It Happened in South Dakota

by Karma Martell | Oct 20, 2021 | Compliance, 2021, Taxes, U.S. Economic System

It Happened in South Dakota

Karma Martell

Karma Martell, Founder of KarmaCom, is a seasoned professional business commentator, writer, and marketer, and serves as virtual CMO for International Wealth Tax Advisors.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

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Pandora Papers Thrusts South Dakota into Tax Haven Spotlight

The Wild West of Bank and Finance Laws

Do you get a lot of credit card offers in the mail from banks you’ve never heard of? Chances are, the bank’s HQ is in, you guessed it, South Dakota. Flip over a few credit cards in your wallet and read the fine print. Why set up an issuing bank in South Dakota? In 1981, the state abolished laws limiting the interest rate on credit cards. South Dakota is home to the big sky, (sorry, Montana) and the sky’s the limit when it comes to interest rates on your Visa or Mastercard.

In 1983, South Dakota was the first state to establish perpetual trusts. In a nutshell, perpetual trusts allow monies to remain in place for generations, with no one having to pay inheritance taxes.

Trusts are wealth structures favored by high-net-worth families and individuals, and South Dakota has a history of legislating highly favorable laws for settlors and trustees. The sweet green icing on the money layer cake is no income tax, no capital gains tax and no inheritance tax. The cherry on top are laws that ensure the investor of extreme privacy and secrecy from any blue and brown suits that may try to penetrate their personal Fort Knox. Assets held in South Dakota trusts have increased from 57 billion to $360 billion in the last 10 years.

According to the Pandora Papers, among South Dakota’s wealthy foreign opt-ins are Ecuador’s President Guillermo Lasso, Chinese real estate billionaire Sun Hongbin, and Guatemalan industrial products titan Federico Kong Vielman.

IWTA founder Jack Brister weighs in: “Though it is true that South Dakota, along with Wyoming, have strong state-level asset privacy laws, it should be known that these laws don’t allow U.S. or international persons a means of U.S. tax avoidance.

U.S. persons are always subject to U.S. tax no matter where they reside or where their assets are located. Trustees are held liable for the appropriate tax reporting and payment of tax due and no state law can remove these federally-mandated responsibilities.

The skinny on the matter is that the U.S.-legislated law in which the premise is a trust, even those established under U.S. law, are foreign trusts unless specific criteria are met. The purpose for enacting such a broad definition of what a foreign trust is was to cast a wide net to ensure U.S. persons could not use such structures to avoid their tax responsibilities without facing severe penalties. In doing so, the U.S. limited its ability to tax trusts established in the U.S. by foreign persons where the trust had no U.S. assets or income and the beneficiaries were not residing in the U.S.

This is because the U.S. has no authority to tax foreign persons if they are not deemed to be U.S. residents and have no U.S. assets or income. Reminder: capital gains and most interest income are tax-exempt. Business income and real property gains are subject to taxation.

These rules apply equally to a foreign trust. Therefore, when a trust is established under state law where the primary fiduciary responsibilities are with a foreign person and not the U.S. trustee (generally a U.S. trust company), and the trust has no U.S.- sourced income, the trust treated as a foreign person, which means there is insufficient nexus to the U.S., resulting in the U.S. having no legal taxing authority.”

Which U.S. States Have the Most Trusts According to the Pandora Papers?

According to Axios, trusts held in the states listed below account for about 1 trillion dollars in secretly-held assets. According to Bloomberg, South Dakota state data alone show one half trillion dollars of wealth in trusts.

Which US states have the most trusts in the Pandora Papers?

How the U.S. Treasury Views Americans’ Reporting of Foreign Assets

The U.S. Bank Secrecy Act demands that foreign banks disclose assets and accounts held by U.S citizens, and that U.S. citizens report those accounts or face a penalty, with $10,000 being the threshold of compliance. FBAR, the Foreign Bank Account Report, is the most-commonly filed disclosure form, while those with assets over $200,000 if living abroad and $50,000 if living stateside, are required to file FATCA (Foreign Account Tax Compliance Act) form 8938. For more on FATCA filing rules, see our blog post. For more on FBAR rules and compliance see the IWTA FBAR primer.

FATCA and the Banking Secrecy Act (BSA) are under the jurisdiction of FinCen, the Financial Crimes Enforcement Network of the U.S. Treasury. FinCen investigations take place worldwide, supporting partner countries in combating money laundering, terrorist financing and other financial crimes.

One might assume that the U.S. would bring the same level of scrutiny to those transferring foreign wealth to U.S. financial institutions and shell companies, but that is not the case because the U.S. has no legal jurisdiction to assert taxing authority.

Why the U.S. is Becoming a Favored Foreign Tax Haven

Although the USA supports the OECD’s global tax effort, they have refused to sign on to the Common Reporting Standard (CRS) which pledges inter-country cooperation in reporting financial assets and accounts to outside jurisdictions. The CES was formed in 2014, per the request of the G20. 112 countries currently participate in the CRS.

The power and autonomy of individual state governance makes it possible for U.S. states to create what amount to independent tax havens under the umbrella of the USA. According to Axios quoting a study by Israeli academic Adam Hofri-Winogradow, 17 of the world’s 20 least-restrictive jurisdictions for trusts were American states.

Will Congress and The Fed Intervene?

On October 6^th, 2021, members of congress introduced “The Enabler’s Act.” The Act would expand the 1970-era Bank Secrecy Act to legislating accountability to parties typical in aiding and abetting money laundering and tax evasion, such as accountants, lawyers, investment advisors, and even public relations professionals and art dealers.

The new provisions would in effect expand FinCen’s 2020 Anti-Money Laundering Act. According to The Hill, not only will the Enabler’s Act improve the chances of catching violators, it would close a loophole in the securities laws that currently exempts investment advisers from the same reporting and procedures that are required of broker-dealers, — in at least some circumstances.

The law does not call out registered investment advisers per se, but its definition of investment professionals is broad and could close the loop. Thus, a new set of whistleblowers may come forward with new insights and information regarding the shadowy world of dark money.

West May Still be Best

It should be noted that unless the Treasury Department revises the definition of a foreign trust for tax purposes, The Enabler’s Act, if passed, is not likely to impact the ability of foreign persons to use the U.S. as a place to establish wealth structures which may avoid their home country tax laws.

Third Quarter 2021 U.S. Economic Outlook: Vaxed, Taxed, and Roaring Back

by Jack Brister | Aug 18, 2021 | U.S. Economic System, 2021, Covid-19

Third Quarter 2021 U.S. Economic Outlook: Vaxed, Taxed, and Roaring Back

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures.

Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Third Quarter 2021 U.S. Economic Outlook: Vaxed, Taxed, and Roaring Back

It’s been a year and a half since the onset of COVID-19, and there’s encouraging news for clients. The U.S. economy is bouncing back to life thanks in part to government aid and relatively high vaccination rates. The national economy grew at a seasonally adjusted, 6.5% annual rate in the second quarter, a sign that the nation has achieved a sustained recovery from the pandemic-induced recession. In fact, the economy has now surpassed its pre-pandemic levels.

Most importantly, profit margins are strong despite rising inflation and reports of higher costs which many economists view as short-term. Net profit margin for the S&P 500’s second quarter is expected to be 12.4%, according to a FactSet Research Systems’ senior earnings analyst. If that turns out to be the actual net profit margin for the quarter, it will be the second-highest for the index since FactSet began tracking the metric in 2008, trailing only last quarter’s net profit margin of 12.8%.

The economy expanded at its fastest pace since last fall, but at a slower rate than the 8.5% growth rate that analysts had expected. That was mainly because supply chain bottlenecks and labor challenges exerted a stronger-than-predicted drag on many businesses as they sought to restock their shelves and hire staff. The drag on inventory rebuilding, in fact, was responsible for subtracting 1.1 percentage points from last quarter’s growth.

Corporate Earnings On-Track to Soar

In terms of corporate earnings, the S&P 500 is on track for its best quarterly earnings growth since 2009. So far S&P 500 companies have posted revenues well above end-of-quarter estimates; beating those estimates by a wider than average margin. Technology, energy, and industrials, posted some of the best performances. Analysts also expect double-digit earnings growth for the second half of 2021.

Those reporting robust second quarter earnings include American Express Co. (AXP.N), which posted second quarter net income of $2.3 billion, or $2.80 a share, up from $257 million, or $0.29 cents a share a year ago. Social media firm Twitter (TWTR.N) stunned Wall Street with earnings that blew past estimates, posting revenue growth of 74% over last year; the fastest since 2014.

All three major U.S. stock indices—the Dow Jones Industrial Average, S&P 500 and Nasdaq—rallied to record highs. DJIA closed with a gain of 238.20 points or 0.68% at 35,061.50 to finish above 35,000 for the first time ever. The S&P 500 (.SPX) gained 44.31 points, or 1.01%, to 4,411.79. The Nasdaq Composite (.IXIC) added 152.39 points, or 1.04% to close at 14, 836.99.

The economy is also receiving substantial support from the Federal Reserve. The Fed reaffirmed that it will keep its interest rates anchored near zero in the short term to encourage borrowing and spending. In a statement after its last policy meeting, it also reported that it will continue buying $120 million in government-backed bonds each month to keep longer-term borrowing rates low. However, given the magnitude of the economic rebound, the Fed signaled that rate hikes could begin in 2023.

Outlook is Rosy Despite Fears

Although investors are concerned about the possible impact of the COVID-19 Delta variant on the global economy, the general expectation is that economic reopening will continue across major developed economies well into the second half of 2021.

Even with uncertainty about the path of the pandemic, the IMF recently raised its projection for economic growth in 2021, the second time it has done so this year. The international organization expects the U.S. economy to expand 7% in 2021 and 4.9% in 2022, up from the 3.5% it projected a few months ago.

But the quickening growth—spurred by large spending packages proposed by President Joe Biden—have some analysts worried that inflation could rise too fast. Already, raw materials and parts, including semiconductors and copper, have spiked in price as demand has outstripped the ability of suppliers and shippers to keep pace.

As a result, some companies such as consumer products giant Procter & Gamble and Honeywell, maker of industrial and consumer goods, have said they plan to raise prices to offset rising costs. However Fed Chair Jerome Powell has said he expects such supply bottlenecks to lead to temporary price increases only, rather than a prolonged bout of accelerated inflation.

GILTI: Changes Ahead

President Biden has proposed to make substantial changes to the tax burden on foreign income through GILTI (global intangible low-taxed Income). The GILTI tax rate has been 21 percent, but the 2017 Tax Cuts and Jobs Act (TCJA) also allowed corporate taxpayers to deduct 50 percent of their GILTI income, which brought the effective tax rate down to 10.5 percent.

The Administration’s crackdown keeps the GILTI rate at 21% but eliminates the 50% deduction, meaning that multinational corporations would pay a higher minimum tax rate. This rate to be determined on a country-to-country basis, would eliminate the ability of corporations to offset losses incurred in one country against income earned in another. Under current law, income in a low-tax rate country can be blended with higher-taxed income and be either reduced or eliminated entirely. Once implemented, the changes will have significant ramifications for multinational corporate taxpayers in 2022, resulting in a higher effective tax rate on foreign income.

Be Prepared for the New Tax Paradigm

With a global corporate tax policy on the near horizon, revisions to the TCJA and the Fed’s new policies on squashing well-established tax loopholes and challenging tax havens, international tax clients need to prepare now for the imminent changes ahead.

Mitigate your tax debt and build wealth with strategic moves and planning. Contact our office for a consultation with Jack Brister.

In 2020 Cryptocurrency is No Longer a “Bit” Player

by Jack Brister | Oct 27, 2020 | Cryptocurrency, 2020, Finance, U.S. Economic System

In 2020 Cryptocurrency is No Longer a “Bit” Player

Jack Brister

Founder, International Wealth Tax Advisors

Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The inevitability of Cryptocurrency in Mainstream Finance

The Financial Crimes Enforcement Network, aka FinCEN, a unit within the United States Treasury Department, has seen no downtime during the pandemic. Tasked with investigating and combatting a whole host of financial crimes, including money laundering and the funding of terrorism, the “suspicious reports” roll in. “Dirty money” flows into the nation’s and the world’s largest banks, and despite employee whistleblowers, the majority of it goes through the legitimizing rinse cycle and gets washed squeaky clean. Given the current set of U.S. laws, as long as the bank-in-question files a suspicious activity alert, they have effectively inoculated themselves against prosecution

So, what does international financial crime have to do with cryptocurrency?

Cryptocurrency is built on the blockchain. Skipping the complexities for a moment, here are two key takeaways for an instrument created by blockchain technology: 1) It is impenetrable to hackers and fraudsters and 2) It is 100% traceable. For a thorough education on blockchain read Investopedia’s Guide to Blockchain.

While Bitcoin got a bad rap in its early days as being associated with dark web activities, the truth is it is much easier to track activities on public block chains, while private banking activities remain largely hidden from scrutiny. According to the United Nations, 90% of money laundering goes undetected.

Forbes’ recent interview with Chanpeng Zhao, Founder & CEO of Binance, largest cryptocurrency exchange in the world by volume, is highly informative in explaining the business of Bitcoin and the blockchain.

Is Crypto the New Gold?

Financial analysts have been reporting a gold buying frenzy as the result of current global economic uncertainty. This is no surprise and has plenty of historic precedence, but what is surprising is that the current run on cryptocurrency mirrors the 2020 gold trading chart to an eerie degree.

In a Bloomberg article dated May 7, 2020 and entitled “Paul Tudor Jones Buys Bitcoin as a Hedge Against Inflation”, Bloomberg reports Jones telling client that Bitcoin today is playing the role that gold played in the 1970’s. Says Jones: “I am not a hard-money nor a crypto nut. The most compelling argument for owning Bitcoin is the coming digitization of currency everywhere, accelerated by Covid-19.”

The Fed Plays Chess: The First Move to Reframe Cryptocurrency from Commodity to Real Currency

In an announcement devoid of fanfare, on July 22, 2020, the Office of the Comptroller of the Currency, officially announced that “banks and thrifts may provide custody services for crypto assets.” The OCC’s opinion applies to banks and federal savings associations of all sizes. How long before banks go from asset guardians to transactional accounts?

The OCC states, “…as the financial markets are increasingly digitized, the need will increase for banks and other service providers to leverage new technology and innovative ways to serve their customers’ needs. By doing so, banks can continue to fulfill the financial intermediation function they have historically played in providing payment, lending, and deposit services.”

DeFi VS CeFi: Moving to a Fiat Hybrid?

Facebook is still planning to roll out Libra, its cryptocurrency offering, the European Central Bank and China’s Central Bank are discussing digital currencies and J.P. Morgan Chase is planning on using stablecoin, which means the coin is tied to an actual asset. In fact, the asset could be money itself.

Here are just a few news items and announcements in September 2020:

The government of the Bahamas Central Bank has announced the October 2020 launch of its CBDC, Central Bank of Digital Currency, the world’s first.

“The intended outcome of Project Sand Dollar is that all residents in The Bahamas would have use of a central bank digital currency, on a modernized technology platform, with an experience and convenience – legally and otherwise – that resembles cash. It is expected that this will allow for reduced service delivery costs, increased transactional efficiency, and an improved overall level of financial inclusion.”

On September 22, 2020, Israeli lawmakers presented the Income Tax Ordinance (Taxation of the Sale of Digital Currencies) bill to the Knesset. The bill exempts digital currencies from capital gains tax. Israeli lawmakers see the free flow and flourishment of cryptocurrencies as key to their economy, which is largely technology-driven.

Although as recent as May 2020, Goldman Sachs declared on an investment call that “cryptocurrencies are not an asset class”, by August 2020 the new global head of digital assets advised, “We are exploring the commercial viability of creating our own fiat digital token.”

Even if you Gained or Lost a Few Coins, the IRS Wants to Know

As originally reported on September 25^th by the Wall Street Journal, the U.S. Treasury has decided in what some call a “tricky move”, to add a simple did-you-or-did-you-not-use-crypto checkbox to Form 1040. The article is behind a paywall, but you can read Fortune’s account here.

Says industry journal be(in)crypto:

“Does the IRS treat interest made form DeFi the same as interest made from CeFi or a traditional bank account? Are utility tokens “virtual currencies?” Are PoS block rewards treated the same as Bitcoin, or should they be treated like dividend re-investments?

The answers are not entirely clear, but one thing is for sure: Traders and investors should think about what they are doing now when planning for how they will pay taxes next year.

Slapping questions related to virtual currencies on page one of the form shows just how important the issue is becoming to regulators.”

Last October, the IRS issued updated guidelines on virtual currency including a downloadable FAQ. Despite the fact that 98% of dirty money crimes involve regular-old-money, the IRS is hard-at-work finding the crypto bandits, as a simple search on their website reveals.

In August 2020, users of Reddit and other forums reported receiving cryptocurrency “warning” letters from the IRS. The letters were soon confirmed by mainstream media and discussed at length on tax law blogs. Some argue that these “soft letters” are of “disputable legality”, and violate taxpayers’ rights, but nevertheless, the warning shots are being fired.

This is an Evolving Story

As we “go to press”, more breaking news: Bitcoin prices surge to their highest since 2018 on the announcement that Paypal will accept the use of cryptocurrency for merchant payments. Read the Marketwatch article here.

It is evident that the Covid economy has only intensified the thirst of investors, entrepreneurs and increasingly, average citizens, for an economic model that more seamlessly marries with life-in-the-digital-lane. We promise to keep you updated on the shifting landscape of cryptocurrency, banking and finance and taxes. The future is here and it’s a wild ride!

Any questions or comments on this article? We’d love to hear them! Email us

FAQ: IWTA’s Founder Jack Brister Answers “The Four Questions”

by IWTA Staff | Nov 22, 2019 | 2019, FAQ, U.S. Economic System

International Wealth Tax Advisors’ (IWTA) clients come from every corner of the world. Despite differences in language, home governments, profession and cultural norms, there are four questions we get asked over and over. These questions revolve around the general principles and philosophies that have informed U.S. laws and tax laws, defined citizenship and set the stage for the world’s greatest free economy. If you have found our website, chances are that you too are seeking answers to the “Four Questions”.

To that end, IWTA’s founder Jack Brister has written four blog posts addressing the Four Questions, which are:

Q1: How is it that when the U.S. financial markets crash, and the U.S. economy tanks, Americans never give up? They get up, brush themselves off and move forward looking for the next opportunity.

Q2: Why does the U.S. employ a system of worldwide taxation and not a territorial system like the rest of the world?

Q3: Why does the U.S. employ a “substance over form” tax system?

Q4: Why does the U.S. tax system require so much disclosure? What is the cost for failure to Disclose?

We hope you will find IWTA’s blog posts on the Four Questions helpful, and look forward to your comments.

–The IWTA Blog Team

The Four Questions: Q2: Why does the U.S. employ a system of worldwide taxation?

by Jack Brister | Nov 19, 2019 | 2019, FAQ, Taxes, U.S., U.S. Economic System

The Four Questions: Q2: Why does the U.S. employ a system of worldwide taxation?

Jack Brister

Founder, International Wealth Tax Advisors

Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

A Citizenship-Based Income Tax

The United States (U.S.) system of federal income taxation is a citizenship-based income tax. Elsewhere in the world, the basic rule is that taxes are based on residency and not on taxation of worldwide income based on citizenship.

The origin of the U.S. taxation of worldwide income is the first federal U.S. income tax. Enacted in 1861 in the early months of the American Civil War, it was part of the Revenue Act of 1861. It levied a 3% tax on incomes over $800, but a 5% tax on income earned in the U.S. by, “any citizen of the United States residing abroad”.

The purpose was to prevent the U.S. wealthy from evading their tax obligations (military and civic) as American citizens and retaining the privileges of citizenship by fleeing the U.S. in its time of crisis. In 1864, the tax was expanded to include income from all sources, no matter where generated (i.e., worldwide taxation). Scholars have said this was born from the proud sense of being a citizen of the U.S. With all the opportunities and privileges come obligations. The concept first flowered out of the battlefields of the U.S. civil war. Hence, the defense of citizenship-based taxation and taxation of worldwide income rests on the belief that U.S. citizenship confers benefits independently of where a citizen resides.

It is not necessary that the amount of benefit received be reflected precisely in the amount of tax charged because the system of U.S. taxation is based on taxes benefiting society at large. Therefore, the income tax liability is measured by the ability to pay, not by the amount of services used during the tax year. But benefit is an important consideration in the scope of an income tax. Many overseas taxpayers feel that taxing the income of citizens living abroad is justifiable only if significant benefits and privileges are afforded U.S. citizens wherever they live. The primary privilege is the ability to have a voice: “taxation with representation.” The early U.S. colonists did not have representation with the King of England. This issue was the primary cause of the U.S. revolutionary war.

The model of citizenship-based taxation of worldwide income has remained in the U.S. law ever since, even as the rest of the world has gravitated to a different model known as territorial taxation. Territorial taxation simply considers where the taxpayer is residing. Over the years, there have been no serious attempts by U.S. lawmakers to end the taxation of citizens who do not reside in the U.S. Instead, the focus of the debate has generally been on the extent to which the earnings of Americans working overseas should be taxed – by both the country of work/residency and the United States.

In addition, some U.S. economists have suggested that the current system of U.S. income taxation was visionary in the sense that the U.S. Federal Government at the time considered the implications of Imperialism. It has been discussed that shortly after the enactment of the current system in 1913, (allowed by the passage of the 16th Amendment to the U.S. Constitution which no longer required apportionment among the states under the 14th Amendment of the Constitution), Congress also enacted the foreign tax credit and other measures to make it easy for U.S. persons to know what their worldwide tax obligation would be and encourage overseas investment. The intention being to spread the American way of capitalism.

So, the thought of the U.S. system of worldwide federal income taxation appears to be rooted in the privilege of citizenship regardless of residence and Imperialism.

See our page on Pre-Immigration and Expatriation Planning for more information on tax liabilities for U.S. citizens living abroad or foreign nationals choosing to reside in the U.S.A.