US-born Kuwaitis liable to pay taxes – FATCA becomes fully implemented by September 2015
(From left) Stephen Ross, Raghad Al-Khudhari, Kristin Konschik and Husain Al- Ghareeb
KUWAIT: A child born in the United States, even taken out of the US after an hour or two after birth, is a US citizen and therefore subject to a recent tax law being implemented by the US worldwide. Kristin Konschik, a lawyer at Withers Worldwide, explained that filing tax returns is not based on the age of taxpayers, but on their income, regardless of age. US-born Kuwaiti children are liable to pay taxes on all bank accounts, assets and inheritance even if they are not aware they are US citizens or have never entered US territory since their birth. “You can have a young child who has an income over the threshold amount and the child assisted by his/her parents must file US tax returns,” Konschik noted. “I am working since the age of 14, and had to file my tax returns because I was already earning a huge amount.
There are exemptions to the rules – if a person’s income is not related to employment income, for example it’s based on interest and dividends, then the threshold is extremely low,” she added. The United States’ Foreign Account Tax Compliance Act (FATCA) became law in 2010 and will be fully implemented by September next year. The goal of FATCA is to prevent US tax and reporting non-compliance by US taxpayers with foreign accounts. US citizens and US residents (including green card holders) are required to report and pay tax on their worldwide income and assets, even if they don’t live in the US or have US assets. They also must report any interests in non-US financial accounts to the US Internal Revenue Service (IRS).
Kuwaiti banks
FATCA imposes a parallel requirement on non- US financial institutions (such as Kuwaiti banks) to report certain information regarding their US clients. The question is whether Kuwaiti banks have already agreed to the US request on reporting US citizens’ assets, and what are the sanctions if any if they fail to do so. “The goal is to collect only information about US citizens’ assets. If Kuwaiti banks do not comply with the request or obligation, then any income that it gets directly or any income that it gets through any other financial institutions will be subjected to a 30 percent withholding tax. That is the consequence of not complying with FATCA. Kuwait entered into an inter-government agreement with FATCA, so they have now an obligation to comply, and Kuwaiti authorities have agreed to it.
The reason why they have agreed to FATCA is because they may be kept out of the world banking system,” Konschik mentioned. “The US used its economic leverage to require world financial institutions to implement the law,” she added. Earlier in the year, Kuwaiti financial institutions became compliant with FATCA, which binds foreign financial institutions that are foreign to the US to report to the IRS the financial status of local customers who are also US citizens. As a result, every US passport holder living in Kuwait is now responsible to pay taxes to the IRS, which has a complex tax code.
Lawyer Hussain Al-Ghareeb from Al-Osaimi Law Firm, said: “High net worth individuals and families residing in Kuwait with US citizenship should seek legal counsel immediately to assess their tax dues and agree a course of action for them, their families, and children before they reach 18 years of age. Our firm has invested in retaining international and local FATCA expertise to help clients navigate the compliance process effectively and efficiently.” FATCA has set a $10,000 penalty for every unreported bank account outside the US before checking the account details or deducting taxes. As a result, a US citizen living in Kuwait who has maintained several bank accounts over several years is now likely to owe over $30,000 in taxes to the US government. “Individuals who have resided in the US and received a green card but did not formally give it up are still liable to pay taxes for the years spent outside the US. In fact, even individuals with expired green cards are liable to pay taxes until they decide to formally to exit their green card status.
Those who wish to relinquish their US citizenship or passport still have to file taxes for the five most recent years as well as possible payment of tax on all inherent gain of their assets.” There are other tax codes that US citizens must comply with, including tax dues, capital gains dues, and inheritance.
The firm also announced public consultation sessions by FATCA specialists Konschik and Stephen Ross from Withers Worldwide, who are now in Kuwait to share their insights and expertise on FATCA compliance to high-net worth families, individuals, and corporations. Al-Osaimi Law Firm is one of the oldest legal service providers in Kuwait, established more than three decades ago by two prominent lawyers Hamad Al-Joaan and the current Managing Partner Meshari Al-Osaimi, both of whom were elected to the National Assembly.
Today, the firm has more than 30 lawyers and legal counsels, in addition to paralegals and support staff, and has been rendering services to various local and international clients.
Question and answer
Why is FATCA relevant to some Kuwaitis?
A: Kuwait is treated as having a FATCA Intergovernmental Agreement (‘IGA’) in effect, which means that Kuwaiti financial institutions must identify all of their account holders and report certain information about their US account holders to the relevant Kuwaiti government authority. Some Kuwaitis are also US citizens or residents (including green card holders) and any Kuwaiti financial institutions must therefore report information about these US account holders to the Kuwaiti authority. The Kuwait authority will send this information to the IRS, which can then identify US citizens or residents who have not complied with their US tax or reporting obligations.
Q:Why is that important?
A: Kuwaitis who are also US citizens or residents should have been regularly filing with the IRS both US tax returns, reporting and paying tax on their worldwide income, and reports of their financial accounts and assets held outside of the US.
Q: What are the consequences of failing to file reports to the IRS or pay the relevant taxes?
A: There are significant fines and penalties for the failure to report either income or foreign accounts.
Q: How will the IRS find out about Kuwaitis who should be filing reports to the IRS?
A: Kuwaiti banks and other financial institutions around the world are required to report details of their US clients to the relevant local tax or government authority or the IRS. Financial institutions have already started client identification procedures and need to have identified all their clients by January 1, 2015. The financial institutions must provide their reports by March 31, 2015 for the year 2014.
Q: What can Kuwaitis who are affected by FATCA do now?
A: Their priority should be to take steps to ensure that their US tax payment and reporting obligations are up to date for prior years. The IRS recognizes that some US taxpayers living abroad may only recently have learned about their filing obligations and wish to comply. Therefore, the IRS has implemented procedures to help them to comply, in some cases without penalty. The procedures require detailed legal and accounting advice.
Q: Can Kuwaitis just give up their US citizenship or green card instead of complying?
A: As part of giving up the US citizenship or green card, they must certify to the IRS that they have complied with filing obligations for the past five years. Therefore, while it is possible to give up US citizenship or green card, they must first have brought their tax affairs up to date.
Q: What happens if Kuwaitis who are affected by FATCA do nothing?
A: Eventually, the IRS will learn the identity of non-compliant US taxpayers and certain financial information from Kuwaiti and/or other non-US banks. The IRS will then seek to recover taxes that should have been paid, together with interest and penalties. Non-compliant US taxpayers may face criminal prosecution and their ability to travel to the US may be affected.
Q: What is the overall advice of Withers Law Firm to Kuwaitis affected by FATCA?
A: Seek specialist US legal and tax advice quickly and take steps to comply with your obligations. While there may be some tax to pay in the US, for a short period the IRS may be lenient about a past failure to report. However, if the IRS learns of your non-compliance from another source, such as a Kuwaiti bank, it will not be so forgiving and serious consequences may well follow.
