… review all significant tax regulations issued by the Department of the Treasury on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, identify in an interim report to the President all such regulations that:
(i) impose an undue financial burden on United States taxpayers;
(ii) add undue complexity to the Federal tax laws; or
(iii) exceed the statutory authority of the Internal Revenue Service.
Unfortunately for beleaguered U.S. Persons abroad, that time frame does not include the original FATCA regulations released in 2014, and the scope does not include past refusals to use clear statutory authority to issue new regulations to excuse us from incomprehensible “offshore” information forms with obscene fines.
For foreigners investing in the U.S. it’s better news: the Trump/Mnuchin review might repeal the Form 5472 filing requirement for single-foreign-member LLCs (proposed on 10 May 2016, 81 FR 28784; finalised on 13 December 2016, 81 FR 89849). That requirement was widely seen as a tiny, halting step towards imposing genuine FATCA reciprocity on inbound investors who were trying to remain anonymous. But even if it doesn’t get repealed, it’s no big deal: the Obama administration left plenty of loopholes to make sure that foreigners can keep hiding their identities from both the U.S. government and their own governments.
What exactly is “FATCA reciprocity”?
When foreign countries say they want FATCA reciprocity, they are not very interested in the garbage data that the IRS can provide right now — 1099-INTs and 1099-DIVs on individually-owned accounts. No one cares about a few dozen basis points of interest on Bank of America deposits left behind by former expats who came back home. Rather, foreign governments want to know about all the super-secret Wyoming and Nevada LLCs used for laundering money into U.S. real estate.
But the IRS can’t provide information on companies — let alone their maximum account balances from the day right before they bought all that real estate — because the IRS has no idea who owns most companies. Even if they did, they have no authority to collect account balance information from domestic banks — the same information which FATCA demands that banks in other countries send.
The extended Form 5472 filing requirement looked like a first crack at circumventing this lack of information. Trump may repeal it. But even if he doesn’t, well-advised foreigners hiding money in the U.S. have little to worry about: the Form 5472 regulations left them a year to shift their assets out of LLCs, and the FinCEN customer due diligence rules finalised on the very next day (11 May 2016, 81 FR 29397) left them a giant class of entities not subject to beneficial-owner lookthrough — trusts — into which they could shift those same assets.
Give everyone enough time to run out the back door
(9) Reporting required under section 6038A. Paragraph (c)(2)(vi) of this section applies to taxable years of entities beginning after December 31, 2016, and ending on or after December 13, 2017.
As Phil notes, that means a single-foreign-member LLC which closes down before 13 December 2017 does not need to file Form 5472. This exception was not some lame-duck thing which Obama inserted under pressure from the incoming Trump administration; it was already in the proposed rule from May 2016.
If the 5472 filing requirement were to come into force for any LLC which started a taxable year after 31 December 2016 regardless of the ending date, that would have left those LLCs just three weeks to escape the new filing requirement, unless they wanted to take a bet that the 45th President would repeal the 44th President’s work. Instead, the “ending on” clause gave them a whole year to decide what to do. Now they can wait to see whether the new Form 5472 filing requirement survives Trump’s regulatory review.
This is very nice treatment for foreigners who import capital to the United States. Contrast that with what Treasury does to U.S. Persons who “export” capital from the U.S. (i.e. use their human capital to earn wages overseas and then put their savings in the bank down the street).
Into a trust instead
Even if Trump doesn’t kill the new Form 5472 filing requirement, the FinCEN customer due diligence rules left a giant hole: they do not require banks to look through trusts.
Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted) …
The definition [of "legal entity customer"] would also not include trusts (other than statutory trusts created by a filing with a Secretary of State or similar office). This is because, unlike the legal entities that are subject to the final rule, a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor or settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries). Formation of a trust does not generally require any action by the state. As FinCEN noted in the NPRM, identifying a “beneficial owner” from among these parties, based on the definition in the proposed or final rule, would not be possible.
Funny, it sure looks like Section 674 of the “Internal” Revenue Code tells you a perfectly good way of doing something that “would not be possible”. You complain that it would be complex and expensive to perform such an analysis? Well, the U.S. government certainly didn’t hesitate to make foreign financial institutions perform that analysis with respect to all of their trust customers (26 CFR 1.1441-1(c)(6)(ii)(C) and all the rest).
But the Financial “Crimes” Enforcement Network didn’t dare make U.S. banks do the same. (Recall that FinCEN are the same bunch of arrogant bastards who say that eight-month old babies are responsible for filing their own FBAR forms and that U.S. persons abroad need to be monitored by U.S. authorities to make sure they’re not laundering money instead of buying groceries.) Just another way in which FATCA “reciprocity” isn’t actually reciprocal, and never will be — unless the world forces the U.S. to accede to CRS instead of lying down and surrendering as FATCA runs them over.
Meanwhile, the compliance-industrial complex immediately stepped up to make use of this FinCEN “oversight” and offer their services to any foreign LLC owners who wanted to flee to the safety of a trust.
Months before anyone seriously thought Trump would be president, the Obama administration poked giant loopholes in their scheme for entity-level FATCA reciprocity. They did not make a serious attempt at finding out who owns any LLC, let alone trust, whose creator doesn’t want to be found. They built a three-foot-tall fence around an open-air bird exhibit. If an elephant tries knocking over the fence you’ll hear loud and indignant braying of donkeys, which will distract otherwise-intelligent observers from the obvious fact that a three-foot tall fence doesn’t trap flying birds. Its construction was just political theatre, designed to fool clueless foreign government officials into thinking that FATCA reciprocity was right around the corner.
FATCA-natics continue the political theatre even today. We all noticed Elise Bean’s insistence that domestic Form 1099 and FATCA Form 8966 were equivalent. On the surface it looks like she was trying to minimise the impact of FATCA in the eyes of the domestic audience. However, it’s likely that she had another motivation: to continue to mislead foreign observers about reciprocity. If Meadows had left her 1099-and-8966 analogy unchallenged, non-Americans listening to her comments might have mistakenly assumed that Treasury was already collecting 8966-equivalent information, and that other countries’ tax authorities would eventually be able to get their hands on such information if they applied enough pressure.
Don’t let FATCA-natics feed you any sanctimonious little myths about how FATCA helps feed starving children in Africa and how you’re a monster for daring to question it. FATCA was designed to kneecap all the U.S.’ competitors and leave Wyoming, Nevada, and Delaware as the last tax havens standing. The IGAs just tricked foreign governments into standing still for the kneecapping.