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2018 FSI Ranks United States as Second Largest Secrecy Haven | FATCA

Paradoxically, while demanding that other countries comply with FATCA, the United States itself has become the second largest secrecy haven in the world according to the Financial Secrecy Index (“FSI”) released by the Tax Justice Network (“TJN”) at the end of January of 2018. Let’s explore why the 2018 FSI considers the United States a Tax Haven.

What is 2018 FSI?

The TJN’s FSI is considered to be one of the most comprehensive assessments of secrecy of financial centers. It is published every two years using independently verifiable data. Its methodology is based on the European Commission’s Joint Research Center. The 2018 FSI, however, is not considered to be influenced by any political considerations.

The FSI is based on various criteria which is updated with each publication. The assessment of a country’s financial secrecy includes such consideration as: requirement to identify beneficial owners of companies, trusts and foundations; whether annual registries are made available to the public in an online format; the extent to which the countries’ financial secrecy rules are forced to comply with the anti-money laundering standards, and so on.

In order to create the index, a secrecy score is combined with a figure representing the size of the offshore financial services industry in each country. This is expressed as a percentage of global exports of financial services. The responsibility for bigger transparency increases with the size of the financial services industry of a country.

In 2018, new indicators where added to what are now considered 20 Key Financial Secrecy Indicators “KFSI”. The 2018 FSI new factors ask whether a jurisdiction in question provides for public register of ownership and annual accounts of limited partnerships; public register of ownership of real estate; public register of users of freeports for the storage of high value assets; protection against prison for banking whistleblowers; harmful tax residency and citizenship rules; and other factors.

2018 FSI Placed United States as Second Largest Secrecy Haven Among the Top 10 Countries

Based on the consideration of all of these factors, including KFSI, the 2018 FSI placed United States as the second largest secrecy haven among the top ten countries. Here is the full list of top ten countries:

1. Switzerland
2. United States
3. Cayman
4. Hong Kong
5. Singapore
6. Luxembourg
7. Germany
8. Taiwan
9. UAE
10. Guernsey

What this means is that the United States is now the country that, with the exception of Switzerland, most contributes to financial secrecy in the world.

Reasons Behind the US Rise in the 2018 FSI Ranking

The second rank of the United States was assigned due to its growing share of the offshore financial services industry. According to 2018 FSI, the US market share of the offshore financial services industry is 22.3%. It was 19.6% in 2015. In fact, in order to occupy the second place in the 2018 FSI, the United States displaced such a notorious offshore haven as the Cayman Islands.

There are other objective reasons and comparative reasons for the US rise to the second place of the 2018 FSI. The main comparative reason is the European Union’s lead in the transparency initiatives. The EU is now the definite leader in combating financial secrecy.

The objective reasons are various. The United States does not have any beneficial ownership registries. It also lacks the country-by-country reporting of corporate profits (although, this may change). Finally, the United States continues to refuse to join the OECD’s Common Reporting Standard (“CRS”).

The Second Place in the 2018 FSI Points to Dubious Cost-Benefit Analysis

The second place in the 2018 FSI is not accidental. Rather, there is a cold, though morally dubious, cost-benefit calculation behind it. On the one hand, the United States was the country that really propelled the global fight against bank secrecy in the years 2008-2014. It trampled all over the vaulted Swiss Bank Secrecy laws when it came to its pursuit of US tax evaders, enacted the revolutionary FATCA legislation, forced the vast majority of foreign financial institutions to share information (including beneficial ownership information) with the IRS concerning US owners of foreign accounts, and engaged in a number of other activities to increase the worldwide financial transparency with respect to US taxpayers.

On the other hand, all of the US efforts to combat bank secrecy were not a fight for transparency ipso facto. Rather, the US government was only interested in fighting bank secrecy in so far as it concerned US taxpayers. With respect to its own bank secrecy laws concerning foreigners who wish to invest in the United States, the US government is on par and even exceeds some of the most secretive tax havens.

In other words, when it comes to fighting US tax evasion, the US government is an innovative champion. With respect to attracting investment in the United States, the same US government seems to do everything possible to turn the United States into a tax haven. This is precisely why it never joined the CRS.

While the US government seems to be acting in the name of the national self-interest, there is one huge problem that this policy creates. Currently, the elites of the most corrupt regimes, mafias and cartels of all stripes, narcotics dealers and other criminals can see the advantage of using the United States as a haven for illicit financial flows, including money laundering and funding of terrorism. There is also an increased danger that the corruption created by one part of the US financial policy may spread to other aspects of our society.

In other words, the current US bank secrecy policy seems to be in contradiction with other stated policies which attempt to specifically target the aforementioned criminal activities. This contradiction is an easy target for critics of the US financial policy and may contribute in the future to potential reversals of the current gains in international financial transparency.

Sherayzen Law Office will continue the monitor the developments in the US bank secrecy laws.

Specified Domestic Entity: Closely-Held Test | 8938 Lawyer & Attorney

In a previous article, I introduced the key term of the Specified Domestic Entity (“SDE”) Definition for corporations and partnerships that may be required to file FATCA Form 8938: “formed or availed of”. At that point, I stated that this term required that a business entity satisfies two legal tests. One of these tests is a Closely-Held Test.

Closely-Held Test: Background Information

Starting tax year 2016, certain business entities and trusts that are classified as SDEs may be required to file Form 8938 with their US tax returns. Treas. Reg. §1.6038D-6(a) states that “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

In a previous article, I discussed the fact that “formed or availed of” is a term of art which has no relationship to the actual finding of intent. Rather, in the context of corporations and partnerships, the “formed or availed of” requirement is satisfied if two legal tests are met. One of these tests is a Closely-Held Test, which is the subject of this article.

Closely-Held Test: General Requirements

In order to meet the closely-held test, a corporation or partnership must be closely held by a specified individual. There are two separate parts of this test that need to be analyzed: (a) who is considered to be a specified individual, and (b) what percentage of ownership meets the “closely held” requirement.

Closely-Held Test: Specified Individual

In another article, I already defined the concept of a Specified Individual. It is, however, worth re-stating the definition here again for convenience purposes. Treas. Reg. §1.6038D-1(a)(2) defines Specified individual as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect; or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession.

Closely-Held Test: Ownership Percentage for Corporations and Partnerships

The ownership requirement of the Closely-Held Test is explained in Treas. Reg. §1.6038D-6(b)(2) with respect to both, corporations and partnerships. A domestic corporation is considered to be “closely held” if “at least 80 percent of the total combined voting power of all classes of stock of the corporation entitled to vote, or at least 80 percent of the total value of the stock of the corporation, is owned, directly, indirectly, or constructively, by a specified individual on the last day of the corporation’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(I).

A domestic partnership is “closely held” if “at least 80 percent of the capital or profits interest in the partnership is held, directly, indirectly, or constructively, by a specified individual on the last day of the partnership’s taxable year.” Treas. Reg. §1.6038D-6(b)(2)(ii).

It is important to emphasize that the 80% threshold is met not only through direct ownership, but also through indirect and constructive ownership. So, one must closely look at the attribution rules of 26 U.S.C. §267 to determine whether the Closely-Held Test is met. Moreover, the constructive ownership rules for the purposes of the Closely-Held Test also contain an additional provision for the addition of spouses of individual family members.

Contact Sherayzen Law Office for Experienced Help with US International Tax Compliance Requirements for Corporations and Partnerships

If you are a minority or a majority owner of a corporation or partnership that either operates outside of the United States or has foreign assets, contact Sherayzen Law Office for professional help with US international tax compliance requirements. Our firm specializes in the are of US international tax law. We can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

Specified Individual | FATCA International Tax Lawyers and Attorneys

Specified Individual is a key tax term that must be correctly understood in order to properly identify the persons who are required to file FATCA Form 8938. In this brief article, I will describe the general definition of a Specified Individual for Form 8938 purposes.

Specified Individual: FATCA Form 8938 Background

In 2010, one of the most important events in modern history of US taxation happened – the passage and signing of the Foreign Account Tax Compliance Act or FATCA. FATCA completely revolutionized the entire landscape of international tax law, elevating the international exchange of tax-related and account-related information to an unprecedented level. FATCA also created a brand-new requirement called Form 8938.

Form 8938 requires US taxpayers to report to the IRS their Specified Foreign Financial Assets (“SFFA”) together with the taxpayers’ US tax returns. Prior to tax year 2016, only a Specified Individual was required to report his SFFA to the IRS. Starting tax year 2016, a Specified Domestic Entity is also required to disclose its SFFA on Form 8938.

Specified Individual Definition

Treas. Reg. §1.6038D-1(a)(2) defines a “specified individual” as anyone who is: (I) US citizen; (ii) resident alien of the United States for any portion of the taxable year; (iii) nonresident alien for whom an election under 26 U.S.C. §6013(g) or (h) is in effect (i.e. nonresident alien who makes an election to be treated as a resident alien in order to file a joint US tax return); or (iv) nonresident alien who is a bona fide resident of Puerto Rico or a section 931 possession (as defined in Treas. Reg. §1.931-1(c)(1) – i.e. Guam, American Samoa and Northern Mariana Islands).

Resident alien includes anyone who is a US permanent resident or meets the substantial presence test.

Contact Sherayzen Law Office for Help With Form 8938 If You Are a Specified Individual

If you are a specified individual who has undisclosed foreign accounts or any other SFFA, you should contact Sherayzen Law Office as soon as possible to explore your offshore voluntary disclosure options. Sherayzen Law Office is a highly experienced international tax law firm that specializes in offshore voluntary disclosures, including OVDP, Streamlined Compliance Procedures (both Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures), Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures and Reasonable Cause (so-called Noisy) Disclosures.

We have helped hundreds of US taxpayers all around the globe to bring their US tax affairs into full compliance with US tax laws, and We can Help You! Contact Us Today to Schedule Your Confidential Consultation!