Tax on US citizens poses a conundrum for Asia's rich

For many years, US citizenship served as a handy safety net for Asia's rich. Like UK and Canadian passports, it offered protection, for example in the run-up to the handover in Hong Kong when some of the wealthy feared (wrongly, it turns out) that their empires might be dismantled by China. But one of the more onerous parts of being a US citizen is the obligation to pay taxes in the US, no matter where income is earned or received.

"The only other two countries with similar enforced tax rules are Libya and North Korea -- hardly the company the US would like to be keeping," said a source.

Income abroad is self-declared, so the onus is on US citizens to truthfully and comprehensively list all income earned overseas and pay the appropriate taxes on it.

"America has greatly tightened the rules with respect to US citizens and green card holders," said Kurt Rademacher, a Hong Kong-based partner at Withers. "Now that so much record-keeping is computerised it is a much greater risk for people to ignore this."

This year the US Internal Revenue Services (IRS) introduced an amnesty programme -- US citizens with unfilled returns of unreported income were being encouraged to voluntarily disclose their income for the past six years by September 23. Some penalties may apply under the amnesty programme "but in many cases these penalties are lower than they would be otherwise, without the amnesty," said Rademacher.

And those US citizens who thought keeping their money in countries where banking secrecy is a long-established tradition may have to think again.

"The whole world is moving towards compliance, there are no safe havens left," said Rademacher.

Following a settlement reached between UBS and the US government, the IRS will gain access to details of 4,450 UBS account holders who are US citizens. This means the IRS can easily track the records of these offshore account holders. (It may not end so easily though as the UBS account holders can challenge the handover of their identities in a Swiss court.)

It would be easy enough to conclude that Asia's richest families do not have much cause to worry about the IRS becoming stricter with US citizens worldwide. But some of these families could have second- or third-generation family members who studied or worked in the US and took citizenship.

"In many families some members have taken US citizenship as the regime has been benign for the last five decades," said Rademacher. "This year, the regime has turned aggressive."

The tax liability of wealthy US passport holders extends to the income they earn, the dividends they receive from companies in which they have stakes, capital gains from sale of assets, and ultimately inheritance. And with the spectre of a more aggressive IRS haunting them, many of these US passport holders are now questioning whether the benefits of the document are worth the potential pain.

"Previously, we would get two to three inquiries annually about relinquishing US citizenship," said Rademacher. "This year we've already had around 200."

As many as 50% of the rich in Taiwan have heirs with US passports, said a private banking source on condition of anonymity. The Taiwanese have traditionally sent their children to the US to study and many of them stay on long enough to qualify for US citizenship. In some other Asian jurisdictions, tycoons are less worried about US citizenship issues.

"Parachutes for most Asian tycoons would be British, Australian or Canadian citizenship [both Li Ka-shing's sons, Victor and Richard, have Canadian citizenship] where tax regimes are friendly," said activist investor David Webb.

While holding a US passport may no longer be the holy grail, investing in the US has not lost its sheen.

"Liquidity has become critical to investment decisions," said Kenny Ho, Asia-Pacific head of products at Julius Baer. "The US markets, which are the most liquid and the deepest in the world, are attracting renewed attention."