New Orleans 2000 meeting

Meeting Summary
  • ALTERNATIVE OFFSHORE STRUCTURESMilton Grundy
    • Contract v ownership
      Insurance and quasi-insurance
      Treaty protection
      Second-hand vehicles
      Valuation
      Postponement
      Much can be done by substituting contract for ownership. A form of contract commonly used is the policy of life assurance. This essentially is a combination of two elements – investment management and life cover, and it can take many forms – e.g. the policy operating as a vehicle for direct investment, or the policy which omits life cover generally or from time to time.

      UK residents have learned to postpone capital gains tax by using a company resident in a treaty jurisdiction and to postpone income tax with settlements on children. A structure may combine the two. A UK resident may postpone income tax without giving income to children by use of a “second-hand” company, policy or trust; the flexibility of the Thin Trust make it a useful vehicle in this context. Similar structures may be useful to taxpayers in other jurisdictions.

      Assets which cannot be valued are difficult to tax. Discretionary trusts, undivided partnership profits and policies of uncertain value offer examples.

      Postponement of a tax liability for a number of years is effectively a form of avoidance, provided the tax not paid is well invested in the meanwhile.

  • ALTERNATIVE OFFSHORE STRUCTURESMilton Grundy
    • Contract v ownership
      Insurance and quasi-insurance
      Treaty protection
      Second-hand vehicles
      Valuation
      Postponement
      Much can be done by substituting contract for ownership. A form of contract commonly used is the policy of life assurance. This essentially is a combination of two elements – investment management and life cover, and it can take many forms – e.g. the policy operating as a vehicle for direct investment, or the policy which omits life cover generally or from time to time.

      UK residents have learned to postpone capital gains tax by using a company resident in a treaty jurisdiction and to postpone income tax with settlements on children. A structure may combine the two. A UK resident may postpone income tax without giving income to children by use of a “second-hand” company, policy or trust; the flexibility of the Thin Trust make it a useful vehicle in this context. Similar structures may be useful to taxpayers in other jurisdictions.

      Assets which cannot be valued are difficult to tax. Discretionary trusts, undivided partnership profits and policies of uncertain value offer examples.

      Postponement of a tax liability for a number of years is effectively a form of avoidance, provided the tax not paid is well invested in the meanwhile.

  • ALTERNATIVES TO TRUSTS : Probate Planning, Corporate StructuresMichael Robison
    • Constructive probate planning
      Non-trust structures designed to avoid death duties
      The client may have an English domicile of origin, acquire US citizenship, become resident in Canada and finally reside in Cayman. On death, his estate could be liable to UK inheritance tax, to US estate tax and to Canadian tax on a deemed disposal of his assets. The client does not want to use a trust – which he sees giving trustees too much power. But he would like to avoid full probate – which costs money and make his bequests public knowledge. He wants rapid transfer of his property, to have asset protection and to avoid claims of dependants. He wants to avoid any transfer tax. One solution is for him to hold property as a joint tenant with his intended beneficiary. He may also name beneficiaries of insurance policies or deferred income plans.

      Another solution is to use a corporation or partnership, with class A and class B interest – class A giving the client control, income, a right of retraction or other rights, and class B benefiting his intended beneficiaries – perhaps a discretionary trust.

      An alternative approach is to plan for probate in a suitable jurisdiction. Historically, a court will entertain an application for probate if the deceased was domiciled or resident in the jurisdiction or if the estate includes significant property sited in the jurisdiction. The executor may hesitate to seek probate in a US state: this could tempt the IRS to assert that the deceased was “resident” in the US. The client may have a separate minor will dealing with his property in that state. Multiple wills have been held to be acceptable under the law of Ontario.

      The Cayman Islands Court will grant probate if the deceased is domiciled in Cayman, or if he has real or personal property in Cayman.

  • ALTERNATIVES TO TRUSTS : Probate Planning, Corporate StructuresMichael Robison
    • Constructive probate planning
      Non-trust structures designed to avoid death duties
      The client may have an English domicile of origin, acquire US citizenship, become resident in Canada and finally reside in Cayman. On death, his estate could be liable to UK inheritance tax, to US estate tax and to Canadian tax on a deemed disposal of his assets. The client does not want to use a trust – which he sees giving trustees too much power. But he would like to avoid full probate – which costs money and make his bequests public knowledge. He wants rapid transfer of his property, to have asset protection and to avoid claims of dependants. He wants to avoid any transfer tax. One solution is for him to hold property as a joint tenant with his intended beneficiary. He may also name beneficiaries of insurance policies or deferred income plans.

      Another solution is to use a corporation or partnership, with class A and class B interest – class A giving the client control, income, a right of retraction or other rights, and class B benefiting his intended beneficiaries – perhaps a discretionary trust.

      An alternative approach is to plan for probate in a suitable jurisdiction. Historically, a court will entertain an application for probate if the deceased was domiciled or resident in the jurisdiction or if the estate includes significant property sited in the jurisdiction. The executor may hesitate to seek probate in a US state: this could tempt the IRS to assert that the deceased was “resident” in the US. The client may have a separate minor will dealing with his property in that state. Multiple wills have been held to be acceptable under the law of Ontario.

      The Cayman Islands Court will grant probate if the deceased is domiciled in Cayman, or if he has real or personal property in Cayman.

  • E-COMMERCE : OECD and EU DevelopmentsLaura Edgar
    • Why does the Internet pose a problem for the tax authorities?
      The principles applicable to taxation of electronic commerce
      The application of the permanent establishment concept
      Characterisation of payments
      Services supplied by electronic means: proposed EU directive
      International cooperation on consumption taxes
      Collection mechanisms and information and identification requirements
      E-commerce creates problems not foreseen when VAT, Sales Tax and other taxes were devised. The lack of physical presence fits uneasily with the concept of a “permanent establishment” and gives no indication of the location of supplier or customer. Records can be hard to access, transactions are difficult to monitor and enforcement is generally difficult.

      The Committee of Fiscal Affairs of the OECD has enunciated some principles – neutrality; efficiency; certainty and simplicity; effectiveness and fairness; flexibility. The essential aim is that e-commerce should not suffer any special tax, but that existing taxes should be applicable to e-commerce. Technical advisory groups have been established. The OECD model treaty’s provisions on permanent establishment are under review. It is considered that a web-site is not itself a PE, but a server may be if it is at the disposal of the taxpayer and not simply leasing space to the taxpayer. A PE does not require personnel, nor is an ISP necessarily an agent of the site owner. One difficulty is that a server may be located anywhere. Another is that several servers may be used. Moreover, the server can be moved, and enforcement may be difficult.

      Some members of a Technical Advisory Group set up by the Committee considered that a payment for download of information is a royalty; but this was a minority view and would offend against the concept of “neutrality” between the taxation of e-commerce and the taxation of traditional business. The majority considered that many payments such as those for accessing online reports, for downloading music or software, and for web-site hosting give rise to business profits and that only a limited class of payments – such as the payment for the right to copy and commercially exploit a product – should be treated as royalties.

      Consumption tax issues give rise to further problems. An EU Directive is under consideration, to deal with the VAT treatment of electronically delivered services: businesses will be required to register transactions in excess of 100,000 euros where services are supplied to non-business customers within the EU. This may lead to “VAT shopping” – registration in countries with lowest VAT rates. It is going to be necessary for the supplier to check on the status of the customer or the authenticity of a VAT number and the genuineness of a customer’s purported location; some of these problems may be solved by technological developments, but many questions remain.

  • E-COMMERCE : OECD and EU DevelopmentsLaura Edgar
    • Why does the Internet pose a problem for the tax authorities?
      The principles applicable to taxation of electronic commerce
      The application of the permanent establishment concept
      Characterisation of payments
      Services supplied by electronic means: proposed EU directive
      International cooperation on consumption taxes
      Collection mechanisms and information and identification requirements
      E-commerce creates problems not foreseen when VAT, Sales Tax and other taxes were devised. The lack of physical presence fits uneasily with the concept of a “permanent establishment” and gives no indication of the location of supplier or customer. Records can be hard to access, transactions are difficult to monitor and enforcement is generally difficult.

      The Committee of Fiscal Affairs of the OECD has enunciated some principles – neutrality; efficiency; certainty and simplicity; effectiveness and fairness; flexibility. The essential aim is that e-commerce should not suffer any special tax, but that existing taxes should be applicable to e-commerce. Technical advisory groups have been established. The OECD model treaty’s provisions on permanent establishment are under review. It is considered that a web-site is not itself a PE, but a server may be if it is at the disposal of the taxpayer and not simply leasing space to the taxpayer. A PE does not require personnel, nor is an ISP necessarily an agent of the site owner. One difficulty is that a server may be located anywhere. Another is that several servers may be used. Moreover, the server can be moved, and enforcement may be difficult.

      Some members of a Technical Advisory Group set up by the Committee considered that a payment for download of information is a royalty; but this was a minority view and would offend against the concept of “neutrality” between the taxation of e-commerce and the taxation of traditional business. The majority considered that many payments such as those for accessing online reports, for downloading music or software, and for web-site hosting give rise to business profits and that only a limited class of payments – such as the payment for the right to copy and commercially exploit a product – should be treated as royalties.

      Consumption tax issues give rise to further problems. An EU Directive is under consideration, to deal with the VAT treatment of electronically delivered services: businesses will be required to register transactions in excess of 100,000 euros where services are supplied to non-business customers within the EU. This may lead to “VAT shopping” – registration in countries with lowest VAT rates. It is going to be necessary for the supplier to check on the status of the customer or the authenticity of a VAT number and the genuineness of a customer’s purported location; some of these problems may be solved by technological developments, but many questions remain.

  • HARMFUL TAX COMPETITION : The Real Tax HavensMarshall Langer
    • Attacks on tax havens began with the US 1981 Gordon Report
      The OECD and EU have attacked harmful tax havens
      The US will legislate against uncooperative tax havens
      Those leading the attack are themselves very significant tax havens
      Attacks on tax havens began with the 1981 Gordon Report. Gordon approved of low taxes but called for sharing of information. Strangely, jurisdictions with MLAT’s are being attacked. Joe Guttentag has been for the last two years the chairman of the OECD Fiscal Affairs Committee, and the US is certainly behind the OECD initiative. Gordon also observed that many countries not generally thought of as tax havens offer tax haven facilities.

      The member countries of OECD did a self-review of their preferential regimes: many important aspects of their tax regimes were omitted. And see the Daniel J. Mitchell Report.

      There are also strange omissions from the OECD list. A number of OECD members have serious tax haven facilities – notably the US and UK. Banks in the US have been paying tax-free interest to non-resident aliens since 1921: the law cannot be changed without consequences too grave to be contemplated. The position was reviewed by Congress in 1966: a change was made for 1972; the date was twice postponed; after further testimony, the exemption was re-instated in 1976. It is now a permanent feature of the US regime. So too is the exemption from tax on capital gains (excluding those from real estate) afforded to non-resident aliens.

      There is no reporting requirement for bank interest paid to a non-resident alien, unless a Canadian resident. Banks may, if it is “easier”, report interest paid to all non-residents.

      Portfolio interest is exempt in the hands of a non-resident alien – the use of e.g. the Netherlands Antilles treaty being no longer necessary. Estate tax on US-situs assets is easily avoided by use of a foreign corporation. The use of foreign flag ships to avoid US tax is general. Despite all this, the US is omitted from the OECD list.

      Deposit Interest Retention Tax in Ireland applies to bank interest paid to residents. It does not apply to non-residents. The exemption has been much abused – and it seems likely that the US exemption is similarly abused.

      Austrian bank secrecy seems to be surviving. Holding company regimes are under review, but not those in Hungary or the LLC in the US. Iceland has enacted its 5% law after the OECD report was published. The OECD has not complained about the Swiss forfait or the UK “remittance basis” for the non-domiciled. Special tax regimes are offered by France and Hungary; Italy continues to tolerate Campione; Japan has repealed its 15% withholding tax on interest; Portugal, Spain and other countries are offering new low-tax facilities.

  • HARMFUL TAX COMPETITION : The Real Tax HavensMarshall Langer
    • Attacks on tax havens began with the US 1981 Gordon Report
      The OECD and EU have attacked harmful tax havens
      The US will legislate against uncooperative tax havens
      Those leading the attack are themselves very significant tax havens
      Attacks on tax havens began with the 1981 Gordon Report. Gordon approved of low taxes but called for sharing of information. Strangely, jurisdictions with MLAT’s are being attacked. Joe Guttentag has been for the last two years the chairman of the OECD Fiscal Affairs Committee, and the US is certainly behind the OECD initiative. Gordon also observed that many countries not generally thought of as tax havens offer tax haven facilities.

      The member countries of OECD did a self-review of their preferential regimes: many important aspects of their tax regimes were omitted. And see the Daniel J. Mitchell Report.

      There are also strange omissions from the OECD list. A number of OECD members have serious tax haven facilities – notably the US and UK. Banks in the US have been paying tax-free interest to non-resident aliens since 1921: the law cannot be changed without consequences too grave to be contemplated. The position was reviewed by Congress in 1966: a change was made for 1972; the date was twice postponed; after further testimony, the exemption was re-instated in 1976. It is now a permanent feature of the US regime. So too is the exemption from tax on capital gains (excluding those from real estate) afforded to non-resident aliens.

      There is no reporting requirement for bank interest paid to a non-resident alien, unless a Canadian resident. Banks may, if it is “easier”, report interest paid to all non-residents.

      Portfolio interest is exempt in the hands of a non-resident alien – the use of e.g. the Netherlands Antilles treaty being no longer necessary. Estate tax on US-situs assets is easily avoided by use of a foreign corporation. The use of foreign flag ships to avoid US tax is general. Despite all this, the US is omitted from the OECD list.

      Deposit Interest Retention Tax in Ireland applies to bank interest paid to residents. It does not apply to non-residents. The exemption has been much abused – and it seems likely that the US exemption is similarly abused.

      Austrian bank secrecy seems to be surviving. Holding company regimes are under review, but not those in Hungary or the LLC in the US. Iceland has enacted its 5% law after the OECD report was published. The OECD has not complained about the Swiss forfait or the UK “remittance basis” for the non-domiciled. Special tax regimes are offered by France and Hungary; Italy continues to tolerate Campione; Japan has repealed its 15% withholding tax on interest; Portugal, Spain and other countries are offering new low-tax facilities.

  • INTERNATIONAL TAX PLANNING THROUGH THE USGraham Taylor
    • The concept of tax neutral US entities
      What kinds of US entities are tax neutral?LLC’s -Partnerships – Indian Tribes – Insurance and Annuities – Charities – Trusts – US Holding Companies – US Licensing Companies – VEBA’s and ‘Rabbi Trusts’
      Why would a non-US person want a US tax neutral entity?Treaty-based Withholding Tax Relief – Anti-Home Country CFC Arbitrage – US Capital Markets Access – Home Country Offshore Estate Planning – US Political and Economic Stability (“Warehousing”) – Appearances
      What are the applicable US tax rules?
      Does the US government have a position on this? – The “Hybrid Ruling” Saga
      What are the practical uses going on today?
      Is this a future trend?
      Tax-neutral entities pass taxability through to their members. LLC’s began in Wyoming and have spread to all the US States. Delaware and some other States permit a single-member LLC: this is treated as a tax nullity. Otherwise, LLC’s are treated as partnerships, which are “pass through” vehicles.

      An Indian tribe is a tax-exempt sovereign entity. Many have their own corporations code. Such a corporation, if wholly-owned by the tribe, is also tax-exempt. They are used for casinos and other enterprises.

      Life assurance companies are lightly taxed and can effectively impart tax exemption to their policies: the income and gains of a portfolio supporting a policy are tax-free. A policy can be used as a wrapper for a hedge fund to insulate the investor from annual gains arising in the fund.

      Private foundations are easy to create, but are subject to strict rules of governance. These restrictions are circumvented by the use of an offshore foundation, which may be arrived at by use of an LLC owned by the US foundation, which is treated as a “fiscal nullity” under the US “check the box” rules.

      Grantor trusts are transparent: the trust is treated as an extension of the grantor. They are easy to create. They may be used to simplify the grantor’s tax reporting obligations. Fully distributing trusts are similarly transparent. An accumulating trust is taxed like an individual; subsequent distributions carry a credit for the tax previously paid.

      A US corporation can deduct 100% of dividends from a more than 80% owned US subsidiary; the 80/20 rule exempts outgoing dividends derived from an active foreign business. Taking into account the credit given for foreign tax, a US corporation may function as a conduit, like an LLC. A similar regime can apply to a royalty company owned by foreign persons.

      The VEBA is a Voluntary Employees Benefit Association. Contributions are deductible and investment proceeds are tax-free. Benefits can be free of estate tax.

      The Rabbi Trust is a deferred compensation plan. The employer gets no deduction and is treated as the owner of the assets until they are paid out. The Rabbi Trust is advantageous where the employer is non-resident and the employee is (for the time being at any rate) a US taxpayer.

      An LLC can benefit from the older US treaties – e.g. that with Sweden. Although the US will treat an LLC as transparent, other countries – e.g. Canada and Japan – may treat it as opaque. A Texas LLC pays a small State tax: this feature exempts its income from, for example, New Zealand tax where a New Zealand taxpayer is the owner. A US holding company may be used as a US Stock Exchange listing vehicle and foreign income can pass without US tax to foreign shareholders. Similarly, a grantor trust with an non-US grantor offers a tax-free “pass through” of foreign income to foreign beneficiaries.

  • INTERNATIONAL TAX PLANNING THROUGH THE USGraham Taylor
    • The concept of tax neutral US entities
      What kinds of US entities are tax neutral?LLC’s -Partnerships – Indian Tribes – Insurance and Annuities – Charities – Trusts – US Holding Companies – US Licensing Companies – VEBA’s and ‘Rabbi Trusts’
      Why would a non-US person want a US tax neutral entity?Treaty-based Withholding Tax Relief – Anti-Home Country CFC Arbitrage – US Capital Markets Access – Home Country Offshore Estate Planning – US Political and Economic Stability (“Warehousing”) – Appearances
      What are the applicable US tax rules?
      Does the US government have a position on this? – The “Hybrid Ruling” Saga
      What are the practical uses going on today?
      Is this a future trend?
      Tax-neutral entities pass taxability through to their members. LLC’s began in Wyoming and have spread to all the US States. Delaware and some other States permit a single-member LLC: this is treated as a tax nullity. Otherwise, LLC’s are treated as partnerships, which are “pass through” vehicles.

      An Indian tribe is a tax-exempt sovereign entity. Many have their own corporations code. Such a corporation, if wholly-owned by the tribe, is also tax-exempt. They are used for casinos and other enterprises.

      Life assurance companies are lightly taxed and can effectively impart tax exemption to their policies: the income and gains of a portfolio supporting a policy are tax-free. A policy can be used as a wrapper for a hedge fund to insulate the investor from annual gains arising in the fund.

      Private foundations are easy to create, but are subject to strict rules of governance. These restrictions are circumvented by the use of an offshore foundation, which may be arrived at by use of an LLC owned by the US foundation, which is treated as a “fiscal nullity” under the US “check the box” rules.

      Grantor trusts are transparent: the trust is treated as an extension of the grantor. They are easy to create. They may be used to simplify the grantor’s tax reporting obligations. Fully distributing trusts are similarly transparent. An accumulating trust is taxed like an individual; subsequent distributions carry a credit for the tax previously paid.

      A US corporation can deduct 100% of dividends from a more than 80% owned US subsidiary; the 80/20 rule exempts outgoing dividends derived from an active foreign business. Taking into account the credit given for foreign tax, a US corporation may function as a conduit, like an LLC. A similar regime can apply to a royalty company owned by foreign persons.

      The VEBA is a Voluntary Employees Benefit Association. Contributions are deductible and investment proceeds are tax-free. Benefits can be free of estate tax.

      The Rabbi Trust is a deferred compensation plan. The employer gets no deduction and is treated as the owner of the assets until they are paid out. The Rabbi Trust is advantageous where the employer is non-resident and the employee is (for the time being at any rate) a US taxpayer.

      An LLC can benefit from the older US treaties – e.g. that with Sweden. Although the US will treat an LLC as transparent, other countries – e.g. Canada and Japan – may treat it as opaque. A Texas LLC pays a small State tax: this feature exempts its income from, for example, New Zealand tax where a New Zealand taxpayer is the owner. A US holding company may be used as a US Stock Exchange listing vehicle and foreign income can pass without US tax to foreign shareholders. Similarly, a grantor trust with an non-US grantor offers a tax-free “pass through” of foreign income to foreign beneficiaries.

  • NEW PROBLEMS; NEW SOLUTIONS : Money Laundering: the Canadian ApproachDoug Ewens
    • A round-up of recent developments
      Capital is nowadays much more mobile; this mobility brings in its train the problems of money-laundering and the concept of “harmful” tax practices. Both are being attacked. The EU and OECD are attacking the tax practices which erode the tax base of high-tax countries; the UN and the Financial Action Task Force of the G7 have taken initiatives against money-laundering. Offshore jurisdictions are anxious not to appear to be bases for money-laundering; their reactions to the attack on “harmful” tax competition are more various.

      In Canada, money-laundering became a crime in 1988; some shortcomings highlighted by FATF are remedied by Bill C-22. This has three main elements – record keeping, reporting funds crossing the border and the establishment of a Financial Intelligence Unit. The Bill has been enacted, but was opposed by the Canadian Bar Association. It delegates to the private sector the job of deciding what transactions are “suspicious”. It creates offences of failing to report and “tipping off”; it provides for searches – of a business without a warrant, of a house with a warrant. It provides for disclosure of information to other institutions, including FIU’s abroad. The Canadian legislation is less rigorous than that of the United States.

      There are concerns about privacy, about powers of search and seize and about the cost – the US experience being that the cost of monitoring millions of money transactions is out of proportion to the recovery from prosecutions and this does not take account of the cost burden shouldered by the private sector. The legislation may well be challenged under s.8 of the Canadian Charter of Rights and Freedoms (c.f. the fourth amendment to the US constitution and Art. 12 of the UN Declaration of Human Rights).

  • NEW PROBLEMS; NEW SOLUTIONS : Money Laundering: the Canadian ApproachDoug Ewens
    • A round-up of recent developments
      Capital is nowadays much more mobile; this mobility brings in its train the problems of money-laundering and the concept of “harmful” tax practices. Both are being attacked. The EU and OECD are attacking the tax practices which erode the tax base of high-tax countries; the UN and the Financial Action Task Force of the G7 have taken initiatives against money-laundering. Offshore jurisdictions are anxious not to appear to be bases for money-laundering; their reactions to the attack on “harmful” tax competition are more various.

      In Canada, money-laundering became a crime in 1988; some shortcomings highlighted by FATF are remedied by Bill C-22. This has three main elements – record keeping, reporting funds crossing the border and the establishment of a Financial Intelligence Unit. The Bill has been enacted, but was opposed by the Canadian Bar Association. It delegates to the private sector the job of deciding what transactions are “suspicious”. It creates offences of failing to report and “tipping off”; it provides for searches – of a business without a warrant, of a house with a warrant. It provides for disclosure of information to other institutions, including FIU’s abroad. The Canadian legislation is less rigorous than that of the United States.

      There are concerns about privacy, about powers of search and seize and about the cost – the US experience being that the cost of monitoring millions of money transactions is out of proportion to the recovery from prosecutions and this does not take account of the cost burden shouldered by the private sector. The legislation may well be challenged under s.8 of the Canadian Charter of Rights and Freedoms (c.f. the fourth amendment to the US constitution and Art. 12 of the UN Declaration of Human Rights).

  • PRE-EXPATRIATION TAX PLANNINGRobert F. Hudson
    • Avoid triggering thresholds of deemed tax expatriation
      Minimise adverse impact of anti-expatriation tax rules
      Partnerships: US estate tax and US situs assets
      Deferred sales techniques to avoid the 10-year recharacterisation rules
      Proper financial disclosures to avoid stiff US penalties
      An “exit tax” was proposed by the US Treasury in 1995. It was not enacted, but the existing regime was tightened up in 1996. The 10-year rule now applies to long-term green card holders. And some measure of objectivity was introduced : the threshold (1999) is $552,000 net worth or $110,000 average taxable income. The net worth threshold may be avoided by avoiding trusts benefiting the intending expatriate, by using pre-nuptials and post-nuptials or by timing expatriation before inheriting or before stock options develop value.

      There are exemptions for dual nationals since birth and for certain individuals with connections with a foreign country; a tax ruling is requisite – and may be obtained in advance (see, now, Notice 98-34). The “Reed Amendment” classifies as an excludable alien an individual who has expatriated for tax avoidance purposes: the Amendment has not so far been implemented, but it is understood that a tax ruling takes an individual outside the scope of the Amendment.

      The 10-year regime bites on US assets only: non-US income is not taxable and non-US assets are not subject to estate tax. The Rangel-Matsui Bill, which would resurrect the 1995 proposals, seems unlikely at present to be enacted.

      A CFC-type company owing US-situs assets is subject to a “look-through” rule. The rule does not apply to a partnership (e.g. check-the-box BVI corporation taxed as a partnership). There are techniques of postponing gains beyond the 10-year period. (And see Steven Gray’s contribution to Vol 1 of the Journal.)

      Financial disclosure is required on expatriation – form 8854. There are penalties for failure. The form is a pre-requisite for a ruling.

  • PRE-EXPATRIATION TAX PLANNINGRobert F. Hudson
    • Avoid triggering thresholds of deemed tax expatriation
      Minimise adverse impact of anti-expatriation tax rules
      Partnerships: US estate tax and US situs assets
      Deferred sales techniques to avoid the 10-year recharacterisation rules
      Proper financial disclosures to avoid stiff US penalties
      An “exit tax” was proposed by the US Treasury in 1995. It was not enacted, but the existing regime was tightened up in 1996. The 10-year rule now applies to long-term green card holders. And some measure of objectivity was introduced : the threshold (1999) is $552,000 net worth or $110,000 average taxable income. The net worth threshold may be avoided by avoiding trusts benefiting the intending expatriate, by using pre-nuptials and post-nuptials or by timing expatriation before inheriting or before stock options develop value.

      There are exemptions for dual nationals since birth and for certain individuals with connections with a foreign country; a tax ruling is requisite – and may be obtained in advance (see, now, Notice 98-34). The “Reed Amendment” classifies as an excludable alien an individual who has expatriated for tax avoidance purposes: the Amendment has not so far been implemented, but it is understood that a tax ruling takes an individual outside the scope of the Amendment.

      The 10-year regime bites on US assets only: non-US income is not taxable and non-US assets are not subject to estate tax. The Rangel-Matsui Bill, which would resurrect the 1995 proposals, seems unlikely at present to be enacted.

      A CFC-type company owing US-situs assets is subject to a “look-through” rule. The rule does not apply to a partnership (e.g. check-the-box BVI corporation taxed as a partnership). There are techniques of postponing gains beyond the 10-year period. (And see Steven Gray’s contribution to Vol 1 of the Journal.)

      Financial disclosure is required on expatriation – form 8854. There are penalties for failure. The form is a pre-requisite for a ruling.

  • UNCLE SAM REACHES OUT : Current US Money Laundering LawBruce Zagaris
    • Predicate Crimes
      Application to Non-US Citizens
      Place of Occurrence of Acts
      Proposed Extension of US Money Laundering Laws
      International Politics of US Money Laundering Policies and Laws
      The US is applying its money-laundering laws extra-territorially. 18US Codes 1956 and 1957 create offences of knowingly taking the proceeds from specified unlawful activities (“SUA’s”) or laundering their proceeds. Knowledge or “wilful blindness” is a necessary feature. The statute applies to US persons everywhere, but requires at least minimal activity in the US. Section 1957 requires the involvement of a financial institution located in the US, but s1956 does not.

      The SUA’s do not extend to simple fraud or corruption, but do cover wire or mail fraud, which in some cases has enabled tax fraud to be prosecuted.

      States also have money-laundering statutes, some of which have broad predicate offences (e.g., any felony). In US v Stein the Court held that wire transfers constituted electronic presence. Further Federal Bills are on their way: they will provide extra-territorial sanctions. The US has also encouraged international organisations to proactively regulate and even to impose countermeasures over a broad range of activities – the FSF (whose work has now been taken over by the IMF), the OECD and the FATF. The US Treasury’s “Adviseries” make it clear that people dealing with institutions in the countries concerned must exercise extreme care.

      “Operation Casablanca” offended the Mexican Government. The new withholding tax rules are going to result in some investment leaving the United States. The Foreign Narcotics Kingpin Designation Act will result in considerable compliance problems. Generally, the US appears to be going too far too fast: the US Government needs to consult with governments of foreign countries and with the private sector.

  • UNCLE SAM REACHES OUT : Current US Money Laundering LawBruce Zagaris
    • Predicate Crimes
      Application to Non-US Citizens
      Place of Occurrence of Acts
      Proposed Extension of US Money Laundering Laws
      International Politics of US Money Laundering Policies and Laws
      The US is applying its money-laundering laws extra-territorially. 18US Codes 1956 and 1957 create offences of knowingly taking the proceeds from specified unlawful activities (“SUA’s”) or laundering their proceeds. Knowledge or “wilful blindness” is a necessary feature. The statute applies to US persons everywhere, but requires at least minimal activity in the US. Section 1957 requires the involvement of a financial institution located in the US, but s1956 does not.

      The SUA’s do not extend to simple fraud or corruption, but do cover wire or mail fraud, which in some cases has enabled tax fraud to be prosecuted.

      States also have money-laundering statutes, some of which have broad predicate offences (e.g., any felony). In US v Stein the Court held that wire transfers constituted electronic presence. Further Federal Bills are on their way: they will provide extra-territorial sanctions. The US has also encouraged international organisations to proactively regulate and even to impose countermeasures over a broad range of activities – the FSF (whose work has now been taken over by the IMF), the OECD and the FATF. The US Treasury’s “Adviseries” make it clear that people dealing with institutions in the countries concerned must exercise extreme care.

      “Operation Casablanca” offended the Mexican Government. The new withholding tax rules are going to result in some investment leaving the United States. The Foreign Narcotics Kingpin Designation Act will result in considerable compliance problems. Generally, the US appears to be going too far too fast: the US Government needs to consult with governments of foreign countries and with the private sector.

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