While generally there is nothing illegal about holding assets through offshore entities, tax administrations generally view such offshore arrangements as a device used by taxpayers to avoid or evade tax liabilities on income represented by the principal or tax on the income generated by the underlying assets.
Along the same lines, governments have put into place regimes to collect and share information about their taxpayers’ offshore financial accounts. Increasingly, tax administrations are working together to assist one another in identifying non-compliance with the tax laws.
For example, the IRS today announced that the tax administrations of the United States, Australia, and the United Kingdom plan to share tax information involving trusts and companies holding assets on behalf of residents in jurisdictions throughout the world.
Today’s agreement with United States, Australia, United Kingdom
According to today’s IRS release (IR-2013-48), the United States, Australia, and the United Kingdom each has acquired data revealing extensive use of entities organized in certain jurisdictions—e.g., Singapore, the British Virgin Islands, Cayman Islands, and the Cook Islands—and the data contains the identities of the individual owners of these entities.
The IRS, Australian Tax Office, and HM Revenue & Customs have been working together to analyze this data; have uncovered information that may be relevant to tax administrations of other jurisdictions; and have developed a plan for sharing the data, as well as their preliminary analysis, if requested by the other tax administrations.
This type of multilateral cooperation and coordinated effort may set a pattern for many other countries to process information of offshore accounts efficiently and allow for effective enforcement of tax laws.
Lastly, today’s IRS release reminds U.S. taxpayers holding assets through offshore entities that they may want to review their tax obligations with respect to these holdings, seek professional advice if necessary, and participate in the IRS Offshore Voluntary Disclosure Program when appropriate in order to avoid significant penalties and possible criminal prosecution.
FATCA and similar programs
The United States, in an effort to curb perceived tax abuses by U.S. persons with offshore bank accounts and/or investments, enacted in 2010 broad-sweeping legislation—FATCA— intended to combat offshore tax evasion by such persons.
While a discussion of the Foreign Account Tax Compliance Act (FATCA) is beyond the scope of this brief discussion, FATCA incorporates a new reporting regime that imposes a severe withholding tax on certain foreign entities that refuse to disclose the identities of U.S. persons holding foreign financial accounts.
FATCA is intended to target non-compliance by U.S. taxpayers with foreign accounts, and as such, requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. This will be achieved by either direct reporting to the IRS or, under certain Intergovernmental Agreements (IGAs), through a reciprocal tax information exchange process.
The United States is not alone in considering this type of action. For example, the UK in April 2013 announced an agreement with France, Germany, Italy, and Spain to develop and pilot a multilateral tax information exchange process—one that provides for the automatic exchange of a broad range of financial information among the five countries—similar to the Model IGAs under the U.S. FATCA regime.
Read TaxNewsFlash-Europe: United Kingdom - FATCA-like plan with France, Germany, Italy, Spain
Voluntary disclosure, tax amnesty programs
In a similar vein, governments and tax jurisdictions have also focused on voluntary disclosure programs and, in some instances, offer “tax amnesty” in an effort to allow taxpayers to “come clean” and become compliant with the tax laws.
Examples of recent disclosure and tax amnesty programs include:
- In Turkey, an April 2013 proposal would require companies and individuals to declare their unrecorded assets held outside Turkey, and if enacted, taxpayers would have to declare the Turkish lira equivalence of cash, foreign currency, gold, securities, capital market instruments, and real estate owned and possessed outside Turkey. Read TaxNewsFlash-Europe: Turkey - Proposal to require taxpayers to declare foreign assets
- Puerto Rico announced an amnesty program that applies for many types of taxes, effective May 13-June 30, 2013. Read TaxNewsFlash-United States: Puerto Rico - New tax amnesty program covers more than income taxes
- São Paulo (Brazil) is offering amnesty for indirect taxes. Read TaxNewsFlash-Americas: Brazil - São Paulo allows amnesty for indirect taxes
- Mexico established a tax amnesty program, effective in 2013, with an application deadline of May 31, 2013. Read TaxNewsFlash-Americas: Mexico - Tax amnesty program (2013) and TaxNewsFlash-Americas: Mexico - Applications for tax amnesty due 31 May 2013
- The United Kingdom provided a program offering taxpayers amnesty for tax on undeclared gains concerning transactions involving property located in the UK or abroad, with a deadline of August 9, 2013, and any unpaid tax due by September 6, 2013. See TaxNewsFlash-Europe: United Kingdom - Amnesty for undeclared gains on property sales
These provide only a sample of information reporting, taxpayer disclosure and/or amnesty provisions.
For more information, contact a tax professional with KPMG LLP: