Offshore Tax Evasion & Compliance: OECD/CRS and FATCA

August 07, 2017  |   Posted by :   |   International Tax Planning,Tax Evasion   |   0 Comments

For foreign investors who become EB-5 Visa holders or other US green card they will be subject to annual US world wide tax reporting for income and disclosure of all offshore financial accounts over $10,000 that they own or control (FBAR filing: FinCen Form 114) and foreign financial assets over $50,000 (FATCA/Form 8938 attached to Form 1040/US Income Tax Return) or risk serious civil and criminal penalties.

The penalties may include a civil penalty for up to 50% of the account balance yearly for FBAR violations (which is computed annually; in the case of Florida Taxpayer Carl Zwerner he had a 150% penalty imposed after he lost at trial so his $1.6m account cost him nearly $2.4m under the FBAR civil penalty). In addition a criminal penalty of up to 10 years in jail for each year the FBAR is not filed

Under FATCA, which was enacted as law in March 2010, as of 2017 over 100,000 foreign financial institutions in over 80 countries are reciprocally exchanging tax information with the US government (Treasury Dept/IRS). If the offshore account has a US owner unless they supply their taxpayer ID information to the offshore bank, the US will withhold 30% of any US source dividends or interest at the source and 30% of gross sales of securities (i.e. 30% of the sales proceeds are withheld with no calculation for any taxpayer basis or other capital gain issues).

A foreign investor who immigrates to the US is subject to worldwide US income, estate and gift taxes and related tax filings which are subject to IRS audit with both tax, interest and civil and criminal penalties due for tax non-compliance. Unlike China, the IRS is a very powerful tax agency with nearly 100,000 employees, an over $10B annual budget while they collect over $3 trillion per year in US taxes due.

As of September 2018, there will be 101 signatories to the Organization of Economic Development digital exchange of tax information between countries known as the Common Reporting Standards (CRS) which has even more expansive tax compliance required including bank balances and income related to insurance products.

My colleague and co-author, David Richardson (international tax consultant, Mid-Ocean Consulting) has written the following superb summary of the complex new tax rules for the OECD/CRS reporting due to begin in Sept 2017 (for over 50 countries and in Sept 2018 another 50+ countries total countries: 101 as of Sept 2018). For international investors who are dual tax residents with the US (and their country of origin or other 3rd party country) their world-wide investments may be subject to dual tax compliance under both the US/Foreign Account Tax Compliance Act (for US source interest, dividends and capital gains) currently in effect and the OECD/CRS greater tax compliance requirements including bank account balances, and payments from the accounts (effective Sept 2017 forward).

David’s article is as follows:


CRS Advisory- Updated; August 2017

As many will already know, the automatic exchange of information for tax law enforcement purposes started first in Europe with the EU Savings Tax Directive, went international with the US Foreign Accounts Tax Compliance Act, and, from 2017, went global with the recently agreed; Common Reporting Standard or “CRS”. The CRS provides for annual automatic exchange between governments of financial account information. CRS sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Background To The CRS

As an attack against “tax avoidance and evasion” facilitated by tax planning techniques purportedly used by some wealthy individuals and corporations in “tax havens” around the world, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013.

On October 29, 2014, 51 jurisdictions (the “early adopters”), 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 on Mutual Administrative Assistance in Tax Matters. Subsequent signatures of the agreement, including a signing ceremony on the margins of the OECD Ministerial meeting of June 2015, brought the total number of jurisdictions to 61 (see below). This agreement specifies the details of what information will be exchanged and when.

Countries that have signed up to the CRS will exchange information “automatically” with one another. The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.

Reportable accounts include those held by individuals and entities (which includes companies, trusts and foundations), and the standard includes a requirement that financial institutions “look through” passive entities to report on the relevant controlling persons. The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies.

What Countries Will Be Subject to CRS

The total number of signatories as at June 4, 2015, was 61, including the following countries and territories:
Albania, Anguilla, Argentina, Aruba, Australia, Austria, Belgium, Bermuda, British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Ghana, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turks and Caicos Islands, and the United Kingdom.

Now over 100 jurisdictions* have committed to sign have endorsed the CRS, and the number is continuing to grow by some signing on effective in 2018. Critically, data began being collected on 1/1/2016 for OECD countries, with 50 countries starting automatic data sharing in 2017, and the balance (notably China and Brazil) coming on line next year. This means that clients with traditional “offshore” structures will forever lose their privacy if they did not restructure their global estate by Dec 31, 2015.
Or, see exceptions below

Pre-Existing Insurance Exception.

The CRS rules, however, provided the following significant exception:

“Accounts Not Required to be Reviewed, Identified, or Reported. A Preexisting Individual Account that is a Cash Value Insurance Contract or an Annuity Contract is not required to be reviewed, identified or reported, provided the Reporting Financial Institution is effectively prevented by law from selling such Contract to residents of a Reportable Jurisdiction.”

This was an important carve-out for an otherwise legitimate and compliant financial instrument. Not a loophole, insurance is an “intended result”, that is being recognized for what it is; one of the few financial structures that offers substance to the form.

In terms of policy design, “death benefit only” policies (no- cash value) add significant further protection as there is no account value to report on as defined in the CRS regulations (similar again to FATCA). The goal may therefore be in designing international no-cash value policies with substantial death benefit, to fully satisfy a client’s local applicable tax and insurance rules- and may also be simultaneously US compliant, should a client or his or her beneficiaries/heirs move to the United States.

STRATEGY: Use of a Puerto Rico as a jurisdiction

A number of jurisdictions offer international life insurance that can at the same time qualify as both tax-exempt and not subject to reporting under the CRS regime, but we wanted to focus on one jurisdiction that is uniquely situated to offer reporting relief to not only U.S. policy holders, as it does now, but to the rest of the world given CRS. That jurisdiction is Puerto Rico.

Puerto Rico is a US Commonwealth Territory that offers a progressive legal structure in the context of financial services with offshore-like flexibility but without the “haven” taint.

And, not unlike a number of US States, Puerto Rico has a clearly articulated segregated statute which holds the assets of a policy legally distinct from any other policy- and from the general account assets and liabilities of the insurance company itself. Thus making the assets of such a policy bankruptcy remote, and never at risk to the carrier. Traditional insurance company grading metrics like “A-ratings” are now somewhat irrelevant.

Asset protection is also very often a factor, and Puerto Rico has very clearly articulated laws that prevent any creditor of a policy owner (or policy beneficiary) from attacking a PR issued policy (provided the funding of the policy itself was not a fraudulent conveyance).

From a reporting perspective, as far as the U.S. is concerned U.S. policyholders are exempted from FBAR reporting and PR resident institutions free from FATCA obligations- in that Puerto Rico is a US territory and deemed to be US for this FATCA purposes. Now for non-US clients, Puerto Rico as a US Territory is off the CRS grid, as it is not currently, nor likely to be, a direct party to CRS.

Returning then to the focus on insurance itself, life insurers in Puerto Rico are NAIC US and Puerto Rican Regulator supervised. Carriers there are not legally licensed to sell insurance locally in Europe, Canada or Latin America, but the exception seems to be on-point availability given the right fact situations. This therefore presumes policy acquisition by a non-native person or entity e.g. a Chilean national cannot take direct ownership of an international policy.

Given that a policy cannot legally be sold to residents of Chile or potentially other countries that are CRS signees, clients will likely use an entity that acquires and takes ownership of the policy. Assuming so, there may or may not be CRS reporting issues for that entity depending on its domicile.

For clients that already have and wish to maintain companies or trusts in jurisdictions that will be required to make the CRS reporting, the use of a death benefit only (no cash value) policy provides effective CRS protection as the policy has no reporting value for CRS purposes. Thus, if the policy was issued prior to January 2016, the pre-existing insurance contract exception discussed above should apply.


International private placement variable life insurance policy can compliantly provide lifetime tax deferral and an income tax-free death benefit upon the death of the life insured- under the tax laws of the United States as well as now many other countries around the world. Such a policy also provides ongoing client confidentiality, as the insurance company – rather than the client – is the deemed owner of the underlying policy reserve assets.

In general terms, international private placement variable life insurance, if issued before December 31, 2015, should be grandfathered from any future CRS reporting. A death benefit only policy (which can be US tax compliant under the IRC 7702 cash value accumulation test) would further buttress this position, as it has no cash value for CRS or FATCA reporting purposes. Meaning that even if the policy was deemed not to be grandfathered and was otherwise subject to CRS reporting, there is no value to report.

In addition to the aforementioned, such a policy, if issued from a Puerto Rican based insurer (regardless of its design) would be free from CRS reporting post the December 2015 grandfathering date, as Puerto Rico is altogether exempted as a U.S. Territory.

David Richardson- Managing Director

David E. Richardson is CEO of Mid-Ocean Consulting Ltd., in Nassau, Bahamas, which guides both institutions and individuals on sophisticated international structuring and private placement insurance related strategies. Additionally, he sits on the board of a number of private foundations and a wide variety of private companies including several that are SEC registered in the United States. He is a graduate
of the ABA sponsored National Trust School at Northwestern University.

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Panama Papers Update: Pakistan Prime Minister Resigns

July 31, 2017  |   Posted by :   |   Panama Papers,Tax Evasion   |   0 Comments

As reported on 7/28/17 by the NY Times Nawaz Sharif, Pakistan Prime Minister, resigned after the Pakistan Supreme Court ordered his removal for corruption.

In 2016, the Panama Papers disclosed that Sharif and 3 of his children owned expensive residential real estate in London held anonymously thru offshore companies.

The Court held that Sharif was not honest, and disqualified to be a member of Parliament. The Court ordered the opening of criminal investigations against the Sharif family who were found to be living beyond their means, failed to present a paper trail of the money they used to purchase the London apartments and falsified records in support of their purchases.

Sharif is the second Prime Minister to now be forced to resign due to disclosures in the Panama Papers. In 2016, the Iceland Prime Minister and his spouse concealed millions of dollars worth of investments in an offshore company, which was disclosed and forced his resignation.

The Panama Papers financial fallout has now claimed two prominent politicians and is now expanding to include soccer stars that used offshore company to conceal income received from monetization of Celebrity Image Rights (name and likeness).

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Monaco striker Radamel Falcao pays €8.2m in tax case

July 24, 2017  |   Posted by :   |   Tax Evasion   |   0 Comments

Monaco forward Radamel Falcao has paid E8.2m ($9.3m US) to tax authorities in Spain as part of an ongoing investigation into alleged tax evasion.

Spanish Tax Authorities are investigating Falcao for tax evasion. They allege he failed to correctly declare 5.6m Euros in income earned from image rights between 2012-2013 while at Atletico Madrid.

If cleared of charges, Falcao will be able to reclaim funds paid, which include tax due plus interest.

Like fellow soccer stars, Messi and Ronaldo, Falcao is alleged to hide income offshore through a maze of shell companies in tax havens: BVI, Ireland, Panama and Colombia. Spain alleges Falcao moved to Monaco to avoid Spanish tax.

The case is ongoing. Falcao has the same agent as Ronaldo, Jorge Mendes, who is alleged to be the mastermind behind these tax evasion strategies. Ronaldo appears before a Spanish Judge on 7/31/17 to respond to similar charges.

Related: Jorge Mendes denies involvement in Radamel Falcao’s tax affairs.

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Recording Artist and Performer DMX Charged With Tax Fraud

July 17, 2017  |   Posted by :   |   Tax Evasion   |   0 Comments

Rapper DMX (aka Earl Simmons) was arrested in NY on 7/13/17 and charged with 14 separate counts of tax fraud and tax evasion for a multi-year scheme to hide millions in income from the IRS and pay $1.7m due in taxes. He faces 40 years in jail for not paying $1.7m in taxes incurred between 2002-2005 and did not file or pay tax for personal income tax returns (2010-2015) despite earning more than $2.3m.

DMX whose hits have included: “Its Dark and Hell is Hot,” “Gon’ Give it to Ya,” is alleged to intentionally avoid taxes by not having a personal bank account, creating bank accounts in names of others, and pay expenses in cash.

In the words of IRS Criminal Investigation Special Agent James Robnett, “While most individuals file truthful tax returns and pay their debts the indictment against Simmons alleges tax crimes including that he failed to file personal tax returns for several years and did not pay his fair share of taxes”

Please click link for complete article from DOJ, Recording Artist and Performer DMX Charged With Tax Fraud.

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Global High Net Worth Investors: Money Laundering & Luxury Real Estate

July 13, 2017  |   Posted by :   |   International Investors,International Tax Planning   |   0 Comments

In July 2016 the US Treasury Dept. expanded its pursuit of international criminals who launder money (hide the illicit funds) through all cash US luxury real estate purchases.

According to the NY Times, nearly 1/2 of luxury real estate nationwide is purchased using shell companies. Effective August 2016 the US Treasury Department has ordered title companies (escrow companies) to report the identities of all cash buyers who purchase expensive US residential real estate (homes and condos). According to the US Treasury Dept. foreign and other purchasers use offshore and onshore “shell companies” (that conceal the real owner identities) to purchase US real estate in all cash transactions which becomes a “US safe haven for their money”.

Effective August 2016, the Treasury Program requires the reporting for all cash purchases at the following sales prices (in the following jurisdictions):

1. New York City (Manhattan: $3m, Other NYC boroughs $1.5m)
2. Florida: Miami-Dade County, Broward and Palm Beach Counties ($1m)
3. California: Los Angeles, San Francisco Bay Area and San Diego ($2m)
4. Texas: San Antonio ($500k)

Additionally, other major US cities may soon be included once the US Treasury Dept., according to FINCEN (Financial Crimes Enforcement Network) Acting Director, Jamal El-Hindi: “learns more about the money-laundering risks in the national real estate market”.

In the United Kingdom recent legislation, The Criminal Finances Bill, is designed to crackdown on billions of dollars laundered by international criminals in the UK real estate market. In the UK it is estimated that up to $173B per year is laundered through UK real estate. Transparency International claims that up to 2000 properties in Central London alone require explanation while UK Home Secretary Amber Rudd estimates an average of 10 “unexplained wealth” transfers per month.

The Bill contains two critical pieces:

1. Authorities may impose “Unexplained Wealth Orders” on owners who buy multi-million pound properties, forcing them to prove the source of the funds or have the assets seized;

2. The UK government may claim property and assets (by seizure) of those guilty of human rights abuses anywhere in the world and revoke their UK Visa.

London in particular is being highlighted as being the “money laundering capital of the world”. Journalist Luke Harding who has investigated global money laundering in a recent expose, The Laundromat is the center of “mega fraud” in which a whole tier of lawyers, agents, real estate brokers have gotten rich by “basically servicing kleptocratic cash”. Harding has analogized the English as being “posh English butlers for kleptocrats” which he termed “depressing and shameful”.

Of particular concern is the role played by British territories in money laundering. Nearly one in ten properties owned in the City of Westminster is owned by an offshore company based in UK territories like British Virgin Islands, Jersey or Guernsey. The Criminal Finances Bill did not include a third provision which would have created a public register of ownership.

Labour MP Dame Margaret Hodge stated: “We are winning the argument but it’s an incredible struggle every time…in the UK post Brexit there is a reluctance to offend anybody. Even the BVI
In case we can get some trade out of them…its nonsense. We should not be defending corruption, money laundering, tax evasion and avoidance and criminal activity in the name of trade.”

In the Panama Papers, of which I have written two books: 1. The IRS/Panama Papers: US Taxpayers with Offshore Entities and 2. The IRS/Panama Paper: Tax Evasion and Money Laundering, it was revealed that certain US states are now replacing offshore tax havens to create shell companies for anonymous owners to use to purchase US assets including: Nevada, Delaware, South Dakota and Wyoming.

It remains to be seen if the US Treasury Dept will expand their recent disclosure requirements to other than NY, FLA, CA and Texas but if the problem is considered a nationwide risk for America and American states are being used by criminals to launder money thru shell companies to buy US luxury real estate it is only a question of time before US legislators and related governmental bodies follow in the footsteps of the United Kingdom and enact a US version of the UK Criminal Finance Bill which would allow the US or State governments to seize US real estate purchased with illicit funds.

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