file your home country annual tax return you remember to mention your assets growing tax-free in the US.

Where all this becomes a little concerning is that if you’re a resident of one of the 189 countries that the US does not report to (via a FATCA IGA Model 1A) then there’s really no way for that country’s tax authority to check up on any US investments. CRS was birthed to close this gap but the US Congress has said that it has no intention of creating legislation to enshrine the CRS rules and instead it will slowly update the FATCA IGAs from model 1 or 1B (where the US does not report on foreigners) to models 1A, 2A or 2B (where it does). But even when this multi-year process is complete it will still leave 138 non-FATCA countries.

And to make matters worse the creative tax planners out there are also discussing even less transparent structures involving trusts in certain 3rd party jurisdictions that entirely disguise beneficial ownership and yet would appear to meet all the requirements of the BSA and Patriot Act legislation in terms of allowing new accounts to be opened.

Learning points from this article (you’ll be tested later and the winner awarded a beer or a coke):

1. The Law of Unintended Consequences does and always will operate
2. Tax law and identifying and exploiting opportunities to avoid tax is and will remain a busy little space – love it or hate it
3. If you haven’t started your CRS program – get a move on now and keep reading these articles

 

Mark Bolton

Banking Strategy & Change Execution LeaderThe small print: this article is entirely the author’s personal opinion and is in no way representative of the views of any current or past employer or client (or his mother’s views on the subject).