HNW clients: transparency in the United States and Latin America
Laura Salviano
Georgetown University Law Center, Washington, DC
Report on a panel discussion at the 16th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami
Wednesday 12 June 2024
Session chairs
Renata Emery TozziniFreire, São Paulo
Robert Moore Baker McKenzie, Miami
Speakers
Heather Fincher Kostelanetz, Washington, DC
Javier Otegui Guyer & Regules, Montevideo
Carolina Rozo Philippi Prietocarrizosa Ferrero DU & Uría, Bogotá
Humberto Sanches Humberto Sanches e Associados, São Paulo
Introduction
The panel was introduced by Renata Emery and Robert Moore. It focused on the evolving landscape of tax transparency and compliance for high net worth (HNW) individuals and multinational businesses in the United States and Latin America. The discussion encompassed various initiatives, regulatory updates, country-specific measures and next steps aimed at enhancing tax transparency and combating tax evasion. Key subjects included the impact of information exchange and the implementation of controlled foreign corporation (CFC) rules.
Panel discussion
United States
Heather Fincher began by outlining the US tax transparency framework and emphasising the Punta del Este Declaration, initiated by the OECD in 2018. This declaration, supported by 15 Latin American countries, aims to combat tax evasion, corruption and illicit financial flows by implementing international transparency standards and maximising the use of exchanged information for various purposes, including tackling financial crimes.
Fincher highlighted the recent Tax Transparency in Latin America 2024: Punta del Este Declaration Progress Report from the OECD, which mentions that over the past five years, these efforts have resulted in the collection of over €2bn, including €862m from nearly 3,000 information requests. Additionally, Latin American countries have formed over 2,000 exchange of information (EOI) bilateral relationships through the Convention on Mutual Administrative Assistance in Tax Matters, covering more than 140 jurisdictions.
From a US perspective, Fincher noted that more than 8,000 officials were trained by the Global Forum Secretariat between 2020 and 2023, reflecting an increased focus on information exchange training.
Historically, US financial institutions collected information on individuals but not on the beneficial owners of entities. After 9/11, the Patriot Act amendments required more thorough due diligence, including collecting beneficial owner information, but this data was not shared with governments. The development of tax information exchange agreements (TIEAs) and the 2010 enactment of the Foreign Account Tax Compliance Act (FATCA) tasked the Treasury with gathering information from foreign financial institutions, leading to intergovernmental agreements (IGAs) for information exchange. However, beneficial ownership information exchange remained limited to tax treaties or TIEAs, leaving significant gaps despite progress since 2010.
The most recent development in US tax transparency, the Corporate Transparency Act (CTA), which passed in 2021 and was implemented in early 2024, requires both US and foreign entities conducting business in the US to report information about the reporting company, its beneficial owners and the applicants who created the entity.
A key question under the CTA is the definition of a beneficial owner, which includes any individual who directly or indirectly exercises substantial control over the company or owns at least 25 per cent of the company’s ownership interest. This has raised concerns about the implications of ‘substantial control’.
The CTA requires reporting the full legal name, date of birth, address, unique identifying number, issuing jurisdiction of the ID (eg, passport or driver’s licence) and a picture of the ID for each beneficial owner and company applicant. Fincher noted that there are significant constitutional challenges to these provisions, with an Alabama federal case ruling them unconstitutional and a new case in Texas also challenging the CTA. Additionally, Congress members have proposed legislation to address these issues. A key concern is how and when this information can be shared.
Regarding digital asset reporting, Fincher mentioned the proposed regulations REG–122793–19, issued on 29 August 2023, which require brokers to file information returns and provide payee statements for digital asset transactions, including virtual currencies, non-fungible tokens (NFTs) and other digital tokens using distributed ledger technology. The regulations classify certain entities as brokers, such as CFCs, foreign partnerships controlled by US persons with US trade or business activities, and foreign persons with substantial US trade or business income. Additionally, the Treasury and Internal Revenue Service is considering the implementation of the Crypto-Asset Reporting Framework (CARF) to enhance digital asset reporting and regulation in the US.
Key issues for Latin Americans operating in the US include proposed regulations on reporting transactions with foreign trusts and receiving large foreign gifts (REG-124850-08). These regulations clarify the tax consequences of indirect loans and the use of foreign trust property by US beneficiaries. Recipients of large gifts must provide donor information, and the reporting threshold for gifts from foreign individuals or estates has been increased. Additionally, gifts or bequests from covered expatriates above the exclusion threshold must be reported.
Finally, Fincher discussed the CFC rules for shareholders of Latin American corporations moving to the US. She highlighted the 2017 US tax reform, which introduced the global intangible low-taxed income (GILTI) tax, and the need to assess whether US tax treaties apply. She emphasised the ‘limitation of benefits’ clause, which prevents third-country residents from claiming treaty benefits not intended for them. Fincher also warned that Latin Americans investing in the US should be aware of the potential to be considered as doing business in the US, which would increase their reporting and tax obligations on the income generated.
Colombia
Carolina Rozo emphasised the reporting obligations for foreign trusts and private foundations, which must be considered transparent for net worth tax purposes. Tax residents must report these transparent investment vehicles under specific conditions. Reporting depends on control, requiring disclosure if one controls the assets, whether as a settlor or beneficiary. Colombian taxpayers are currently engaged in discussions with tax authorities about control issues and whether trust protectors have reporting obligations due to their potential control over assets. Moreover, there is also a discussion on whether private foundations and trusts should also be considered transparent for income tax purposes.
Rozo also commented on the legal uncertainty surrounding the application of the CFC regime in Colombia. This uncertainty is significant due to the complexities in determining control and the low threshold for control. The interaction between the CFC regime and other tax regimes, such as the indirect transfer regime, exacerbates this issue. For example, a Colombian tax resident with a US CFC might face double taxation on capital gains without crediting taxes paid by the foreign entity. Additionally, the CFC regime may conflict with international tax treaties, leading to further tax liabilities. This lack of clarity, especially with complex structures like joint ventures and trusts, creates significant uncertainty for taxpayers.
Rozo raised concerns about beneficial owner reporting, noting it borrows concepts from criminal law, causing complications. The process involves three steps:
- determining if an individual owns at least 5 per cent of the entity;
- assessing control over the entity; and
- if neither applies, reporting the legal representative as the beneficial owner.
This can lead to reporting individuals who are not liable for tax purposes but could be for criminal purposes, resulting in significant controversy and criticism due to extensive reporting on non-taxpayer beneficial owners.
Lastly, Rozo noted that Colombia has executed double tax treaties with information exchange clauses and anticipates robust enforcement of tax transparency by the authorities in the coming years.
Brazil
Humberto Sanches discussed the significant changes in Brazil’s tax landscape, focusing on the introduction of CFC rules and their implications for HNW clients. Previously, Brazil lacked CFC regulations, which facilitated tax deferral through foreign companies. The new robust legal framework now requires comprehensive reviews of client structures, exploring new setups and working with financial advisers and trustees to adapt investment strategies.
Clients are shifting from traditional portfolios to more sophisticated arrangements like investment funds and structured notes. The ‘check the box’ election allows companies to be treated as transparent, enabling clients to defer taxes by considering company assets as directly held by individuals.
Sanches also noted a growing trend of using trusts for international tax planning, now positively regarded in Brazil except in limited circumstances. Trusts offer flexibility for succession planning and tax deferral, with recent legal clarifications easing their use without facing punitive taxes. Sanches also highlighted the increase in gift and inheritance taxes, prompting accelerated gifting strategies.
Financial assets held abroad by Brazilian residents are now taxed at a flat rate of 15 per cent, down from past rates up to 27.5 per cent. This rate applies to various asset types, including stocks, bonds, certain insurance policies and crypto assets, allowing for offsetting gains with losses to minimise tax liabilities.
Trusts are considered transparent, with assets deemed directly held by the settlor, although irrevocable discretionary trusts present complexities. Foundations are treated as CFCs, differing from trusts and requiring careful planning, especially in jurisdictions where trusts are not recognised.
Foreign insurance policies redeemable by the insured are now seen as CFCs if the policyholder can influence investments. Without such influence, they are treated as financial assets, offering tax deferral benefits. Sanches emphasised the importance of careful structuring for compliance.
In closing, Sanches noted that the introduction of these rules has created practical challenges for accountants, lawyers and clients, necessitating accurate record-keeping and compliance with Brazilian generally accepted accounting principles (GAAP). Moreover, he pointed out that the government’s stance on recognising market value fluctuations of such assets will probably lead to future disputes.
Uruguay
Javier Otegui outlined the tax transparency and reporting requirements in Uruguay, focusing on both corporate and individual tax obligations. Uruguay operates primarily under a territorial tax system for companies. An exception exists for passive income from multinational companies without substance in Uruguay, which is subject to worldwide taxation. For individuals, worldwide income is taxed, including derivative instruments and returns from movable capital like interests and dividends. Notably, new tax residents enjoy a tax holiday, exempting them from certain taxes, which is relevant considering Uruguay has received many people from other countries.
Uruguay’s CFC rules apply only to individuals investing in low or no tax jurisdictions (LONT). Uruguay does not require reporting of foreign assets or entities and has no regulations on OECD’s Pillar Two directives or voluntary disclosure regimes. Before 2010, CFC rules did not exist, and individuals were taxed only on Uruguayan income. From 2011 to 2016, a general CFC rule applied to individuals controlling entities paying less than 12 per cent tax. Since 2017, these rules target entities in LONT, with 33 jurisdictions identified, including Puerto Rico and the US Virgin Islands.
Uruguay has established robust EOI frameworks, with 25 bilateral double tax treaties containing EOI clauses and 11 bilateral EOI treaties. Since 2018, Uruguay has been actively exchanging information under the Common Reporting Standard (CRS), receiving data from 110 jurisdictions and sending information to 86. Uruguay is also a signatory to the Convention on Mutual Administrative Assistance in Tax Matters, involving 147 countries.
Regarding beneficial ownership disclosure, Uruguay requires entities to identify individuals owning more than 15 per cent of capital, votes or control. This requirement extends to resident entities, permanent establishments, foreign investment funds or trusts with resident administrators or trustees, foreign entities with more than US$390,000 in Uruguayan assets and foreign entities with significant management in Uruguay. Ownership information is confidential and accessible only to authorised entities, including tax and anti-money laundering authorities. Non-compliance can result in fines up to US$40,000.
Finally, Otegui highlighted key practical considerations for Uruguayan investors in offshore entities. If the entity is not in a LONT, investors benefit from tax deferral, and dividends and interest are taxed at 12 per cent (or enjoy an 11-year tax holiday for new residents). There is no indirect transfer tax and no net worth tax on individuals. If the entity is in a LONT (rare), it faces a 12 per cent tax on interests, dividends, and capital gains, with the same tax holiday for new residents. Indirect sale tax applies if over 50 per cent of the entity’s assets are in Uruguay, but there is no individual net worth tax, as Uruguayan companies pay for the national net worth tax.
Conclusion and final remarks
Emery closed the panel by highlighting the key insights from the discussion. She noted that while transparency and CFC rules across the Americas share many similarities, significant discrepancies hinder a harmonised environment.
The panellists emphasised a shared concern: the protection of taxpayer rights. Increasingly, taxpayer information is shared by tax administrations without the taxpayer’s knowledge or control. Taxpayers often do not know which information is being shared, how it will be used, or if administrations have proper confidentiality mechanisms.
This issue has led to numerous disputes in each country, focusing on protecting taxpayer rights from a human rights perspective. At the end, participants shared their experiences and insights on these disputes, highlighting the various stages of litigation and the approach adopted in these cases.