The UBS and LGT tax scandals since 2008 have opened a door to a significant shift in advice on tax matters generally, especially in relation to US private clients.

Date: Aug 2010

Tags: Tax, Trusts, Transparency

The UBS and LGT tax scandals since 2008 have opened a door to a significant shift in advice on tax matters generally, especially in relation to US private clients.

Transparency is now key and the idea of wealthy US individuals moving assets around to avoid making full disclosures, or worse – pay their US tax liability, is a thing of the past, said Todd Beutler, a partner in the Hong Kong office of Withers, the law firm.

The best advice that advisers and intermediaries can now give their US clients is to come forward early and make full disclosures, he said.

Greater global scrutiny

Being open and upfront is now a lot easier to do so as a result of various governments, including the US, extending tax amnesties to enable individuals to make voluntary disclosures with reduced penalties – and avoiding criminal prosecution, explained Beutler.

“There is a general movement globally, led by the OECD, for countries to embrace the concept of information exchange on tax,” he said, leading to greater transparency in most jurisdictions.

On the flipside, however, this has also led to people shopping around to find the most tax-friendly jurisdictions to hold their assets.

But as various governments get hungrier for revenue for their coffers, they will put greater pressure on individuals to embrace transparency and come forward with relevant information.

In this regard, the US tax authorities are making a targeted effort to locate US individuals who are not meeting their tax filing and information reporting requirements, and this has certainly extended to Asia. 

Recent press reports confirm that the US tax authorities are contacting non-US financial institutions and their US clients regarding what the US authorities perceive as rampant tax evasion. 

Finally, a new US tax law set to enter into full effect on January 1, 2013 is going to force non-US banks and other financial institutions to either provide detailed information reporting on their US clients or face a draconian 30% US tax on US income.

Clients clinging to lack of transparency and bank secrecy may soon find that the old regimes no longer shield them from the US tax authorities (or other countries’ tax enforcers).

Advising US clients – and their children

In terms of the reach of the US Internal Revenue Service (IRS), Beutler said wealthy individuals in Asia face a challenge in relation to the tax situation of their children, especially those who are being educated in the US.

“Depending on whether their children already have US citizenship or permanent residency status (ie. a green card), or have been there long enough to be considered as being taxable in the US, they need to seek advice about their reporting obligations,” advised Beutler.

Many persons in Asia may have derivative US citizenship even though they have never obtained a US passport, or they may have obtained a US green card but don’t live in the US. In both of these situations, such individuals are subject to worldwide tax in the same manner as US citizens living in the US or in Asia.

A trap that a lot of wealthy individuals fall into, said Beutler, is thinking that if they give up their US green card for immigration purposes then they are giving up their tax status. Yet this is not the case.

For children who have not yet gone to the US, he said their parents need to get advice on how they might be able to get student visas that can limit their US tax exposure and associated reporting obligations – rather than simply staying in the US under a green card.

“There is also a danger that a lot of wealthy individuals are often not aware that they or their children are subject to US estate and generational taxes as a result of time they might have previously spent there,” warned Beutler. Holding a US green card can lead to the IRS asserting US domicile and estate tax liability even where other ties to the US are less substantial.

An option might be to consider trust structures to provide funds to children without them being considered taxable under US law, he suggested. Trusts can be structured so that the non-US settlors and not the US beneficiaries are subject to US tax and so that the US beneficiaries are not subject to estate tax at a later date.

“Also,” Beutler added, “children or other people might have taken on US citizenship from one or both of their parents, so they might not think to mention this to their advisers or provide the information which is required.” 

In the past, this may not have been as great of a concern, but with US tax law set to impose stricter requirements on intermediaries in relation to their US clients, the intermediaries are going to need to know more about the potential US tax status of their clients.

When dealing with US clients, therefore, Beutler said financial advisers need to make sure they go through a thorough know-your-client process to understand the exact background and nature of any relationship that the client or their children might have in connection with the US, and therefore what their reporting obligations might be – even if the client is unaware of certain things. “This needs to be done before it is too late,” he said. 

This will help the intermediaries deal with new US tax rules and it will help their clients with US tax exposure try to limit the potential criminal and civil penalties for non-compliance with the detailed US tax filing and information reporting requirements. Many of these clients may want to explore the possibility of expatriating, which, Beutler confirmed, he is handling for many clients already.