Gerson Preston’s Partner Alan Lips Discusses Tax Planning

Gerson Preston’s Partner Alan Lips Discusses Tax Planning | Gerson Preston

Some 65,000 Puerto Ricans left their bankrupt U.S. island commonwealth last year. A group of private bankers are moving the other way. They’re increasingly opening offshore banks known as International Financial Entities, which were created by a Puerto Rican law in 2012.

Tax experts attribute at least part of the influx to a little-known loophole made possible by the IFE structure. It lets non-U.S. account holders put money in Puerto Rico anonymously and potentially avoid taxes at home even as they benefit from the stability and safety of the U.S. That’s become increasingly attractive because of a new global financial-disclosure system taking effect in September. Under the Common Reporting Standard, more than 100 countries have agreed to automatically provide to one another annual reports about accounts belonging to people subject to taxes in each member nation. Previously, they mainly shared information on request, making it harder to identify suspect accounts. Much like the U.S.’s Foreign Account Tax Compliance Act, which requires foreign banks to report on Americans with accounts, the CRS initiative is meant to combat the use of offshore bank accounts to evade taxes.

To take advantage of the loophole, a non-U.S. client sets up a shell company or a trust to hold assets. That entity then deposits funds with a Puerto Rican IFE. “Once set up, it’s a huge way for people to avoid CRS reporting,” says Alan Lips, a partner at Miami-based accounting firm Gerson Preston.

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