Tax Quarry

Because of the US policy to tax worldwide income, Foreign Tax Credits (FTC) are very important as a planning tool for multinational corporations and individuals with taxable assets and earnings outside of the US.   Aside from treaties, this is one of the only ways available to reduce double taxation where the US and the foreign jurisdiction both impose tax.

Some of the questions that need to be answered to determine if the entity or individual is eligible for a credit are (i) whether the payment is an income tax; (ii) whether the jurisdiction levying the tax is a foreign country; (iii) whether the person attempting to claim the FTC is a qualified US person, as defined under the Internal Revenue Code (“IRC”), and (iv) who is the payor of the tax. 

The question that the temporary regulations is attempting to address relates to the determination of whether a US person is considered to have paid a foreign income tax for purposes of the foreign tax credit. The regulations provide additional rules for identifying the person with legal liability to pay the foreign income tax in certain circumstances. 

Specifically, the guidance introduces rules for determining the person on whom foreign law imposes legal liability for tax, including in the case of taxes imposed on the income of foreign consolidated groups and entities that have different classifications for U.S. and foreign tax law purposes

According to the IRS background summary, the statutory provision was enacted to address concerns about the inappropriate separation of foreign income taxes and related income.  It provides that there is a “foreign tax credit splitting” event if a foreign income tax is paid or accrued by a taxpayer and the related income is, or will be, taken into account by a covered person with respect to such taxpayer. In such a case, the tax is suspended until the taxable year in which the related income is taken into account by the payor of the tax.

The Regulations identify an exclusive list of arrangements that will be treated as giving rise to foreign tax credit splitting events and provides guidance on determining the amount of related income and taxes paid or accrued with respect to splitter arrangements. These splitter arrangements have been defined as:

(a) reverse hybrid structures,

(b) certain foreign consolidated groups,

(c)  disregarded debt structures in the context of group relief and other loss-sharing regimes, and

(d)  two classes of hybrid instruments.

The IRS may identify additional splitter arrangements for future tax years.  

Click here for a link to the temporary regulations.  

Written by Marsha Henry ©

On January 18^th to 19^th, 2012, over forty countries came together at the Forum on Tax Administration (FTA) in Buenos Aires.  Their purpose was to address the question of whether increased co-operation with other member countries of the group would improve their own country’s tax administration efforts. 

The most heated topic of conversation was about the ongoing fight against offshore tax abuses.  According to the OECD final report, the forum concluded with “a unified and strengthened commitment to combat offshore tax abuse.”  The report states:

Our strategy includes unprecedented sharing and exchange of information and coordinated action to better identify and tirelessly pursue the promoters and users of abusive offshore schemes. Those who once felt safe concealing their money and assets overseas are now in an increasingly risky position.

Other topics discussed included the need to work smarter in times of shrinking budgets, and the necessity for each country to strengthen their relationship with large multi-national business through what the group described as “efficient and effective strategies that benefit both the taxpayer and taxing authority.”  Below is a summary of the main points from the discussion provided by the OECD:

Offshore Compliance
Although there have been some high-profile successes in the fight against offshore tax abuse, resulting in significant additional tax revenues and real improvements in transparency and exchange of information, it is far too soon to declare victory. When promoters and facilitators feel that we are tightening the net, they may simply move to a new location. We will be relentless in our pursuit of them – no matter where they may be. Our Offshore Compliance Network is building on the achievements of individual countries to improve our collective ability to deter, detect, and deal with offshore tax evasion. An early priority is to better understand the structures used to hide offshore wealth. We further agreed that collaboration must now include coordinated actions by countries to finally put an end to offshore non-compliance.

Taking the Relationship between Tax Administrations and Large Business Taxpayers Further
The FTA has worked hard in recent years to foster a more constructive relationship between large businesses and tax administrations. An adversarial relationship between tax administrations and multinational corporate taxpayers serves neither of our purposes well and is contrary to our common goals, which are earlier and greater certainty, consistency, and efficiency. To this end, we agreed that we need to create innovative strategies for issue resolution that are less time and resource intensive for both, while still promoting a climate that encourages compliance with tax laws. We will pay particular attention to the process of conducting and resolving transfer pricing cases. Overall, we intend to move away from a hide and seek approach to one based on greater transparency on the part of both taxpayers and tax administrations. As more companies put good tax compliance at the heart of their corporate governance, this will be easier to achieve.

Tax Administration in the Current Climate
The continued fragility that permeates the global economy demands that we work smarter.  In this context, it is important for tax administrations to be efficient and effective in carrying out the roles entrusted to them. We are committed to sharing best practices among ourselves and with developing countries to continually improve the quality of tax administration across the world. We also recognize that high quality customer service is essential to nurture high levels of voluntary compliance.

For more information about the topics discussed at the meeting and to view the FTA’s latest reports please visit www.oecd.org/tax/fta.

Executive Summary taken from United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Headed by Carl Levin, Chairman.

In 2004, the America Jobs Creation Act (AJCA) permitted U.S. corporations to repatriate income held outside of the United States at an effective tax rate of 5.25% instead of the top 35% corporate income tax rate.  The purpose of this tax provision was to encourage companies to return cash assets to the United States, which proponents of the provision argued would spur increased domestic investment and U.S. jobs.  In response, corporations returned $312 billion in qualified repatriation dollars to the United States and avoided an estimated $3.3 billion in tax payments, but the growth in American jobs and investment that was supposed to follow did not occur. 

The U.S. Senate Permanent Subcommittee on Investigations has long had an investigative interest in issues involving the movement of corporate funds to offshore jurisdictions and the treatment of those funds under the U.S. tax system.  Certain provisions of the U.S. tax code now encourage corporations to move jobs and money overseas.              For example, corporations may qualify for deductions and otherwise reduce their U.S. taxes for expenses that they incur to shut down U.S. plants and move their operations to other countries, and are even allowed to deduct interest on facilities they build offshore.  Corporations can also defer taxes on the income of their foreign subsidiaries, generating tax savings, and use foreign tax credits to reduce their U.S. taxes. These and other tax provisions can encourage the outsourcing of American jobs.  In addition, over the past ten years, some U.S. corporations with multinational operations have been reporting “staggering increases” in profits offshore, while reducing the taxes they pay to the United States.

To increase its understanding of these matters, the Subcommittee undertook a review of the 2004 tax repatriation provision.           

The Report makes the following findings of fact:

1.            U.S. Jobs Lost Rather Than Gained.  After repatriating over $150 billion under the 2004 American Jobs Creation Act (AJCA), the top 15 repatriating corporations reduced their overall U.S. workforce by 20,931 jobs, while broad-based studies of all 840 repatriating corporations found no evidence that repatriated funds increased overall U.S. employment.

2.            Research and Development Expenditures Did Not Accelerate.  After repatriating over $150 billion, the 15 top repatriating corporations showed slight decreases in the pace of their U.S. research and development expenditures, while broad-based studies of all 840 repatriating corporations found no evidence that repatriation funds increased overall U.S. research and development outlays.

3.            Stock Repurchases Increased After Repatriation.              Despite a prohibition on using repatriated funds for stock repurchases, the top 15 repatriating corporations accelerated their spending on stock buybacks after repatriation, increasing them 16% from 2004 to 2005, and 38% from 2005 to 2006, while a broad-based study of all 840 repatriating corporations estimated that each extra dollar of repatriated cash was associated with an increase of between 60 and 92 cents in payouts to shareholders.

4.            Executive Compensation Increased After Repatriation.  Despite a prohibition on using repatriated funds for executive compensation, after repatriating over $150 billion, annual compensation for the top five executives at the top 15 repatriating corporations jumped 27% from 2004 to 2005, and another 30%, from 2005 to 2006, with ten of the corporations issuing restricted stock awards of $1 million or more to senior executives.

5.            Only a Narrow Sector of Multinationals Benefited.  Repatriation primarily benefited a narrow slice of the American economy, returning about $140 billion in repatriated dollars to multinational corporations in the pharmaceutical and technology industries, while providing no benefit to domestic firms that chose not to engage in offshore operations or investments.

6.            Most Repatriated Funds Flowed from Tax Havens.  Funds were repatriated primarily from low tax or tax haven jurisdictions; seven of the surveyed corporations repatriated between 90% and 100% of their funds from tax havens.

7.            Offshore Funds Increased After 2004 Repatriation.  Since the 2004 AJCA repatriation, the corporations that repatriated substantial sums have built up their

offshore funds at a greater rate than before the AJCA, evidence that repatriation has encouraged the shifting of more corporate dollars and investments offshore.

8.            More than $2 Trillion in Cash Assets Now Held by U.S. Corporations.  In 2011, U.S. corporations have record domestic cash assets of around $2 trillion, indicating that that the availability of cash is not constraining hiring or domestic investment decisions and that allowing corporations to repatriate more cash would be an ineffective way to spur new jobs.

Repatriation is a Failed Tax Policy.  The 2004 repatriation cost the U.S. Treasury an estimated net revenue loss of $3.3 billion over ten years, produced no appreciable increase in U.S. jobs or research investments, and led to U.S. corporations directing more funds offshore.

Report Recommendation

The Report recommends against enacting a second corporate repatriation tax break due to the harms associated with a substantial revenue loss, failed jobs stimulus, and added incentive for U.S. corporations to move jobs and investment offshore.

For a copy of the report, select the following link:  

Download PSI.Repatriationreport.101011 

The table below, produced by the IRS, represents the top 15 countries in 2009 for foreign person’s receiving US source income that is subject to withholding taxes. 

September 15, 2011

WASHINGTON — The Internal Revenue Service continues to make strong progress in combating international tax evasion, with new details announced showing the recently completed offshore program pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed last week.

The IRS also announced today it has collected $2.2 billion so far from people who participated in the 2009 program, reflecting closures of about 80 percent of the cases from the initial offshore program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program — a figure that will increase because it doesn’t yet include penalties.

“By any measure, we are in the middle of an unprecedented period for our global international tax enforcement efforts,” said IRS Commissioner Doug Shulman. “We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.”

Global tax enforcement is a top priority at the IRS, and Shulman noted progress on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments. In addition, the IRS and Justice Department have increased efforts involving criminal investigation of international tax evasion.

The combination of efforts helped support the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which ended on Sept. 9. The 2011 effort followed the strong response to the 2009 Offshore Voluntary Disclosure Program (OVDP) that ended on Oct. 15, 2009. The programs gave U.S.taxpayers with undisclosed assets or income offshore a second chance to get compliant with the U.S. tax system, pay their fair share and avoid potential criminal charges.

The 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline, but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.

“My goal all along was to get people back into the U.S. tax system,” Shulman said. “Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury and turning the tide against offshore tax evasion.”

In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes, interest and penalties representing about 80 percent of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.

The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.

“This dollar figure will grow in the months ahead,” Shulman said. “But just as importantly, we have changed the risk calculus. Americans now understand that if they try to hide assets overseas, the chances of being caught continue to increase.”

The financial impact can be seen in a variety of other areas beyond the 2009 and 2011 programs.

Criminal prosecutions. People hiding assets offshore have received jail sentences running for months or years, and they have been ordered to pay hundreds of thousands and even millions of dollars.

UBS. UBS AG, Switzerland's largest bank, agreed in 2009 to pay $780 million in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. government.

The two disclosure programs provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, and the IRS will use this information to continue its international enforcement efforts.

On September 8, 2011 at the US Senate Committee on Finance, Senator Chairman Max Baucus introduced the hearing with a significant quote from Roman poet Ovid.  He stated:  “A horse never runs so fast as when it has other horses to catch up to and outpace”.   This is an apt description of the competitive global environment the US government and US companies must operate.    

The Senator went on to discuss the role US tax rules play in helping the US maintain its competitive advantage. 

Right now, we are confronting a massive debt problem due, in part, to the 2008 financial crisis. As we work to emerge from that crisis, we must understand how our tax code affects international business and investment.

We must make sure our tax code does not encourage American businesses to relocate jobs overseas, and at the same time, the tax code must not put U.S. businesses at a disadvantage in foreign markets.

Senator Orrin Hatch also addressed the role of tax reform in the changing landscape of international tax.  He said, ”working our way through the thicket of the international tax systems is a critical step on the road toward comprehensive tax reform.   Senator Hatch also addressed the outdated tax rules that govern US tax planning and how it interacts with the rules of other nations. 

Yet despite the changes that have taken place in the United States and around the world since the 1920s, the basics of our international tax system have pretty much remained the same for over 80 years.

 One particular international tax issue that Senator Hatch raised as hindering progress for US multinational companies is the way repatriation of profits works.   

… many U.S. multinational corporations earn money overseas, and typically want to bring that money back home to the United States. However, our international tax system discourages, and some would say penalizes, U.S. multinational corporations from repatriating foreign earnings by imposing a 35 percent residual U.S. tax at the time of repatriation.

As a result, several high-profile U.S. multinational corporations are sitting on large piles of cash earned from foreign operations. Yet these same corporations are actually borrowing money. One of the reasons for this borrowing is that their cash is trapped offshore, and these corporations will be subject to a 35 percent U.S. tax for repatriating their cash back to the United States

Witnesses at the hearing presented various approaches to resolve the problems arising from the outdated tax rules governing international relations.

Click here to watch the hearing and review the transcripts of each witnesses testimony.

Press Release

IR-2011-76, July 14, 2011

WASHINGTON — The Treasury Department and the Internal Revenue Service recently issued a notice announcing plans to phase in the requirements of the Foreign Account Tax Compliance Act (FATCA). The new law targets noncompliance by U.S. taxpayers through foreign accounts.

Under the notice’s phased implementation approach, foreign financial institutions (FFIs) and U.S. withholding agents are given adequate time to build the systems needed to fully comply with FATCA.

"FATCA is an important development in U.S. efforts to combat offshore noncompliance.  At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions." said IRS Commissioner Doug Shulman.  "Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."

FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.  FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

• Identify U.S. accounts,
• Report certain information to the IRS regarding U.S. accounts, and
• Withhold a 30-percent tax on certain payments to non-participating FFIs and account holders who are unwilling to provide the required information.

FFIs that do not enter into an agreement with the IRS will be subject to withholding on certain types of payments, including U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and passthru payments.

Notice 2011-53, issued July 14,2011 by Treasury and the IRS, provides a workable timeline for FFIs and U.S. withholding agents to implement the various requirements of FATCA.  Specifically, the notice phases in the implementation of FATCA in the following manner:

• An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
• Withholding on U.S. source dividends and interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
• Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013.  Reporting requirements will begin in 2014.
• For purposes of the Notice, high risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.

Treasury and IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively.

On June 20, 2011, President Obama released a statement reaffirming the United States’ commitment to an “open investment policy”.   In the words of the President, this commitment is “a commitment to treat all investors in a fair and equitable manner under the law”.  President Obama continued to elaborate stating the following:

My administration is committed to ensuring that the United States continues to be the most attractive place for businesses to locate, invest, grow, and create jobs.  We encourage and support business investment from sources both at home and abroad.

According to Obama’s press release, in support of encouraging inbound investments to the US, he mentions that

“Investments by foreign-domiciled companies and investors create well-paid jobs, contribute to economic growth, boost productivity, and support American communities.  The United States consistently receives more foreign direct investment than any other country in the world.  By voting with their balance sheets, businesses from abroad have clearly stated that the United States is one of the best places in the world to invest.  This is because we have a strong and open economy, the world’s most productive workforce, a unique culture of innovation and entrepreneurship, remarkable colleges and universities, and a business environment marked by transparency, protection of intellectual property, and the rule of law.

What does this mean from a tax perspective?  Specifically, what does this mean in the context of a discussion about a proposal to reduce taxes on repatriation of profits for a discrete, specified period of time in order to stimulate cash flow and tax receipts in a struggling US economy?  Essentially, this proposal would give corporations, with significant profits accumulating outside of the US, a “repatriation holiday”.

In an article by David Kocieniewski from the New York Times, entitled, “Companies Push for Tax Break on Foreign Cash”, the author describes the way the current proposed repatriation holiday would work. 

According to Mr. Kocieniewski's description, where a US corporation has amassed a profit in a foreign jurisdiction, “the federal income tax owed on ... profits returned to the United States would fall to 5.25% for one year, from 35%”.  The idea, if perfectly executed in alignment with the proposal, would, “generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could ease the huge budget deficit”.    

However, critics, including Mr. Kocieniewski believe that perfect execution is unlikely and not possible without extensive monitoring.  Further, they question whether the long-term impact of such a policy would end up costing taxpayers more in lost revenue outweighing the short-term benefits to the Treasury. 

Mr. Kocieniewski lists Mr. Obama and his administration in the list of hardliners against the repatriation holiday proposal. 

But, in light of Mr. Obama’s acknowledgement of the increasing global competition that the US faces for jobs and industries; and the desire for the US to remain the destination of choice for investors around the world, would it make good business/political sense to cash in on the short term gains of a repatriation holiday?  

For a copy of the press release, click here.

June 20, 2011

By: Marsha Henry © 

The House Ways and Means Committee has scheduled a public hearing for May 24, 2011 on the rules in certain foreign jurisdictions for taxing foreign income.

The attached document, prepared by the staff of the Joint Committee on Taxation, describes the U.S. international tax rules applicable to foreign income of resident taxpayers, provides a general overview of a territorial system of taxation, including a brief discussion of basic design considerations, and summarizes the rules of nine selected countries for the taxation of foreign income.

Click on the following link to download the document:

Download International_tax_system

The tax convention between Canada and The Hellenic Republic was signed on June 29, 2009.  Like all other tax treaties signed by Canada, this one is intended to govern activities of residents and non-residents of Canada that in order to avoid of double taxation and prevent fiscal evasion with respect to taxes on income and on capital.

The Treaty applies any person (corporate or individual) who is a resident of one or both of the Contracting States.  The agreement provides a definition of resident, as well as a definition of permanent establishment.  It also governs the method and approach to taxing income such as income from immovable property and business profits.  In addition, the agreement contains rules governing the taxation of dividends and interest paid by a company that is a resident of a Contracting to a resident of the other Contracting State.