US Tax Bomb
According to the Department of the Treasury of the United States, the number of overseas residents who abandoned their green cards or American citizenship in 2013 reached approximately 3,000, hitting a record high. For reference, the number was just 231 in 2008. Most of the 3,000 or so persons are likely to be non-Americans trying to dodge the Foreign Account Tax Compliance Act (FATCA), which has been effective since July 1.
“These days, more than half of customer inquiries are about the FATCA,” said a private banker, adding, “They are wondering how to avoid the imposition of huge unpaid taxes and penalties by the implementation of the unprecedented system.”
President Barack Obama passed the FATCA bill on March 18, 2010, in an attempt to prevent offshore tax evasion by the rich. His administration signed inter-government agreements for the purpose with 26 countries, including Britain, Canada, and Japan, until March this year, and Korea concluded the agreement on March 17. The Department of the Treasury has recently announced that 70 countries and over 77,000 financial organizations are in compliance with the FATCA.
The bill is to compel not just individuals but also financial institutions abroad to report the overseas financial assets of American taxpayers including citizens, permanent residents, and de facto residents. The last category covers students and corporate employees staying in the U.S. for a significant period of time.
The key of the law consists of reporting by foreign banking institutions. Korean financial organizations have to report data on American taxpayers’ accounts exceeding US$50,000 to the Internal Revenue Service (IRS). In the case of violation, a withholding tax rate of 30 percent is applied to the amount paid to American corporations, which is equivalent to a ban on sales in American territory.
The FATCA’s impact is redoubled in combination with the Report of Foreign Bank & Financial Accounts (FBAR). Effective since the 1970s, the FBAR is one of those schemes similar to the FATCA, and compels any person with a liability to taxation to report to the department if he or she deposits US$10,000 or more in an overseas account, even for a single day. Violators are subject to civil and criminal penalties. Fifty percent of the maximum balance is imposed as the penalty, in addition to surtax, for accounts exceeding US$200,000.
The heavy regulation has been lacking in its effectiveness, though, because it is based on voluntary reporting by account holders. In other words, the non-fulfillment of the duty cannot be confirmed unless the Korean government cooperates. Up to now, the government has delivered domestic financial account information to the U.S. only in extremely limited cases, for example, when involvement in a crime is suspected. However, the asset information of the other individuals will be disclosed as well, once banking institutions begin to report to the IRS in compliance with the FATCA.
U.S. Government Blocking Returning of Green Cards
The ratio of those having a green card or American citizenship to the number of super-rich is particularly high in Korea. In addition, the impact of the FATCA is likely to be even greater, because a lot of cases have to do with simultaneous business in the U.S. and Korea, or sending children to the U.S. for education. Approximately 300,000 persons, including 130,000 citizens and permanent residents, are estimated to be subject to the law.
In fact, many well-off Koreans have split their financial assets of over US$50,000 into multiple organizations ahead of the implementation of the FATCA while showing increasing interest in tangible assets that do not have to be reported like gold and real estate. Some of them even withdrew their deposits to hoard the cash in private safes.
The others have renounced their U.S. citizenship. “Nowadays, you can see a large number of people returning their green cards to the U.S. Embassy,” another private banker mentioned, continuing, “However, the U.S., on its part, is becoming more and more uncooperative for them, to not lose its tax revenue sources.”
“Renunciation of citizenship is not a perfect solution, because it is linked to the expatriation tax and military service,” said Kim Hyun-jin, attorney at the Asset Management Team of Law Firm Sejong. The expatriation tax is calculated not based on the assets in U.S. territory, but the overall assets that an American citizen has when he or she gives up citizenship. The tax is equivalent to about 30 percent of total assets. The same rule is applied to permanent residents who lived in the U.S. and paid taxes for at least eight years during the 15-year period before the date of renunciation.
For now, the only alternative is the Offshore Voluntary Disclosure Program (OVDP). It allows a voluntary report of overseas financial assets owned for the past eight years, and reporters can avoid criminal punishment by paying 27.5 percent of the maximum balance for the eight-year period, along with unpaid taxes and incurred interest. Still, it is said that many wealthy individuals are feeling some burden with the OVDP, since the amount of documents and the fine they have to pay are both substantial.