Asymmetric Global Financial Reporting Regimes Provide Privacy Protection Opportunity by Ken Vitek, CPA
Posted on October 12, 2017
Due to global efforts to combat tax avoidance and uncover assets hidden in offshore accounts, individuals and financial institutions continue to face a complex and challenging environment for cross-border tax reporting and compliance. There are presently more regulations centered on tax transparency and reducing countries’ lost tax revenues than ever before. However, there remains a lack of one universal reporting standard for which all taxpayers in all countries must comply. As a result, taxpayers must tread carefully under the guidance of experienced tax professionals to avoid a broad range of tax, privacy and security risks.
Disparities Between U.S. and Foreign Reporting Requirements
The U.S.’s most recent attack on tax avoidance commenced in 2010 with the introduction of the Foreign Account Tax Compliance Act (FATCA). Effective for tax years beginning in 2014, the law generally requires foreign financial institutions to share information with the IRS about financial accounts with total asset values exceeding specific thresholds in which a U.S. taxpayer has a financial interest. This applies to U.S. entities, citizens, tax resident aliens (i.e. persons who have a green card or who meet the so-called “substantial presence test”), and non-resident aliens who elect to be treated as U.S. tax resident aliens. It also applies to U.S. persons who are beneficial owners of trusts, partnerships and corporations that are formed in a foreign jurisdiction.
Many foreign countries have entered into Intergovernmental Agreements (IGAs) to comply with FATCA and to report certain information to the U.S. about U.S. taxpayers with offshore accounts. Nevertheless, the U.S. faces criticism for being far less forthcoming and failing to share the same level of information and detail about financial accounts owned by residents of FATCA partner countries.
In 2014, the Organization for Economic Cooperation and Development (OECD) introduced the Standard for Automatic Exchange of Financial Information in Tax Matters, commonly referred to as the Common Reporting Standard (CRS). The OECD promulgated CRS as a global standard for the automatic exchange of information about financial accounts. Essentially, CRS is a global FATCA regime. However, while more than 100 countries have committed to CRS, the U.S. has declined to participate.
The U.S.’s absence from CRS, as well as its limited FATCA reciprocity with foreign countries, may leave U.S. and foreign taxpayers with unique opportunities to disclose their worldwide holdings in compliance with international tax reporting regulations while minimizing their reporting requirements and preserving their financial privacy.
Potential Opportunities Hidden in Contrasting Reporting Standards
While FATCA and CRS share the same basic objective, there are key differences between the two standards.
For one, FATCA applies to foreign financial accounts that meet minimum balance thresholds, whereas CRS has no minimum reporting requirements. Secondly, CRS requires the reporting of far more details about account holders’ personal information than those required by FATCA. As a result, CRS requires both higher volumes of reporting and more personal information about account owners.
Another differentiating factor between the two reporting standards is that FATCA focuses on identifying account holders who may be considered U.S. taxpayers, whereas CRS aims to identify the financial accounts held by all non-residents of a particular jurisdiction. Since the U.S. does not participate in CRS, financial institutions in the U.S. generally do not have a requirement to report the existence of foreign-owned financial accounts or the beneficial owners of such accounts. In certain situations, this may be true even though the foreign individuals or entities are residents of a FATCA partner country.
As a result, there may be opportunities for non-U.S. persons to preserve their financial privacy and reduce their compliance burdens when they hold assets, whether directly, through an entity, or within a trust, in U.S. financial institutions outside the purview of their home countries. This may be especially beneficial to high-net-worth families from countries that lack appropriate controls and who are all too often at risk of kidnappings and extortion. That said, it must be emphasized that exploiting the differences between FATCA and CRS to avoid reporting and disclosures as a means to commit tax evasion is inappropriate and likely illegal in most jurisdictions.
Although it may be possible for non-U.S. persons to protect their privacy and reduce their compliance burden by investing through U.S. financial institutions, it is important that such non-U.S. persons consult with U.S. tax advisors to ensure their investments are in the most efficient tax structures to meet their situations.
About the Author: Ken Vitek, CPA, is an associate director of International Tax Services with Berkowitz Pollack Brant, where he provides income and estate tax planning and compliance services to high-net-worth families and closely held businesses with an international presence. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.