Why Americans don’t have offshore bank accounts

By Felix Salmon
July 24, 2012
Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar.

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Adam Davidson uses his NYT Magazine column to weigh in on the subject of offshore tax havens this week, and delivers something very peculiar. His initial conceit is reminiscent of Dennis Berman’s attempts to set himself up as a pre-IPO Facebook investor, only without the deceit:

Earlier this month, I decided to see how hard it would be to set up my own offshore bank account. I figured it would be pretty difficult, because I’m not rich and don’t have a team of tax lawyers to oversee my money and because the E.U. and U.S. governments have been cracking down on tax havens by imposing stricter tax-sharing requirements.

You know how this is going to end: Davidson ends up concluding, in the first of his “deep thoughts this week”, that “it takes 10 minutes to open an offshore account”. But, by his own account, that isn’t really true. He did end up talking on the phone — surely for more than 10 minutes — to someone who said that in return for $1,500 or so, he could set up a Belizean company with a bank account in Singapore. It’s not at all clear whether Davidson actually ended up creating the Belizean company or its Singaporean bank account, although it is clear that in addition to the phone call, Davidson had to get notarized copies of his passport, driver’s license, “and some other identity documents”, and then email them to A&P Intertrust, a company in Canada.

More to the point, Davidson didn’t incur any of the really big expenses involved in setting up an offshore account, most of which come in the form of legal and accounting advice. As Davidson writes:

Setting up an account may be easy, but managing one is expensive. Following the law requires a team of lawyers and accountants to carefully monitor tax laws in dozens of countries and maintain accounts that stay on the safe side of confusing rules. It’s not really worth the cost for anyone other than wealthy investors looking to put aside money, tax-free, for future generations. Or for large multinationals who prefer to centralize their global cash-flow stream in a place that doesn’t tax corporations or require a lot of financial reporting. Why would a huge company like G.E. want to pay U.S. taxes every time its Spanish subsidiary sells parts to a company in Belarus when it could avoid them by incorporating offshore?

This is entirely true. If you’re a US citizen and you intend to spend your money in the US at some point, there’s very little reason to set up an offshore account. And even if you’re saving for your heirs, if they end up spending the money in the US, then they’ll probably have to pay full income tax on any money they bring in from overseas. What’s more, given demographic and fiscal realities, the income tax they pay might be significantly higher than it is today.

So why would Adam Davidson or anybody else ever want an offshore bank account? He cites laws saying that information about the owners of such accounts is not public and is would not be available even to the Belizean or Singaporean governments. And he talks about how difficult it would be for the IRS to investigate such arrangements. All of which is a polite way of saying that if you intend to break the law, there’s a good chance that you won’t get caught. (Although, tell that to the thousands of Americans who held money in Swiss accounts at UBS, and then saw their details handed over to the IRS.)

The IRS also doesn’t really need to be able to investigate all those bank accounts directly, most of the time: all they need to do is ask the account holder directly. If Adam Davidson were ever audited by the IRS, they would ask him for a list of all of his offshore accounts — and if he had any sense at all, he would give it to them.

While it’s true that people are more likely to break the law if they think they won’t get caught, there’s no way that changing US law is going to alter that. The attraction of offshore accounts isn’t a function of US law, really, so much as it’s a function of the fact that such accounts are opaque to US tax authorities. And it’s really hard for the US Congress to unilaterally pass a law which suddenly allows the IRS just as much access to an account in Singapore as they have to an account in Des Moines.

Still, they’re trying, with something called the Foreign Account Tax Compliance Act, which puts a lot of transparency responsibilities onto any foreign financial firm with American account holders. And weirdly, Davidson isn’t a fan of the act:

The move is very unpopular among foreign banks, governments and Americans living abroad, but the more complex rules could actually mean more business for offshore centers. By the time Fatca is in full force, in 2017, truly wealthy individuals and corporations will almost certainly have used their resources to find more intricate loopholes.

Instead, he says:

My colleagues at NPR’s “Planet Money” recently polled several economists of all political stripes and found that while they disagreed on the right level of taxation, they generally agreed that the overly complex taxation of rich people and corporations was disastrous. It all but guarantees that those people and companies will spend an inordinate amount of money figuring out how to game the system rather than come up with new ideas that improve the economy. Economists generally agree that the best tax system would be simple and strict, offering little incentive to lobby for loopholes. The big problem, of course, is that many of the people and corporations with the most influence over Congress don’t want it that way.

And this is where I get very confused, since it’s not at all clear what Davidson is calling for here. The third of Davidson’s “deep thoughts” is that “it would be better if the rules were simpler” — but how would it be better? By those lights, today’s rules are better than the rules which are going to be in force in 2017, just because they’re simpler. And it seems to me, at least when it comes to US individuals, that we already have a simple system. You have to pay taxes on your global income, including investment income, wherever those investments are in the world.

As a result, by all accounts, Americans have much less money in offshore bank accounts than citizens of most other countries. Reliable data on such things is impossible to come by, of course, but all of the numbers in Davidson’s piece are trying to measure a total amount in offshore centers, rather than the amount that can credibly be considered to be American in some way.

And while it’s true that American companies have a lot of money offshore, substantially all of those companies are multinational, and they would have to have many international bank accounts no matter what the rules said.

As far as US individuals are concerned, no one has yet demonstrated to me that there’s some kind of pandemic of rich people opening offshore accounts. In England, where I come from, it’s reasonably commonplace for individuals to have bank accounts in Jersey. And in Germany, likewise, lots of middle-class families keep money in Luxembourg or Liechtenstein. But in the US, by contrast, I see no day-to-day indication that offshore accounts are a remotely common tax-avoidance strategy.

Insofar as there is a problem, it seems to me, the problem is with tax collection and enforcement, rather than with the complexity of US tax legislation. Yes, the US tax code is ridiculously complex, and riddled with loopholes which ought to be abolished. But I think it’s actually pretty good when it comes to individuals’ offshore assets. And it’s only going to get better as Fatca comes in to force.

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Comments
24 comments so far

The compliance rules are too complex. Why, for example, do I need to file an FBAR TD 90-22.1 on my foreign assets with the Treasury Department ($10000 aggregate threshold) and a Form 8938 with my tax return to the IRS ($50000 threshold)? Given that the IRS is a sub agency of the Treasury Department, is it really beyond them to create one consolidated reporting structure?

Posted by Hippopotamax | Report as abusive

Hippopotamax raises a great point that you completely skip over. Complying with FBAR requirements is absolutely ridiculously complex. And not all the people that are caught up in FBAR requirements have offshore accounts because they are incredibly rich. What about immigrants or Americans living abroad?

The whole FBAR circus is so complex and overbearing that I find it really offensive. Just because I’m an immigrant, the IRS treats me as if I were some sort of criminal hiding money abroad. I’ll never get back those hours wasted trying to figure out FBAR and nobody will reimburse me for lost efficiency after I close as many foreign accounts as I possibly can to make my reporting easier.

Posted by magnusvk | Report as abusive

“So why would Adam Davidson or anybody else ever want an offshore bank account?”

I wanted to open a bank account in Europe, so I could get a credit card that was based on the euro instead of the dollar. Almost all U.S. banks charge absurd exchange fees (3-5%) for credit card charges in other currencies, so I thought I would open a small savings account and get a credit card to avoid those fees. Not possible as far as I could see.

Since that was when the euro was trading at $1.45 or so, I’m o.k. that it didn’t happen, but at some point I’d like to be able to open an account there, unless U.S. banks stop trying to get me to subsidize all of their gambling losses with their absurd fees.

Posted by KenG_CA | Report as abusive

@KenG, I understand that the Capital One card doesn’t charge an exchange fee, although I prefer using my AmEx for the miles.

Back in the dotcom heyday, there was at least one Swiss bank offering accounts through the web. Those eventually disappeared, and given the reporting hassles I’m glad I didn’t do it.

Posted by Curmudgeon | Report as abusive

Curmudgeon, I expected somebody would mention that, but was hoping nobody would, so I didn’t go into this long story about them. Yes, Capital One does not charge an exchange fee, but that comes with the burden of dealing with Capital One’s illogical rules.

The last time I went to Europe, I planned on using my capital one card as much as possible. Knowing this would exceed the limit on my card, I made an extra payment before I left, so I would actually have a credit balance. A few days before the end of the trip, the hotel we were staying at told me my card was declined as they tried to add that days’ charges on it. How could that be, I thought. I went on-line and checked my balance, and sure enough, I had lots of credit available. When I called Capital One, they told me that even though I paid the total balance on my card, I could not charge more than my credit limit in one month. So while I had a zero balance, I couldn’t use the card. I had to use my card from SkankofAmerica for the remainder of the trip, which charged me 2-3% for the privilege of generating exchange and merchant fees for them.

After a year or so, I forgave Capital One, and started using it again. Then one month, I sent in a payment a day late (the amount due was a fraction of my credit limit, and I’ve had a history with them of paying off the balance every month), so they put my account on hold. OK, my bad, I paid them late, they can shut off my card until they get the payment. Ten days after my bank says they received payment (electronically, no waiting for checks to clear), Capital One still hasn’t enabled the card again. I call them up and they tell me it’s still suspended, even though the balance has been zero for almost two weeks. I told them I get the message, they don’t want me to use the card, so my wife and I both stopped using our Capital One cards. For good.

Any other banks that don’t charge an exchange fee? I won’t bore you with my Amex story.

Posted by KenG_CA | Report as abusive

Ha, sorry, Ken. I mostly use Amex these days, and eat the exchange fees. I have a USAA MC for those that don’t take Amex, but I don’t think I’ve ever used that in Europe, so I don’t know their fee structure. Yes, I also have a BOA card, but I actually got that card about seven acquisitions before it became BOA.

Posted by Curmudgeon | Report as abusive

KenG_CA, I have no trouble with US banks. I don’t use them. I don’t understand why the vast majority of average income citizens use banks. As you said, bank fees are ridiculous. I don’t need a foreign bank, either. I use a credit union. I travel internationally with a credit union Visa card, with no fees for international transactions or even for cash advances. Cash advances have no fee aside from interest on any outstanding balance, and the interest rate charged for cash advances is the same as what they charge on purchases. The currency exchange rate, at full value with no up-charge, converts to $US on the day of the transaction. They offer cards with up to $15,000 credit limit (with an appropriate credit score, of course). If your score is not so good, they charge slightly higher interest rates, without gouging. If you report a stolen card or unknown transaction, they return your money for the transaction to your account within 1 business day, and do the same with debit card transactions on your checking account. Unless evidence clearly shows that you authorized the transaction, but you forgot you did so, they re-apply the transaction at that time, but never tie up or hold your money unless a transaction is truly legitimate. The credit card interest rate is only 8.15%. They never trick members into higher rates or fees, and they forgive you for a late payment (i.e., no late fee) unless you’re a habitual offender. Even then, the fee is reasonable, and they don’t raise your interest rate. If they need to raise interest rates for all members, they maintain existing balances at the old rate until you pay it off. That has happened once in over 10 years, and the rate rose a whopping 1 percentage point. They pay over 3% APY on checking account balances – no minimum balance required. They have over 40,000 fee-free cooperative ATMs in the US. If you use a fee-charging ATM, they reimburse up to $12 in fees to you every month. Get away from the overcharging banks that are driven by greed instead of a reasonable level of profit. Go to a credit union.

Posted by bk_Indiana | Report as abusive

With tens if not hundreds of thousands of US citizens working outside of the US, all of whom who need what the IRS/Treasury consider to be “offshore” bank accounts, why is there no easy to fill in tax form for them? Perhaps more importantly, since they receive none of their normal benefits of being in the US while they live abroad, why do they need to complete a US Tax Return at all? A very large number of them qualify for the Foreign Earnings exemption and so pay no tax anyway.

Posted by FifthDecade | Report as abusive

There are approx. 6.3 million US citizens who live abroad. Nearly every one of them needs a bank account to receive wages and pay bills. Many banks abroad have been terminating the accounts of US citizens who reside overseas rather than implement the costly system changes and reporting required. In some and possibly many countries there are also privacy law changes as well as sovereignty issues to be overcome to comply with the extra-territorial US FATCA.

There are 207 nations in the world of which seven, repeat, seven have made FATCA agreements with the US to-date. With five months remaining in 2012, there are still 200 countries to go. Important creditor countries such as China and Russia have not signed up and may never do so. Canada and Mexico with their large number of US citizens have also not agreed to implement FATCA. With FATCA implementation planned for January 1, 2013, I’m glad I’m not running this project!

Posted by CitizenAbroad | Report as abusive

I’m an American abroad and I actually do have an offshore account. It’s located in the United States. It wasn’t the easiest account to open either, because I had to pretend that I actually lived in the so that I wouldn’t be denied banking services in America. The other day, I was informed that I can’t open up a local account because I’m labelled as being one of those unwanted “US persons”. So, yes, I am an American and I do have an offshore bank account in the United States. Sorry if that offends anyone.

Posted by ExpatAmi | Report as abusive

Excuse me??

“And it’s only going to get better as FATCA comes in to force.”

I am confused. So, what is going to get better? You said in the paragraph above:

“As far as US individuals are concerned, no one has yet demonstrated to me that there’s some kind of pandemic of rich people opening offshore accounts.”

So, there is no problem, but it is going to get better?

Uh?

How can 388 pages, so far, of FATCA regulations and rules to search out every U.S.Person in the whole wide world, and make every Financial Institution on the face of the globe, to become a tax reporter to the International Revenue Service (IRS), at huge expense to an already shaky global financial economy, possibly be better?

Geez, most of these BIG organizations can’t follow the KYC and AML rules already. They are now facing Dodd Frank complexity, and now you want to dump an additional 388 pages of FATCA regulations on top of them and assume that it will “get better?” I hope you are not one of those that never saw a rule or regulation you didn’t like.

Have you seen the new FATCA form that you, as an individual, have to fill out along with the FBAR form? Duplicative, complexity on steroids, and serious penalties for foot faults.

Then, it is possible you don’t understand what a U.S. Person is, and how onerous these FATCA and FBAR regulations are.

Here, just consider what the IRS is requiring under FATCA. Let’s examine what a U.S. Person is…

When Congress designed this FATCA monstrosity, they forgot about the unique nature of US citizenship taxation, where U.S. Persons get taxed no matter where they reside in the world, and they weren’t thinking about how the IRS designates “U.S. persons”.

A U.S. Person is more than just a Homeland resident U.S.Citizen. It includes accidental Americans by birth who don’t know they are American; Non resident green card holders; Expats living abroad for years; and even non resident Foreigners so classified due IRS rules. All are supposed to be filing returns to the IRS, paying taxes, completing FBAR and duplicative FATCA forms, with draconian penalties for failure!

BTW, the rest of the world practices a residency based taxation system, just like the 50 States in the Union. And, for a reason. It is simpler to administer. It is understandable, it is logical, and you are taxed where you live and receive services and seen as fairer than taxing a person living in a foreign land. California doesn’t tax an Iowan, just because they were originally born in California and them moved away in later life.

Impacts of FATCA? Increased renunciation of Citizenship. Banks shedding U.S. Clients as Americans become pariahs. Foreigners refusing to enter into partnerships with Americans as they don’t want their account data turned over to the IRS, Investors getting rid of US financial products. Surprised? You shouldn’t be.

There is a lot more FATCA Fallout and collateral damage and unintended consequences to come, for a problem that may not really be there.

Posted by FBAR_Compliant | Report as abusive

‘Muriykans think Rhode Island is ‘offshore’.

Posted by Neil_McGowan | Report as abusive

“The IRS also doesn’t really need to be able to investigate all those bank accounts directly, most of the time: all they need to do is ask the account holder directly.”

That begs the question: How many times has Mitt Romney been audited by the IRS in his lifetime?

Posted by GRRR | Report as abusive

With respect to corporate income taxes, the U.S. is in a distinct minority in attempting to tax global income. Most OECD countries have a territorial system with the idea of imposing taxes on corporate operations within their borders.

Posted by realist50 | Report as abusive

Felix, you obviously don’t understand the current regulations. Davidson would be required to report his off shore account by FBAR–he doesn’t need to be audited. There’s also a spot on your tax return and then there’s FACTA. I’m afraid F_Bar Compliant gets it all too right. This law is hopelessly complex and over-reaches America’s sovereignty. I’m not a rich person hiding money. I’m an American living abroad trying to stay compliant. FACTA has made me think about giving up my US citizenship–something I never, ever dreamed I would ever consider.

Posted by MackieJo | Report as abusive

Felix, your mind is putty. You clearly do not believe in freedom, honestly earned freedom. You do believe in slavery, servitude and fascism of the state that presumes to own and control all property regardless if all laws are complied with. Does England have laws that say; if you followed all our laws and paid all our taxes, but you hid some honestly made money from us you’re a criminal and we can take all your money from you? The US does. FACTA is just the next step in making it illegal for any American to live or work overseas or put those that do at serious risk for breaking laws where there was no harm or illegal action other than a fiction of the law. FACTA has already made it so that many US Embassies cannot get bank accounts. In fact Hillary (500 FBI Files on her desk) McCarthy Clinton had to plead recently for foreign banks to service US embassy and State Dept. accounts in spite of FACTA violating every foreign countries sovereignty.
It would be more refreshing if you actually studied and knew the details about your column’s subject before expressing your erratic views on serious topics. Must be nice to live a charmed UK life not being subject to slave level taxes with no benefits on any and all your labor and property in the know Universe.

Posted by JP007 | Report as abusive

@JP007 It would be impossible for someone to have “paid all our taxes” if they were hiding some money, whether or not it was honestly made. Income tax would be due on any income or dividends the money generated, or capital gains tax on any profits on the sale of investments.

In some places eg Switzerland Wealth Tax would replace Capital Gains Tax, and if you hide money outside of the country you might be unknowingly but still fraudulently increasing any mortgage interest relief you might be eligible for in Switzerland. In England, Tax Evasion is illegal. It isn’t “hiding” it, it’s putting upward pressure on everyone else’s tax bills because you are too selfish to tell the truth, it’s tax fraud and anyone indulging their inner child by pretending it’s only a game deserves to be punished. Who doesn’t deserve to be punished are all those honest hardworking expats who declare everything correctly for little gain for the IRS.

Posted by FifthDecade | Report as abusive

When my parents liven in the Detroit area and Canadian banks paid more interest they took a bus across to Windsor (Canadian Suburb of Detroit) and opened an account with no more problem than a American one.

Posted by Samrch | Report as abusive

All of these questions are interesting and, to me, personally germane, but most pressing is the curious detail that no one could find a word beginning with “T” to append to the name of the bill.

Posted by dmcdougall | Report as abusive

Even if there were many people with offshore accounts, how many of them would want to reveal this information openly? I am sure that the estimated number of people with offshore accounts is grossly understated. If I had a huge sum of money, I would definitely want to protect it and to reduce the amount of taxes on it. Whether through investment or an offshore bank account, I would look for ways.

Posted by Simonstar12 | Report as abusive

Would an off-shore bank account be an advantage for me (a US Citizen) if I want to set up an separate for acct for $$$ I will spend when I’m traveling -or- living over-seas? Can I legally avoid paying US Taxes on interest earned over-seas, as long as I spend that $$$ deposited in an acct while I am out of the country?

Thanks in advance for any insight y’all can provide.

Posted by GoState99755 | Report as abusive

I’m discovering that this new law makes it very difficult, if not impossible, for a newly formed UK, properly registered (with Companies House), completely legal Corporation to open a regular Small Business account at UK banks if one or all of the owners/account holders are U.S. Citizens even if the newly formed Corporation is a legally separate entity (not an “establishment” of the U.S. Corporation) and the company liability insurance, local solicitors, etc. and plans on hiring completely local UK people to run the operations.

It can be done at select banks but only as an “international account” with much higher minimum balances that must be maintained and subject to all kinds of restrictions better suited to the extremely wealthy, I suppose, than the average small business person who opens the overseas business to better serve his or her customers in a particular country or region and to encourage innovation.

Anyone seeking to do this should take care not to listen to the “experts” at the Company Formation Service who claim that the process is “easy and done all the time” — it was, but as a representative of one major UK bank said, “We won’t open ANY new accounts for ANY new customers where even one of the owners, account holders or major shareholders, is American because of the Foreign Account Tax Compliance Act”. I suppose this problem can be avoided with the appointment of foreign “Nominee” Directors, shareholders, etc. who set up the bank accounts on behalf of the “true beneficial owners”, Americans, but I’m not certain yet because that’s not how we set up our overseas Corporation — and certainly NOT in a “tax haven”.

Again, the U.S. Congress screws things up for legitimate business people, students and others with the usual U.S. reaction to discovered abuse or fraud. Overkill.

Posted by SmallBizGuy13 | Report as abusive

After reading all the comments above I’ve decided not to go for an offshore bank account after earning a huge amount of money. Don’t laugh at me…!!! I believe that if someone can earn money then he/she’ll be able to protect that too (from the taxes also). Anyway, I’m recently taking a certificate on management skills from http://nicholashill.com/. Wish me luck. Although I don’t need it. :-)

Posted by Hilone | Report as abusive

If you had 9500 in 10 different banks, the IRS wouldn’t ever know. Banks do not report under 10,000 even if they are under FATCAT rules.

Or.. just keep your 50,000 in a safe deposit box. Problem solved.

Posted by MarkDonners | Report as abusive
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