The days may be coming to an end when Americans could send income to summer tax-free in the Swiss Alps or winter in the Caribbean.
Banks that shield income under bank secrecy laws — hiding earnings from tax authorities in their customers’ home jurisdictions — will be subject next year to the Foreign Account Tax Compliance Act of 2010. The law will start turning the heat up on foreign banks that do not comply with United States requests for transparency about their clients’ information. Banks must turn over individuals’ previously anonymous information or face a 30 percent withholding tax on certain payments sourced in the U.S., explained UF Law Assistant Professor Omri Marian.
“Almost all banks in the world have substantial activities in the United States,” said Marian, an international tax scholar and a member of UF Law’s international tax faculty. “So decide what you want to do, either tell us about your account holders or we’ll take 30 percent of your profits in the United States.”
He said the levy would be unacceptable to a number of offshore banks, and the IRS expects them to comply with the requests for account holder information.
Monica Gianni (LLMT 95), a visiting tax professor, agrees that the law will have a significant impact on the number of individuals who take advantage of tax havens, but it won’t stop everybody.
“It will have a major effect, however, there will still be people who aren’t truthful and aren’t disclosing that they’re U.S. persons,” she said.
Gianni also notes that the law will have numerous unintended consequences for American citizens living abroad or for those who want to honestly invest their money in overseas banks. Some foreign banks will simply not invest in the United States and won’t deal with Americans in order to completely avoid any financial risk associated with the law.
“I think (the law) goes too far,” she said. “In theory it’s a good thing, but it’s basically the United States imposing its laws on foreign banks.”
Abrahm Smith (LLMT 03), a partner at Baker & McKenzie LLP in Miami who counsels clients on undisclosed income from offshore accounts, has seen an uptick in business recently as more individuals come to him to learn how to comply with the law.
“We don’t see clients who say, ‘I want to hide money, how do I do it?’” Smith said. “What FATCA is doing is bringing people out of obscurity and into the light.”
The new law is part of a sea change in offshore account practices, Smith said.
“It is much more difficult to be noncompliant and hide your money and people are noticing that that just doesn’t work,” Smith said. “Today is a transparent world — the whole Swiss banking system has changed, and that’s happened in the last five or six years.”
So if the Swiss and Cayman Islands banking sectors are hammered by this law, what options are left for the tax evaders of the world?
Cryptocurrencies, Marian said.
A 2013 essay by Marian in the Michigan Law Review gained national attention when he suggested that cracking down on traditional tax havens could encourage tax evaders to find a new tax haven in bitcoin and other cryptocurrencies.
Bitcoin — a recently developed digital currency that only exists in the virtual world but holds real-world value — would be appealing because it can be exchanged anonymously and is not subject to government regulation, much less taxation.
“Banks are becoming agents in the service of tax authorities, they’re intermediaries, basically,” Marian said. “Let’s say that I still want to evade taxes. How do I get the financial intermediary out of the picture?”
He said cryptocurrencies appear to be a perfect choice because they are exchanged peer-to-peer and no party holds any information.
After Marian’s paper came out, the Silk Road takedown illustrated how bitcoin was serving just the sort of role he envisioned. Federal authorities arrested the mastermind behind the website that operated on the seedy underbelly of the Internet known as the Dark Web, trafficking in drugs, guns and other illegal fare. Dark Web transactions are conducted in bitcoin. Even after the bust, the digital currency proved its staying power, holding most of its value. (As of mid-November, one bitcoin was trading at $430.)
Marian is quick to point out that the notion of evading taxes with cryptocurrencies did not originate with him, but it’s an interesting view of what the tax havens of the future might look like.
“You basically lost the traditional way of evading taxes, so I think this course of action is much more plausible now than it was even six months ago,” he said.