More and more foreign banks are closing their doors to US citizens after a new law demands that ?international foreign institutions? disclose the names of their US clients with deposits of more th
More and more foreign banks are closing their doors to US citizens after a new law demands that ?international foreign institutions? disclose the names of their US clients with deposits of more than $50,000, otherwise they will be subject to a withholding tax of 30% of all payments made to them in the US. While this applies to the US, could the idea spread across the water and governments in Europe consider similar action in their clampdown on tax evasion?
The Hiring Incentives to Restore Employment (HIRE) Act, which was signed by President Barack Obama on 18th March 2010 and comes into effect in 2013, seeks to bolster employment for the unemployed with a series of tax breaks for businesses. Importantly, however, the Act also provides the Internal Revenue Service (IRS) with increased means of tracing and prosecuting tax evaders. It contains legislation whereby foreign financial institutions are requested to comply with US law and provide information or a tax payment to the IRS ? in effect making them international enforcement arms for the US tax authority.
The institution will have to provide the IRS with information on an account holder?s name and address, tax information number, account number, balance, gross receipts and gross payments or withdrawals from the account.
Under US law, its citizens are taxed on their worldwide income even if they live outside the States. American expatriates are therefore taxed both in US and their country of residence. The US authorities have been increasingly and successfully clamping down on US companies, residents and expatriates who hide money away offshore.
As a result of the measures taken by the US, many Americans have already had their accounts closed by foreign institutions which find legislation already in place makes the US compliance procedure too onerous. US expatriates have been left without limited access to local banking facilities and to open an account in the US usually involves having an address there. Consequently, there has been a surge in US expatriates renouncing their US citizenship with double the number of Americans surrendering their citizen?s rights in the last quarter of 2009 than during the whole of 2008.
The HIRE Act makes it even more difficult for US citizens living abroad to hold overseas accounts, and if they do, to avoid being taxed in the US. Provisions in the Act are aimed at closing loopholes in the 2001 Qualified Intermediaries agreement where a withholding tax was levied on ?US persons? if they did not make a full disclosure to a qualified intermediary. Now more banks in Switzerland, the UK and the Channel Islands are reviewing the implications of the Act and shutting their accounts to US customers.
In order to comply with America?s requirements, foreign banks and financial institutions may have to pay out for extras like upgrades to their computer systems and training. It also means shifting through their client databases to identify US citizens as well as collate the information for the IRS. This could have reverberations in that the banks could increase their costs to all their customers in order to pay for the extra expense.
In a survey conducted by UK law firm Withers, over 50% of the bankers, accountants and independent financial advisers polled said that they knew of Americans who had been refused investment and banking services during the last two years. Nearly all of those questioned expected this to increase due to the HIRE Act. Just under 75% said they expected investment in the US to decrease because of the Act. However, 87% said they believed financial institutions would comply with the legislation to have access to US markets. Respondents also described the new legislation as “an absolute game-changer”.
A partner at Withers, Jay Krause, said: “The difficulties that American expats face predates the HIRE Act. But the new law will take it to a whole new level. I think that it is the most remarkable piece of tax legislation ever enacted; its impact is severe, wide-ranging and by no means limited to the US. It will affect all Americans abroad and a multitude of non-US institutions, big and small.?
According to Withers, in those instances where local bank secrecy or other laws would prevent the disclosure of account information without a waiver by the account holder, the financial institution will be required to obtain such waivers, close the relevant account or be subject to a 30% withholding tax.
The US HIRE Act has tightened the tax reporting requirements of US citizens living abroad even further. They will find it even more difficult if not impossible to hide money away from the IRS and even risk being left abroad with nowhere to secure their money. It is just another brief chapter in how the net is closing around expatriates who persistently refuse to pay their tax liabilities or use legitimate tax mitigation arrangements.
US signs amended tax treaty
In addition to the HIRE legislation, the US has signed an updated Convention on Mutual Administrative Assistance in Tax Matters with 14 other countries. Along with the US the treaty was signed by Denmark, Finland, Iceland, Italy, France, Netherlands, Norway, Sweden, Ukraine, the UK, Korea, Mexico, Portugal and Slovenia.
Director of the OECD Centre for Tax Policy and Administration, Jeffrey Owens, said: ?This is another success story in the fight against offshore tax evasion. Once the Protocol has entered into force, the Convention will be a very powerful instrument that will contribute to a fairer world where all taxpayers pay the right amount of tax, at the right time.?
The Convention provides for a wide range of tools for cross-border tax co-operation including exchange of information, multilateral simultaneous tax examinations and cross-border assistance in tax collection. The amended Convention will become a more powerful tool for multilateral tax co-operation as it will enable a wider group of countries to take part and will require full exchange of information on request in all tax matters without regard to a domestic tax interest requirement or bank secrecy for tax purposes.
The old world of tax evasion is failing fast and a new age of tax compliance with tax planning is replacing it. Tax doesn?t necessarily have to be high or difficult whatever your nationality or wherever you live, especially if you have effective legitimate tax savings structures to protect your wealth.
Blevins Franks is an experienced tax and wealth management firm that can advise you of the tax mitigating vehicles available which are most suited to your specific circumstances and requirements.
By Bill Blevins, Managing Director, Blevins Franks
8th July 2010