On 2/19/17 thousands of Panamians protested in the streets carrying signs “No More Governments of Thieves and the Corrupt”. They were demonstrating over the most recent scandal emerging from the Panama Papers the Brazilian firm, Odebrecht who paid $788m in bribes to win construction contracts in 12 countries (including $59m in bribes in Panama). Odebrecht has agreed to pay the largest fine ever ($3.5b) to the US Dept of Justice.
Panama has requested Interpol issue “wanted alerts” for the sons of the former Panama President, Ricardo Martinelli, who was President during 2010-2014 when the $59m in bribes were paid in Panama.
In Panama, prosecutors raided the offices of Mossack Fonseca, the law firm at the center of the scandal, seeking evidence of their links to Odebrecht.
In the words of one of the street protestors: “The goal of the protests is to demand that all those corrupt in all the parties and businessmen are investigated so they return the money and go to jail”.Read More »
Taxpayers with undisclosed offshore holdings who applied for the IRS Offshore Voluntary Disclosure Program (OVDP) through the pre-clearance process but were either denied access to the OVDP, or later withdrew from the program face increased risks.
On February 1, 2017 the IRS Large Business and International Division of the IRS released a 13-item list for issue-based examinations and concerns for tax compliance, which included IRS/ OVDP Declines/Withdrawals.
Under these new IRS/OVDP rules:
1) Anyone who opts out of the IRS/OVDP is subject to an immediate IRS civil tax audit of his or her tax returns and FBAR filings. Information that the taxpayer submitted in either the pre-clearance process or to the IRS/OVDP (subsequent to the pre-clearance but prior to withdrawal) may be evidence used against them.
The IRS filing was submitted without either transactional or use immunity. Upon submission, the Taxpayer waived constitutional objections including: the 5th amendment right against self-incrimination, 4th amendment right against unreasonable searches and seizures.
2) Increased IRS tax audits are portended for continued tax non-compliance if the IRS receives information (not disclosed by the taxpayer) from 3rd parties including: foreign banks, foreign facilitators, or under treaty requests.
Much of this information is coming to the IRS based on implementation of the provisions of the Foreign Account Tax Compliance Act (“FATCA”) by foreign financial institutions, or from listed foreign financial institutions who are either under settlement agreements with the US Department of Justice or are in settlement discussions (e.g. in Switzerland as of 1/25/17 145 foreign financial institutions have been “listed” by the IRS and if a taxpayer has an account with them their penalty includes a 50% account balance penalty paid up front upon submission of their IRS/OVDP offer along with tax, interest and other penalties).
Please see my recent newsletter on this topic.
3) Those US taxpayers who applied through for the IRS/OVDP through the pre-clearance process but were either denied access or withdrew from the program face a heightened risk of IRS civil tax audit, criminal tax investigation or IRS referral for US/DOJ criminal prosecution.
The IRS/OVDP for submissions made on or after July 1, 2014 require that all payments due be made up front at the time of the submission of the IRS/OVDP (see IRS Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014 (“IRS FAQ”). See IRS FAQ #1.1
Under the “7/1/14 IRS OVDP” (7/1/14 forward) a 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See IRS FAQ #7.2 for a complete list of all 145 foreign financial institutions/facilitators as of 1/25/17 (published 1/31/17).
Under IRS FAQ #7.2, 23, 24:
For those taxpayers who request preclearance before they submit their offshore voluntary disclosure, under #23, the taxpayer must send detailed information to the IRS Criminal Investigation Lead Development Center (LDC) which includes:
1) Applicant identifying information including complete names, dates of birth, tax identification numbers, addresses and telephone numbers;
2) Identifying information of all financial institutions at which undisclosed OVDP assets (see FAQ # 35) were held including complete names (including DBAs and pseudonyms), addresses and telephone #s;
3) Identifying information of all foreign and domestic entities (e.g. corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed IRS/OVDP assets were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers, addresses and the jurisdictions in which the entities were organized.
4) In the case of jointly filed tax returns, if each spouse intends to apply for the OVDP, each spouse should request preclearance.
5) Criminal investigation will then notify taxpayers or their representatives via fax whether or not they are eligible to make an offshore voluntary disclosure. It may take up to 30 days for Criminal Investigation to notify taxpayers or their representatives of the decision.
It should be noted that IRS pre-clearance does not guarantee a taxpayer acceptance into the IRS/OVDP. Taxpayers pre-cleared for OVDP must follow the steps outlined in IRS/FAQ #24 within 45 days from receipt of the tax notification to make an offshore voluntary disclosure. Taxpayers must truthfully, timely and completely comply with all provisions of the OVDP.
Under IRS FAQ #24, Taxpayers who make an offshore, voluntary disclosure must submit their Offshore Voluntary Disclosure Letter (and attachment) to the IRS (address as designated in Philadelphia, PA). IRS Criminal Investigation will review the Offshore Voluntary Disclosure Letter and notify taxpayers or their Representatives whether the offshore voluntary disclosures have been preliminary accepted as timely or declined (usually within 45 days of receipt of a complete Offshore Voluntary Disclosure Letter).
Once a taxpayer’s disclosure has been preliminarily accepted by IRS Criminal Investigation as timely, the taxpayer must complete the submission and cooperate with the civil examiner in the resolution of the civil liability before the disclosure is considered complete.
Under IRS FAQ #24.1, where spouses both desire to participate in the OVDP, they may do so jointly or separately. If spouses make a joint submission, they must include all required information and documents for each spouse and clearly indicate the intention to disclose jointly. If spouses make separate submissions each spouse must complete and submit all required information and documents.
Under IRS/FAQ #25, if the Voluntary Disclosure is accepted, the IRS Criminal Investigation Division will instruct the taxpayer or his representative to submit the full voluntary disclosure to the IRS Austin campus within 90 days of the date of the timeliness determination. The Voluntary Disclosure submission must be sent in two separate parts:
2) All documents as required under IRS/FAQ #25.
Under IRS/FAQ #7, the terms of the Offshore Voluntary Disclosure Program require that the taxpayers must:
1) Provide payment, documents
2) Co-operate in the voluntary disclosure process, including providing information on foreign accounts and assets, institutions and facilitators, and signing agreements to extend the period of time for addressing Title 26 liabilities and FBAR penalties.
Regarding payment it is now due with the submission of the disclosure. Under IRS FAQ #25, the payment to the Dept. of Treasury is in the total amount of tax, interest, offshore penalty, accuracy-related penalty, and if applicable, the failure-to-file and failure-to-pay penalties, for the voluntary disclosure period. These payments are advance payments; consequently any credit or refund of the payments is subject to the limitations of IRC Sec. 6511 (see IRS/FAQ #25). These total tax, interest and penalty payments are due up front with the application submission.
Under IRS/FAQ #7, the up front payment includes the following penalties which may in the aggregate with tax and interest “wipe out” the account:
1) Pay 20 percent accuracy-related penalties under IRC Sec. 6662(a) on the full amount of the offshore-related underpayments of tax for all years;
2) Pay failure to file penalties under IRC 6651 (a) (1), if applicable;
3) Pay failure to pay penalties under IRC 6651 (a) (2), if applicable;
The big penalty is the Title 26 Misc. penalty. The payment, in lieu of all other penalties that may apply to the undisclosed foreign accounts assets and entities, including FBARS and offshore-related information return penalties and tax liabilities for the years prior to the voluntary disclosure period, a Misc. Title 26 offshore penalty equal to 27.5%, or 50% for those listed in FAQ #7.2, of the highest aggregate value of OVDP assets as defined in IRS/FAQ # 35 during the period covered by the Voluntary Disclosure.
The suspension of interest provisions of IRC Sec. 6404(g) do not apply to interest due under the OVDP.Read More »
On 2/10/17 The Guardian reported that Juergen Mossack & Ramon Fonseca, founders of Panamanian law firm Mossack Fonseca were arrested and jailed following Panama probe into creating companies linked to Brazil corruption in the bribery case of Brazilian Company Odebrecht. The case is part of the sprawling Brazilian Lava Jato corruption scandal.
The Panama Papers consist of millions of Mossack Fonseca documents (leaked 4/16) that showed how the rich and powerful used offshore companies to avoid taxes. The new twist in this case is that bribery and apparent money laundering are now included in addition to tax crimes. Authorities in the US, Switzerland, Brazil, Ecuador, Peru, Colombia and Panama have joined forces for over 1 year to pursue these criminal claims which now have lead to arrests of two internationally prominent lawyers at the center of the scandal.
Kenia Porcell, Panama Attorney General, said she had information that Mossack Fonseca “allegedly was a criminal organization that is dedicated to hiding money and assets from suspicious origins.”
The monies at issue apparently come from bribes circulated via corporate entities, which were then returned “washed” or “bleached” to Panama.
This is the first major arrest of lawyers involved in tax evasion, bribes and money laundering since the Panama Papers exploded in April 2016.
In December 2016, Odebrecht (Brazil’s largest construction company) pleaded guilty to having paid $788m in bribes to government officials throughout Latin America to secure public works contracts (the bribes earned them $3.8B in illegal profits; they have agreed to pay $3.5B in penalties to US, Switzerland and Brazil to resolve charges, which was the largest fine ever in a foreign corruption case).
Their plea was entered in US Federal Court since Odebrecht entities used the US banking system and have shares/debts traded on US securities exchanges. The US Dept. of Justice found evidence of a special department of their company specifically dedicated to paying bribes, often using shell companies and tax havens (Andorra, Cayman Islands) to avoid detection. US prosecutors charged Odebrecht under the Foreign Corrupt Practices Act.
The fallout has been explosive. The scandal has widened and now includes investigations in Colombia, Mexico, Peru, Panama, the Dominican Republic, Venezuela, Chile, Argentina, Guatemala, Ecuador and Africa (Angola).
Accusations now include massive bribes paid to major politicians:
1. In Peru an arrest order was issued for former President Alejandro Toledo for accepting a $20m bribe (he was Peru’s President from 2001-2006) a former World Bank economist, Stanford University graduate, and is now their visiting Professor). Toledo has been charged with influence peddling and money laundering receiving $20m in bribes in exchange for favoring Odebrecht in bidding to build the Interoceanic Highway connecting Brazil to Peru.
Others implicated in Peru include: the wife of ex-President Ollanta Humala being investigated in connection with a $3m donation that she received for her husband’s presidential campaign. Other Peruvian politicians implicated include: 5 officials in the administration of ex-President Alan Garcia, who were arrested in connection with the awarding of the contract to build a light-rail system in Lima.
2. In Colombia, a witness, former Senator Otto Bula was arrested January 14, 2017 (charged with conspiracy in connection with a scheme to favor Odebrecht’s bid to build a highway connecting Bogota, Colombia’s capital to the Caribbean). As a witness, he testified that President Juan Manuel Santos received a nearly $1m contribution (ironically Santos received the Nobel Peace Prize in 2016 for crafting a peace agreement with his country’s largest rebel group).
On January 12, 2017 (two days before Bula’s arrest) authorities detained former Transportation Vice Minister Gabriel Garcia Morales on charges that he received $6.5m in 2000-2010 to award a road project to Odebrecht.
3. In Brazil, the scandal has contributed to an economic recession and political upheaval. The Odebrecht scandal started in 2014 as a money laundering investigation in Brazil known as the “Car Wash” because bribes were being funneled through a gas station.
Brazil politicians have been charged with taking bribes to help the company secure contracts with state oil company Petrobas. Former President Inacio Luis da Silva faces corruption charges in connection with Odebrecht bribes. His successor, Dilma Rousseff was not charged with accepting bribes but was impeached last fall partly because the public blamed her for not being more vigilant about halting corruption.
In the words of Martin Santivanez, a political scientist at San Ignacio de Loyola University in Lima: “Clearly this is a kind of moral catastrophe. People thought to have been of high moral standing are falling one by one for their connections to the huge corrupt network of Odebrecht and other Brazilian companies”.Read More »
In a groundbreaking study the TaxFoundation.org released a study of IRS tax audits for the 2015 Fiscal Year (thru 9/30/15, the most recent tax year for which IRS tax audit statistics have been released), which revealed the following:
1. The overall IRS audit rate has dropped from 1.1% (2010), 1 in 90 taxpayers to .8% (2015) less than 1%, 1 in 120 taxpayers.
2. However, IRS tax audit rates have greatly increased for high income earners. For taxpayers at the higher income levels: between $500k to $1m (3.81%, 1 in 26 compared to approximately 3% for recent tax years); between $1m-$5m (8.42%, 1 in 12 compared to approx. 7% for recent tax years); $5m-$10m (19.44%, 1 in 5 compared to 11 % for recent tax years); $10m over (34.69% 1 in 3 compared to 16 % for recent tax years).
3. Effective tax rates may be as high as 55% for “blended” Federal/CA tax rates based out phase-out for personal exemptions, itemized deductions and minimal or no pension contributions.
Tax projections include the following:
1. Income over $500,000, tax is 40.4%: $210,966( $137,330/Federal, $45,375/ CA; $17,261/ FICA);
2. Income over $1m, tax is 45.45%: $454,486 ($317,123/Federal, $108,352/CA; $29,011/FICA);
3. Income over $5m, tax is 50.02% $2,501,188 ($1,738,067/Federal, $640,110/CA; $123,011/FICA)
4. Income over $10m, tax is 50.60% $5,059,747 ($3,514,125/Federal, $1,305,110/CA; $240,511/FICA).Read More »
By David E. Richardson and Gary S. Wolfe
US investors (incl. US resident citizens, Green Card holders or income tax residents under the substantial presence test and any US citizen located abroad) face significant US Income, Estate and Gift tax issues on their investment portfolios namely:
1) Imposition of Federal and State (e.g. CA) “blended income tax” rates up to 55%;
2) 2017 US Estate & Gift Tax of 40% (after personal exemption of $5.49m or, combined $11.26m for husband and wife).
3) Risk of creditor attachments (>1 million lawsuits filed yearly in California; plaintiff’s attorneys look for “deep pocket defendants” who hold assets titled in individual names or closely held entities).
4) US world wide information reporting requirements for undisclosed foreign bank accounts (FBAR filings/FinCen Form 114 for foreign (offshore) bank accounts over $10k; failure to file is an annual 50% penalty, which can be up to 300% if non-tax compliant for 6 years. Willful FBAR violations failure can also result in a 10-year felony for each year FBAR not filed.
5) Foreign Account Tax Compliance Act (FATCA) is reporting by foreign banks on US account holders (adopted 3/10, effective for tax years thereafter). Form 8938 is a separate tax filing due (attached to Form 1040) for foreign financial assets over $50k. Thus taxpayers with foreign bank accounts over $50k have to file both the FBAR and the FATCA filing (Form 8938) or risk multiple civil and criminal tax penalties.
US investors can virtually double their net after-tax return on investments. How? By the compliant elimination of US Income, Estate and Gift taxes on the investment portfolio income with minimal or no reporting. It can, has, and is being be done by many US investors, both domestically and abroad.
In 2006 the Wall Street Journal came out with an article in which they disclosed a “trade secret”; the wealthy use Private Placement Life Insurance policies for investment tax planning (and not for Estate Tax planning). A tax-exempt Private Placement Life Insurance Policy (PPLI) acts as a “tax free wrapper” for investment income (i.e. the annual earnings including interest, dividends, capital gains are not subject to tax reporting or US income tax if held in the cash value portion of the tax compliant life insurance policy (per IRC Sec. 7702). Like a tax-free municipal bond, they are by definition (and Congressional decree) tax-exempted.
For over 10 years, I and my colleague and co-author, David Richardson of Mid-Ocean Consulting (Bahamas), an acknowledged expert in this tax area, have been utilizing and refining this planning. We co-wrote an article in 2013 entitled: US Tax Planning for Passive Investments (published by the American Bar Association/The Practical Tax Lawyer). In it we describe these tax features and the attendant asset protection benefits (absent a fraudulent conveyance). And assuming the PPLI is issued under Puerto Rico Law (which is a US territory wherein the FBAR rules do not apply) and further assuming the policy is owned by a single member US LLC (California recommended due its favorable asset protection statutes for LLCs), no Form 8938 FATCA reporting is due.
We have since added a new component to further enhance the planning. The strategy that we have developed effectively replaces a commercial annuity with a private annuity in order to fund arguably the “best type” of variable life insurance in the US, that is, insurance that provides a tax exempt death benefit, and also full tax-free access during life time; a so-called Non-Modified Endowment Contract or “Non-MEC”. With this policy design, which typically requires funding over a 4-5 year period, the private annuity allows for cost effective, low friction funding mechanism that we feel is a better alternative to the commercial annuity. It is quick to implement, cost effective, and flexible with robust asset protection.
The international insurance carriers we favor for US clients (or non-US clients with a US nexus) are located in Puerto Rico.
Notwithstanding the compliant nature of the planning, PR is a US territory that exempts onerous “offshore” reporting, that could otherwise trigger an audit. Clients can name their own investment manager and custodian to hold and manage the policy segregated assets that are bankruptcy remote by virtue of being legally segregated under local statute. They may not however, direct or control investments held in the policy separate account (re: Webber vs. IRS). Rather, investments must be managed by an independent, third party manager. Insurance fees are generally fractional versus US domestic general account alternatives, with policies amortizing set up charges and fees typically in only the first or second year.
How does it actually work?
1) A Private Annuity contract is established in Nassau with a newly established, dedicated International Business Corporation (“IBC”) which contracts with the client. The Bahamas offers excellent confidentiality and asset protection laws i.e. a 2-year statute of limitations to contest a transfer as a fraudulent conveyance and, disclosure of any financial matter is a crime in Nassau. Note- the Bahamas will neither hide tax cheats nor provide sanctuary for debtors looking to defraud creditors, but it can be a haven for legitimate and compliant tax planning and asset protection.
The Private Annuity is funded with monies contributed by the US client (min. $5m) that are sent to a major international bank. The contract itself includes the following material terms: the annuity payment receipt may be current or deferred; the annuity may be fully collapsed at any time upon written notice to the annuity company. Also by mutual consent, an investment manager and custodian is appointed who holds and manages the annuity assets that are placed in a legally segregated account (to make it both creditor exempt and bankruptcy remote). If the annuity policy is governed by Puerto Rico law, the annuity corpus/earnings are exempt from 3rd party creditor attachment on day-one of the agreement- again with the proviso that there was no prior claim against those assets in particular, or, the creditor did not attempt to make themselves insolvent.
The annuity corpus and earnings compound tax deferred until withdrawn as an annuity payment (which is only partially taxable i.e. the basis portion of the annuity payment is tax-free). The annual earnings are not reported until withdrawn, which minimizes risk of IRS tax audit.
2) The annuity payout for each of the five years necessary to fund the PPLI is directed to a US irrevocable trust with an independent trustee (such trustee cannot be spouse, parents or children but can be nephew/niece, brother/sister-in-law, or trusted advisor). We do not recommend institutional trustees due to the complexity of the planning. As stated previously, up to $11.26m may be contributed to the trust US Estate and Gift Tax free, so any amount up to this may also be used to fund the PPLI. The trust and PPLI can be funded in excess of $11.26m, but any excess will be included in the Grantor’s taxable estate (see below for exception).
3) The trust may be an “intentionally defective grantor trust” such that the trust income is taxed to the Grantor (and does not require separate Fiduciary Income Tax Filings e.g. Form 1041) and reported on the grantor’s Form 1040 tax return annually. The trust corpus is exempt from US Estate and Gift tax but as stated, income inures to the Grantor. That said, the life insurance policy (PPLI) owned by the trust (and also the policy beneficiary) does not produce any taxable income during lifetime. And upon death of the insured, the death benefit proceeds are paid out to the trust as death beneficiary completely US Income, Estate and Gift tax-free. The trust may then distribute to US (or non-US) beneficiaries in whole or in part with no incidence of US taxation. At this point, the trust may make a partial distribution and decide to rollover funds in a new policy and thus extending the tax-free compounding on these assets.
The tax status of the trust as an intentionally defective grantor trust is confirmed by specific trust provisions e.g. unsecured loans, grantor ability to substitute trust assets and others as cited under the IRC. In addition, if the trust is an intentionally defective grantor trust then the Grantor may “sell “ assets to the trust without imposition of capital gain tax and no income tax recognition for “interest” received on the asset sale.
3) Upon death of the insured, the insurance pays to the trust the death benefit. Said death benefit is received as the tax-free proceeds of life insurance (re: IRC 101 a i)- this includes: Initial corpus + growth + “true” insurance component, less any prior loans (if any) which may be repaid or more commonly netted off. As noted above, the trust can freely distribute this amount in whole or in part, out of the Grantor’s Estate (and therefore not part of probate) and thus free of any taxation to either the donor or donee.
In sum, with careful planning and timely* execution, a US investor can:
• Effectively double investment returns by eliminating current and future US Income and Capital Gains Tax
• Eliminate the corpus and all future growth from US Estate Tax
• Place assets beyond the reach of unforeseen creditors
• Minimize reporting on international investments
• Reduce audit risk
• Contractually retain the flexibility to modify or even terminate the arrangement
* Tax planning and asset protection strategies are ineffective unless initiated prior to the imposition of tax, or a challenge e.g. lawsuit, divorce, IRS audit etc.Read More »