Here's the situation :

A relative of mine who is resident and citizen of Country "A" has
opened an account with Paypal. As per Paypal's policy, residents of
Country "A" can open account with Paypal but Paypal will not
transmit/wire funds to anybank in Country "A". 

Now this relative of mine sells goods on the internet using Paypal and
now has significant amount of funds in his Paypal account. However,
because of the above Paypal policy, he is not able to withdraw his
money.

As far as I know, there are two possible ways this situation could
be resolved and I would like to know the legal as well as tax
implications of both.

(1) My relative opens a US bank account. There are sites like
http://www.usbankaccount.com who claim they will open a US bank
account for non US residents at a certain fee.

Question: Is it legally possible for a person who has no US address
and no SSN to open a US bank account. It will also be great if the
"Answerer" can let me know about the reliability of sites like
usbankaccount.com .

(2) My relative tranfers his Paypal funds into my account (I am a US
resident and have a US bank account). Subsequently, I can transmit the
funds to my relative in Country "A".

Question : Since the amount is substantial, I would like to know if
there would be tax implications for me for holding my relative's
money temporarily in my account(even though its not really "income" for me). Also,
will it have any legal ramifications (eg. money laundering etc. - even
though I can't think how)

P.S : If it is of any help to answer the questions above, I should
mention that Country "A" is a US friendly nation and not a country
associated with terrorism or any other kind of "evil" in the Post 9/11
world.

---

Clarification of Question by bystander-ga on 23 Dec 2003 16:59 PST

aht,

Thanks for your comprehensive answer(comments!).
I am happy to note that you understand the situation fully. Infact you
opened another angle about Paypal's "Buyer Protection Policy" that
neither me nor my relative had considered.

I have my own Paypal account and here is what I am planning to do.
Please let me know if notice any cause for concern.

(Step 1) Have my relative transfer his Paypal account balance to my Paypal account.
(Step 2) Then I will do an "instant transfer" from my Paypal account
to my current bank account(attached to my Paypal account). I noted
that you recommend against using my current Bank account to attach to
Paypal for transfer. I am wondering what could be the problem since
from the standpoint of my paypal account I am not really dealing with
"Buyers" who can lay claim to the money in my bank account(My "Buyer"
is only my "Relative"... right ?) .Please clarify.
(Step 3) I plan to transmit the money from my US bank account to my
own foreign currency(USD) bank account in Country "A". Then I will
issue a check to my relative for the equivalent Country A local
currency.
Note : I have a bank account in Country "A". This type of bank account
is for non-residents of Country "A" and the money can be held in US
dollars)
----------------------------------------------------------------------------


Step (3) is the one I am worried about. How do I prove that I did not
profit from holding my relative's money in my account. In other words
- how do I prove that I returned the money since I am transfering it
to my own non-resident bank account in Country "A".
Would you recommend that I do a wire transfer from my US bank account
directly to my relative's bank account(in Country A's local currency)
- instead of my own bank account in Country "A" first , as I planned.

Again, your help is much appreciated.

Some part of the above, may seem confusing (esp Step 3). Please ask
for clarification as required.

bystander-ga:

Thank you for your question regarding the legal and tax implications
associated with two separate options for your relative to transfer out
money from his Paypal account.

First, I should restate that the information I and my fellow
Researchers provide here is based on information that we are able to
find both online and offline, as well as our own analysis and
therefore opinion. I am not a certified tax or legal adviser. I only
state this to remind you that neither Google nor I can accept any
liability for any consequences that may result from any actions your
relative take after receiving this information. I'm sure that you and
your relative are already aware of that, but anytime the IRS is
involved, it's best to restate things. :)

The first option that you asked about is the option where your
relative would open a US-based back account in their own name, for the
purposes of receiving the funds from the Paypal account.

I would recommend that you review the Answer provided by
politicalguru-ga for a similar Question:

  "Opening a US bank account without a SS Number"
  http://answers.google.com/answers/threadview?id=28508

In this Answer, politicalguru-ga points out that it is technically and
legally possible (but perhaps extremely difficult) for a non-US
resident to open up a US-based bank account. Further to this, I would
point out that, while your relative may be able to open up an account
using your address, it comes at the potential future risk that an
agency such as the IRS would look at the bank account as proof of
residency (legal or not). When it comes to taxes, often definitions
apply that would otherwise run counter to the definitions of other
government agencies such as the Immigration and Naturalization
Service. Therefore, it would be best for your relative to NOT
establish a US-based bank account in their own name.

This leads us to the second option you asked about, namely the
situation where your relative transfers their money to you, then you
move the money into "Country A" through an electronic funds transfer.
More specifically, you are interested in any legal or tax issues that
may be related to the following process:

1) Your relative transfers funds from their Paypal account to your Paypal account;
2) You transfer the funds from your Paypal account to your US bank account;
3) You transfer the funds from your US bank account to your account in "Country A";
4) You write a check from your "Country A" bank account to remit the
funds to your relative.

I will preface my analysis by first referring you to the following
policies used by Paypal:

Paypal Seller Protection Policy:
http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_spp-outside

- please note in particular the bolded section in Section 1, which
states in part "if the sender's transaction is reversed for any reason
and you do not qualify for the Seller Protection Policy for that
transaction, you will owe PayPal for the amount of the reversed
transaction plus a $10 chargeback fee".

Paypal Buyer Protection Policy:
http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_pbp-outside

- note that this policy only covers items sold on eBay by verified US
or Canadian sellers; therefore, as long as "Country A" is not Canada,
this policy *should* not apply to your relative

Paypal Buyer Complaint Policy:
http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_buyer_complaint-outside

- this policy provides recourse to any buyer of any tangible, physical
good sold by a seller who receives payment using Paypal
- note that this policy means that Paypal reserves the right to be the
final judge in any dispute, with recourse being the reversal of the
funds payment

Payments (Sending, Receiving, and Withdrawals) Policy
http://www.paypal.com/cgi-bin/webscr?cmd=p/gen/ua/policy_payments-outside

- please read Section II Paragraph 2. carefully. In this paragraph,
Paypal reserves the right to reverse payments and charge a service
charge for the reversal. While Paypal's right is limited to the
balance in the affected Paypal account, Paypal reserves the right to
pursue the balance of the reversal through any legal means available,
including making a claim on the bank account associated with the
account. Depending on your relationship with your bank, this may mean
a temporary freeze on the affected funds until the issue has been
resolved.
- further, the policy states that "If you open a Premier or Business
Account after October 11, 2001, you authorize PayPal to debit your
bank account linked to that PayPal account for the amount that you owe
PayPal on transactions which were not covered by the Seller Protection
Policy and which were not recoverable from your PayPal balance."

It is due primarily to this last policy that you are best advised to
structure the flow of funds with your safety in mind. While I hope
that your Paypal account is not a Premier or Business Account, you are
still better off using a dedicated checking account, separate from
your regular checking account, to link to your Paypal account. That
way, Paypal does not have the necessary information to trigger an
electronic dispute that may affect your own funds.

As for the potential for dispute, it will arise primarily from a buyer
filing a complaint with Paypal after a transaction with your relative
(the 'seller'). If Paypal determines (based on their own criteria)
that fraud is involved, and decides to reverse the payment, and if
there is not enough money in your relative's Paypal account to cover
the reversal, there is a tangible possibility that Paypal will track
the last transfer out of your relative's account to your account, and
attempt to recover the funds from you on the grounds that the funds
were fraudulently obtained in the first place. It's Paypal's system,
they make the rules. The only way to safeguard the funds is to remove
them from Paypal's system, by transferring them to your (dedicated)
checking account. Even then, the funds are not absolutely safe until
you transfer them from this checking account that is known to Paypal.
Please do not read any malice towards Paypal in my comments; I am only
stating the possible recourse available to Paypal as defined by their
own policies and agreed to by all users of Paypal.

Once the funds have been transferred to your (dedicated) checking
account, the question of tax implications must be addressed. For this,
I refer you to the following question posted to the Bankrate.com "Ask
the tax adviser" column in November 2000:

"...taxes on gifts from foreigners" (scroll down to 2nd question)
http://www.bankrate.com/brm/itax/tax_adviser/20001114a.asp?prodtype=itax

In this question response by George Saenz, a columnist with
Bankrate.com, George advises the questioner that the IRS requires that
"certain large gifts from foreigners be reported for informational
purposes." That means that while there is no income tax associated
with monetary gifts from foreigners, the IRS still wants to know about
them. The threshold for reporting is given as $100,000 US total per
tax year. If the "substantial amount" you mention is greater than
$100,000 US, then you are required to report each individual gift
greater than $5k using Form 3520 (2002).

Internal Revenue Service Form 3520:
http://www.irs.gov/pub/irs-pdf/f3520.pdf

You would also be personally responsible for reporting and remitting
income tax on any income generated as a result of the gift. By using a
dedicated, non-interest bearing checking account, you can avoid this
and maintain a good paper trail at the same time.

Once the money (that you received as a gift) is in the dedicated
checking account, you should be free to transfer it to yourself and
the account you hold in "Country A", as long as there are electronic
fund transfer agreements in place between the two banks involved.
Depending on the bank you use in "Country A", you may be able to open
the dedicated chequing account with their American
subsidiary/parent/partner, making this transfer easier to manage. This
method would save you the service charges and risk associated with
using a money order to directly send the money to your relative. One
example of an international bank that understands this sort of need is
HSBC:

Press Release: "HSBC first bank to offer truly global banking service"
http://www.hsbc.com/code/tools/site/Renderer.jhtml?cp=/public/groupsite/news_room/2003_archive/en/hsbc_first_bank_to_offer_truly_global_internet_banking_service.jhtml&bu=groupsite&toolName=news_room&ln=en&isPc=true&pId=9e503a70-2e23-11d7-bba1-080020c629df

For your own protection, you should make sure that your relative
understands that you are not responsible for any service charges or
foreign exchange conversion charges that may be incurred each time you
do this transfer. As you mentioned that you would be transferring the
funds to a US-Dollar account in "Country A", there should be minimal
exchange charges; there will most likely be transfer fees to get your
money there, though.

Finally, make sure that you keep accurate records of each and every
transfer. Again, I will recommend using separate accounts (including
Paypal if at all possible). That way, your personal finances are kept
separate from your relative's money, even after it becomes his "gift"
to you. If the IRS ever decides to audit you for any reason
whatsoever, this detailed record keeping will be important. This
record-keeping includes keeping each and every returned cheque that
you write to your relative from the US-Dollar foreign account, and
every statement from that account. That way, if necessary, you can
show that you only ever earned minimal interest, if any, on that
money. I presume that you already know that you are supposed to report
the income from that foreign bank account in your annual tax return
for the IRS.

This flow of money should be considered proper, as the funds are not
obtained through illegal activities and you are not charging a fee for
handling the funds.
Your relative is still responsible for reporting their income from the
original transactions on their tax report in "Country A" if that
country tracks foreign income as part of total income.

I hope that this information helps you and your relative with the
decisions that you will need to make. Best of luck, and please let me
know if you require any clarification to this Answer.

Regards,

aht-ga
Google Answers Researcher


-------------------------

Search Strategy:

monetary gifts foreigner
://www.google.com/search?hl=en&lr=&ie=ISO-8859-1&q=monetary+gifts+foreigner&btnG=Google+Search

paypal reversal
://www.google.com/search?q=paypal+reversal

---

Clarification of Answer by aht-ga on 24 Dec 2003 13:59 PST

bystander-ga:

Thank you for your understanding in this matter; the disclaimer is
unfortunately absolutely necessary, as it is illegal for anyone other
than a certified legal professional (ie. lawyer registered with the
bar association in your state of residence) to provide legal advice.
Therefore, I can only provide you with my opinion.

To help you get all the way to 100% satisfaction, may I recommend that
you consider posting the tax portion of your question on the
Bankrate.com "Ask The Experts" service? You can find this at:

http://www.bankrate.com/brm/ask.asp

Again, this is for the tax portion of your question only. I believe
that they will confirm everything that I have expressed above, as far
as interpreting the income tax implications go.

As for the legal aspects, unfortunately the only way to obtain actual
"legal advice" that does not come with an opinion disclaimer would be
to contact a lawyer directly. Unfortunately, lawyers who understand
the tax and international monetary movement business are not cheap!

All the best to you and your relative in this, I hope it works out for the best.

Regards,

aht-ga
Google Answers Researcher

The researcher fully understood my situation and ferreted out lot of
information to help me resolve it. I gave 4 stars(instead of 5)
because even though the answer is very helpful, the fact that it is
only an "opinion" and not "legal advice"(as pointed out in the
disclaimer) means that there is still room for doubt about the
legal/tax ramifications of the situation - which doesn't really answer
my question 100%. The rating here does not judge the ability of the
researcher, only the usefullness of the answer to me.

First, allow me to refer you to this five-star Answer by
politicalguru-ga, on the topic of opening a US bank account without a
SSN:

http://answers.google.com/answers/threadview?id=28508

Second, a comment regarding the potential concern of money-laundering.

Paypal has demonstrated in the past their willingness to help a
'buyer' resolve a bad trade by deducting the original payment from the
'seller's account and crediting it back to the 'buyer'. It has been
opined by individuals on various online discussion forums that this
willingness is often applied in a draconian manner, where Paypal
deducts the amount without allowing the seller the opportunity to
prove that the 'buyer' is not justified in requesting the credit. This
is basically Paypal's Buyer Protection Policy at work.

In a situation such as this, Paypal technically (through its Terms of
Service) are allowed to make these deductions from the seller's
account without compensation or recourse. However, they are limited to
the funds that are in the Paypal account, and by extension, any
account in their system. The account-holder has very little leverage
when it comes to Paypal's "anti-fraud" tactics. Your relative's Paypal
account does not qualify for Paypal's Seller Protection Policy as it
is a non-US account.

In order to transfer money to and from a bank account, the bank
account needs to be in the same name as the Paypal account holder, as
that is part of Paypal's verification process. Further, Paypal will
activate the "Instant Transfer" feature for any bank account added to
a Paypal account. This means that whenever a deduction from the Paypal
account would result in a negative balance, an automatic electronic
transfer is made from the attached bank account. This leaves open the
possibility that Paypal's Buyer Protection Policy will drain the
Paypal account, and begin drawing down the attached bank account.
Definitely not a good idea, if the attached bank account is used to
hold any substantial balance.

It is not illegal to receive and send gifts of money. If your relative
were to take his money from his Paypal account, and choose to give it
to you via your own Paypal account, that is not necessarily a form of
income for you. If you then choose to transfer the funds from your
Paypal account to the attached bank account, then from that bank
account to another bank account in your own name, that too should not
result in any taxable situation (within reason, of course... suspicion
of money laundering activities may kick in if the amounts and volume
of transfers is too high). If you then choose to use the funds to
purchase money orders that you then send to your relative, that too
should not trigger any tax obligations. You are not earning any income
from this activity, so there is no income to tax.

The important thing here is to protect yourself, and your relative,
from any undesired effects of Paypal's Buyer Protection Policy. If you
use the proper sequence of Paypal accounts, bank accounts, and
monetary instruments, you should be able to protect against Paypal
making a mistake, and leave a clear enough paper trail to prove that
no money laundering activities are taking place.

Sorry, forgot to clarify one point: you will not want to use your
current personal bank accounts for this purpose. Instead, if you
choose to help your relative in this manner, you are best advised to
set up a separate Paypal account and a separate checking account in
order to keep this money separate. That way, there is less likelihood
that Paypal can harm you personally through an error in applying their
Buyer Protection Policy.

Also, please note that these comments are based on my opinion, and do
not reflect any recommended course of action from Google Inc. or its
subsidiaries. The information researched by politicalguru-ca above can
help your relative make an informed decision about whether he wants to
try setting up a US-based bank account of his own (using your
address). If instead you choose to set up your own accounts to help
him, then I can provide some additional research to help point you in
the right direction.

Regards,

aht-ga
Google Answers Researcher

I have also posted the following as "Clarification" above . Sorry about that.

----------------------------------------------------------------------

aht,

Thanks for your comprehensive answer(comments!).
I am happy to note that you understand the situation fully. Infact you
opened another angle about Paypal's "Buyer Protection Policy" that
neither me nor my relative had considered.

I have my own Paypal account and here is what I am planning to do.
Please let me know if notice any cause for concern.

(Step 1) Have my relative transfer his Paypal account balance to my Paypal account.
(Step 2) Then I will do an "instant transfer" from my Paypal account
to my current bank account(attached to my Paypal account). I noted
that you recommend against using my current Bank account to attach to
Paypal for transfer. I am wondering what could be the problem since
from the standpoint of my paypal account I am not really dealing with
"Buyers" who can lay claim to the money in my bank account(My "Buyer"
is only my "Relative"... right ?) .Please clarify.
(Step 3) I plan to transmit the money from my US bank account to my
own foreign currency(USD) bank account in Country "A". Then I will
issue a check to my relative for the equivalent Country A local
currency.
Note : I have a bank account in Country "A". This type of bank account
is for non-residents of Country "A" and the money can be held in US
dollars)
----------------------------------------------------------------------------


Step (3) is the one I am worried about. How do I prove that I did not
profit from holding my relative's money in my account. In other words
- how do I prove that I returned the money since I am transfering it
to my own non-resident bank account in Country "A".
Would you recommend that I do a wire transfer from my US bank account
directly to my relative's bank account(in Country A's local currency)
- instead of my own bank account in Country "A" first , as I planned.

Again, your help is much appreciated.

Some part of the above, may seem confusing (esp Step 3). Please ask
for clarification as required.