IRS has done quite a thorough job of catching
the income or capital gains from just about every
kind of offshore or foreign investment that US
residents can get involved in. Taxes are either
applied as gains are made, or they are applied
when an investment is realised, with taxes being
calculated back over the period of the investment
and compounded forward to the time of payment.
of the key tax collection mechanisms are aimed
at Controlled Foreign Corporations, Foreign Personal
Holding Companies, Foreign Investment Companies,
Passive Foreign Investment Companies, Grantor
Trust Provisions and Foreign Trust Reporting Requirements.
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
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.
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).
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.
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
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
aggregate value of all foreign financial accounts
exceeds $10,000 at any time during the calendar
IRS has made a number of attempts to uncover what
it supposes to be hordes of undisclosed overseas
investment accounts. In October, 2009, Commissioner
Doug Shulman said that he was pleased with the
response to the agency's latest voluntary offshore
bank account disclosure scheme, the deadline for
which passed on October 15.
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.
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
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.
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.
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.
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
Foreign Account Tax Compliance Act, introduced
into both chambers of Congress on October 27,
became law on March 18, 2010 with some measures
taking effect in 2012, others in 2013. It 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.
the bill, foreign financial institutions, foreign
trusts, and foreign corporations are forced into
providing information about their US account holders,
grantors, and owners.
Foreign Account Tax Compliance Act will:
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
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.
The bill was introduced in the Senate by Baucus
and Sen. John Kerry, and in the House of Representatives
by Reps. Charles Rangel and Richard Neal.
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 is the culmination of that effort and
represents the best ideas from both the House
and the Senate."
predicted that the bill would make banking secrecy
"a thing of the past".
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,"
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.
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,"
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.