Some of the world’s most notorious secret account havens have agreed to give information about U.S. tax payers to the Internal Revenue Service.
In a 24-day span ending December 19, eight jurisdictions — the Cayman Islands, Costa Rica, Jersey, Guernsey, the Isle of Man, Bermuda, Malta and the Netherlands – signed separate agreements with the IRS to help it implement the Foreign Account Tax Compliance Act (FATCA), enacted by Congress to uncover offshore tax evasion. Deals with more countries are in the works.
IRS Intergovernmental Agreements
An IRS intergovernmental agreement “obligates the foreign country to require its investment funds and other financial institutions, unless they are exempt, to collect certain information from their U.S. account holders and report it to their country’s tax authority, which will then report the information to the IRS,” explains accountant Jay Bakst, a partner in the financial services practice of EisnerAmper LLP, an advisory and accounting firm in New York.
Institutions in countries that have yet to ink an intergovernmental agreement must enter into an agreement with the IRS to report directly to it or face 30-percent withholding on certain income from U.S. sources.
Reportable data includes the client’s name, address and tax identification number, plus information on account deposits, withdrawals and balances. Reporting begins in 2015, when 2014 account data will be furnished to the IRS.
Considering the Cayman Islands
For advisors and their U.S. clients, the Cayman Islands accord is particularly significant. The British territory’s money and secretive banks, private funds and insurance outfits are popular with affluent Americans, and for some of them the new pact could prove a game changer.
Prior to the Cayman government’s November 29 agreement with the IRS, Cayman banks that didn’t have income from the U.S. — and which were therefore unaffected by FATCA’s withholding on U.S.-source income — had little motivation to comply with the American law.
The same was true for Cayman funds with no U.S. income. But the intergovernmental agreement means an institution will be breaking its own country’s law by failing to report U.S. investors’ information to its government. That is a “strong incentive” to turn over the data regardless of whether withholding would apply, Bakst says.
For advisors with international clients, attorney Frank L. Brunetti points out that most IRS intergovernmental agreements are reciprocal. For example, the IRS will be reporting to Costa Rica about its taxpayers in the U.S.
International clients should also be aware that multilateral agreements are expanding, where “multiple countries are sharing in the same exchange-of-information protocol,” says Brunetti. He is a partner at Scarinci Hollenbeck in Lyndhurst, N.J., as well as an academic observer to the United Nations Committee of Experts on Cooperation in International Tax Matters.
“Governments are cooperating with each other because they are looking for revenue, and they’re getting much better at it with the technology and the laws,” Brunetti says. “There are not many places for the international billionaire to hide assets anymore.”
Credit: Eric Reiner
If you have any questions relating to tax law, please do not hesitate to contact Joseph Maya and the other experienced attorneys at Maya Murphy, P.C. at (203) 221-3100 or JMaya@Mayalaw.com to schedule a free initial consultation.