Changes in Federal Tax and its impact on US and non-US clients

John Shoemaker of Butler Snow

Jun 23, 2022

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1. What developments have we recently seen in regards to US Federal tax and automatic exchange of information?

2. How does that affect clients outside the United States?

3. Are there deadlines that clients must be aware of?

Video transcript

1. What developments have we recently seen in regards to US Federal tax and automatic exchange of information?

What we've seen recently, and I think these have flown under the radar a bit, one, there was a Treasury Department Inspector General report, which really took the IRS to task for failing to capitalise on the FATCA data that it had received over the course of the last, say seven to eight years of reporting cycles of the FATCA regime. Now the FATCA regime, for those who may not be familiar with it, and I'm sure at this point almost everyone has heard about it, Foreign Account Tax Compliance Act. It's a system where financial institutions outside the United States were sending data to the United States, either through their home jurisdictions tax and revenue department or directly to the U.S. Then that information could be used by the IRS to double check the returns of Americans who had accounts overseas, or where they themselves living overseas and had to arrange their financial affairs around their residents outside the United States. So this Treasury Department inspector General report really said look, IRS, you're not utilising this data correctly, you've not seen an increase in tax revenue collected that justifies all the time and effort and expense you've gone to create this program, and you're not even sorting through and analysing the data correctly to identify ways in which you could be using it. So, it really was a wakeup call to the IRS to say look, you either need to drop this program, which I don't think anyone is going to support in the U.S. The program is in place, there is a use for it and the Inspector General's report acknowledges that. Or, and I think this is the most likely outcome, you need to start to spend the time, the money, and the effort to use that data correctly, and let's see results. Let's see it brought to bear to both increase revenue and increase compliance rates amongst those who currently aren't being compliant with how they're treating their offshore assets. That's one, and it really did make the Commissioner of the IRS sit up and take notice and understand okay, I'm being brought to justice here that I've got to step up and use this information correctly. The second thing flowed from that, which is shortly after that the commissioner acknowledged something that we in the offshore community had known for years, which is while FATCA purports to be reciprocal, meaning any country that has signed an intergovernmental agreement to exchange data with the U.S. has the option of signing a reciprocal agreement, meaning they will get data from the U.S. just like they're giving data to the U.S. Those of us in the offshore world practicing knew that data was not apples to oranges. It's not one for one data. Trusts, partnerships, life insurance companies, investment accounts in the U.S. were not forced to analyse and disclose information the way that their equivalents offshore are forced to do under the FATCA regime. So the Commissioner acknowledged that and said we need to do better about getting reciprocity in place, and he actually proposed legislation that would implement, in essence, a regime within the U.S. that would create one for one data exchange. This also affects the idea that the U.S. is not participating in CRS, the Common Reporting Standard, or automatic exchange of information. For years people have said look, you can create a structure, put your money in the U.S. They're not participating in CRS, and therefore that money is safe from a privacy perspective from being shared with your home jurisdiction. Well, that's never been true because of what I mentioned, the reciprocity of FATCA IGAs. There's always the possibility that any country could sign an agreement and get an exchange with the U.S. if it wanted to, but it had the holes in it. Like we've mentioned, not one for one data exchange. Now the commissioner has publicly acknowledged that and has proposed legislation that would fill that gap and put the U.S. on a level standing to exchange information outside of the United States, just like the data that it's getting flowing into the U.S. on Americans who have accounts overseas. So those are, I think, very big developments that haven't gotten front page headlines, but could fundamentally alter the way that the U.S. sits currently in the global financial network.

2. How does that affect clients outside the United States?

It definitely has a direct effect on U.S. clients. Like I mentioned, the IRS is going to be a lot more aggressive in the coming years in utilising their FATCA data, and they're going to be called to demonstrate that they're getting a higher collection rate and a higher compliance rate from U.S. taxpayers. But for non-U.S. taxpayers it has an even larger effect, which is for a lot of this planning that's occurred over the last, say seven to eight years where folks have been fleeing to using the U.S. as a trust jurisdiction, or a partnership jurisdiction, or to bank assets with the idea that there wasn't an automatic exchange of that data back to their home country for non-U.S. persons. This is a loud announcement that that's on a pathway to being done away with. Now it's not going to happen overnight, but now is the time, early on in the process, to get your head around what's the impact on my structuring. Maybe there's stranded costs that you could recoup because you've been using entities and jurisdictional approaches in the U.S. that will no longer be necessary if you're not getting that privacy protection that you had premised the structuring on. On the other hand, and this isn't all clients, but for some clients, if there is anything from a compliance perspective, meeting regulatory and tax requirements in your home jurisdiction, if there's anything that isn't being cleaned up and you were relying on the fact that there wasn't an automatic exchange of information that would draw attention to it, now's the time to see that that's coming down the road. Go ahead and get into a disclosure system or some type of reconciliation program to get that cleared up well ahead of the time pressures of information being sent back to your home jurisdiction. So, I think it's very important for non-U.S. clients who are using the U.S. for structuring, for choice of law, for banking operations, really look at what's motivating that, why are you doing it? Are you compliant with the assets that are being held there? And let's get ahead of the curve in getting that rectified before your hand is forced because certain data has been provided back to your home jurisdiction.

3. Are there deadlines that clients must be aware of?

So, tax filing deadlines, I think will be important along with information exchange deadlines. The U.S. has a tax filing deadline every year. Some people may be familiar with it. It's referenced a lot in pop culture and films and movies. April 15th of every year, U.S. tax filing deadline. Some people may not know, there's an automatic two-month extension for people who are physically residing outside of the U.S., like myself. I'm an American, American taxpayer. I pay my federal income tax every year. I get an automatic extension to June 15th. Now that can be extended even further by filing paperwork. But June 15th is really a relevant deadline for anyone outside the United States who has to file a U.S. tax return. You want to get things right before that so you're not having to file an amended return, or you've missed a deadline and now you've introduced penalties or interest in. So it's always good if you're being tipped off that hey, there's something to think about with U.S tax and this conversation is triggering something in your mind, there's an imminent deadline coming up in regards to last year's tax return, June 15th. For non-U.S. persons who are interested in the concepts we've raised today about potential reciprocity of information, data flowing back out of the U.S. to other countries, then I think a key deadline is the end of August each year. The global common reporting standard, where information is being exchanged between a variety of countries worldwide, it has a rolling deadline based upon each jurisdiction. It starts as early as March, but the latest deadline tends to be, without extensions, tend to be the end of August every year. So we're coming up now on the summer, but will very soon be at the end of August and that data is then in the system and is flying around the world. And so if you've got any concerns that you haven't properly accounted for, or declared something that is going to create a tax liability for you in your home residence jurisdiction, you want to get that done, cleared away, get a good plan of attack to deal with that by the end of August, you've avoided then another cycle of data being in the system that could trip a trigger of an audit or a follow up query from your home jurisdiction. So June 15th for a U.S. person to pay attention to, and I think end of August is a good deadline to remind non U.S. clients to get everything squared away because that's when a new cycle of information goes into the global system.

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