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Brought to you by FATCA - Book

Brought to you by FATCA

Offshore Investment Guide

The Foreign Account tax Compliance Act (”FATCA”) aims to combat tax evasion by U.S. Persons using foreign accounts. It requires any U.S. person with foreign accounts, or by entities in which U.S. taxpayers hold an ownership or beneficial interest and Non-U.S. persons who are dealing in U.S. Dollars or have a U.S. person beneficiary to be compliant with FATCA requirements. It requires financial intermediaries outside the U.S. to pass information about their U.S. customers to the U.S. tax authorities, the Internal Revenue Service (IRS) or to their local tax authorities. Failure to meet these reporting obligations would result in a 30% withholding tax on the financial institutions.

To comply, the documentary evidence issued by the US Internal Revenue Service must contain sufficient information to support your FATCA status. Only legal entities which are FATCA compliant can deal in U.S. Dollars.

To properly comply with these new FATCA reporting requirements “participating” FFI will be obligated to:

  1. undertake certain identification and due diligence procedures with respect to its account holders;
  2. report annually to the IRS on its accountholders who are U.S. persons or foreign entities; and
  3. withhold and pay over to the IRS 30-percent of any payments of U.S. dollars, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its U.S. persons.

Brought to you by IRC 402(b)

Famed investor Warren Buffett has pointed out that the true long-term holder should think of tax deferral as an interest-free loan from the Federal and state governments. Unlike ordinary debt, you get the benefit of more assets working for you but you have no monthly payments, you are charged no interest expense, and you get to decide when the bill comes due.

  1. Deferred Compensation: is unreduced by taxation, thus providing a larger capital base and ”turbo-charged” gains and accumulations.
  2. The Mechanism by which Pre-Tax Profit is Tax Deductible Capital A patriarch of Fund of a Fund firm wanted to capitalize on his firm’s success and a hold on to his team of traders. We showed him how to invest his business income pre-tax, tax-deferred. To improve retention, he provide his team of champions deferred compensation in shares of their fund.
  3. Pre-Tax, Tax-Deferred Investing with Low Cost Leverage

A Client has a combined marginal tax rate of 45%. We enabled him to defer business income by investing pre-tax, tax-deferred, into his own company stock which he leveraged at an interest cost of 3%. By investing pre-tax with leverage, he more than doubled his accumulation power.

  • Trading a Fixed Annuity for an Immediately Funded Investment Account A Hedge Fund owner approached us with a novel issue. He was receiving a fee of $400,000 a quarter, which was to continue for 23 years. He wanted more liquidity and protection against inflation. We converted his installments into a deferred compensation account and he was able to invest pre-tax, tax-deferred in the investments of his choosing.
  • Reducing Financing Costs
A firm was carrying a $10 million line of credit and paying 18% interest, or $1.8 million a year. The firm was entitled to a $20 million fee. The plan was to pay off the loan and invest the fee that remained after the payoff and after taxes. We showed that at a 40% tax rate, it would take $16.67 million of pretax fee to pay off the loan, leaving only $3.33 million for investment. By investing the full $20 million income pre-tax, tax-deferred and refinancing the line of credit at 5%, the firm more than doubled its capital accumulation power.

Deal with it

There are three sectors of the Foreign Account Tax Compliance Act (”FATCA”) and only one sector requires no FATCA administration or Global Intermediary Identification Number (”GIIN”).

  1. U.S. Person-connected to a US Person-counter-party to a U.S. person
  2. Those dealing in U.S. Dollars require a GIIN and must disclose every transaction, party to transaction and counter-party to a transaction.
  3. Does not require a GIIN and is a U.S. Dollar Exempt Entity
NOTE: The Book is only available with a Fairbrook Alliance consultation.

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