H. Jacob Lager

Archive for the ‘Offshore Accounts’ Category

Planning on “pleading the Fifth”? Not when it comes to offshore banking

In Court decisions, Offshore Accounts, Uncategorized on September 7, 2012 at 12:45 pm

I have never actually heard someone take the Fifth.  Not as an advocate.  Not as opposing counsel.  Heck, not even as a juror.

Three years of law school and nearly 15 years of practice and I’ve never actually heard those magic words: “on advice of counsel, I respectfully refuse to answer on the grounds that to do so might incriminate myself.”

See.  I even know them by heart.

Sadly, On August 27, the Seventh Circuit made it even more unlikely that I’d hear them anytime soon.  The panel ruled that the Fifth Amendment privilege against self-incrimination does not apply to a taxpayer’s offshore banking records and that the taxpayer may not invoke the privilege to resist compliance with a subpoena seeking records kept pursuant to the Bank Secrecy Act.

In so ruling, the Seventh Circuit joined the Ninth Circuit in holding that the so-called “required records” exception to the Fifth Amendment privilege against self-incrimination applies to records of foreign bank accounts.

So, what is this exception and why haven’t they mentioned it on Law & Order?  According to the Ninth Circuit, the doctrine exists because “the Supreme Court has recognized that . . . the privilege does not extend to records required to be kept as a result of an individual’s voluntary participation in a regulated activity.”

What this essentially means is that if you voluntarily (remember that word – it’s important later) enter into a regulated activity that requires you to keep records, you can’t later prevent those records from being disclosed.

So how does this exception work?

Under the required records doctrine, a government inquiry does not impact your Fifth Amendment rights if:

(1) The government’s inquiry is essentially regulatory; [hmm… ok, but aren’t they all?]

(2) The information is a preserved record of a kind customarily retained; and

(3) The records have taken on public aspects making them analogous to a public document.

Ok, wait a minute!  If you’re wondering why your banking records are considered analogous to a “public document,” then you’ve been paying attention.  According to the Ninth Circuit, where “personal information is compelled in furtherance of a valid regulatory scheme, as is the case here, that information assumes a public aspect….  Similarly, disclosure of basic account information is an ‘essentially neutral’ act necessary for effective regulation of offshore banking.”

Does this mean if there is a regulation requiring that you maintain information, that information is automatically exempt from Fifth Amendment protection?  Doesn’t that exception swallow the entire rule?  Not exactly.

The trick here is that you must voluntarily enter into the activity itself in the first place.  Your individual tax returns remain protected in most respects because simply being a taxpayer does not involve a voluntary choice.  However, according to the Ninth Circuit, “no one is required to participate in the activity of offshore banking.”  Thus, the required records doctrine applies to offshore banking records because the taxpayer “enters upon a regulated activity knowing that the maintenance of extensive records available for inspection by the regulatory agency is one of the conditions of engaging in the activity….”

In short, if you bank offshore, you cede any Fifth Amendment protections related to that account.

Bet you didn’t see that in the application.


The top four tax rumors about the Facebook IPO: Busted!

In Business entities, Business entity, Offshore Accounts, Tax rumors on May 23, 2012 at 6:50 am

Facebook tax

I love it when current events make my job easy.

To wit: the recent Facebook IPO, Ed Saverin’s expatriation, and Sen. Chuck Schumer’s legislative reaction thereto.

In case you live entirely off the grid, chances are you’ve heard about a little company called Facebook that went public this past Friday, making a lot of people instant millionaires, and a few people billionaires.  One of those people, Ed Saverin reportedly ceded his US citizenship recently to avoid paying US taxes on his recent windfall.  In response, Sen. Schumer (D-NY) introduced a rather drastic piece of legislation that would ban Saverin from ever setting foot on US soil again!

So, with that in mind, I give you, the top four tax rumors about the Facebook IPO:  Busted! (Consider this the tax version of Snopes.com).

1.   Ed Saverin has sneakily avoided US taxes.

Status: False

By expatriating, Saverin has incurred what’s known as the “exit tax.” He will be treated as having sold all his US assets on the day of his expatriation, which will cause Saverin to owe a 15% a capital gains tax for 2012 on the appreciation of his Facebook shares.  Although his exact stake in Facebook is unknown, Saverin himself has issued statements indicating that his exit tax bill will exceed several hundred million dollars.

So why is Schumer so upset?

2.  Ed Saverin is paying less taxes than he would have without leaving the US.

Status: True

The date of Saverin’s exit is key.  By leaving prior to the IPO, Saverin effectively “sold” his Facebook shares at a value that is far less certain (and likely less rich) than it’s opening $38/share value.

Saverin’s early exit also opens the door for some valuation discounting.  At the time of his expatriation, Saverin owned a non-controlling minority position in a company that was not publicly traded.  Also, as famously depicted in The Social Network, Saverin had long ago been pushed out of any management role at the company.

“So that means that it is highly likely that Saverin applied one or more significant discounts to the value of his shares due to the lack of any open market for his shares and  the lack of company control that his minority stake would impart a willing buyer,” notes Barbara Barschak, CPA a partner with the Los Angeles firm of Katz Cassidy.

So, if we assume Saverin’s shares had a book value of $20/share at the time of his exit, a 40 percent discount would further reduce his per share value to $12.   Compared to today’s $34 trading value, Saverin would be paying $1.80 of capital gains tax on each share instead of $5.10.  That’s 35.3 percent of what he would pay today.

But wait!  There’s more!

3.  Ed Saverin is avoiding future US taxes.

Status: True

In general, proceeds from the sale of intangible property is sourced to the seller’s tax residence.  This means that when Saverin does decide to sell his shares, the resulting proceeds will be subject to the prevailing capital gain tax rate of Singapore.

If Singapore had a capital gains tax.  It does not.

When you consider the likelihood of higher US capital gains rates in the future (at the very least, we know Saverin would be subject to next year’s extra 3.8% Medicare tax on high earners), expatriating this year ends up saving Saverin even more money.

“Good for him, but bad for the US,” says Barschak.

4.  Ed Saverin will never be allowed to return to the US.

Status:  Highly Unlikely.

Because expatriation is perfectly legal, there is very little the federal government can do to thwart Saverin’s savings.  The IRS could dispute Saverin’s per share value or his applied discounts, but those are just factual disputes.  The concepts underlying Saverin’s tax savings are legal and somewhat vanilla.  At the end of the day he will realize a significant tax savings from this move,

So  what’s a lawmaker filled with righteous fury to do?

Why, ban Saverin from ever visiting the US again, of course!  That’s what Senators Chuck Schumer and Robert Casey (D-Pa) have proposed for any US citizen who expatriates to avoid taxes.

In the unlikely event this legislation actually becomes law, such a retroactive application would be vulnerable to constitutional attack as a targeted bill of attainder.  So why would a US Senator waste his time pushing such a bill?

Oh, right.  Election year.

Indian Retroactivity: Fact or Fiction?

In Foreign taxes, Offshore Accounts on April 30, 2012 at 8:34 am

Vodafone verdit, Indian tax law

What was supposed to be a final decision in the Vodafone case has instead given rise to an aggressive Indian effort to impose retroactive taxes on foreign investors and significant consternation in the global investment community.

To quickly recap the issue, India attempted to tax the $ 11.2 billion purchase of an Indian subsidiary between two non-Indian parties.  Earlier this year, the Indian tax authorities lost this fight in front of India’s Supreme Court.  The Indian government responded by enacting legislation retroactively imposing a capital gains tax on merger and acquisition deals conducted overseas where the underlying asset is located in India.

The rest of the world has, not surprisingly, freaked out.

Among others, U.S. Treasury Secretary Timothy Geithner has pressed Indian Finance Minister Pranab Mukherjee for reassurances that US investors will not be subject to Indian taxes on years-old transactions.  Mukherjee has attempted to soothe concerns, stating at an April 20 conference that older tax cases would not be reopened.  According to Mukherjee, “No case can be reopened which is more than six years old.” He further added that “there is no uncertainty” in Indian tax law for foreign investors and that India would hold transparent, open discussions with those who have concerns about the law.

Right or not, the recent tax fight does not appear to be slowing Indian investment.

“We are seeing lots of outbound US investment in India right now,” says Lisa Sergi, a senior tax director at WTAS.  “India remains a strong option for our clients in technology and manufacturing as an area with low costs and a terrific market.”

And as for the potential uncertainty of Indian taxes?

“There are clear laws on the books in India, but in practice, the government will fight and hold out until the client pays something more.  But in that way, they are no different than California’s Franchise Tax Board,” says Sergi.

So there you have it:  Indian tax uncertainty is no less onerous than our own.

Three most common mistakes you will encounter using a drop-off trust

In Foreign taxes, Offshore Accounts on April 24, 2012 at 9:28 am

Part three in the series

Two weeks ago, we introduced the potential benefits of funding a drop-off trust prior to obtaining a US domicile.  Last week, we discussed how the IRS would determine when you actually obtained that US status and how to properly time your trust formation.

And now, the exciting conclusion!  This week, we focus on the most common mistakes and hidden traps incoming foreign nationals encounter when using a drop-off trust as part of their tax strategy.

1.  Don’t be a control freak.

The most important thing to remember about drop-off trusts is that you may not retain control over its assets.  You are completing a gift to a trust that benefits your descendants.  If you retain the right to revoke or amend the trust, the trust corpus will be included in your US taxable estate.

2.  Give up the benefits.

Because this is a completed gift to the future, you may not retain a right to possess, dispose, or enjoy any particular trust asset or income stream.  This means you may not retain a life interest or annuity payment related to a trust asset.  Similarly, a retained “reversionary” interest exceeding five percent of trust assets is disallowed.  Even a retained power of appointment that allows you to designate beneficiaries in the future will be treated as an excess benefit that can cause the subject property to be included in your US taxable estate.  Likewise, the power to change life insurance beneficiaries with respect to a life insurance policy that is owned by the trust will cause the attendant death benefit to be included.

That said, you may be permitted to retain a discretionary beneficial interest. This means the trustee may allow you to benefit from the trust assets, but you may not possess a right to legally force any such enjoyment.  For example, an informal non-written arrangement with a trustee that allows you continued enjoyment of trust assets will defeat the trust’s independent nature and cause inclusion in the taxable estate.  Also, if the trustee’s discretion is subject to a standard (i.e. for “support, health care, education, and maintenance”) that can be enforced by the settlor as a beneficiary, this retained right will cause inclusion.  If, under applicable local creditors’ rights laws, your creditors can force the trust income to pay your debts, this feature will be treated as a retained right that causes inclusion.

3.  Replace the trustee with a subordinate.

You are allowed to retain a right to remove and replace independent trustees. This power is often reserved to you as the designated “Trust Protector.” So long as the trustee is not “related and subordinate” to you, retaining this power will not cause US estate inclusion.  Generally speaking, a trustee will be “related and subordinate” if the trustee is a close family member, subordinate employee, or a company owned by you.

A properly planned and structured drop-off trust should allow you to both enjoy trust assets as a discretionary beneficiary and preserve the benefit of removing assets from your future US taxable estate.  If you have questions about setting up a drop-off trust, contact me.

Photo courtesy of Karen V. Bryan

Welcome to the US! We’re so glad your money, er, you, are here!

In Offshore Accounts on April 9, 2012 at 8:03 am

Part one:  Foreign “drop off” trusts 

It can be tough to remember in an election year, but people still like to move to the US.  When they do, new taxpayers are often surprised by our global tax system that taxes residents on their worldwide assets and income.  With just a little planning before the person becomes a US taxpayer, his beneficiaries may actually get to keep a little of his hard-earned cash.

Enter the drop-off trust.

A pre-immigration trust (sometimes referred to as a “drop-off” trust) is a trust created in a non-US jurisdiction by a non-resident alien before he becomes a US taxpayer whose taxable estate includes his global holdings.  By setting up the drop off trust, the trust grantor can effectively remove from his US taxable estate all his non-US assets since the initial trust transfer escapes US jurisdiction.

Before 1996, this strategy was even more effective because the grantor could also use the drop-off trust to avoid US income taxes on gains attributable to the trust assets. The trust, as a non-US person, would invest only in non-US source income, and would thereby escape US taxation.

However, in 1996 Congress caught up with this scheme, and instituted the so-called “five-year rule.”  Under this rule, if a non-US person becomes a US person within five years after funding a foreign trust, then the foreign trust is treated as a “pass-through” grantor trust that attributes the trust’s income to the grantor himself. This rule essentially eliminated any income tax benefit from using a drop-off trust, since most immigrants don’t plan their US residency five years in advance.

Still, the estate tax benefits of a drop-off trust are very real.   With careful planning, an incoming foreign national can effectively remove large portions of his wealth from US estate taxation by depositing those assets in a properly domiciled foreign situs trust.  One important note: the trust’s creation and funding must occur prior to the moment the foreign national establishes his US domicile for estate tax purposes. As a result, planning with a US tax attorney before arriving in the US is crucial.

More about this process in Part Two of the series.  Tune in next week for more exciting adventures in the world of International Tax Law!


*Photo provided by Phil of Photos.

Control key ingredient for Spanish, Indian aggressive pursuit of permanent establishments

In Foreign taxes, Offshore Accounts on March 19, 2012 at 9:05 am

What might cause a business to be taxed in a foreign jurisdiction?  Control, according to a pair of recent decisions out of Spain and India.

No stranger to aggressive long-arm taxation (see Vodafone litigation), India’s Authority for Advance Rulings (AAR) just issued a February 7 ruling that deemed a French data network provider’s control over certain undersea cables in Indian territory a sufficient presence to justify permanent establishment status in India.  The ruling specifically noted that whether the French company owned or leased the equipment was irrelevant, so long as it has the power to control the equipment.  Similarly, the AAR further noted that a PE could be triggered by a mere computer or data server in India if a business is conducted through such equipment.

One month earlier, Spain’s Supreme Court teached its long-awaited decision in Roche Vitamins Europe Ltd., ruling that the company’s Spanish subsidiary created a permanent establishment via agency for Roche Vitamins Europe, a Swiss company.  Because all of the Spanish company’s activity was directed, organized, and managed by the Swiss company, the Court held that the subsidiary operated as a dependent agent as it carried on, under the two contracts, activities (manufacturing and distribution) that could have been performed directly through a fixed place of business.

The fact that the Spanish sub had no capacity to contract or negotiate for its Swiss parent did not prevent the court from broadly applying the dependent agency clause of the Spain-Switzerland tax treaty. Even though the sub did not “habitually [exercise] authority to conclude contracts that are binding for the” parent (as required by the treaty), the court nonetheless ruled that the parent’s control of the sub was sufficient to attribute to the Spanish PE the profits derived from the sub’s activities (manufacturing and distribution).

These two cases present strong reminders for multinational taxpayers to reexamine structures in which a group member performs, under one or more contracts, activities for nonresident related entities.  In particular, taxpayers should determine whether the evidence supports an argument that the local entity has sufficient autonomy and that its operations and/or assets are not subject to a foreign parent’s discretion.


In FBAR, Offshore Accounts, Tax Crime on January 31, 2012 at 12:34 pm

UBS clients Stephen M. Kerr and Michael Quiel have been charged with filing false tax returns and failure to file Reports of Foreign Bank and Financial Accounts (FBAR), the U.S. Justice Department announced on January 30. The indictment also charged the defendants, along with former San Diego attorney Christopher M. Rusch, with conspiracy to defraud. Rusch was arrested Jan. 29 in Miami after being expelled from Panama at the request of the U.S. government.

According to the indictment:

“Beginning in or before 2004, and continuing through at least December 2007, Kerr and Quiel obtained control of shares of stock of publicly traded domestic companies in a way that concealed their ownership of the stock. Kerr and Quiel then deposited the stock, or proceeds from the sale of the stock, to multiple undeclared bank accounts set up with the assistance of Rusch at UBS in Switzerland and at another Swiss bank. These accounts were all held in the names of nominee entities to further conceal Kerr’s and Quiel’s ownership.”

More from the Justice Department here: http://www.justice.gov/opa/pr/2012/January/12-tax-136.html