The breaking of a paradigm in the International Tax scenario

The breaking of a paradigm in the International Tax scenario

João Pedro Volz

A paradigm can be colloquially defined as a set of standards or rules or a pattern by which we can attempt to determine or interpret the future course of events. A paradigm shift is a substantial change in those concepts or patterns. Today, the world of international tax and investment finds itself at the heart of a paradigm shift. 

If you were to consult any number of high-profile attorneys, accountants or experts, there was one truth which everyone knew, but few ever openly acknowledged, that is that the United States of America is the largest, most economically stable, and most secure fiscal paradise in the world. The United States offered foreign investors ample opportunities to invest through disregarded entities, where foreign investors would have zero tax or reporting obligations on foreign income, wide ranging exemptions from us tax on us brokerage, and almost absolute privacy. This was offered on top of the possibility to bank with stable currency at mostly no additional cost to the foreign investors. 

This reality made sense to experts and professionals working in the field. Why would the United States not give foreign investors this benefit, when il essence it would lead the US to becoming the post FATCA banking capital of the world, and bring mired other benefits to its local economy. And even United Statesglobal efforts to impose global regulation and oversight was mostly limited to policing the actions of US individuals abroad. The US purposely avoided joining widely adhered to OECD sponsored exchange of information agreements, and common reporting standard practices. This all made clear there were two parallel systems, the developed worlds, and the United States. 

The first shock to the paradigm came from a 2017 regulation requiring single member LLCs with foreign owners to registering substantial ownership and control, and changes to that control utilizing form 5472, traditionally used for C-Corporations. This singular report to the IRS did not cause a tremendous stir on the part of foreign investors, as information provided to tax authorities are generally under broad privacy protections under US law. 

If the 2017 regulation shift was cause for attention, the Corporate Transparency Act shatters everything the international community took as a consensus pertaining to the US global policy on collecting and exchanging information. Congress, overturning a veto by then president trump, gave FinCen, the US financial crime police, board authority to create a database of companies and their owners. The hundreds of pages of final regulations published September 30th painted over broad reasons why this regulation was being enacted. In general, FinCen states their purpose is to help catch terrorists, Russians, and criminals, who today enjoy the privacy offered by US corporate law to operate their international trade.  They didnt really clarify how their current wide-ranging tools and authority had failed to catch the criminals but do list that the constitutionally granted protections of due process created a burden they found unbearable, in requiring that they provide a judge with sufficient evidence prior to accessing corporate information currently held by the IRS. This requirement of judicial protection is something the legal community has considered a key feature of constitutional rights held by US citizens. 

FinCen also applaud the efforts of Germany and France in creating registries of companies and promote the possibility of this information would be exchanged if an exchange agreement were to be signed with another country. They make it clear this database will be the basis for automatically exchange in the future. FinCen assures the reader that this will not impose a large burden on the business owner. The cost of implementing this new regulation combined with penalties cast serious doubt on their claims. The reality is business owners will need to pay professionals hundreds, if not thousands to adhere to this regulation as companies who dont adhere will be subject to a punitive fine upwards of $10,000.

The result of the CTA is that every entity opened in the United States will need to register with few exceptions. This registration will become required starting 2024 and will apply to all new and existing entities. New entities will have 30 days to register from the time of their constitution. Registration requires the entities inform their registered agents, addresses, and EIN numbers. Individuals who directly or indirectly have 25% or more of the voting rights or distribution rights over a company will need to be informed as well. Individuals with substantial control over the company will also need to be informed. They will need to submit a scanned passport and provide identification number and address. Indirect ownership does include individuals who are investing in a US company through a convertible promissory note. Trusts are generally excluded from the rule, but beneficiaries may be subject to registration insofar their owners have demand rights over their trusts and are few enough to be counted as substantial owners.

In essence everyone who owns real property either through a us company or an offshore will have to register. Everyone triangulating their international operations through a US company will need to register. This additional registration will come at a cost. Investors will need to hire local experts to keep their information up to date at the risk of suffering penalties. While this information is on this face not to be made public, those wishing to have privacy in their investments should consult an expert to rethink their structure.