Legislative History Reveals FATCA Had Nothing To Do With Collecting Tax Revenue From U.S. Persons With Foreign Accounts Evading Taxes (Part I)

reprinted with permission from Tax Connections

Prior to the enactment of FATCA, Congress and the Executive were in possession of concrete-evidence revealing FATCA would fail to collect any meaningful amount of tax-revenue from U.S. persons evading tax through offshore financial center holdings. Congress should have halted enactment of HIRE – if in fact, FATCA’s purpose was to collect tax-revenue from offshore tax evasion by U.S. persons.

The United States Congress used estimates from the Joint Committee on Taxation (JCT) as the foundation for supporting the Foreign Account Tax Compliance Act (FATCA), contained in the Hiring Incentives to Restore Employment Act (HIRE).

HIRE was a tax expenditure designed to encourage U.S. small business to hire new employees. HIRE included two tax expenditures of note: a payroll tax exemption to employers and a one-thousand dollar tax credit for employers hiring employees between February of 2010 and January of 2011. [1] FATCA was included in HIRE because the tax revenue collected from FATCA was supposed to offset the tax expenditures authorized by HIRE. [2] The tax revenue FATCA was said to be targeting was from U.S. persons with foreign bank accounts who were evading tax.

In July of 2008, and around the time of the UBS scandal and the Global Financial Crisis the U.S. Senate Permanent Subcommittee on Investigations held a hearing and issued a report entitled “Tax Haven Banks and U.S. Tax Compliance”. [3] The underlying justification for FATCA as a substantial revenue raiser rested on a single statement found in a footnote in the 2008 hearing report: “Each year, the United States loses an estimated $100B in tax revenue due to offshore tax abuses.” [4] In a 2009 follow-up report, the Ways and Means’ Subcommittee on Select Revenue Measures held a hearing entitled: Banking Secrecy Practices and Wealthy Americans. During this hearing, the Senate increased the U.S. tax revenue loss-estimate by 50 percent stating: “Contributing to the annual tax gap are offshore tax schemes responsible for lost tax revenues totaling an estimated $150B each year.” [5] The estimates entered into the record during these hearings measured the offshore tax gap, or the amount of tax revenue[6] that would be collected if offshore tax evasion by U.S. persons holding foreign bank accounts was ended. One month, before HIRE was signed into law by President Obama, new evidence revealed the offshore tax gap was nowhere near as large as previously thought.

On February 23, 2010, the JCT released a report estimating that FATCA would instead, only collect $8.7B over ten-years or $870M per year; a huge difference from last-year’s estimate of $150B per year.[7] Assuming this latest estimate was accurate, the 2008 and 2009 estimates were drastically overinflated – to the tune of over $149B annually! At that point, a reasonable person puts on the breaks and asks questions. At the very least Congress should have engaged in some due diligence to determine why there was such a huge discrepancy. After all, there was plenty of time remaining on the legislative clock,[8] and the report invalidated the policy justification for FATCA. Instead, Congress and President Obama steamrolled FATCA into law in less-than a month after the JCT estimate – almost like, they wanted to hurry to get it in, before someone caught wind that the FATCA had nothing to do with closing the fictitious $150B offshore tax gap, because there was really no tax revenue outstanding. (Part I….To Be Continued)

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[1] The Hiring Incentives to Restore Employment (HIRE) Act of 2010 (Pub.L. 111–147, 124 Stat. 71, enacted March 18, 2010, H.R. 2847).

[2] HIRE was originally a $150B dollar incentive package, but the package was reduced to $15B before enactment. It would be interesting to take a look at the timing of the reduction in the HIRE economic incentive package (from $150B to $15B), and compare it with the JCT’s February 23rd estimate, to determine if the reduction in the spending package was a result of learning FATCA would not collect any meaningful amount of tax revenue from offshore accounts, because there was none to collect.

[3] Tax Haven Banks and U.S. Taxpayer Compliance, Senate Permanent Subcomm. on Investigations, Comm. on Homeland Security and Governmental Affairs, 110th Cong. (2008).

[4] Ibid.

[5] Banking Secrecy Practices and Wealthy Americans, Senate Ways and Means Subcomm. on Select Revenue Measures, 111th Cong. (2009). Emphasis added.

[6] In the U.S., we have a 1099 system, where banks are forced to report interest and dividends. Unless there is some income from the account, it follows that there can be no income tax due from that account. The way to determine whether there is income from an account is to require the accountholder’s financial institution to report on the income from the account.

[7] The 2010 JCT report estimate of $8.7B in offshore tax evasion tax-revenue to be collected over ten-years or $870M per year (median average). It should be noted that the report breaks down the estimate by year. Therefore the median average is not the best number to use in every case. Individual calculations based on empirical data from a particular year proving the current validity of the report will incorporate the amounts listed on the report for each relevant year in question to preserve the integrity of the proposition for which the calculation was intended to support.

[8] The House Ways & Means Committee held the Hearing on Banking Secrecy Practices and Wealthy American Taxpayers on March 31st, 2009. The House passed the original version of HIRE on June 18th, 2009. The JCTs estimate was released on February 23rd, 2010. HIRE passed the Senate the following day on February 24th, 2010 (with amendment). The House followed by adding an amendment on March 4th, 2010 (with amendment) which was approved by the Senate on March 17th, 2010. March 18th, 2010, President Obama signed HIRE into law, and thereby FATCA into law as well. Therefore, there was a full month from the time the JCT report was issued, and the day President Obama signed HIRE (containing FATCA) into law. (Part I….To Be Continued)

The Repatriation tax and the 962 Election for Americans with a U.K. corporation

by Monte Silver
reprinted with permission of the author

The U.S. 2017 tax reform has made it very problematic for an American residing in the UK to conduct business through a UK corporation. Operating through a UK corporation exposes the expat to two new taxes: Repatriation and GILTI. This article will discuss the little known 962 election, how it can be used to reduce Repatriation tax liability, and some issues that must be considered before doing so.

A numerical example is helpful. An American living in the UK has been operating a CPA sole practice or family restaurant for 30 years through a wholly owned UK company. After paying UK corporate income tax on profits over the years, the company has $500,000 in retained earnings in its bank account, which the expat is counting on for retirement. Under the Repatriation tax, the expat is now personally liable for $87,700 (17.54% * $500,000) of that amount.

How is this tax paid? In eight annual payments, with the first payment of 8% (or $7,016) being due June 15, 2019 (as a result of the extension achieved from the U.S. Treasury).

Let’s assume that the expat has no personal foreign tax credits to use to offset to the Repatriation tax. In other words, in previous years the expat has already used all personal income tax paid in the UK to offset U.S. income tax.

Section 962 of the U.S. Internal Revenue Code (“IRC”) may help. Section 962 allows the expat to be treated as a corporation for a specific year (say in 2017) solely for purposes of the Repatriation tax (and other Subpart F income which taxpayers rarely have).

Why does this help? Simple. If we assume an average UK corporate tax rate of 20% over the past 10 years, then approximately $100,000 ($500,000*1.20%) of UK corporate tax has been paid. As the UK corporation never owned U.S. taxes, it never utilized these taxes as credits on any U.S. corporate tax return.

And if the expat utilizes the 962 election in 2017, there are two potential benefits: (1) ability to use the corporate taxes paid in the UK to offset the Repatriation tax, and (2) enjoy the lower corporate Repatriation tax rate.

In the real world, situations are rarely black and white – i.e. lots of corporate credits but no personal credits. For example, if the expat has some personal tax credits available, the point at which the 962 election becomes beneficial requires analyzing different numerical scenarios, taking into account many factors, such as gross-up rules under section 78. However, in cases where the UK corporation has a significant pool of unused tax credits and the expat has none, the 962 election may make sense.

The remainder of the article will discuss one significant landmine that may arise when using the election. And it is important to state until now, 962 has rarely been used, so there may be others:

Post-2017 distributions. What happens when the UK corporation finally distributes the $500,000 to the expat? If no 962 election was made, no additional U.S. tax is paid by the expat (IRC 959). UK tax, however, may be due. And if 962 election was made? Bad news: all the distributions out of the accumulated earnings, beyond what was paid on the Repatriation tax, are subject to U.S. tax (IRC 962(d))! Ouch. At what rates? Most likely personal marginal rates. Double ouch.

An example will help illustrate this. In the above example, if no 962 election is used and no personal tax credits are available, the expat would be liable for $87,700 in Repatriation tax, but no more U.S. tax would be due upon distributing the $500,000. But under 962, let’s assume that the $100,000 in corporate tax credits eliminated any Repatriation tax liability. Upon distribution of the $500,000, the expat would pay U.S. taxes at the marginal rate, or as much as $185,000 ($500,000 * 37% – the highest marginal rate). Triple ouch!

Does 962 make sense? It may in the following three situations, but careful analysis is required: (1) When the UK corporate tax credits far outweigh the personal income tax credits available, and/or (2) when the expat has no plans to withdraw the money in the corporation, and/or (3) the UK taxes due at the time of distribution may render any U.S. additional taxes minimal.

In summary, in planning around the Repatriation tax, the 962 election is an option. However, careful analysis is required to achieve the best results under U.S. and UK tax law. A totally different analysis exists for the 962 election with regard to GILTI in 2018 onward.

Nothing herein shall be deemed legal advice
American Tax Solutions

U.S., U.K., Canada, Australia and Netherlands form international tax enforcement group

According to an article by Michael Cohn in Accounting Today, a multi-lateral tax enforcement group has been formed. TThe Joint Chiefs of Global Tax Enforcement (or J5 for short), intend to “collaborate in fighting international and transnational tax crimes and money laundering.”

Membership of the J5 includes the heads of tax crime and senior officials from Internal Revenue Service Criminal Investigation (IRS CI), Her Majesty’s Revenue & Customs (HMRC) in the U.K., the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), and the Dutch Fiscal Information and Investigation Service (FIOD).

Leaders of the group met Thursday in Montreal to formulate their plans. The J5 plans to work together to gather and share information and intelligence, as well as conduct operations and build capacity for tax crime enforcement officials. Areas of focus include cybercrime and cryptocurrency, data analytics, and enablers and facilitators of tax crimes. The alliance will concentrate on building international enforcement capacity, as well as enhancing operational capability by piloting new approaches and conducting joint operations, to bring perpetrators who enable and facilitate offshore tax crime to justice

While it sounds like the planned operations will be aimed at bigger fish, what will be interesting to see is how Canada and the Netherlands proceed. Both countries have Mutual Collection Assistance provisions in their tax treaties with the U.S. (as do France, Sweden and Denmark) that indicate they will not collect from their own citizens if they were citizens when the tax was incurred. And of course, in the case of Canada, no collection of FBAR penalties. Unless I misunderstand, it sounds like the J5 intend to move into enforcement, which sounds like collection to me.

It appears that in addition to provisions in any number of DTA’s, we now have several “information exchange” programs/policies/statutes such as Foreign Account Tax Compliance Act (#FATCA) , the Common Reporting Standard (#)CRS and the OECD’s CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS . It is difficult enough to read ONE treaty and comprehend what is covered. How is one to evaluate ALL of the aspects that are touched upon by these different programs?

Up to now the one principle that protected one from extraterritorial collection was the revenue rule. A
paper I came across years ago (dated 2004) by Professor Vern Krishna was already predicting the fall of the “revenue rule.” This paper was written a few months after the U.S. passed the American Jobs Creation Act, (see page 154 from link) while removing the issue of intent* to avoid paying tax when renouncing, also created the notion of “tax citizenship.” When relinquishing or renouncing, the requirements of notifying the State Department and filing information with the IRS were added to the process. Four years away from the H.E.A.R.T. Act (the Exit Tax 877A) and 6 years from
H.I.R.E. Act ( FATCA).

In tax law, absent special enforcement treaties, sovereign countries do not enforce the revenue laws
of other countries (the “revenue rule”).

To overcome this rule, many countries negotiate bilateral treaties for information disclosure and
mutual enforcement assistance to counter tax evasion.

In theory, the common law revenue rule reflects the principle that a country has exclusive
sovereignty over its tax policy. However, Lord Mansfield’s rule has limited scope in a world of
increasing regulatory supervision and information exchange between countries on money
laundering and terrorism financing.

The traditional rule that a country will not enforce the revenue laws of another country
and that no country is under an obligation to disclose financial information to foreign governments is very much on its way to extinction.

What do you think? Will all these actions eventually result in a system where there are no privacy laws concerning one’s finances, every bloody dime one earns will be owed to someone as tax?

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*removed the intent issue of renouncing for tax purposes by establishing 3 tests (income, asset, certification of tax compliance for 5 years on form 8854) to determine