0% tax for digital nomad achievable?

[JackAlabama]

I believe the risk for wire fraud is rather theoretical and US LLC can work well with zero tax if one is careful, but the concept of a true perpetual traveler doesn't seem to fit into the framework of Form 5472.

It is theoretical or just simply not true. Otherwise it would be easy to find related material online and folks getting ducked left and right.

For example you underline your argument with the case of:
"Petitioners carried out a scheme to smuggle large quantities of liquor into Canada from the United States to evade Canada’s heavy alcohol import taxes. They were convicted of violating the federal wire fraud statute, 18 U. S. C. §1343, for doing so."

But just reading it for 10 secs gives a complete different assessment than what you stated.

So, running an alcohol smuggling venture might lead to troubles.

 

[Deepbarrels]

As mentioned, US LLC works and for a business your size, will probably be fine.

Similar can be done in Hong Kong, where if you take certain precautions you can avoid taxation there. Costa Rica and Panama are similar but local payment processing and banking options are challenging.

how could this be done in Costa Rica / Panama? Does the US LLC always have to be involved in this planning?

That being said, although US LLC structure is widely used and convenient, there are less risky non-CRS solutions.

Would you mind explaining those solutions?

 

[Don]

It is theoretical or just simply not true. Otherwise it would be easy to find related material online and folks getting ducked left and right.

For example you underline your argument with the case of:
"Petitioners carried out a scheme to smuggle large quantities of liquor into Canada from the United States to evade Canada’s heavy alcohol import taxes. They were convicted of violating the federal wire fraud statute, 18 U. S. C. §1343, for doing so."

But just reading it for 10 secs gives a complete different assessment than what you stated.

So, running an alcohol smuggling venture might lead to troubles.

Moving assets to the US by electronic wire to avoid the CRS, especially for the purpose of confidentiality is almost always linked to tax evasion. Therefore, a wire to the US violates the US domestic law which is the mail fraud statute.
The US Supreme court affirms where a non-resident alien using any form of communication with the USA such as international transfers, internet or telephone with the USA to avoid tax back home is a serious violation of the Federal Wire Fraud Statute, subject to a fine up to $1 million and 20 - 30 years prison.
Think you're safe from anyone finding out the account in the US is undeclared? Wait until John Doe Summons or FATCA reciprocal reporting.

Would you mind explaining those solutions?

1) non-crs jurisdictions, disputed/unrecognised territories
2) structures where you are not reported as a beneficiary (but are indirectly still in control)
3) exemptions, e.g. structuring your assets under a financial institution, public company, or retirement fund, etc. This area includes completely legit solutions, which are somewhat complex and only available/feasible for those with serious money.

 

[JackAlabama]

Moving assets to the US by electronic wire to avoid the CRS, especially for the purpose of confidentiality is almost always linked to tax evasion. Therefore, a wire to the US violates the US domestic law which is the mail fraud statute.
The US Supreme court affirms where a non-resident alien using any form of communication with the USA such as international transfers, internet or telephone with the USA to avoid tax back home is a serious violation of the Federal Wire Fraud Statute, subject to a fine up to $1 million and 20 - 30 years prison.
Think you're safe from anyone finding out the account in the US is undeclared? Wait until John Doe Summons or FATCA reciprocal reporting.


1) non-crs jurisdictions, disputed/unrecognised territories
2) structures where you are not reported as a beneficiary (but are indirectly still in control)
3) exemptions, e.g. structuring your assets under a financial institution, public company, or retirement fund, etc. This area includes completely legit solutions, which are somewhat complex and only available/feasible for those with serious money.

Do you have any sources for what you state are your opinions?
a good starting point would be articles of basically whole of Latam getting busted left and right since they all keep their money in US?
Or the different treatment of crs/non-crs which as you imply are treated differently.

 

[Don]

Do you have any sources for what you state are your opinions?
a good starting point would be articles of basically whole of Latam getting busted left and right since they all keep their money in US?
Or the different treatment of crs/non-crs which as you imply are treated differently.

Back in the day, every other businessman had an IBC or company in a tropical island like Seychelles with zero substance and just funnelled profits there.
Cyprus banks would open accounts over a phone call and the next day you could funnel millions through without any issues.

At one point, regulations changed, and most people stopped using such solutions. Some people got caught. I expect it will be a similar case with using US LLCs as offshore companies.
The moral of the story is that it's better to learn to stop at the right moment.

Today, arguably, the US is the biggest offshore jurisdiction (https://otonomos.medium.com/delaware-deep-dive-the-worlds-biggest-offshore-jurisdiction-ca261f8748d)
It is obviously not in the US interest to do it, but at some point, the US might have to start reciprocating information exchange under FATCA, which will be a game changer.
At this point, it might be more beneficial for the US to start enforcing wire fraud in cases where they expect a positive ROI.

In fact, reciprocal reporting is being planned and expected to come into force soon.

The Reciprocal FATCA Proposal is detailed in the General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals highlighted as follows:

• require certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) for all financial accounts held by foreign persons maintained at a U.S. office.
• expand the current reporting required with respect to U.S. source income paid to accounts held by foreign persons to include similar non-U.S. source payments.
• require financial institutions to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account held by a foreign person.
• require financial institutions to report information regarding certain passive entities and their substantial foreign owners. For example, a financial institution maintaining an account for a passive entity that is a trust would be required to obtain and report to the IRS information on the owner(s) of the trust.

“Reciprocal FATCA” Bill Will Be A Game Changer | JD Supra

Under the concept of “Reciprocal FATCA” financial institutions and brokers ought to start preparing to assume greater and expanded reporting...

www.jdsupra.com

Now, FATCA is a bit different animal compared to CRS.
To learn more about the non-CRS solutions, simply open up the CRS handbook. As my friend, who is a CRS expert, said - even a monkey can avoid CRS.

 

[Sols]

Depends on many factors but how low fraction have you seen companies keep without transfer pricing problems? Payment processors like stripe and braintree charge 3% per transaction, can your payment agency also charge that? If countries are using comparable price method for arms length transaction to check transfer pricing then 3% can be enough? Assuming payment processors and payment agencies are the same thing.

I have seen 3% and lower.

It's best to do a transfer pricing analysis. Usually costs a few thousand.

Is it common for a payment agent to process payments for their parent company only? Or tax people don't like that and they need to be processing payments for many companies to be acceptable?

You can only do it for the parent company and other directly related group entities.

If you process for unrelated companies, you need a financial services license of some sort.

how could this be done in Costa Rica / Panama? Does the US LLC always have to be involved in this planning?

In the text you quoted, I meant that you can set up a company in Panama or Costa Rica and run your ecommerce business directly through it. However, because banking and payment processing options are quite lackluster, it's quite challenging.

 

[saintjohnny]

Moving assets to the US by electronic wire to avoid the CRS, especially for the purpose of confidentiality is almost always linked to tax evasion. Therefore, a wire to the US violates the US domestic law which is the mail fraud statute.
The US Supreme court affirms where a non-resident alien using any form of communication with the USA such as international transfers, internet or telephone with the USA to avoid tax back home is a serious violation of the Federal Wire Fraud Statute, subject to a fine up to $1 million and 20 - 30 years prison.
Think you're safe from anyone finding out the account in the US is undeclared? Wait until John Doe Summons or FATCA reciprocal reporting.

As I see it... folks who are not evading tax back home shouldn't worry about being burned by the US DOJ on wire fraud charges. It's like worrying about being convicted for Animal Cruelty and Torture for killing a fly in your home.

If your business is smuggling alcohol, or you're using the US to blatantly evade tax (i.e. tell a non resident company to wire to your US account), yeah, definitely worry about this possibility.

But do you really think people who are compliant with their local tax laws really need to worry about such serious accusations?

And... is it really illegal to file 5472 and put your legal country of residence – which could be a territorial tax country where you have your house, family, etc., while traveling the world? I seriously doubt so.

 

[Don]

But do you really think people who are compliant with their local tax laws really need to worry about such serious accusations?

No

The point is not everyone is compliant, according to the EU authorities who only speak truth:
"European Parliament describes UK and US as global hubs for money laundering and tax evasion"

Pandora Papers: European Parliament describes UK and US as global hubs for money laundering and tax evasion

"EU blacklist of tax havens has become a blunt instrument, unable to catch some of the worst-offending countries."

www.brusselstimes.com

 

[baio12]

I have seen 3% and lower.

If payment agent charges you 3% and the payment processor charges the agent 3%, payment agent would have 0 profit. But if transfer pricing analysis recommends payment agent to take 30% profit margin, that is still only 3.9% the payment agent needs to charge you to get 30% profit margin. That is how it works?

Payment agent's revenue is the total amount they pass to you, or just their fee? If it's just their fee, then 3.9% example would work and give them 30% profit margin. But if their revenue is taken to be the whole amount they pass to you, then the fee would give them less than 1% profit margin which won't work. But in both cases they collect and keep same total amount of money as profit.

Is there a standard for what countries take to be a payment agent's revenue or it can depend?

It's best to do a transfer pricing analysis. Usually costs a few thousand.

You hire a firm in that country and they ask you lots of questions then send you a report saying the specific prices per every product they think you should charge? Or is it just the profit margin they think company should have?

 

[Sols]

If payment agent charges you 3% and the payment processor charges the agent 3%, payment agent would have 0 profit. But if transfer pricing analysis recommends payment agent to take 30% profit margin, that is still only 3.9% the payment agent needs to charge you to get 30% profit margin. That is how it works?

Payment agent's revenue is the total amount they pass to you, or just their fee? If it's just their fee, then 3.9% example would work and give them 30% profit margin. But if their revenue is taken to be the whole amount they pass to you, then the fee would give them less than 1% profit margin which won't work. But in both cases they collect and keep same total amount of money as profit.

You can make the margin apply to the processing cost (30% turns 3% payment fee into 3.9%) or it can be a margin on the overall volume (0.50% of 300,000 USD becomes 1,500 USD/year).

Is there a standard for what countries take to be a payment agent's revenue or it can depend?

Not to my knowledge. Most companies just pick something and are almost never questioned about it. The more responsible ones have a transfer pricing analysis performed.

You hire a firm in that country and they ask you lots of questions then send you a report saying the specific prices per every product they think you should charge? Or is it just the profit margin they think company should have?

They look at the whole setup, to figure out what a reasonable margin should be. They compare your business to others, so that your margin is in line with business norms.

 

[baio12]

Another option is to live and form a company "offshore" but establish a subsidiary in for example UK or EU which acts as a payment agent company. This subsidiary collects payments on behalf of the offshore parent company. Not all PSPs accept it but enough do that it's a viable option.

Is payment agent company the same as third party billing company? I haven't seen "payment agent" mentioned on PSP webpages but see many of them banning "third party billing" companies.

The payment agent structure works well indeed. However, in most EU jurisdictions, there are obligations to obtain a financial license with such a structure. Cyprus is one of the exceptions.
Similarly to a payment agent, a franchise model could sometimes work.

Do you know what more countries require financial license for payment agent structure or where I can find it?

There are different legal arrangements available such as
Payment institution, e-money institution, commercial agent, single- and multi purpose vouchers.

First 2 would be complicated to start instead of payment agent I think but can you elaborate what is commercial agent or voucher arrangement?

 

[Don]

Is payment agent company the same as third party billing company? I haven't seen "payment agent" mentioned on PSP webpages but see many of them banning "third party billing" companies.

Do you know what more countries require financial license for payment agent structure or where I can find it?

First 2 would be complicated to start instead of payment agent I think but can you elaborate what is commercial agent or voucher arrangement?

Multi purpose voucher arrangement basically means you collect money ahead and when clients get the service/product (redeem the voucher) you pay VAT.

Commercial agent (payment agent) has the contractual right to negotiate the sale or purchase of goods or services or to enter into contracts for the sale or purchase of goods or services on behalf of the payer or the payee.

In the EU those e-commerce platforms, which intermediate payments between both the buyer and the seller should operate under a payment institution license.
The majority of marketplace type services act as representatives of one of the parties, e.g. Bolt and Wolt act as the representative of the service provider. As such they do not need a license to intermediate payments.

EU jurisdictions have implemented the directives differently in their legislation. From what I've seen many big companies and even EMI-s use such structures in jurisdictions like Cyprus, Malta, Estonia, because of less bureaucracy, and better laws.

 

[Sols]

Is payment agent company the same as third party billing company? I haven't seen "payment agent" mentioned on PSP webpages but see many of them banning "third party billing" companies.

All billing companies are payment agents but not all payment agents are billing companies.

 

[baio12]

Commercial agent (payment agent) has the contractual right to negotiate the sale or purchase of goods or services or to enter into contracts for the sale or purchase of goods or services on behalf of the payer or the payee.

Does payment agent collect and submit VAT or is it the company providing the main service?

All billing companies are payment agents but not all payment agents are billing companies.

What's difference between them? What are some example of type of company that is a payment agent but not a billing company?

 

[Sols]

What's difference between them? What are some example of type of company that is a payment agent but not a billing company?

Main difference is with whom the customer contracts. With a billing company, the customer enters into an agreement with the billing company. With a payment agent, the customer enters into an agreement with the principal. The payment agent is usually mentioned in the agreement but there's no formal relationship between the customer and the agent.

 

[baio12]

Main difference is with whom the customer contracts. With a billing company, the customer enters into an agreement with the billing company. With a payment agent, the customer enters into an agreement with the principal. The payment agent is usually mentioned in the agreement but there's no formal relationship between the customer and the agent.

In what cases should you use one vs other?

 

[Don]

In what cases should you use one vs other?

A billing company is like a franchise and can act as a shield to the main business.
In the case of an agency, the economic risk rests in principle with the principal. In the case of franchising, the economic risk lies in principle with the franchisee.
The franchisee acts in his own name and at his own risk, whereas the commercial agent acts in the name of the principal and, in principle, also at the risk of the principal.

 

[baio12]

A billing company is like a franchise and can act as a shield to the main business.

On PSP conditions many of them don't allow third party billing companies to sign up. Are there countries or companies where it's easier to set it up?

 

[baio12]

You can only do it for the parent company and other directly related group entities.

If you process for unrelated companies, you need a financial services license of some sort.

Payment agent that work with unrelated companies will need license but billing company that work with unrelated companies is allowed to do without license?

 

[Sols]

Payment agent that work with unrelated companies will need license but billing company that work with unrelated companies is allowed to do without license?

If we're talking about EU/EEA, any person (legal entity or natural person) who holds, transmits, or processes money on behalf of an unrelated person is offering a financial service and needs a license. Of course, there are payment agents and billing companies that violate this rule and face no repercussions.

In some cases, billing companies are subsidiaries (or agents) of financial institutions and are set up to keep the activities at slight distance from the financial institution itself. Quite common in adult entertainment.