I have been campaigning on issues relating to the European Union Savings Tax Directive since 2005, at least. It was, therefore, pleasing to note that Bloomberg could report last night:
Luxembourg's Prime Minister Xavier Bettel said his country has reached a deal with other European Union nations on the extension of a savings-tax arrangement that will require all of the bloc's 28 members to exchange data.
As they also noted:
Austria and Luxembourg had refused to sign up to the agreement before the conclusion of talks on the exchange of savings information between the EU and Switzerland and four other non-EU countries with borders on the 28-nation bloc.
The countries in question are Switzerland, Liechtenstein, San Marino, Andorra and Monaco. Luxembourg says it has now received assurances that they are all making progress towards also adopting automatic information exchange, which is, of course, inevitable under the terms of the new OECD arrangements on this issue.
It's taken a long time to get this progress, and it has only happened because of wider moves, including the US Foreign Accounts Tax Compliance Act (FATCA), but after being told for so long that we would never get such an agreement to properly exchange information on the tax affairs of all EU citizens, including on matters relating to the companies and trusts that they own, I take quiet satisfaction that at long last this deal will be in place.
It should also be noted that this really does shatter a lot more of the secrecy in places like Jersey, Guernsey, the Isle of Man, Cayman, the British Virgin Islands and so on, because all the British Overseas Territories and Crown Dependencies are deemed by the European Union to be part of the EU for these purposes, and as a result the UK must require that they comply fully with the terms of this new agreement.
Day by day we inch closer to ending tax haven secrecy.
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even noisy satisfaction is appropriate here. You deserve it.
It suggests that there is a lot of support for fair taxation behind the scenes. Let’s hope the movement speeds up.
Does this mean that Luxembourg will have to scratch the law they enacted as late at last year that established two new forms of legal entities, the “Special Limited Partnership” and the “Standard Limited Partnership”? As I read the promotions of them they open up for bearer shares and no registered information about their financials.
I hope so….
The managers of these new entities become paying agents upon receipt (PAUR). There is no need for information on beneficial owners required by Liechtenstein. The bank where the account is held then sends an awareness report to the authorities where the PAUR resides. It will then be up to the PAUR to report on the direct or indirect initial contributor of assets, whether they have any equitable rights or not. If no such settlor exists, then the PAUR becomes a Paying Agent Upon Distribution.
Simples. LoL
The obvious consequence of this is that any untaxed capital that may still have been deposited in Luxembourg will simply leave the EU altogether and fully escape any withholding.
The most obvious destination is now ironically the United States. Despite the Obama Admininistration’s efforts, it is obvious that Congress (under either Rpublican or Democratic control) will never agree to any automatic exchange of information.
Even worse, there is currently no Federal statute to compel states such as Nevada or Delaware to identify and maintain registers of the beneficiaries of bearer shares in companies incorporated there.
The EU has simply granted yet a massive competitive advantage to the US financial services industry (which really did not need that gift).
MRubio,
It’s not that easy for entities and legal arrangements to pack up lock, stock and barrel. The management of any entity will be defined as PAUR and trust co’s within EU may be subject to audits to ensure compliance.
Furthermore the USA is a now terrible place to hide accounts for two reasons:
1. The OECD CSR will compel US banks to either look-through the account or the entity itself is a Financial Institution…. and it’s not up to the US Govt to identify the Beneficial Owners, it will be up to the bank. So even if DE, NV, MT or other states such as OR and SD which don’t ID Benenfical Owners (or any LLC in USA) the US bank has to know the BO and it’s the bank that will report the BO.
2. Furthermore, the USA has recently mandated that all entities, even foreign owned, must file a FBAR report detailing bank account details, so no-one in their right mind will incorporate a US entity these days to hide deposits.
Of course, there are ways to avoid the new tax nets but it requires such sophisticated that the old ways of the 90’s and naughties are passe.
Mr Morris,
You bring up a very good point regarding the fact that US banks would, if they were to apply OECD standard, be required to identify the beneficial owners of entities maintaining accounts.
However, the essential problem of your analysis is your assumption that the US will apply the OECD standards. Whilst the US administration has signed up to the OECD Corporate Social Responsibility (CSR) and Automatic Exchange of Information (AEI) models, their actual implementations would require legislation by Congress. This will encounter insurmountable opposition, especially when it comes to AEI.
As you may be aware, Obama’s Treasury Department has for a couple of years now requested from Congress the authorization to exchange reciprocal information with countries that have entered Intergovernmental Agreements (IGA) for the implementation of FATCA. The Republican leadership of the House’s financial Services Committee (whose support is required for the House to even get a vote on the issue) has immediately killed the idea. You can see Congressman Bill Posey’s letter to Treasury Secretary Jack Lew to this effect here http://bit.ly/1mmBJRm. Congressman Posey also co-authored a letter of the entire bi-partisan Florida Congressional delegation raising opposition to the reciprocal information exchange to be found here http://1.usa.gov/1kSfS1i
You should read this blog by Allison Christians of McGill University, a former White&Case tax attorney turned academic whose views are generally closely aligned with the Tax Justice Network: http://bit.ly/1glLD3h. The most revealing paragraph in that blog is the following:
“The OECD’s forging ahead with a plan that more or less relies heavily on US acceptance is eerily reminiscent of the last OECD attempt to curb tax evasion, via the harmful tax practices initiative. The US first supporting and then completely reversing course eviscerated that effort, thus cementing the status quo we witness today.”
Considering the current Congressional political dynamics (or complete lack thereof), there is only an infinitesimal probability that the current bunch of OECD-led initiatives will end up differently.
for the time being and for the foreseeable future, there is really nothing complicated about tax evasion strategies. Just turn up at any branch of any bank in Miami with a passport of any color, and pen a non-interest bearing brokerage or money-market account. Then incorporate a company in South Dakota or Delaware with bearer shares, and transfer accounts and assets in specie. Voila, done!
I did not understand your point about FBAR. An account maintained in Miami, Houston or New York is by definition not Foreign (the “F” in FBAR), and so is not subject to FinCen reporting even if its beneficial owners are non-resident aliens.
Thank you.
MRubio
No, sorry my mistake. You are correct. A FBAR is not needed for US account. I was thinking of the situation where one uses a DE entity to hold an account outside USA.
The required reciprocal nature of FATCA is indeed very interesting. Model 2 IGA does not need recipircal agreement and Model 1 only relates to interest and dividends. Still, I wouldn’t be rushing to open an account in USA if I were EU resident.
Mr Morris
Thank you for clarifying your point regarding FBAR.
I would encourage you to be mindful of the fact that there is no “required reciprocity” under both IGA Model 1 and Model 2. Both documents only contain a commitment by the US Government to support legislation serving the purpose of a reciprocal exchange of information, but do not oblige Congress to agree to that legislation at all. There is considerable uncertainty about the legal and constitutional nature and validity of the IGA, and some observers openly wonder whether they are binding on any branch of the United States at all.
The Treasury is currently implementing reciprocity-“light” by way of its Internal Revenue Bulletin 2012-20 (http://www.irs.gov/irb/2012-20_IRB/ar07.html), which it takes the view does not require further Congressional consent. The scope of information that the IRS is authorized to collect and disclose under Bulleting 2012-20 is limited to accounts held directly by non-resident aliens and earning at least $10 in bank interest.
The term “interest” is very narrowly defined and excludes coupons from money-market funds, commercial paper, public and private securities, etc.
I would be curious to know the basis on which you believe that dividends earned by non-resident aliens are also subject to reporting. I am not aware of any law or regulation that authorizes this.
There is anecdotal evidence of significant capital flows from Europe into South Florida in particular, although I have not seen any scientific data to verify this.
MRubio
So, are Nevada & Delaware outside the scope of FATCA?
I didn’t understand that to be the case….
Mr William,
Yes, FATCA (FOREIGN Accounts Tax Compliance Act) only applies to accounts maintained outside the United States. The statute does not have any relevance for onshore accounts.
MRubio,
You misunderstand me due to the brevity of my answer. But let’s say a Dane establishes a NV LLC and opens the bank account anywhere in USA. Although the USA govt. doesnt know the beneficial owner, because that info is held by an agent in NV (not on central register), two things are bad for the Dane:-
1. According to the OECD CSR, the bank anywhere in the US will have to identify the controlling person(s) of the NV LLC. Whether the LLC is a FI or NFE is beyond the space I have here to explain.
2. The USA, since 2012, makes it mandatory for the LLC to file details of its bank accounts anywhere in the world. Look up FBAR.
I am conference speaker, soon to be held in several European territories, will describe what is in scope or out of scope of FATCA, OECD CSR, EUSD, mini FATCA and EU Administrative Assistance. Talk about minefield hopscotch.
Mr Morris
Our posts must have crossed.
I would entirely agree with your assessment of the situation if Congress were ever to pass the domestic legislation necessary to implement in US law the various commitments made by the Government at the level of the OECD, G20 or G7/8. But this is in the opinion of almost all observers highly unlikely to happen (I remember even Mr Murphy once agreeing with this).
Under the current legislation (Internal Revenue Bulletin 2012-20, http://www.irs.gov/irb/2012-20_IRB/ar07.html), the IRS is only authorized to collect and disclose information about accounts held directly by non-resident aliens and earning at least $10 in bank interest. The term “interest” is very narrowly defined and excludes coupons from money-market funds, commercial paper, public and private securities, etc. This creates extensive avoidance opportunities.
Please note that the IRS policy based on Bulletin 2012-20 is the object of a Federal lawsuit filed by the Florida and Texas Bankers Associations. Additionally, the House (but not the Senate) passed a bill sponsored by Florida Representative Bill Posey denying the IRS the authority to collect and disclose this data.
Your example of a Dane is interesting because Denmark was an early signatory of a Model 1 IGA with the United States, under the Article 6(1) of which the US Government is committed to:
“… to further improve transparency and enhance the exchange relationship with [FATCA Partner] by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic exchange”.
This commitment is obviously worthless without a vote of Congress. The Obama White House has tried in two different budget submissions to obtain such a vote (see here for the 2014 budget on page 202 http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/spec.pdf ; and here for the budget 2015 on page 203 http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf)
Needless to say, neither budget submissions ever even reached the level of a discussion in the House’s Committees.
So under the current legislation (and for the foreseeable future based on Congressional political dynamics), the hypothetical Danish tax evader is safe from any reporting, and this without even involving any moderately sophisticated structuring of his/her affairs through bearer entities.
Your point about FBAR is surprising. FBAR are part of USC 31 (Financial Regulations) and not USC 26 (Internal Revenue) and are therefore subject to completely different disclosure rules to third-parties including foreign governments.
But even before entering into this, why would a US entity, even if it were owned in majority for the benefit of non-resident aliens, have a duty to file an FBAR if they only maintain bank and custodian accounts in the United States?
Please feel free to elaborate.
Best regards.
If you wanted to destroy a country, I think the quickest & easiest way would be to give it a significant & politically powerful financial sector.
If we move quickly we can establish transparency across most regimes except (say) Russia, Iran, N Korea… All the hot money should flock there.
Given a few years we can then expect no further trouble from Russia, Iran or N Korea.