US Nationals - Is a Barge Pole Long Enough? May 2015
As a business, we are ultra weary of dealing with US nationals and have always treated them with the proverbial barge pole on financial matters. Having been asked more than once as to our stance on this I thought I would put down our understanding of the situation and why it so potentially dangerous for any advisor in the offshore market.
As advisors we can take the brunt of blame for when financial matters go wrong. Endowment, pension, mortgage mis-selling are testimony to this. The fact that we get guidance from the suppliers is no amour against a behind the curve regulator. Americans investing in offshore financial products falls into a similar category for us - so either know what you are doing - and how few advisors and companies really do - or stay away.
And this is why... We have all heard about FATCA and how excited various companies are that they are now "ready" and have put in place the appropriate measures. BUT the issue is not whether they are ready. All FATCA does is enforce reporting on companies who have US citizens as customers. This is so that the IRS can enforce taxation, and for the offshore advisor it is how foul they fall on returns from any Passive Foreign Investment Company (PFIC). A piece of legislation beautifully crafted as a trade barrier to its citizens - but that is another story.
PFICs are simply “pooled investments” registered outside of the United States. This most typically encompasses mutual funds, but can include all kinds of financial products including hedge funds, insurance products, non-U.S. pension plans and bank accounts.
So here is the problem... All income (including capital gains) from PFIC's is viewed by the IRS as ordinary income and they automatically tax it at the top individual tax rate (39.6%). In some cases, the total tax on a PFIC investment may rise to well above 50%. Furthermore, capital losses cannot be carried forward or used to offset other capital gains.
Now this is not new. Perhaps up until now those US citizens with such investments were ignorant or hid the fact from the IRS. FATCA makes this very difficult because the institutions themselves will be informing the IRS. And you guessed it...failure to declare has punitive fines and even jail time.
A company being FATCA ready is not a reassurance. The reassurance comes from whether the funds you are directing the US citizens to are not subject to PFIC regulations.
Be careful - Be careful So it is not unusual for companies to advise us not to worry. "Get a disclaimer", "use a trust" are the sort of things you may hear to reassure. Be careful with this sort of advice. From the IRS website: "Trusts also commonly show up in abusive tax structures. Unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions...Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS".
Playing the American game is not for the faint hearted.
By: Alan Dempster Director of BD Wealth Management. Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of any corporation agency or government. Examples of analysis performed within this article are only examples and should not be utilized in real world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of any government or corporate entity