It is a well-known occurrence that when the future seems somewhat uncertain in the home country that many look to the North, that is, the United States, as a haven of financial security. Some make travel arrangements to time the delivery date so that children are born on U.S. soil to secure for them ease of future entry into the U.S.A. and for gaining citizenship. Others keep U.S. dollar bank and investment accounts to protect against eventual devaluation of our home currency. The financially more successful amongst us may move to the US to gain resident alien status ("green card" status) or secure an investor's visa to protect against economic and political risk.
However, many of those who sought or are seeking refuge in the U.S.A. are not fully aware of the actual costs of it! In the following we would like to shed some light on the potential implications of three important pieces of U.S. legislation, namely FBAR (Foreign Bank Account Reporting Act), HIRE (Hiring Incentives to Restore Employment Act) and FATCA (Foreign Account Tax Compliance Act), that have serious implications for these strategies.
In simple terms, these three pieces of legislation could be summarized as follows:
The FBAR prescribes that all U.S. persons should report their foreign bank accounts by June 30 of each year.
The HIRE broadens the scope of reportable assets by including direct and indirect financial benefits received (for example, market-determined rental charge for usage of real estate)
The FATCA imposes a reporting obligation on all foreign banks and other financial institutions to report all accounts held by U.S. persons (effective as of the 1st of July 2014).
Originally the qualification of an individual to be considered "a U.S. person" under FBAR was quite narrow and included only those who had a lawful admission for permanent alien residence (green card holders) and those who spent more than 183 days in a year in the US. However, in October of 2008 the IRS revised the FBAR instructions and further expanded the definition of a "U.S. person" by also including persons "in and doing business in the United States."
The IRS Notice 2011-34, issued in connection with the launch of FATCA, lists six indications of a U.S. person status:
US citizenship or lawful permanent alien resident (green card) status;
A US birthplace;
A U.S. residence address or a U.S. correspondence address (including a U.S. P.O. box); or
Standing instructions to transfer funds to an account maintained in the United States or directions regularly received from a U.S. address; or
An "in care of" address or a "hold mail' address that is the sole address with respect to the client; or
A power of attorney or signatory authority granted to a person with a U.S. address.
Under U.S. Internal Revenue Service code, all U.S. persons must pay tax on their worldwide income and gains, regardless of their residency. The trickiness of the issue of the IRS reclassifying a non-resident alien as a U.S. person is the fact that this reclassification is done as a "rebuttable presumption," which means that the reclassification will stand until proven otherwise. Therefore, this reclassification will stand as fact until the non-resident alien can prove to the IRS beyond reasonable doubt that the reclassification was based in incorrect facts and circumstances.
The fact that a foreign bank would face a penalty of 30% withholding tax and/or run the risk of losing its U.S. dollar correspondent banking relationship creates a situation where almost all foreign banks have or will enter into an agreement with the IRS and report under FATCA. It still remains to be seen how sovereign states will react when the U.S. starts eroding their tax base by claiming the right to tax many of the country's top income earners who have "Americanized" their financial security.
The bottom line is that what looked like a golden opportunity in the past has now lost its sheen. This recent extension of the already long arm of the U.S. Taxman brings a growing awareness that belonging to the group of "accidental gringos" who seek economic and/or financial refuge in the U.S. has become an economic threat and, in the end, could bring more trouble than good.