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The Latest IRS "Privacy Shinanigans"
Written by David Schectman
Governments around the world are reinforcing their tax collection methods by means of twisted rules and procedures that sneak in silently through the “back door.” It was Louis XIV’s finance minister, Jean-Baptiste Colbert, who claimed that “the art of taxation is to pluck the maximum amount of feathers from the goose with the least amount of hissing.” Colbert’s view easily applies in today’s world.
In October of 1997, the U.S. Treasury established new rules regarding the U.S. Withholding Tax Policy, also referred to as “taxation at source.” These new rules took effect on January 1st, 2001. In the fall of 2000, BFI informed their clients in detail about the implications of that new policy and the practical strategies required to retain both confidentiality and investment flexibility offshore. Today, one and a half years later, they have re-visited the topic once again.
Recent developments have given the U.S. Withholding Tax Policy yet another spin. For citizens or permanent residents wanting to maintain privacy and direct access to their offshore bank accounts, a clear understanding of these new rules is essential.
It is noteworthy that, while these new rules are of particular interest to citizens, any international investor and non-U.S. person will benefit from reading this report. The European Union is currently discussing the creation of similar rules. And, it is not all that unreasonable to expect others to follow their lead.
Based on the U.S. Withholding Tax Policy, the IRS has been able to reinforce its tax collecting capabilities across the globe. It did so by delegating its procedures to foreign institutions and financial systems, all the while not requesting that the latter abandon its historic confidentially based practices. Banks in jurisdictions like and with their bank secrecy laws could enter into an agreement with the IRS called a ‘qualified intermediary agreement.’
Those banks not willing to obey the withholding tax rules would be banned from investing in any kind of securities. In 2000, when the stock markets were booming and every investor wanted “part of the action,” not being able to offer securities was NOT an option. Therefore, most banks around the world agreed to act as de facto agents of the IRS and to submit being audited in that regard by independent auditors for proof to the IRS.
Banks subject to secrecy laws had to approach each client, in order to establish their tax status, requesting them to submit an IRS form W-9 to authorize the bank to divulge the client’s identity to the IRS. In return the client was allowed access to the global investment universe including the market.
A second option was for persons to protect their privacy by selling ALL the securities and to agree to be barred from dealing in securities through this bank account. In general, this option was satisfactory to most clients, since the purpose of their offshore relationship was mostly to gain access to non-U.S. investments and to diversify for currency and asset protection purposes.
A third and final option was to employ investment strategies and structures that would avoid all implications of the withholding tax policies. Examples of such strategies included investments in offshore annuities, endowments or various kinds of mutual funds (although, here too, caution is required based on U.S. PFIC rules).
NEW RESTRICTIONS IMPOSED ON OFFSHORE BANKS
Obviously, the Withholding Tax Policy is an effort to more effectively drive home tax dollars. Latest developments have now produced a new dimension: it appears that the IRS is now working to drive U.S. investors out of offshore bank accounts altogether! If you do not address this issue adequately, this development is bound to result in a dramatic deterioration in the quality of the services you will be able to obtain from your offshore bank.
During a recent Q1 compliance audit of Swiss banking giant UBS, the legalese term of ‘deemed sales’ was re-evaluated and renegotiated. The new understanding is that “all securities transactions ( and non-U.S. securities) by a citizen shall be reported by the bank to the IRS under the Q1 agreement if the transaction is deemed to be initiated from within the ”
As of now, this situation applies specifically to the Q1 agreement between UBS and the IRS. Other Q1 signatory banks, including the other Swiss “giant,” Credit Suisse, have stated that non-U.S. securities are not subject to their Q1 agreement with the IRS. However, according to banking expert Dr. Erich Stoeger, CEO & Chairman of EurAxxess AG, Credit Suisse may be the next bank to be audited. He thinks that over time all offshore signatory banks will be forced into the more stringent interpretation of the Q1 agreements they have signed.
This new application of the withholding tax rules prompts a drastic change of the way Q1 banks will be able to deal with those clients that choose not to submit a W-9 form and who have therefore not authorized the bank to report their transactions to the IRS. If they wish to continue protecting their privacy, the operational capabilities for such offshore accounts are curtailed as follows:
- The bank cannot accept anymore securities orders from the by phone, by mail or via the Internet. This does not only refer to securities but to all worldwide securities.
- Instructions regarding securities can only be accepted if given from outside the or in person at the bank. Due to lack of proof that a telephone call was initiated outside the the bank will not accept telephone instructions for securities transactions at all, nor will it discuss a portfolio strategy over the phone.
- The bank also has to abstain from meeting the client in the in context with securities investments, and it needs to stop mailing bank correspondence and statements to the client’s address in the States.
In response to this contractual adjustment, UBS was forced to send a client letter detailing the new (non) service conditions. Here are some quotes from that letter:
“Effective immediately, we (UBS) will not be able to accept your instructions for the purchase and sale of securities. Additionally, we think that the present instructions regarding correspondence should be modified promptly…”
“…. In order to solve this problem, we suggest that you give UBS a mandate to manage your account. In addition, UBS will retain all correspondence at the bank if no mailing instructions are being placed within 10 days. The reason for this sudden change of policy is the “U.S. Tax Law” and especially the so-called “deemed sales in the .” This rule says that each transaction which is potentially taxable in the , must be reported to the U.S. Authorities, regardless of marketplace and securities involved…”
“…(Therefore,) this reporting obligation is no longer limited on securities only, but includes all securities worldwide.”
WHAT CAN YOU DO ABOUT THIS PROBLEM?
We have come up with a strategy that will allow you to bring back your Swiss funds in gold without a paper trail. You can maintain your privacy. The procedure for cashing out of your annuity or bank account for gold works as follows: Call Andy Schectman at 1 (800) 255-1129, and I will calculate the dollar value of your Swiss franc annuities or bank account and lock in a firm and binding price of your gold purchase. At the same time I will draft a letter for you instructing your insurance company or bank to liquidate your account. They will be instructed to directly wire transfer the proceeds from your account to Miles Franklin’s gold wholesaler and the coins will then be shipped to you. Although it is your legal responsibility to report the gain (or loss) of any account, there is no paper trail pointing to the gold purchase. In other words, because you never wrote out a check to a gold company to buy gold there is no paper trail.
We usually sell our clients P.C.G.S. third-party sealed and certified coins. That eliminates subjectivity and affords great liquidity to these coins.
Your Swiss francs are now converted into gold in your possession and your investment remains private. As the need arises, and when the price of gold has risen, you can liquidate the coins very easily, with no subjectivity, and no commission charged if you sell them back to us.
5 MORE SWISS STRATEGIES TO RETAIN PRIVACY AND CONVENIENCE
persons are required to pay taxes on their worldwide income. Obviously, the IRS is determined to collect those taxes—in full. However, the obligation to pay taxes should not ban persons from retaining their fundamental rights of privacy and freedom. The following strategies allow persons to legally accomplish those rights, despite the latest “interpretation” of Q1 agreements.
- Arrange for a discretionary asset management mandate with your bank.
- Arrange for a discretionary asset management mandate with an independent offshore asset manger of your choice.
- Employ an offshore Legal Representative
- Place your portfolio in an offshore legal entity.
- Place your portfolio in an offshore “insurance wrapper”
As you are well aware, insurance-based asset protection and wealth preservation strategies are BFI Consultant’s area of expertise. For more information and advice on Swiss options call Andy at 1(800) 255-1129 and Andy will forward your request to BFI for you.
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