FATCA – Chapter 4
FATCA Driven (Even More . . . ) – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information (Part III)
Information and more information is the mantra of revised IRS Forms as a result of FATCA. See, FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
U.S. citizens residing outside the U.S. along with lawful permanent residents (“LPRs”) are not the only
persons who need to understand the IRS forms referenced above. Indeed, all entities and institutions, whether they are small privately held companies or large and traditional financial institutions are required to complete and have signed a range of IRS forms.
The forms can be either the actual IRS form, or a satisfactory substitute form. Many individuals are of the erroneous view that if they are not financial institutions, they do not need to concern themselves with these classifications.
Unfortunately, that is not the case. Also, these classification rules apply to the surprise of many, if there are (or are not) U.S. persons involved.
In addition to a basic understanding of U.S. laws, it is also crucial that the parties see if their country has entered into an IGA. For instance, if we examine the tiny little country of Liechtenstein which has a relatively large financial sector, it is necessary to first classify the type of entity.
For instance, if it is a Liechtenstein Stiftung, it will probably (but not necessary) be a trust and not a corporation. See the IRS Memorandum from 2009 that provides that a Liechtenstein Stiftung will be classified as a trust, if its primary purpose is to protect or conserve the property transferred to the Stiftung for the Stiftung’s beneficiaries and is usually not established primarily for actively carrying on business activities.[1]
[1] See Memorandum Number: AM2009-012, dated October 16, 2009, issued by the Office of Chief Counsel, Internal Revenue Service.
Next, in this example, with a Liechtenstein Stiftung, the country of Liechtenstein has entered into an Intergovernmental Agreement (“IGA”).
Hence, the terms of the IGA are most important. Under the IGA, as is the case generally for FATCA, the entity has to be either an Foreign Financial Institution (“FFI” or “FI”) or a Non-Financial Foreign Entity (“NFFE”).
1) Definition of Financial Institution (“FI”)
A financial institution is any entity that:
- Accepts deposits in the ordinary course of a banking or similar business (“Depository Institution”);[1]
- Holds, as a substantial portion of its business financial assets for the benefit of one or more other persons (“Custodial Institution”);[2]
- Is an investment entity; or
- Is an specified insurance company or holding company that is a member of an expanded group;[3]
[1] See Article 1(i), IGA.
[2] See Article 1(h), IGA.
[3] See Article 1(k), IGA.
Generally a private Liechtenstein Stiftung would not satisfy any of these requirements (although it could conceivably be the case that one could be an “investment entity”). Hence, it would generally be an NFFE and not an FI.
NFFEs can be passive or active. The kind of compliance obligations varies depending on the type of NFFE (passive or active).
- Passive NFFEs
A passive NFFE is an NFFE which is not an active NFFE or a withholding foreign partnership or withholding foreign trust.[1]
There are several criteria under which a NFFE can be classified as an active NFFE. The following explain the most relevant criteria.
- Active NFFEs
Among the criteria that the IGA establishes, under which a NFFE can be considered as an Active NFFE, are the following:
1) If less than 50% of the NFFE’s gross income is passive income and less than 50% of the assets held by the NFFE are assets that produce or are held for the production of passive income during the preceding calendar year. A
2) Substantially all of the activities of the NFFE consist of holding (in whole or in part) the outstanding stock of, or providing financing and businesses other than the business of a Financial Institution.
Sometimes trusts or Stiftungs will also participate in or hold interests in companies, some of which may engage in active trades or businesses or simply hold passive investments. On the contrary, the companies/subsidiaries only hold other assets from which they derived passive income (e.g., dividends, interests, rents, royalties, etc.).[2]
This will determine if a Stiftung will be classified as a Passive NFFE or not under FATCA regulations and the IGA.
[1] It also can make a difference if the trust (or Stiftung in this example) is a so-called “withholding” foreign trust; which generally requires an agreement with the IRS.
[2] Treas. Reg. § 1.1472-1.
Not surprisingly, the above analysis is complex, because the rules are complex. Accordingly, it has been the author’s experience, that many institutions around the world which request one or more of the above IRS Forms have great difficulty in even implementing these rules. Most of their employees seem to have little understanding of what is a very complex area of law, even when their resident country has issued extensive regulations or guidance about how the terms of the IGA are to be implemented.
The Intersection of U.S. Federal Tax Law with Collection of International Information – Including other Federal Agencies
For decades, the IRS largely worked in a vacuum, relative to other government agencies.
Changes started in earnest in 2003 after September 11, 2001, when Congress past various anti-terrorism laws. For details of the history and how and when the IRS became responsible for these functions, the IRS Internal 
Revenue Manual has a detailed explanation – Part 4, Chapter 26, Section 5. Bank Secrecy Act History and Law
In April 2003, the IRS became in charge of civil enforcement of foreign account information under Title 31. See IRM, Part 4, Chapter 26, Section 16. Report of Foreign Bank and Financial Accounts (FBAR).
The world has changed dramatically in these past few years and the IRS no longer works in such a vacuum. For a history of foreign bank and Congressional influences, see, How Congressional Hearings (Particularly In the Senate) Drive IRS and Justice Department Behavior
Today there are a host of governmental inter-agency activities along with foreign government exchanges of information; e.g., DHS, Department of State, ICE, USCIS, foreign government exchanges of information under FATCA IGAs, a plethora of federal “intelligence agencies” for “terrorism related requests” as identified in IRM pursuant to IRC Section 6103(i), foreign governments under tax treaty exchanges, among many others.
The law is not even clear as to which agencies qualify as “intelligence agencies” as they are not identified in the statute and many are presumably classified organizations.
- Who is an “intelligence agency” for purposes of the statute?
The following is a list of some of the intelligence agencies that are presumably included in the federal tax statute Section 6103(i)(7):
National |
|
| United States Intelligence Community Director of National Intelligence National Intelligence Council [NIC] National Counterterrorism Center (NCTC) National Counterintelligence Executive [NCIX] |
Official Official Official Official Official |
| Central Intelligence Agency | Official |
| National Security Agency | Official |
| National Reconnaissance Office | Official |
| National Geospatial-Intelligence Agency | Official |
| Defense Intelligence Agency | Official |
| Federal Bureau of Investigation | Official |
| Department of Homeland Security Office of Intelligence and Analysis | Official |
Other Defense Department |
|
| Assistant to the Secretary for Intelligence Oversight | Official |
| Under Secretary of Defense for Intelligence Under Secretary of Defense for Policy |
Official Official |
| Assistant Secretary of Defense for Networks and Information Integration | Official |
| Defense Information Systems Agency | Official |
| Defense Advanced Research Projects Agency | Official |
| Defense Protective Service | Official |
| Defense Security Service | Official |
| US Special Operations Command | Official |
| Army Army Deputy Chief of Staff for Intelligence Intelligence and Security Command |
Official Official Official |
| Navy Office of Naval Intelligence Naval Security Group Command Naval Criminal Investigative Service |
Official Official Official Official |
| Marine Corps | Official |
| Air Force Air Force Technical Applications Center Air Intelligence Agency |
Official Official Official |
Other Federal Agencies |
|
| National Security Council President’s Foreign Intelligence Advisory Board Office of National Drug Control Policy |
Official Official Official |
| Energy Department Office of Intelligence |
Official Official |
| Justice Department Justice Intelligence Coordinating Council OIG – Office of the Inspector General DEA – Drug Enforcement Administration NDIC – National Drug Intelligence Center USNCB – U.S. National Central Bureau |
Official Official Official Official Official Official Official |
| State Department INR – Bureau of Intelligence & Research INL – Bureau for International Narcotics and Law Enforcement Affairs CT – Counterterrorism Office DS – Bureau of Diplomatic Security |
Official Official Official Official Official |
| Treasury Department Office of Intelligence Support Office of the Under Secretary (Enforcement) FINCEN – Financial Crimes Enforcement FLETC – Federal Law Enforcement Training Center |
Official Official Official Official Official |
| National Archives and Records Administration Information Security Oversight Office |
Official Official |
A less secret organization is the Social Security Administration which now increasingly intersect with the work of
the IRS. Also, the Department of State now provides warnings on its Passport applications about tax consequences and requirements of social security numbers (“SSN”s).
See also how in an Application for a U.S. Passport there are now specifically references IRC Section 6039E.
Finally, see also how on the last page (page 28) of currently issued U.S. Passport (“Book“) and paragraph D that explains generally the taxation obligations of citizenship.
–
USCs without a Social Security Number (and a Passport) Cannot Travel to the U.S.
Recent posts have focused on the dilemma facing U.S. citizens (USCs) who have no social security number (“SSN”). See an older post (23 July 2014) – Why do I have to get a Social Security Number to file a U.S. income tax return (USCs)?
These problems are quickly coming to the surface, now that financial institutions 
(“FFIs”) around the world and private companies and trusts (e.g., non-financial foreign entities -NFFEs) must have their owners and clients certify they are not U.S. citizens; OR report the accounts of such U.S. citizens to the IRS under FATCA and the intergovernmental agreements (“IGAs”).
The intricacies of this problem are highlighted in a technical paper I recently drafted and presented to the U.S. Treasury Department and the Joint Committee of Taxation, among other federal government groups. Some key excerpts of that paper titled URGENT NEED FOR U.S. CITIZENS RESIDING OUTSIDE THE U.S. TO BE ABLE TO OBTAIN A TAXPAYER IDENTIFICATION NUMBER (“TIN”) OTHER THAN A SOCIAL SECURITY NUMBER are set out below in this section:
The U.S. tax law imposing taxation on the worldwide income of USCs[1] residing overseas has created a dilemma that prejudices these USCs without a SSN. This strict SSN/TIN regulatory rule undermines the basic tax administration system and discourages tax compliance for those USCs who never obtained a SSN. This dilemma affects numerous USCs throughout the world, which is now compounded by the certification and reporting requirements of USCs and third parties, such as FFIs and NFFEs[ under the Foreign Account Tax Compliance Act (“FATCA”).
In short, USCs without a SSN, necessarily cannot be in compliance with U.S. federal tax law. As I point out in my paper, such –
“A law that cannot be complied with is surely a bad law, the same as a “ . . .law that cannot be enforced is a bad law.”[a]
[a] See, The Case Against Taxing Citizens, Reuven S. Avi-Yonah (March 31, 2010), University of Michigan School of Law, Law & Economics Working Papers.
The paper referenced above explains how difficult it is for USCs residing overseas to ever obtain a SSN. Specifically, it explains how difficult it is to have an in-person interview at only 18 different locations around the world with a U.S. Department of State employee. See, 12 Year Old (and Older) U.S. Citizens Residing Outside the U.S. Must Have An “In-Person” Interview in a U.S. Embassy or Consulate for SSN Application in 1 of Just 17 Posts Worldwide
As a USC residing somewhere around the world, you might decide to simply spend the time, money and resources to travel internationally to arrive in the U.S. to apply for a SSN directly with the Social Security Administration within the U.S. Unfortunately, any USC is now legally prohibited from traveling in or out of the U.S. without a U.S. passport. There are few exceptions to this general rule, none of which contemplate U.S. federal tax compliance. See, the relevant excerpts from the white paper:
C. Travel to the U.S. is Also Not An Option for a USC without a SSN, Due to 22 CFR § 53.1 Requiring a U.S. Passport
A possible solution to this TIN/SSN dilemma may appear to be a trip to the U.S. by the USC to apply for a SSN in the U.S. Unfortunately, this simply creates another dilemma, since the USC must have a U.S. passport to travel to the U.S. The immigration law regulations 22 CFR § 53.1 require that a U.S. citizen have a U.S. passport to enter or depart the United States. The relevant part of the regulations is § 53.1(a) which provides as follows:
Passport requirement; definitions.
(a) It is unlawful for a citizen of the United States, unless excepted under 22 CFR 53.2,[2] to enter or depart, or attempt to enter or depart, the United States, without a valid U.S. passport.
These regulations were first published in 2006 and unfortunately, simply create another dilemma for the USC residing overseas without a SSN. This additional dilemma is that an application[3] for a U.S. passport requires the individual have a SSN; a vicious circle back to the inability to obtain a SSN.
At the end of the day, the restrictions imposed on USCs make it legally impossible for a USC without a passport to travel to the U.S. (even if they wish they could) to obtain a SSN.
[1] See, IRC § 61 and Treas. Reg. §§ 1.1?1(b) and 1.1?1(a)(1)..
[2] The exceptions set forth in this regulation would not generally be applicable in the case of USCs residing overseas without a SSN.
[3] Application for a U.S. Passport – http://www.state.gov/documents/organization/212239.pdf.
Laura Saunders of the WSJ: “Record Number Gave Up U.S. Citizenship or Long-Term Residency in 2014”
Record Number Gave Up U.S. Citizenship or Long-Term Residency in 2014: WSJ: By, Laura Saunders (10 Feb. 2015)
*
Her most recent article has a number of excellent observations, including the following regarding an academic study of those citizens living abroad:
According to a recent survey of 1,546 U.S. citizens and former citizens living abroad, 31% of participants have actively considered renouncing their U.S. citizenship and 3% are in the process of doing so. Many who were considering the move cited increasingly onerous and intrusive financial reporting requirements. The survey was conducted between Dec. 5 and Jan. 20 by Amanda Klekowski von Koppenfels, a researcher at the University of Kent in the U.K.
For other articles written by Ms. Laura Saunders, on this related subject, see the Media: News & Articles section –
Wall Street Journal: Expats Left Frustrated as Banks Cut Services Abroad Americans Overseas Struggle With Implications of Crackdown on Money Laundering and Tax Evasion, (The Wall Street Journal, 11 Sept 2014) By –Laura Saunders
IRS Eases Up on Accidental Tax Cheats: Agency Lowers Some Offshore-Account Penalties, Raises Others (The Wall Street Journal, June 18, 2014), By – Liam Pleven and Laura Saunders
IRS Warns of Breach of Individual Financial Information – Bank Account Details and other FATCA Related Account Data
This is not new news; indeed it is somewhat old and stale. It has become more relevant, however, as the exchange of financial information under FATCA is to commence in a few months in 2015.
The IRS issued a warning in September that reads in relevant part as follows:
IRS Warns Financial Institutions of Scams Designed to Steal FATCA-Related Account Data
WASHINGTON — The Internal Revenue Service today issued a fraud alert for international financial institutions complying with the Foreign Account Tax Compliance Act (FATCA). Scam artists posing as the IRS have fraudulently solicited financial institutions seeking account holder identity and financial account information.
The IRS does not require financial institutions to provide specific account holder identity information or financial account information over the phone or by fax or email. Further, the IRS does not solicit FATCA registration passwords or similar confidential account access information.
This statement may be a bit misleading, since the FATCA law does require specific individual account holder information be provided to the government. It is detailed in its scope of information required; including account numbers, names of account owners, addresses of account owners, income from such accounts, taxpayer identification numbers (which means Social Security Numbers for U.S. citizens), etc.
Time will tell, how effective governments will be in maintaining their taxpayers’ information confidential; as opposed to private institutions, such as JP Morgan. See, JPMorgan data breach entry point identified: NYT
“Neither Confirm nor Deny the Existence of the TECs data”: IRS Using the TECs Database to Track Taxpayers Movements –
There have been a series of previous posts that discussed the IRS and other government agencies ability to track taxpayers and their assets outside the U.S.
See for instance, the following posts: Should IRS use Department of Homeland Security to Track Taxpayers Overseas Re: Civil (not Criminal) Tax Matters? The IRS works with Department of Homeland Security with TECs Database to Track Movement of Taxpayers
Interestingly, the release of IRS internal training manuals and materials (which were obtained through a Freedom of Information Act – FOIA – request) and includes the Power Point slide in this post, describes the TECs database and how it can be used by IRS agents regarding foreign assets and individuals as follows:
The Treasury Enforcement Communications System (TECS) is a database maintained by the Department of Homeland Security (DHS), and it is used extensively by the law enforcement community. TECS contains historical travel information such as records of commercial airline flights, border crossings, and specific dates that individuals have traveled to and from the United States.
All this information could provide you with potential leads to pursue.
For example, the discovery of where the taxpayer may hold assets or accounts or where the taxpayer conducts business. It may also assist in determining taxpayer’s residency and the credibility of taxpayer testimony. TECS may have gaps in the information captured, caution is advised. For example, it might contain incomplete information about border crossings, private plane and private boat information. It does not contain enough stand alone data to determine residency. It should be used together with other sources of information.
In addition, the IRS training materials demonstrates the secrecy of the TECs database and what steps the IRS tells their agents to take regarding the TECs database. The following excerpt directly from the IRS “Matrix Application Training International Individual Compliance: Basic Structures Part II: Pre-Audit, Investigative Techniques & Statutes”
• IRM 5.1.18.14.10 – Covers using TECS Historical Travel Information
First and foremost, do not discuss the existence of TECS with the taxpayers. We must neither confirm nor deny the existence of TECS data.
FATCA IGA with Hong Kong Signed: U.S. Citizens and Lawful Permanent Residents Residing in or Around Hong Kong Need to Know
Those USCs and LPRs who are living in Hong Kong or the Pacific Rim with accounts in the Hong Kong financial sector, need to be aware of the FATCA implications and the Intergovernmental Agreement (IGA) that was just signed.
The Hong Kong government’s press release with pictures can be viewed here. Of course, even those not resident in Asia with accounts, investments, financial instruments and other activities such as private equity funds, will be effected by this IGA.
The U.S. Treasury had announced in May 2014 that Hong Kong had previously ” . . . reached agreements in substance and have consented to being included on this list . . . “
The Government of the Hong Kong Special Administrative Region (HKSAR) publishes facts about the financial sector that can be reviewed here:
OECD’s Automatic Exchange of Information – Following the U.S. Lead of FATCA – for Better or for Worse
There has been much grumbling and lamenting around the world about the U.S. law of FATCA that went into effect in 2014. See, Part 1- Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S.
For better or worse, FATCA has become the basic model that has driven all of the large economies (some 50+ countries) to move along the same path of automatic exchange of information with countries around the world. Recent revelations last week of Luxembourg is likely to only increase the political motivation to push forward these efforts. See, the Guardian’s recent article, Luxembourg tax files: how tiny state rubber-stamped tax avoidance on an industrial scale, (5 Nov 2014, by Simon Bowers).
The OECD is now moving at light-speed, at least compared to the normal speed of the OECD, as its member countries have signed a ” . . . Common Reporting Standard for automatic exchange of tax information, now contained in Part II of the full version of the Standard. On 6 May 2014, the OECD Declaration on Automatic Exchange of Information in Tax Matters was endorsed by all 34 member countries along with several nonmember countries. . . ”
See the Automatic Exchange of Information programs provided by the OECD in its website
Importantly, and most recently on October 29, 2014, ” . . . 51 jurisdictions, 39 of which were represented at ministerial level, signed a multilateral competent authority agreement to automatically exchange information based on Article 6 of the Multilateral Convention. This agreement specifies the details of what information will be exchanged and when, as set out in the Standard. . . ”
Interestingly, it seems clear that the Common Reporting Standard for automatic exchange of tax information will become the future standard of automatic information.
Technology and a world wide financial sector that is globally connected throughout, allows governments around the world to make these systems possible; for better or for worse.
USCs and LPRs Who Are Having Their Non-U.S. Accounts Closed: Is it hype or is it real?
Is it hype or is it real?
It’s difficult to know with certainty how accurate are the various claims that U.S. citizens overseas are having their accounts closed by foreign financial institutions. If it has happened to you, of course you will know it. See for instance the following reports, just to name a few:
Association of Americans Resident Overseas: Americans Abroad are Denied Access to Banking and Investment Opportunities
Time Magazine: Swiss Banks Tell American Expats to Empty Their Accounts
The Huffington Post (Aug 2014) – Expatriate Tax Sense or Broad-Brush Overreach: The U.S. Foreign Account Tax Compliance Act (FATCA)
The New York Times (April 2013) Overseas Finances Can Trip Up Americans Abroad
and
American Citizens Abroad which compiles various news accounts of accounts being closed.
Anecdotally, I have certainly seen it in my practice, in places such as Hong Kong, London, Geneva and Zurich, but I can’t say I have seen it as a widespread practice. Indeed, for those individuals with large investment accounts (e.g., greater than US$1M, the banks seem to accommodate, or at least require them to move their assets to their U.S. affiliate or branch). I suspect those with smaller accounts of less than US$100,000, are seeing a broader brush stroke closing these accounts.
For good practical advice about maintaining or opening foreign accounts, I recommend you read:
I can say that what I have seen in practice is a widespread plan by individuals to close foreign financial accounts and relocate the assets to a U.S. financial institution. This is not the decision of the financial institution, but rather the individual. The reason is not FATCA, per se, but a desire to reduce the compliance costs of filing and reporting on these foreign accounts. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
Multiple tiers of reporting of foreign assets is now required and it can cost a small fortune to have a good international tax adviser who is aware of these reporting requirements. See, USCs and LPRs residing outside the U.S. – and IRS Form 8938 [Specified Foreign Financial Assets]
For those with significant assets and numerous accounts, the professional fees and costs of reporting accurately these accounts can become exorbitant (especially when the risks of potentially devastating civil penalties are weighed into the mix). See, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part II)
At the end of the day, the practical affect I have seen (anecdotally) is a widespread desire to close foreign accounts and move them to the U.S.; not because of FATCA, but because of the costs and compliance and risk (more than just perceived – considering the IRS now regularly threatens large multiple year 50% willfulness penalties for those who did not file an FBAR) of being penalized by the IRS.
I find this ironic, since there is no legal restriction for a USC to hold foreign accounts and indeed a USC or LPR residing outside the U.S., will generally find it easier from a lifestyle and personal financial management perspective to have an account in their home country. The affect, however, is that U.S. financial institutions are receiving these assets and investments.
I will post a survey this week to ask individuals if they have had their non-U.S. bank accounts closed.
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