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Making sense of cross-border financial rules

Tighter rules: countries such as the US, Britain and Canada are increasing the financial reporting obligations for their citizens living overseas, and for others with a financial connection to their jurisdiction

Every month, we will answer general questions from readers about trips, traps, and tangled finances involving their international connections.

The following case, that is actually an iteration of a number of similar cases, has been reconfigured to keep readers’ identities and finances confidential.

Please note that the discussions relative to these situations involving tax, finance, legal, immigration and other regulations are general in nature and will not quote or define specific US tax law provisions. Therefore, this article cannot be used for individual tax advice or for any other financial planning for an individual’s personal situation.

The narrative goes like this: “I am a Bermudian, resident in Bermuda. I have a Bermuda, a UK, and a US passport.

“I am a caretaker for my elderly mother since she is recovering from a broken hip. Recently, my Mom received letters from two local banks requesting that she fill out all of these forms relative to her accounts, from what I can see, to prove that she is not a US citizen.

“The letters were firm in stating that if she did not comply, her accounts would be frozen. Extremely upset, my mother finally shared the latest letter with me where I then realised that this was not the first notice she has gotten. The first few notifications, she simply ignored. After all, she said, ‘Everyone knows that I am not an American.’”

Ah, actually, her banks and the US Internal Revenue Service don’t know, and will need verifiable proof of non-US connectivity.

Why is this happening and what does it mean to Bermuda residents connected globally elsewhere?

The US, whose citizens, green-card holders and in varying instances, tax residents, at certain threshold criteria are subject to tax on their income on a worldwide basis regardless of where they live.

US persons must also adhere to US tax law under certain reporting requirements on accounts, financial interests and other assets owned in foreign jurisdictions. This reporting action is called Fatca: the US Foreign Account Tax Compliance Act. Otherwise known as America’s global tax law, it has generated far-reaching consequences, not just for the US, but for the rest of the world.

Fatca, an enormous and costly personal burden for the ordinary US person living abroad, has generated tremendous interest and action globally, triggering various country emulators such as UK Fatca and others.

For example, if you are a United Kingdom resident citizen, a Canadian resident citizen, or a US citizen resident anywhere, just to name a few, and you have offshore (foreign accounts) not only do you have to report these accounts personally, but the countries’ government and financial institutions where the said accounts exist may be required to report various information about you: your name, address, accounts, assets holdings, and other financial information to relative tax and revenue authorities.

US Fatca imperatives imposed (by executing country intergovernmental agreements) with United States’ trading partners has brought about reporting compliance in more than 100 countries, with a limited few not participating.

Fatca, a controversial action derided and chaffed upon, has over time come to represent with transparent reporting standards an antidote to money-laundering, tax evasion, banking privacy with secret accounts, political corruption, terrorist activity and related activities.

Where does Bermuda fit into this global standard?

On December 19, 2013, Bermuda entered into an IGA (Intergovernmental Agreement) Model 2 with the US. This agreement — I paraphrase — seeks to build on their existing relationship with respect to mutual assistance in tax matters and desire to conclude an agreement to improve their co-operation in combating international tax evasion; authorises the exchange of information for tax purposes; facilitating implementation of the Foreign Account Tax Compliance Act of America: Reporting and Exchange of Information. Bermuda shall direct and enable all Reporting Bermuda Financial Institutions to:

a) register with the IRS by July 1, 2014, and comply with the requirements of an FFI agreement, including with respect to due diligence, reporting, and withholding;

b) with respect to financial accounts maintained by Reporting Bermuda Financial Institutions as of June 30, 2014 shall identify US accounts, and account holders utilising various United States Indicia and connectivity analyses. The entire agreement is specific to the responsibilities agreed upon between our Bermuda Government and the US, running to 45 pages.

You can read it in its entirety here: https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/Fatca-Agreement-Bermuda-12-19-2013.pdf

So, back to our readers’ question. The issue here, as you astute readers have probably surmised, is that this is not Mom’s problem, but her son, the US citizen’s issue. He is a joint holder on all of Mom’s accounts, thereby, the association of US connectivity from her local banks. Mom will have to provide verifiable documentation that she is not a US citizen, US green-card holder or other. The issue will only be partly resolved at this point, because her son has also received a letter regarding the same issues. He, if not in US tax compliance, needs serious tax advice.

On a substantive side note, sometimes individuals who feel that because they have other passports (besides being a US citizen or a green-card holder), the US/Bermuda Model 2 IGA agreement does not apply to them, so it can be ignored. Don’t.

Speak to any knowledgable US tax practitioner about the difference between non-wilful (honest mistakes or misunderstandings) and wilfulness when dealing with US tax law. You may not like the answer — so, it is always wise to be proactive by putting your affairs in order.

I leave you with that.

Readers, send me your questions about cross border financial planning issues. I will answer them.

Next month: I’ve inherited a foreign estate. What do I do now?

Additional reading:

See an excellent article “10 Facts About Fatca, America’s Manifest Destiny Law Changing Banking Worldwide,” by Robert W Wood in Forbes Magazine online.

Here is the link: http://www.forbes.com/sites/robertwood/2014/08/19/ten-facts-about-fatca-americas-manifest-destiny-law-changing-banking-worldwide/#45f5c2611961

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com