Have Precious Metals in a Swiss Bank Deposit Box? The IRS Wants to Know

A few weeks ago we had a discussion in the comments of a post here on Screwtape about the issues of storing precious metals abroad. Questions were raised about the potential for metals held in Swiss banks to be subject to future onerous US laws, including confiscation.   Mark Nestman recently posted an article that sheds some light on the subject.  Entitled "IRS: Offshore Banks will Need to Disclose Precious Metals Held by US Clients", Mr. Nestman wrote on how new regulations under the Foreign Account Tax Compliance Act (FATCA) take aim at US citizens holding precious metals overseas.

I highly recommend reading the article in its entirety, but below is a key passage:
4. What assets need to be reported? I summarized financial assets that need to be reported on Form 8938here. Henderson confirmed that foreign real estate owned by a U.S. individual isn’t reportable. By extension, precious metals, art, or other personal possessions you maintain in a foreign residence aren’t reportable, either. But, when asked about the reportability of precious metals held by an individual in offshore safe deposit boxes or private vaults. Henderson briefly consulted with one of his colleagues and replied, “That will be covered in forthcoming regulations under Chapter 4.”
Henderson was referring to Chapter 4 of FATCA, the subject heading of which is “Taxes to Enforce Reporting on Certain Foreign Accounts.” This is the notorious section that imposes the 30% withholding tax on most U.S. payments to FFIs and NFFEs.
To avoid withholding, FATCA requires FFIs (but not NFFEs) to:
“…Comply with requests by the Secretary for additional information with respect to any United States account maintained by such institution.”
In the context of offshore precious metals holdings, it would be simple for an FFI holding a custodial account on behalf of a U.S. person to provide this information to the IRS. However, Henderson was specifically asked about the reportability of precious metals held in a safety deposit box or private vault.
The only way the FFI would be able to obtain the requested information for a safety deposit box would be to obtain an inventory from the owner, or break open the safety deposit box and take its own inventory. If it failed to do so, the FFI would presumably be subject to the 30% withholding regime. I hope this draconian interpretation is incorrect, but the answer will apparently be found in the future regulations for Chapter 4.
However, an offshore private vault is arguably not an FFI. FACTA defines a FFI as any non-U.S. entity that:
“… (i) accepts deposits in the ordinary course of a banking or similar business, (ii) holds financial assets for the account of others as a substantial portion of its business, or (iii) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, or commodities.”
An offshore private vault that isn’t engaged or holding itself out to be engaged such activities would seem to be a NFFE, not a FFI. As such, the private vault shouldn’t be subject to FATCA’s withholding regime so long as it can prove that it doesn’t have 10% or greater U.S. ownership. Nor should the vault be required to disclose the names or the investments maintained by U.S. customers.
Henderson’s response also implies that offshore precious metals held by an individual in a safety deposit box or private vault aren’t reportable for Form 8938 purposes, at least not for 2011. The case for not reporting the holding on either disclosure form is strongest if you have exclusive access to the box, because in that event you arguably need not report it on either Form 8938 or the FBAR. For the reasons why I don’t think it’s reportable on the FBAR, read this post.

Thus based on the interpretation above, the IRS indeed is indeed looking to force foreign banks to release information on precious metals holdings of its US clients, even if such metals are stored in a safe deposit box.  However, private depositories still appear to be exempt (at least for now).  Investors with offshore metals holdings would be wise to contact their tax advisors and remain on top of these rapidly changing regulations.

4 comments:

GM Jenkins said...

Thanks for the heads up Brian. Btw, what do you think of PSLV with a 7-8% premium?

KJ said...

http://www.golemxiv.co.uk/2012/02/another-tiny-detail-from-switzerland/

Brian O'Flanagan said...

@GM, I think PSLV is fairly valued as long as it is below 10% - but even at 7-8% there is a risk of more follow on offerings from Sprott that would crash the premium closer to zero (like he did with PHYS).

Kid Dynamite said...

@GM, @Brian -
I am continuing with my PSLV hot potato trade - I'm still long PSLV vs short SLV, as we all know that the dark side of the force is strong! I will give it several weeks to work before I give up on it.