Taxing New Rules Make Hiding Cash Harder
More paperwork as governments force wealthy to declare overseas assets. What you need to know.
It won’t be long before there is no place in the world to hide money from your home country.
Governments have tried to catch people who aren’t paying their taxes, or worse, are laundering money for years. But they are now joining forces in ways that will make the global financial system far more transparent and will make its virtually impossible to hide cash.
“This is the new world, it’s here to stay,” says Michelle Yan, director of Asia-Pacific Financial Services International Tax Services at EY.
U.S. citizens, or anyone with a U.S. green card, certainly have been finding this out. The U.S Financial Accounting Tax Compliance Act, or Fatca, enacted in 2010, went into effect in July to make sure you are paying U.S. taxes no matter where you live, or where your money is located, and to bring to light money sitting in non-U.S. bank accounts that may not have been earned legally.
You are subject to Fatca if you live outside the U.S. and have at least US$200,000 in a non-U.S. account by the end of the year or US$300,000 at any point during the year; the thresholds double if you are married and file together with your spouse. Fatca also applies to U.S. citizens who live in the U.S. and have at least US$50,000 in a non-U.S. account at the end of the year or US$75,000 at any point during the year.
The U.S. government also requires financial institutions to withhold 30% of any dividend and interest income earned on any U.S. investments and paid to a non-U.S. person or non-U.S. financial institution that doesn’t comply with Fatca, BNY Mellon Wealth Management said in a report to its private bank clients.
The U.S. defines the term “financial institution” broadly to capture everything from banks and brokers to hedge funds, private equity funds and certain insurers.
Most governments throughout Asia have either signed agreements with the U.S. to make sure this reporting takes place or have agreed to sign the agreements. For those agreements yet to be signed, the U.S. will treat them as if they have been in operation since 2014.
We’ll get to the rest of the nitty-gritty on FATCA in a moment. But first, it’s important to know this U.S. law is snowballing across the globe. More than 80 countries or jurisdictions agreed in late October to automatically exchange financial information with one another according to a “common reporting standard” developed by the Organization for Economic Co-operation and approved by leaders of the Group of 20.
India and South Korea are among countries that have agreed to automatically exchange information on foreign account holders with other countries by 2017, while China, Hong Kong, Macao and Singapore are among others pledging to begin in 2018. The standard covers investment income, account balances and proceeds from the sale of any financial assets. Banks and brokers as well some investment vehicles and insurers are among financial institutions required to divulge details on their account holders.
The global regulations will make it very difficult for anyone to hide money outside of their home country, but it also will make it very difficult for banks that want to avoid the burdensome paperwork involved in compliance to turn away new customers. “We believe there are a lot of Chinese with bank accounts in Hong Kong – are the banks suddenly going to say we’re not going to take Chinese money?” says Charles Kinsley, a KPMG tax partner.
In fact, banks that closed accounts for U.S. individuals – or turned new U.S. customers away – to avoid the messy reporting requirements associated with Fatca won’t be able to get away with that under the new global standard, “when there are many other countries with which to exchange information,” KPMG wrote in a report detailing the new standards.
This has been a very real problem for U.S. citizens as well as U.S. green card holders trying to open accounts outside the U.S. since Fatca has been unveiled. Many financial institutions have turned away potential customers to avoid compliance costs of as much as US$5,000 a year, according to BNY Mellon Wealth Management.
So this brings us back to Fatca and what you need to know now. The law goes into effect for the 2014 tax year. Non-U.S. financial institutions under Fatca need to evaluate their existing customers to make sure they know who has income that needs to be reported. Then, they have to set up new procedures for new customers. These typically involve filling out a U.S. tax form detailing your citizenship among other details so the U.S. knows whether you have income that should be taxed. The forms are pages long and are not easy to complete, says KPMG’s Kinsley.
“What new investors are finding is it’s a far more onerous process,” Kinsley says. Banks “are trying to make it a pleasant experience and it’s not a pleasant experience.”
BNY Mellon Wealth Management recently set up an outpost in Hong Kong with its arms outstretched to individuals and families with U.S. ties. For U.S. citizens, Fatca reporting isn’t much more difficult than filing a tax return. The difficulties come more into play for non-U.S. residents who have green cards, and aren’t accustomed to filing U.S. taxes. BNY Mellon is willing to take them on since it has the systems in place. “To us it’s not a big event,” says Chuck Long, the wealth management unit’s Greater China head.
Kinsley says all banks would be wise to hang on to high-net-worth clients even if they do have U.S. ties. For one thing, banks have to evaluate all their customers anyway to make sure they are complying, and if you have more wealth, chances are you will be paying enough in fees to justify the extra compliance costs.
