The impact of IRS rules on the Caribbean
Aside from being obliged to file tax returns even when living overseas, the Bank Secrecy Act has led to the need for Americans to declare overseas bank and financial accounts over a certain level says Derren Joseph.
By Derren Joseph
PORT-OF-SPAIN, Trinidad, Tuesday February 28, 2012 - Some in the Caribbean wait patiently for stronger unity, through an institution like CARICOM or maybe even ALBA; that connects the various territories in this archipelago that stretches from the Bahamas down to Suriname. Then there are sceptics like me who think we already have a working Caribbean union with the US dollar as the true common currency, headquarters for the region’s elite in South Florida, and entities like Nestle, Unilevel, Digicel, Neal and Massy, Guardian Holdings, RBC, First Caribbean, Scotia Bank, Republic Bank, Rituals Coffee, Prestige Holdings, SM Jaleel, Holiday Foods and even Blue Waters treating the wider region like a single marketplace. No need to wait for a Caribbean union – it is already here.
As a region, the Caribbean is inextricably linked to the United States. There is no need for me to comment on the extent to which the region is socially connected to the US. Economically, the biggest industry by any measure is tourism and the biggest source market for the region’s tourism product remains the United States. For so many reasons, it makes sense that the region pays attention to U.S. politics and these days, the discussion needs to be about the changes in US tax regulations.
To be more specific, I see three distinct interest groups in the region that may or should now be concerned – Americans resident in the region, the region’s financial institutions and territories that promote so-called off-shore financial services. The reason is simply the U.S. government’s more aggressive stance on taxing its citizens.
Let us start with individuals. Almost everyone in the Caribbean has a relative or friend with either a green card or a US passport. Some of them live in the States, some have returned to live in the region. The US however, is the only country that taxes its citizens / residents on their worldwide income even when they are not resident in the US. So aside from being obliged to file tax returns even when living overseas, the Bank Secrecy Act has led to the need for Americans to declare overseas bank and financial accounts over a certain level (known as FBAR regulations) or pay particularly high penalties for failing to do so.
This leads us to the region’s financial institutions. Perhaps recognising that many Americans (either resident in the States or resident overseas, including those resident in the Caribbean) do not declare overseas income and financial assets, the IRS is now going a step further. Essentially, regional financial institutions will be required to report depositors / investors they believe to be Americans to the IRS (under something called FATCA). The incentive for these Foreign Financial Institutions (FFIs) to comply, would be to avoid withholding penalties imposed on their US assets. Obviously regional operations of Canadian banks like RBC and Scotia would just piggy back on what their Canadian operations are already doing so the real compliance headache (new processes and new administrative costs) would fall on indigenous entities like Republic, First Citizens, First Caribbean, Unit Trust etc.
This leads me to the impact on Caribbean territories themselves. Five European countries have already cut a deal with the American government which means that their financial institutions report Americans to their respective European government who in turn report details to the US government. Are individual islands thinking about that option? Also there are some islands which must be unsure about what the eventual impact will be. Would their resident off shore financial institutions just pack up shop in frustration or are they poised to benefit from the increasing number of Americans who are renouncing their citizenship in favour of economic citizenship programs such as in Dominica or St Kitts?
One comment under a recent FATCA article in the internet edition of the Wall Street journal noted that the Americans got the Swiss banks to do something that the Nazi regime failed to do even at the height of its power – surrender the names of citizens with secret accounts. Some speculate that resentment of American infringement of national sovereignty will increase worldwide once these regulations are fully implemented. Time will tell how this turns out, but it is a reminder that citizenship is both a privilege and a responsibility.
In the meantime, just tell your American friends and family to make sure that they report their foreign accounts this year in their 2011 returns. The reason being that when FATCA starts being phased in from next year, the IRS may find out anyway. If the IRS finds out on their own, that would cause a whole lot more trouble.
The opinions expressed in this commentary are solely those of Derren Joseph. Derren Joseph is a U.S. tax accountant, tourism industry consultant and columnist who is passionate about Caribbean development.