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Disclosure of Swiss Bank Staff Details to the IRS Blocked by Swiss Court

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On January 3, 2018, a decision of the Swiss Federal Court (the nation’s highest court) dated December 18, 2017, was published, prohibiting automatic disclosure of the Swiss bank staff details to the IRS and the US DOJ. Let’s analyze this decision in more detail.

Disclosure of Swiss Bank Staff Details: History of the Case

The lawsuit decided in 2017 is not the first time that the Swiss Federal Court is placing limits on the IRS ability to obtain information from Switzerland with respect to Swiss citizens. Already in 2016, the Court ruled that a Swiss bank could not disclose to the US authorities the names of financial advisers who helped US taxpayers set up secret Swiss bank accounts (“facilitators”). The reasoning was based on the inadequate level of data protection in the United States which is far below the Swiss Data Protection Act.

It should be emphasized, however, that in the same opinion, the Court also said that the names of facilitators could be disclosed to the US government despite the data protection concerns if the failure to do so would deepen the legal dispute between Switzerland and a the United States and harm the Swiss reputation as a financial center.

The lawsuit with respect to disclosure of Swiss bank staff details was initiated by an unnamed US taxpayer who lived in Switzerland. He filed a lawsuit to prevent the Swiss equivalent of the IRS, the Federal Tax Administration (“FTA”) from disclosing to the US government the name of third parties who were involved or might have been involved with his financial affairs. The lower Swiss court agreed with the taxpayer.

Automatic Disclosure of Swiss Bank Staff Details to the IRS Prohibited

The Swiss Federal Court also partially agreed with the unnamed US taxpayer, stating that FTA could not automatically turn over to the US government the names of Swiss bankers and others who might have helped US tax residents in evading their US tax reporting obligations. The reasoning behind the decision was based on relevance.

Basically, the Court stated that the Swiss bank staff details in this particular case were not necessary to the US government to prove its tax evasion case against the unnamed US account holder. “What is needed . . . is information about the existence and intervention of these third parties, not their identities,” the Court said.

The Court basically stated that administrative assistance requests should not be used for indirect purposes. In other words, the IRS cannot use such requests “in order to obtain information about the identities of alleged accomplices of the taxpayer . . . that could be subject to criminal prosecution if this information is not relevant to elucidate the tax situation of the same taxpayer.”

Obviously, this reasoning does not offer any decisive protection for Swiss bank staff details. It appears that, if the information would have been necessary for the US tax authorities to prove its tax evasion case, the transfer of Swiss Bank Staff details would have been permitted. Additionally, the decision might have come in a bit late as hundreds of documents with the Swiss bankers’ names have already been turned over to the IRS.

Swiss Bank Staff Case Offers No Protection to US Taxpayer’s Data Transfer

Moreover, the Court’s decision offered no hope for blocking the transfer of US taxpayers’ information. While the Court blocked the transfer of the Swiss bank staff details, it still allowed the FTA to provide to the US government the US account holder’s information. This means that the transfer of data concerning US tax residents from Switzerland to the United States will continue unimpeded.

Swiss Bank Staff Case Offers Insight Into IRS’ Next Target in Switzerland

This case also offers a good insight into the current IRS strategy concerning Switzerland. It appears that the IRS is compiling statistics concerning Swiss bank staff who might have helped US taxpayers evade their US tax reporting obligations. Most likely, the focus is on the bankers who provided this help regularly to a large amount of US taxpayers.

Sherayzen Law Office will continue to observe the IRS latest moves in Switzerland.

Jordanian Bank FATCA Letters

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As FATCA continues its triumphant march across the globe, banks from more and more countries continue to send out FATCA letters to their US customers. Recently, the banks in the Kingdom of Jordan sent out additional FATCA letters (hereinafter, “Jordanian Bank FATCA Letters”). Jordanian Bank FATCA letters caught many U.S. taxpayers by surprise; some even refuse to believe that they are obligated to provide this type of information to their banks. Yet, noncompliance with the requests of Jordanian Bank FATCA Letters may have grave consequences for US taxpayers.

FATCA Background

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to target tax noncompliance of U.S. taxpayers with foreign accounts. Since its enaction, this law established a new global standard for tax information exchange. More than 110 jurisdictions today operate under the worldwide reach of FATCA.

In essence, FATCA is used by U.S. authorities to obtain information regarding foreign accounts held by U.S. persons directly from foreign financial institutions by forcing these institutions to collect and send to the IRS information required by FATCA. Hence, FATCA effectively turns all FATCA-compliant foreign banks into IRS informants.

Additionally, FATCA requires U.S. taxpayers to report “Specified Foreign Assets” (this is a term of art in international tax law) on Forms 8938. Forms 8938 should be attached to the taxpayers’ U.S. tax returns and filed with the IRS.

Jordanian Bank FATCA Letters

FATCA is implemented worldwide through a network of bilateral treaties, which are divided in to Model 1 and Model 2 treaties. However, individual banks can also comply with FATCA without Model 1 and Model 2 treaties. A minority of countries follow this path, and the Kingdom of Jordan is one of them.

This means that Jordanian Bank FATCA Letters are sent out by Jordan banks not due to any Model 1 or Model 2 treaties between the United States and Jordan, but, rather, through direct FATCA compliance (i.e. Jordanian banks register with the IRS and provide the required information directly to the IRS).

The purpose of the Jordanian Bank FATCA Letters are similar to all other FATCA Letters – obtain the information required to be reported under FATCA by foreign financial institutions to the IRS. In particular, this includes information relevant to the account owner’s U.S. tax residency.

Impact of Jordanian Bank FATCA Letters on U.S. taxpayers with Undisclosed Foreign Accounts

Jordanian Bank FATCA Letters may have very important impact on U.S. taxpayers with undisclosed foreign accounts. In this article I want to emphasize the timing aspects of such letters.

By requesting FATCA information, Jordanian Bank FATCA Letters create a timetable for timely voluntary disclosure of the concerned U.S. taxpayers. First of all, the taxpayers who receive Jordanian Bank FATCA Letters have a deadline (ranging usually between 30-45 days, and, occasionally, 90 days) to file the letter with the bank. Since the bank sends the information supplied by U.S. taxpayers to the IRS, these U.S. taxpayers have a limited window of opportunity to timely disclose their foreign accounts. If a taxpayer refuses to provide the required information, the bank may still report him to the IRS as a “recalcitrant taxpayer” and even close his accounts.

Additionally, there is a more subtle impact of Jordanian Bank FATCA Letters on U.S. taxpayers – a notice of existence of FATCA and other U.S. tax reporting requirements. A lot of U.S. taxpayers are able to utilize Streamlined Procedures due to the fact that they did not know about the U.S. tax reporting requirements with respect to foreign accounts and foreign income. However, once U.S. taxpayers receive Jordanian Bank FATCA Letters, they can only claim their lack of knowledge with respect to prior years. It will be very difficult to sustain this argument with respect to current and future tax years.

Contact Sherayzen Law Office if You Received a FATCA Letter (from Jordan or from Any Other Country)

If you received a FATCA Letter from a foreign bank, contact Sherayzen Law Office for professional help. Our experienced legal team will thoroughly analyze your situation, propose the best strategy with respect to responding to the FATCA Letter, review your voluntary disclosure options and prepare all legal and tax documents to complete your voluntary disclosure.

Call Us Today to Schedule Your Confidential Consultation!

US Tax Consequences of the New Indian Gold Monetisation Scheme

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A recent article from Reuters discusses the appearance of the new Indian Gold Monetisation Scheme. The idea is to allow Indians to deposit gold into the banks in return for interest payments; in return, the Indian government is hoping to utilize the gold hoarded by its citizens to reduce gold imports.

While the idea is that the Indian Gold Monetisation Plan will be open to resident Indians only, it is likely that at least some US tax residents will be able to participate in the scheme either as US citizens and US permanent residents (who are US tax residents irrespective of where they live) or as Indian non-residents who never declared their non-residency status in India.

This article intends to explore some of the potential US tax problems that may arise as are result of participation in the Indian Gold Monetisation Scheme. The conclusions drawn in this article are preliminary and they may or may not reflect the actual IRS position in the future; the conclusions are and also should be treated simply as general discussion of the subject, not as a legal advice.

2015 Indian Gold Monetisation Scheme

In October 25, 2015, Indian Prime Minister Narendra Modi announced that a new Indian Gold Monetisation Scheme will be in place by the time of an ancient Hindu festival – Diwali (November 11, 2015). Under the scheme, Indian residents (as well as mutual funds and ETFs) will be able to use gold to open an essentially a fixed-deposit bank account (based on a gold certificate) with an Indian bank; in return, they will receive a gold certificate valued at the “prevailing gold price” at the time the account is opened and they will further receive interest on these gold deposits.

The gold will be collected by the Collection and Purity Testing Centers (CPTCs) certified by the Bureau of Indian Standards. The banks will issue the gold certificates against these gold deposits.

The new bank accounts will start earning interest after the deposited gold is refined into tradable gold bars or 30 days after the receipt of gold at the CPTCs or the bank’s designated branch – whichever is earlier.

There will be three types of fixed-deposit accounts under the Indian Gold Monetisation Scheme: short-term (1-3 years), medium term (5-7 years) and long-term (12-15 years). The banks will determine any premature withdrawal penalties.

Upon the maturity of the fixed-deposit account, the depositor will receive either the gold or the equivalent amount in rupees. The choice of receiving the gold or the rupees needs to be made at the time the account is opened.

Indian Tax Treatment of Interest and Capital Gains Earned As a Result of the Indian Gold Monetisation Scheme

In this Indian Gold Monetisation Scheme, there are three potential points of tax recognition by the participating depositors: capital gain on the original gold deposit, interest earned on the gold deposit at maturity and capital gain at the point of gold redemption (or principal redemption) at the then-current market prices.

The Indian government does not tax any of these three tax recognition events – i.e. neither capital gains nor the interest earned.

Potential US Tax Treatment of Interest Earned As Part of Indian Gold Monetisation Scheme

Despite the fact that Indian government does not tax the interest return on the gold certificates and absent any tax treaty changes, I believe that the most likely outcome is that this interest will be taxed as ordinary income in the United States. There is some marginal potential for the interest to be treated as collectible gain, but I just do not see this as a likely scenario when the IRS has a chance to make a ruling on it.

Potential Problems in US Tax Treatment of the Initial Deposit of Gold to Obtain Gold Certificates under the Indian Gold Monetisation Scheme

Generally, in the United States, any gain on the sale of gold bars and gold jewelry is treated as a capital gain from the sale of a collectible subject to 28% tax gain. There is a potential additional 3.8% Net Investment Income Tax as a result of Obamacare.

The question really becomes whether the opening of the gold account under the Gold Monetisation Scheme, where the gold is being melted into bars and the depositor receives a gold certificate with a rupee account at fair market value, should be considered as a sale or exchange of gold or is this just a 1031 exchange of the like properties?

The answer cannot be given with any certainty at this point, because the IRS has made no rulings on this very subject. However, it is possible that such an even will be treated by the IRS as a taxable exchange, because the gold is transformed into a rupees-based deposit account based on its market value – i.e. the number of rupees given to the depositor is equivalent to the fair market value, not the cost-basis that the depositor has at the point the gold is given to CPTCs.

On the other hand, the IRS could agree with an argument that, under the Indian Gold Monetisation Scheme, the gold is nothing but a guarantee for the rupee deposit account. Since the depositor receives a Gold Certificate and can get the same gold back upon the maturity of the account, it does not seem fair to tax the gain on the gold at this point (this argument, may not work if the deposit chooses to receive the original deposit back in rupees). If the 1031 rules are used to analyze this situation, the majority of secondary sources (such as EFT law firm opinions) seem to indicate that there may not be a taxable exchange for US tax purposes in this case. I tend to agree with this position in most situations, but it is too early to make the final determination at this point.

There is actually merit to both arguments and, until the gold certificates are actually issued and all facts can be analyzed, it is difficult to state what the IRS position will be.

Potential US Tax Treatment of the Gold/Rupee Redemption Based on Gold Certificates Issued under the Indian Gold Monetisation Scheme

There are two issues here: (1) is the gold redemption considered to be a taxable event; (2) is the rupee redemption under the gold certificates considered to be a taxable and how should it be taxed.

1. Gold Redemption

Let’s analyze the physical gold redemption first. It appears that the deposit will be able to obtain the same amount of gold irrespective of the changes in value since the original gold was melted into bars at CPTCs. This means that, if the 1 gram of gold is originally melted at 2,500 rupees, and rises in price to 3,000 rupees within three years, the deposit will still get one gram of gold. There seems to be a gain here of 500 rupees, but there is no actual monetization of gain. This is a hypothetical gain on the conversion of the gold certificate into physical gold.

The taxation of gain in a situation where one form of gold is transformed into another form of gold is one of the most complex topics in the US taxation of collectibles. Often times, even the same certificates may be taxed in a different manner.

Due to the fact that this topic is heavily fact-dependent with little IRS official guidance, it is best to delay the answer of this question until the time when these certificates are issued and can be analyzed in the actual factual context. At that time, if you have any questions regarding taxation of your gold certificate, contact Sherayzen Law Office directly.

2. Rupee Redemption

Unlike the gold redemption (which, depending on the circumstances, may not be taxable at all), the issue of taxability of the rupee redemption of the gold is fairly straightforward – this is a taxable event where gold is exchanged for rupees. Most likely, this exchange will be taxed in the United States as a collectible capital gain rate of 28% percent.

However, there are a couple of complications with respect to calculating the collectible gain. First, it should be remembered that the collectible gain should be calculated in US dollars (contact Sherayzen Law Office directly for more information). Second, the cost-basis of the gold will depend on whether the conversion of gold into a Gold Certificate is considered to be a taxable gain. If it is, then, the cost basis would be the fair market value at the time the gold is submitted by the depositor to be melted into bars at CPTCs. If it is not, then the original cost-basis (i.e. what the gold was actually acquired for) will be used in the determination of the collectible gain.

Other Issues Regarding 2015 Indian Gold Monetisation Scheme

In addition to US collectible and interest tax issues discussed above, investing through Indian Gold Monetisation Scheme may bring forth other US tax requirements. In particular, I wish to emphasize here that accounts opened through Indian Gold Monetisation Scheme are most likely reportable accounts for FBAR and Form 8938 purposes.

Contact Sherayzen Law Office for Help With US Tax Compliance

If you are a US person who has foreign accounts, foreign assets and/or foreign income, you should contact Sherayzen Law Office for professional help with your US tax compliance. Our experienced legal team, headed by the firm’s founder, attorney Eugene Sherayzen, will thoroughly analyze your case, identify your current and past US international tax compliance issues, develop a compliance plan for you (whether for current-year compliance or as part of your voluntary disclosure), and implement this plan, including preparation of all legal documents and tax forms.

US international tax laws are complex and should be handled by professionals with deep knowledge of the subject matter. This why You should contact Sherayzen Law Office Now!