Tax Quarry

 
Internal Revenue Code § 7874[i] was introduced to discourage U.S. corporations from engaging in certain "inversion" transactions.  An inversion transaction, for purposes of § 7874, exists if the following circumstances occur: a U.S. corporation or partnership becomes a subsidiary of, or transfers substantially all of its assets to, a foreign corporation and the former owners of the U.S. entity own at least 60% of the stock, by vote or value, of the new foreign parent corporation.  Inversion transactions include stock inversions, asset inversions, and various permutations of these two types.

Congress intended that this new provision capture transactions in which a U.S. corporation reincorporates in a foreign jurisdiction, but the resulting entity has only "a minimal presence in [the] foreign country of incorporation."  In light of this intention, the "substantial business activities" exception was enacted.  However, new regulations significantly narrow the substantial business activities exception to the point where it captures transactions that were not intended to be in scope.

The changes in the regulations have limited the ability of U.S. multinational corporations to compete against other corporations established in jurisdictions with lower corporate tax rates.  The U.S. has one of the highest corporate tax rates in the developed world.  In order to achieve corporate tax neutrality, which will encourage companies to establish and maintain businesses in the U.S., the government will need to more aggressively target tax policies and rules that act as disincentives for companies to maintain their operations in the U.S.

INTRODUCTION

Over the past year, FinCen, Treasury and the Internal Revenue Service (“IRS”) have made some significant changes to the Foreign Bank and Financial Accounts (“FBAR”) reporting rules.  In addition, they have modified the new Foreign Account Tax Compliance Act (“FATCA”) reporting rules for individuals to disclose their foreign financial assets.  These changes have created much confusion for tax professionals as well as individuals and corporations who are unclear about what their reporting obligations are, and how these two reporting systems work together.  

To relieve some of this confusion, the IRS has released a statement informing taxpayers that the new FATCA filing requirements do not replace or otherwise affect a taxpayer’s obligations under FBAR. In fact, individuals are expected to file each form for which they meet the relevant reporting threshold.  Because the rules are still in transition, determining whether a taxpayer meets these requirements can be a challenge. 

OVERVIEW OF FBAR REPORTING REQUIREMENTS

Under the FBAR reporting rules a U.S. person that has a financial interest in, or has signature authority over, any foreign financial accounts must file a Form TD F 90-22.1 if the aggregate value of these accounts exceed $10,000 at any time during the calendar year.  If the threshold requirements are met, the report must be filed annually before June 30 of the year following the calendar year reported. 

There are a number of exceptions to FBAR filing requirements. For example, the rules provide an exemption from reporting certain accounts.  These include accounts of a department or agency of the United States, an Indian Tribe or any State or any political subdivision of the State or wholly owned entities of any of the foregoing; as well as accounts of an international financial institution, a military banking facility, or correspondent or nostro accounts maintained by banks and used solely for bank-to-bank settlements. 

There is also an exception for officers and employees with signature authority over, but no financial interest in a reportable account.  If an individual is an officer or employer of (1) an entity that is examined by a specified government agency; (2) a financial institution that is registered with the SEC or Commodity Futures Trading Commission; (3) an authorized service provider for an investment company registered with the SEC; (4) an entity with a class of equity securities listed on any US national securities exchange; or (4) a United States corporation that has a class of equity securities registered under section 12(g) of the SEC Act, they are not required to file a report.     

Failure to file the report may result in both civil and criminal penalties, unless the violation is due to reasonable cause.  Reasonable cause includes reliance on the advice of the tax professional that was aware the financial foreign account existed or whether the account was established for legitimate purposes and not to conceal the reporting of income or assets. 

OVERVIEW OF FATCA REPORTING REQUIREMENTS

FATCA requires certain U.S. Taxpayers holding financial assets with an aggregate value exceeding $50,000 to report certain information about those assets with their annual return.  The first obligation to report began in 2012 for those who held assets beginning after March 18, 2010.

Treasury and the IRS have provided the following asset reporting thresholds for taxpayers residing in the United States:  

• Unmarried individuals must report values that are greater than $50,000 on the last day of the year or greater than $75,000 at any time during the year;
• Married individuals filing jointly must report values that are greater than $100,000 on the last day of the year or greater than $150,000 at any time during the year;
• Married individuals filing separately are the same as unmarried individuals.

For taxpayers residing outside of the U.S. and satisfying the bona fide resident or physical presence test the thresholds are a lot higher:

• Unmarried individuals must report asset values greater than $200,000 on the last day of the year or greater than $300,000 at any time during the year;
• Married individuals filing jointly must report asset values greater than $400,000 on the last day of the year or greater than $600,000 at any time during the year
• Married individuals filing separate are subject to the same reporting requirements as unmarried individuals.

A penalty of $10,000, and a penalty for $50,000 for continued failure to file after receiving notification from the IRS, will be imposed on any taxpayer who cannot show reasonable cause for not reporting.

Although it is anticipated that the FATCA rules will extend to require reporting by certain domestic entities, at this point only individuals are subject to the filing requirements.

KEY DIFFERENCES AND SIMILARITIES BETWEEN FBAR AND FATCA

Below is a chart comparison, provided by the IRS, of the reporting requirements under FATCA (Form 8938) and FBAR (Form TD F 90-22.1).  The chart attempts to provide some clarity about whether a taxpayer must file, which form(s) are required to be filed, and when a taxpayer must file in order to avoid the onerous penalties that might be imposed.

Wall Street Journal has an interesting article on big U.S. companies who have decided to  incorporate abroad for tax savings, among other reasons. 

Read the article here.

Jules, a fashion consultant living in New York City's Upper East Side, says:  

Have you ever thought about trading in your boring black socks for something a little bit more fun and updated, yet still professional? If you are looking to spice up your wardrobe in a simple way, you have options at every price point.

Gone are the days of everything matching. Substitute your black socks for a color you like or try something a little out of your color comfort zone. There are many different stripes, dot and color combinations. They will be a conversation starter and show that you are man of true style!

Paul Smith Polka Dot Sock found at Barneys

Sock it to Me Combo Moustachioed $9.00 each

Henrik Vibskov Helsinki socks from Copenhagen $25.00

If you are looking for more great fashion advice from Jules, visit her blog at http://sayitinstylewithjules.blogspot.com/   or send her an email at  [email protected]

On July 26, 2012, the OECD issued the following statement endorsing a new model international tax agreement designed to improve cross-border tax compliance and boost transparency.

Developed by the United States, France, Germany, Italy, Spain and the United Kingdom, the model allows the implementation of the Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments.  The agreement will reduce compliance costs for financial institutions and provide for reciprocity.

The model agreement calls on the OECD to work with interested countries on adapting the terms of the agreement to create a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.

OECD Secretary-General Angel Gurría said:  “I warmly welcome the co-operative and multilateral approach on which the model agreement is based. We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible. A proliferation of different systems is in nobody’s interest. We are happy to redouble our efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world.”  

As a next step, the OECD will organise, in cooperation with the Business and Industry Advisory Committee (BIAC) to the OECD, a briefing session on the “Model Intergovernmental Agreement on Improving Tax Compliance and Implementing FATCA” at OECD headquarters in Paris in September 2012. The Organisation will then quickly advance to design common systems to reduce costs and increase benefits for governments and businesses alike.

My boss Rich has designated Friday as “Bow-Tie Fridays” in the office.  Although not everyone participates, he faithfully accessorizes his suits with the most creative bow-ties each and every Friday. Rich has served as an example that, contrary to popular belief, bow-ties are not just worn (1)  for formal events, (2) if you are humpty-dumpty, or (3) by clowns.  In 2012 bow-ties have a place in every young professional males wardrobe. 

Wearing a bow-tie changes the focus of a man from his chest to his neck.  In fact, according to a Men’s Health Magazine website article, the bow-tie is ideal for a man who wants to draw attention to his face. 

On a more basic level, it modifies a man’s look from the standard monotony of the common office necktie.  For a man trying to be a trendsetter, bow-ties offer a unique opportunity to spice up otherwise boring work attire,  without being too risqué.  In my opinion, wearing a bow-tie also suggests a certain level of sophistication.    

Here are three of my favorite styles:

1.  This one is playful and fun.  It adds a pop of color without being too dramatic.  

Duchamp multi-color stripe bow-tie $150

2.  If you are looking for something more conservative, this bow-tie is perfectly versatile and will blend in nicely with any suit. 

Barneys New York Co-op micro houndstooth bow-tie $65

3.  If you are looking for something closer to the pattern of a regular tie, this bow-tie is perfect for you.  

Barneys New York Co-op Regimental striped bow-tie $65

A few days ago I attended a training seminar on how to advise small businesses about choosing an appropriate legal form to run their business.  This included a review of the tax considerations that should be factored into a decision to operate using one form over another.

The presentation covered the various forms of business structures available in the U.S. that are often used by small businesses in many industries.  By far the most common types that were used were S corporations, limited liability companies and limited partnerships.   

The speaker who covered the tax issues discussed the basic considerations that affect small businesses, which included the potential exposure to double taxation where both shareholder and corporate entity may become subject to tax and the pass-through of tax attributes depending on which entity was chosen.

However, what was noticeably missing from the discussion of the tax issues were the international tax concerns that arise when operating a small business, especially a small business with an online presence.  Those issues include the following:

1.  Determination of Status:  Each jurisdiction defines small business differently.  There is no standard international definition.  If you are actively seeking to take advantage of being classified as a small business for purposes of obtaining a loan, take advantage of a preferred tax rate or maintain eligibility for certain government sponsored programs these distinction may be vital to where you ultimately decide to operate your business.  For example, the United States uses industry codes to determine whether a certain type of business is considered small.  Canada, on the other hand, defines small sized businesses based on either or both revenue and number of employees.  The UK makes the determination based on the balance sheet, number of employees and revenues.    
   
   
2. Compliance: The United States is one of the few jurisdictions that have a worldwide system of taxation.  Simply, this means that if you are a citizen or resident of the US, you are required to file a tax return and claim all income regardless of where that income was earned.  The foreign tax credit regime attempts to eliminate the double tax effect that this creates.  However, outside of basic tax reporting obligations the US also requires the reporting of assets owned in foreign jurisdictions as well.  The reporting requirements are referred to as “FBAR”, which stands for Foreign Bank and Financial Accounts; and “FACTA”, an acronym for Foreign Account Tax Compliance.  An FBAR is required where a US taxpayer has signing authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account where a certain dollar value threshold is met.  FACTA requires taxpayers with specified foreign financial assets that exceed certain thresholds to report those assets.  Penalties for failing to comply can be very hefty.
   
   
3. Withholding Tax Obligations:  The US has an extensive tax treaty network.  Tax treaties serve many purposes.  One such purpose is reducing withholding tax obligations for certain activities carried on in a country with a tax treaty with the US.  If no treaty is in place, or if the activity that the business is engaged in is not covered by the treaty, then a portion of any monies received as payment to a non-resident of that jurisdiction may be withheld to satisfy local tax obligations.  Factoring this into cash flow analysis is essential to forecasting your businesses access to its revenue.
    
4. Transfer Pricing: According to the IRS website, these rules basically govern “prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles”.   The goal is to ensure that these transactions yield results that are consistent with the results that would have been realized if uncontrolled/unrelated taxpayers had engaged in the same transaction under the same circumstances.  This can be a very tricky area to navigate.  Where goods are services are being offered between related/controlled businesses in different geographical jurisdictions it may be worthwhile obtain professional advice to ward against any of these types of audits.  An adjustment penalty may otherwise apply.

Marsha Henry
July 2, 2012
Copyright 

Every professional woman needs a designer handbag.  Tax Quarry's top picks are: 

1.  Go big or Go home.  At $29,990, this brown crocodile Gucci tote is an investment equivalent to purchasing a small car.  

2.  The amarante colored LV Alma hand held bag, priced at $2,490, with monogrammed leather is a more affordable option than the Gucci crocodile tote above. 

3.  Prada clay grey top handle leather hinge bag.  $2,950.  Say no more.

On Friday, May 11, 2012, the ABA Tax section presented a seminar entitled "US International Tax Planning in the Cloud".   

Summer Lepree of Holland & Knight, LLP was the moderator.  Speakers were Jeffrey Rubinger of KPMG, Danielle Rolfes of the US Department of Treasury and Anne Shelburne of the Internal Revenue Service.

 Some of the tax issues that arise in this situation include proper characterization of the income, determining the appropriate source, as well as whether the activity creates a US presence and how tax treaty rules apply.  

Please click the following link to download a copy of presentation slides. 

Download ABA US International Tax Planning in the Cloud