US taxpayers now required to declare offshore accounts
As if things weren't bad enough because of the global financial crisis, managers of money of US citizens in Asia now face another obstacle when it comes to attracting this particular set of clients.
A new requirement for US taxpayers to declare offshore accounts is potentially going to hurt private banks, consumer banks, securities firms and fund houses -- practically any entity that manages money for US citizens in Asia. Hong Kong and Singapore, in particular, are home to many US citizens.
Under existing rules, having US citizens as clients is already onerous due to the legal and tax requirements involved. With the latest guidance from the US Internal Revenue Service, which came into effect on March 23, Asia-based US taxpayers with undeclared offshore bank accounts and entities have been urged to take advantage of new voluntary disclosure guidelines and report their assets before a deadline of September 23.
By beating the deadline, US taxpayers in Asia "can generally avoid prosecution", says Kurt Rademacher, a Hong Kong-based partner at Withers, a law firm that advises high-net-worth individuals. He notes that IRD Commissioner Douglas Shulman has said that US taxpayers who don't come forward by the deadline will face a "more dire" situation.
Despite the IRS guidance having been issued six weeks ago, a large number of US citizens in Asia have yet to act on the voluntary disclosure. Those that AsianInvestor spoke with say the inaction is largely due to a lack of understanding of exactly what the requirements are and the method of disclosure. This is where law firms like Withers enter the picture. For his part, Rademacher advises full compliance.
According to Withers, a foreign bank account report (FBAR) is required of all US citizens and residents, green card holders, and persons (a term which includes entities) who have a financial interest in or signature authority over financial accounts in foreign countries exceeding $10,000 in total.
The penalty for failing to file an FBAR is $10,000 per account per year if the failure was non-wilful. If the failure to file was wilful, the penalty is the greater of $100,000 or 50% of the balance of each account per year. In severe cases, wilful violations can lead to harsh criminal sanctions of up to a $500,000 fine and 10 years in prison, in addition to the civil penalties.
Rademacher says recent changes to the FBAR form has broadened the scope of accounts that trigger a filing obligation in which the financial interest needs to be stated.
The latest guidance from the IRS comes in the wake of ongoing efforts by both the IRS and the Department of Justice to uncover names of US taxpayers with undeclared offshore accounts. Additional scrutiny from the G20 has focused on numerous international finance centres, including Hong Kong, Singapore, Switzerland, Lichtenstein, Luxembourg and Monaco. All of these jurisdictions have agreed in recent weeks to modify their international information sharing agreements to comply with OECD standards.