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| Let’s Talk Taxes – Think You Can Hide Your Foreign Bank Account From The IRS? Think Again! |
Asha Dixit
08/28/2013
“Every additional country we bring on board means we are one step closer to winning the fight against offshore tax evasion.†Disclaimer: Every individual’s tax situation is
different and tax situations change over time. This article is intended to give
general information to enable the reader to discuss their situation with a tax
adviser. It is not intended to be tax or
legal advice and should not be construed as such.
U.S. Department of the Treasury, Treasury Engaging with More than 80 Countries to Combat Offshore Tax Evasion and Improve Global Tax Compliance, July 12, 2013
The days when a taxpayer could hide their foreign bank accounts from the IRS are over. As the United States signs Intergovernmental agreements (IGAs) with countries all across the world ensuring compliance with Foreign Account Tax Compliance Act (FATCA) requirements, the net is slowly but surely closing around taxpayers with unreported foreign bank accounts.
On August 13, 2013 Cayman Islands, a “tax havenâ€, concluded a Model 1 IGA (explained below) with the United States. This agreement will provide for the automatic exchange of information with Cayman Islands and thereby enable compliance with FATCA regulations. The significance of this agreement rests on that fact that Cayman Islands is a major global financial center and home to thousands of hedge funds and hundreds of banks including global financial institutions like Deutsche Bank, HSBC, and UBS.
Other significant financial centers and tax havens like Bermuda, Bahamas, Luxembourg, Isle of Man, and British Virgin Islands are among the 80 countries negotiating IGAs with the United States. Switzerland, another tax haven, has already entered into a Model 2 IGA with the United States. These agreements and negotiations demonstrate to individuals and financial institutions that think “the FATCA is going awayâ€, the fallacy of their belief.
Enacted in 2010 by U.S., FATCA requires foreign financial institutions (FFIs) to enter into agreements with IRS to identify and report certain information on U.S. taxpayer accounts. FFIs that do not enter into agreements will be subject to 30% withholding requirements. Since many foreign jurisdictions in which these accounts are held have laws prohibiting transfers of such information, the U.S. has come up with IGAs.
Model 1 IGAs enable the FFIs to transmit the information required under FATCA to the source counties’ tax authorities which then automatically transmit the information to the IRS. Model 2 IGAs enable FFIs to directly transmit the information to the IRS. Either way an IGA paves the road for FFIs to transmit U.S. taxpayers’ account information.
The implications of U.S. Model 1 IGAs from tax perspective is obvious in the June 2013 OECD report “Automatic Exchange of Information: The Next Step.†The report states, “Automatic exchange of information involves the systematic and periodic transmission of “bulk†taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income (e.g. dividends, interest, royalties, salaries, pensions, etc.). “
United States is one of the few countries that tax its citizens and residents on their world-wide income. In addition, U.S. taxpayers have reporting requirements relating to their overseas financial institutional accounts. In 2010, the Congressional Joint Committee on Taxation estimated that FATCA would raise $8.7 billion in tax revenues over 10 years.
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