On August 14, 2017, TWG International Tax Director Mishkin Santa interviewed UK advisor Mark Summers on hot topics in U.S.-UK taxation. In the first part of this two-part series, Summers addressed common tax planning considerations.
In this second part of the series, Summers addresses steps that other countries are taking to exchange taxpayers’ financial data with one another.
What is CRS (Common Reporting Standard), and do you think it will have any effect on U.S. taxpayers and their overseas assets?
CRS is basically the Foreign Account Tax Compliance Act (FATCA) on a multilateral global scale: over 100 countries have agreed to start reporting to each other on the financial assets of people who are residents in the other country. There is no withholding tax like there is in FATCA. It is an automatic exchange of information on financial assets. It looks very, very similar to FATCA in the way that it operates. It basically means that there will be no hiding places on the globe very shortly for all people. In the same way that Americans now cannot really hide assets anywhere else, as they will be found under FATCA, CRS makes it difficult to hide assets for everybody else.
U.S. Approach to CRS
The U.S. has decided not to sign up to CRS because it has FATCA. This is a problem, because FATCA is not reciprocal with most countries in terms of the level of detail given, because the U.S. is not tooled up. The U.S. is very far behind the curve relative to the UK and the rest of the world when it comes to banking information exchange and its ability to gather information on financial ownership of entities, securities, and everything else.
Under CRS, the information exchange will begin, at the latest, early next year. The biggest thing is to make sure that your affairs are quite sufficiently obvious and transparent that they do not spur questions from home revenue authorities.
How quickly does it all happen? The UK is going to be very quick on picking this up. They have an advanced super computer, military grade, called Connect that, although it is not perfect, by world standards it is very, very good at joining the dots on taxpayers and their assets, and things that do not add up. So once this global reporting really kicks in, we are probably going to see a lot of tax inquiries raised on all kinds of people. That will go for Americans resident in the UK, as well, especially when they have assets that are situated neither in the U.S. nor in the UK, and there are plenty of those.
One hot topic in the tax world is foreign pensions. Specifically, U.S. taxpayers having interests in UK pensions and potentially rolling them over into a Qualifying Recognized Overseas Pension Scheme (QROPS). Can you give us your insights into this?
This is a very, very tricky area that Brexit is probably going to impact. For U.S. taxpayers in the UK who have a pension, particularly private pensions, if they could ship it back to the U.S., that would be useful. But, the UK does not allow you, unless you pay very heavy exit taxes, to export your pension, particularly your private pension, which is like a U.S. private individual retirement account (IRA).
You are allowed to export your pension under something called a QROPS, a qualifying overseas pension. In the past, you could go and put your QROPS into almost any jurisdiction, where it was an approved plan from HRMC. That has been dramatically cut down, and new rules came in last April that said that you can only use a QROPS if you are a nonresident of the UK and you are moving your pension into a QROPS that is in the country in which you are residing. If you are resident within the EU, you could go to any other EU country. If you’re going to the U.S., the pension would need to go into a QROPS in the U.S. There are not so many of those, because the U.S. has pension rules that can be very different from the UK.
Up until now, a lot of UK individuals were retiring, particularly to Florida, and using Malta as the jurisdiction to park their UK pension. Why? The short answer is that Malta has a very beneficial treaty with the U.S. There is more than meets the eye here.
Disagreement among U.S. Tax Practitioners
First, there are a lot of U.S. tax practitioners who do not believe that the tax treaty can shield the drawdown of money from the Malta QROPS for U.S. income tax purposes. Other U.S. practitioners believe the treaty affords these projections. The IRS has really only now started to become aware that they exist.
Second, the UK leaving the EU under Brexit means, presumably, that the rule will tighten to the point where you can only have a QROPS in your country of residency. So, the Malta route, which was attractive, will presumably disappear in the next 2 years, if they stick to the Brexit timetable. How that will happen retroactively, that’s going to be interesting, as well, because the UK has no problem with retroactive tax measures. So, watch this space.
Can you please elaborate on the “Same Country Exception?” What is it and what is the probability that it may be implemented at some point?
The “same country exception” is an idea that FATCA could be softened, so that U.S. taxpayers residing outside the U.S. do not have to report bank accounts or financial assets in the country in which they reside.
Is that going to happen? Over the last 6 or 7 years, U.S. taxpayers who have settled in Switzerland have had some real problems getting bank accounts, financial products, and mortgages with Swiss banks, because they’re running scared of FATCA. That has started to shift back, and the tide is changing. There was an extreme situation where Americans could find almost nowhere to bank if they actually resided in Switzerland. It was getting very difficult. And other countries did that, too. Lobbying efforts have resulted in some softening, but I’m not sure the same country exception is suddenly going to materialize.
Tax Trap – Forfait Fiscal
Big catch, by the way, for the really wealthy U.S. taxpayer: a lot of wealthy retirees are attracted to move to Switzerland because of what they call the lump-sum taxation (forfait fiscal), where you basically pay a fixed sum of tax every year based on the rental value of your home. You do not pay any other tax globally.
U.S. taxpayers cannot do that. Under the tax treaties between the U.S. and Switzerland, you will basically end up paying double tax, so it’s not an option for U.S. taxpayers moving to Switzerland. Which could be one of the reasons why Tina Turner has, in the last couple of years, decided she wants to expatriate from the U.S. and become a Swiss citizen. She resides in the capital of Zurich. So, there we go, but that’s one of the classic traps you see with wealthy taxpayers.