IRS Releases Guidance for Expatriates

The IRS has released Notice 2009-85 - Guidance for Expatriates under Section 877A.  Setion 877A applies to (1) any U.S. citizen who relinquishes his or her citizenship and (2) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States for at least 8 taxable years during the period of 15 taxable years before expatriating.  If you fall in either of these categories, this new guidance will apply if: (1) you have an average net income tax liability per year for the five preceding taxable
years equal to $145,000 in 2009; (2) you have net worth of $2 million or more as of the expatriation date; or (3) you fail to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the expatriation date.  There are certain exceptions to the above classification rules.  So, any person seeking to relinquish their US citizenship or their green card needs to understand these new rules before making that decision. 

If you relinquish your citizenship or lawful permanent residency and you are subject to section 877A, you are deemed to have sold your assets for fair market value and are subject to income tax on any gain at the time of expatriation.  In such situations, each person is permitted an exclusion equal to $626,000 for 2009, indexed for inflation.  There are prescribed ways for the exclusion to be allocated to certain assets on expatriating.  Careful analysis is required.  There are also special considerations when you have foreign companies, assets, or are a beneficiary of a foreign trust. 

The requirements and associated guidance on expatriating can be rather complex.  The U.S. government has made it financially difficult to given up your citizenship, and even your green card. 

Cayman Islands are Outpacing their Regional Competitors

The Cayman Islands continue to outpace their regional offshore financial center competitors when it comes to signing Tax Information Exchange Agreements ("TIEAs").  The G20 countries earlier this year began putting dramatic pressure on offshore financial centers to welcome and accept tax transparency.  The OECD has stated that in order to be an accepted jurisdiction a country must enter into twelve TIEAs.  Since this mandate was announced, the Cayman Islands have been on a rapid pace in order to satisfy this obligation.  The Cayman Islands has signed their twelfth TIEA earlier this year, but they have not stopped there.

It was recently announced that the Cayman Islands government has signed its thirteenth Tax Information Exchange Agreement.  This latest TIEA was signed with France, one of the more aggressive jurisdictions in the battle against tax havens.  One must assume that the declaration that its banks would pull out of tax havens effective March 2010.  France deems a tax haven as a country who does not have the requisite TIEAs signed, an on the "white list" published by the OECD.  

Proof of this threat was recently evidenced when BNP Paribas announced that they were closing their bank in the Bahamas because the Bahamas has failed to enter into twelve TIEAs to date.  The Cayman Islands appear to have taken the global threat more seriously than its regional competitors and continue to blaze the trail in this regard.

Senator Carl Levin Does Not Give UP

Despite the unprecedented response by offshore financial jurisdictions by entering into a flood of tax information exchange agreements, Democrat Senator Carl Levin still is not satisfied. Senator Levin will offer his Stop Tax Haven Abuse Act as an amendment to the Senate Finance Committee's healthcare bill when it reaches the Senate floor, according to a Levin aide.

Under the belief that there are tens of billions of dollars of untaxed revenue offshore, the Tax Haven Abuse Act creates certain presumptions for entities and transactions in Offshore Secrecy Jurisdictions, which the Act will define. The Tax Haven Abuse Act has been criticized as being potentially damaging to the ability for U.S. companies to participate in the global marketplace.

It is unclear how President Obama and the executive branch will react to this tax along to the healthcare legislation. The Tax Haven Abuse Act was backed by President Obama when he was a senator, however, many on the finance committee wish to have the healthcare bill focused on healthcare.

Certainly the policy makers in the international offshore financial centers should keep a close eye on the United States healthcare bill and the aggressive posture of Senator Levin.