Tax havens have typically been associated with countries like Switzerland, Panama, and Malta, but now they’re flourishing within the US, too. In September 2023, the Institute for Policy Studies, a left-leaning think tank, published a report detailing the growth of tax haven states in the US. The states named in the report have a few key things in common: All but two have no estate or inheritance taxes. Eight have no capital gains tax, five have no corporate income tax, and seven have no state individual income tax. South Dakota, Nevada, and Wyoming have none of these taxes.
Many wealthy non citizen, non residents have been encouraged to set up structures in the US. Or just simply open US bank accounts in their own names. The relatively recent popularity of US structures started in the mid 2010s as many HNWIs sought to legally avoid CRS / AEOI reporting.
What about FATCA you may ask. While negotiating the FATCA intergovernmental agreement with third-party countries to sign up to FATCA, Treasury was forced to give its word that it would one day commit to equivalent reciprocal reporting. Laughably, this promise was accepted by negotiating partners. Lo and behold, the Republican-controlled Congress stymied the pledged reciprocity. Obama’s administration thrice urged the Republican-led Congress to enact proposals to provide “full reciprocity under FATCA”, so as to ensure that the United States can live up to its end of the bargain on foreign tax reporting. Posey, a Republican Representative was tasked to tell Obama’s administration that despite US requesting other nations to report on US persons, USA reciprocal reporting would discourage investment in the USA, and would impose costly compliance costs.
As many countries adopted the CRS, there has been pressure from around the world for the US to follow suit. According to a General Accounting Office report from Congress, the US is unlikely to abandon its FATCA. Although CRS was based on US legislation, it focuses on tax-residence rather than citizenship. The congressional report argues that swapping FATCA for CRS would cost the US an unknown amount to make the changes without any tangible benefit to the IRS. In fact, under CRS, the US tax authorities would not be informed of any accounts belonging to US citizens living overseas, even if they have a US tax obligation. However, under CRS rules, the financial institution would only need to share information with the jurisdiction of tax residency, instead of the IRS as FATCA requires. The congressional report argues that swapping FATCA for CRS would cost the US an ‘unknown amount’ to make the changes without any tangible benefit to the IRS. In fact, under CRS, the US tax authorities would not be informed of any accounts belonging to US citizens living overseas, even if they have a US tax obligation.
The Biggest Impediment to Exchanging Information
The biggest impediment to automatic exchange of information is that the US maintains a list of countries that the US deems satisfactory to provide information. The recent IRS Rev Proc 2020-15 updated list of countries, deposit interest paid to nonresident aliens published April 2020 is published irregularly, adding one or two countries on average every 18 months. E.g. only Georgia and Singapore have been added in the last year. There are only 49 nations on the list. that US can automatically share FATCA information with. So, even if the IRS gathers information on non-US persons with financial accounts in the USA for FATCA reciprocal reporting, this information cannot be sent to a country if that country is not deemed safe… For example, Chinese, Argentina, Peru or Japan residents can carry on hiding money in the USA until the cows come home.
So if this loophole works so well, why don’t I think that non Americans should rush to US structures? It’s about the Pasquantino case.
Pasquantino v. United States, 544 U.S. 349 (2005)
is a United States Supreme Court case in which the Court held that a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute.
On April 26, 2005, the United States Supreme Court held in Pasquantino v United States, that a “plot to defraud a foreign government of tax revenues” can, where the requisite nexus to the US exists, constitute a wire fraud violation under the US Criminal Code, which is a federal crime. Wire fraud is a predicate offence under the US criminal money laundering laws, and also under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), meaning that wire fraud charges can also expose defendants to concomitant charges under money laundering and RICO crimes, including where appropriate, forfeiture, treble damages, liability for adverse parties’ costs and attorneys’ fees, and severe criminal penalties and imprisonment.
Pasquantino may, potentially, have significant consequences for the private banking industry. Just how significant those ramifications are however, is debatable. At least there is the possibility that bankers who directly or indirectly assist clients to “hide” funds from non-US tax authorities using the facilities of US interstate or foreign commerce (something that can be as simple as a US dollar denominated wire transfer) may well be committing a US federal crime subject to substantial penalties, including imprisonment.
Background
Prior to 1996, Canada raised the excise tax on liquors such that Canadian excise taxes greatly exceeded comparable United States taxes. From 1996-2000,[3] Carl and David Pasquantino purchased large amounts of liquor over the phone from discount stores in Maryland. In order to avoid paying Canadian excise tax on imported alcohol, they hired individuals to smuggle the liquor over the border by automobile. The Federal Bureau of Alcohol, Tobacco, Firearms, and Explosives learned about the smuggling operation and investigated, leading to the arrest of the Pasquantinos and their associates.
Federal district court
The smuggling operation did not violate any federal alcohol statute or any applicable anti-smuggling statute, so the Pasquantinos and one of their conspirators, Arthur Hilts, were indicted under the federal wire fraud statute, 18 U.S.C. § 1343. The statute prohibits using wires, radio, or television to conduct “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” The statute was implicated when the Pasquantinos ordered alcohol over the phone.
Before trial, the Pasquantinos and Hilts asked the court for a dismissal, claiming that the government did not have a sufficient interest in enforcing Canadian revenue laws and that the Canadian tax revenue did not constitute property under the wire fraud statute; the court denied the motion and the case went to trial.[6] The Pasquantinos were convicted by a jury and sentenced to 57 months in prison for each of six counts, to be served concurrently, and Hilts to 21 months in prison.
Canada also indicted the men for tax fraud, but had not adjudicated the claim before the U.S. criminal court made its determination.
Wire fraud is a federal crime that carries a sentence of up to 20 years’ imprisonment and fines of up to $250,000 for individuals and $500,000 for organizations. The statute of limitations to bring a charge is five years unless the wire fraud targeted a financial institution, in which case the statute of limitations is 10 years. If the wire fraud is related to special circumstances, or targets a financial institution, it can carry a prison sentence of up to 30 years and a fine of up to $1 million.
A person need not have actually defrauded someone or personally sent a fraudulent communication to be convicted of wire fraud. It is sufficient to prove the intent to defraud or acting with knowledge of fraudulent communications being sent.
If you think the Pasquantinos case was an anomaly? Just remember the FIFA case.
In 2015, United States federal prosecutors disclosed cases of corruption by officials and associates connected with the Swiss based Fédération internationale de Football Association (FIFA), the governing body of association football, futsal and beach soccer.
Near the end of May 2015, fourteen people were indicted in connection with an investigation by the United States Federal Bureau of Investigation (FBI) and the Internal Revenue Service Criminal Investigation Division (IRS-CI) into wire fraud, racketeering, and money laundering. The United States Attorney General simultaneously announced the unsealing of the indictments and the prior guilty pleas by four football executives and two corporations.
So if a foreigner is guilty of a tax offense outside of the US? They can be in trouble in the US as well.
Consider yourself warned.
