did you say you have a u.s. passport?
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STEP Bahamas 7 June 2012
Jack Brister, Principal International Tax Services
[email protected]
Introduction
So you have a U.S. Passport. Welcome to the club! Your membership comes with many privileges; status, safety, a expansive and a sophisticated financial system with an occasional collapse, and Oh! Yes!, the best part of all – subject to tax on your worldwide income from whatever source from where ever you reside. Great, huh!
U.S. Tax System
The U.S. tax system is one of the most complex schemes in the modern world. Many also believe it to be the most invasive.
Why is it so complex?
Why is the reporting so strict?
To Know is to understand
Complexity
Taxation of divorce / separation −Higher tax rate − Less tax benefits
Capital gains tax Depreciation Estate taxes Expatriation
Complexity
Legal authority −Hierarchy
Code Court rulings Principals of law Regulations Private letter rulings Tax Advice Memorandum (TAM) Private Letter Rulings (PLR) Notices and announcements Instructions, etc.
U.S. Tax Reporting
The U.S. tax reporting is largely a system based on voluntary compliance − “A system of taxation by confession.”, U.S.
Supreme Court Justice Jackson − Until WWII there was no payroll tax withholding. − Minimal third party information reporting to tax
authorities and limited withholding tax
With few exceptions, U.S. residents (i.e., U.S. persons - citizens, green card holders, resident alien, trusts, estates and entities) are required to make income tax, estate and gift tax reports
U.S. Tax Reporting
Global or Territorial? −Commissioner v.
Glenshaw Glass Co. 1955 U.S. Supreme Court case (348 U.S. 426) Court held it was the
intention of Congress when enacting § 61(a) of the Code “income derived from whatever source” to tax all income except that which was specifically exempted.
− Foreign Tax Credit
Cross-Border Tax Reporting
1921 capital gains taxed at a preferred rate of 12.5%.
1944 to 1964 income tax rates reached 92%. FPHC rules – 1954 FTC rules - 1954 CFC rules – 1964
1965 to 1981 highest income tax rate was 70%. 1982 to 2012 highest income tax rate has been 40%
1986 capital gains tax rates as high as 33%. PFIC rules enacted
Cross-Border Tax Reporting
Continued non-compliance with global reporting resulted in OVDIs and HIRE ACT
1996 foreign trust reporting rules enacted
2003 first offshore voluntary disclosure program a failure, less than 1,200 taxpayers
2009 strict penalty offshore voluntary compliance program a success – more than 17,000 taxpayers came forward
2010 HIRE ACT (FACTA) FGT definition expanded Additional PFIC reporting FFI and SFFA reporting
2011 OVDI a continued success as a result of stricter penalty regime IRS continues OVDI for 2012 forward
Foreign Trusts What is a Foreign Trust
− Court and control tests − Established in a foreign jurisdiction with
foreign trustee / fiduciary
Taxation − Grantor Trust
treated as foreign gift − Foreign grantor trust beneficiary statement
required Irrevocable
− Distributions to, and for, settlor or settlor’s spouse until settlor’s death
Income and expenses taxable to settlor
Foreign Trusts
Irrevocable with distributions available to persons other than settlor or settlor’s spouse
U.S. beneficiaries taxable on proportionate share of DNI −Required to report based on
beneficiary statement Accumulated income
Swan v. Commissioner PLRs
− IRS comments on Lichtenstein foundations Generally treated as a foreign grantor
trust −Other civil law based foundations
must be evaluated on facts and circumstances
Underlying Foreign Entities
treated as foreign corporations for U.S. tax purposes Limited liability
−Most foreign jurisdiction partnerships will be treated as partnerships
Foreign corporations −Controlled foreign corporations − Passive foreign investment
companies
Controlled Foreign Corporation −Any foreign corporation in which more
than 50% of the voting stock or total value of all stock is owned, directly or indirectly, by U.S. shareholders U.S. shareholder is a U.S. person that
owns at least 10% of the voting stock − Taxation
Anti-deferral regime −Subpart F income currently includible
Passive income, re-investment in U.S. property, foreign bribes, certain operating income, etc.
Underlying Foreign Entities
− U.S. beneficiaries Attribution rules
indirect ownership – IRC 958(a) constructive ownership – IRC
958 (b) − Indirect ownership focus is on control − Beneficiary may be deemed having sufficient
ownership / control, therefore be required to report Beneficiary is trustee, can vote shares, control or
influence over trustee − Courts rejected IRS assertions without sufficient
beneficiary control
Passive Foreign Investment Company − Foreign corporation in which 75% of
the gross income is passive; or the average of 50% of the assets is intended to produce passive income
− Taxation Purpose is anti-deferral
shareholders to report
Underlying Foreign Entities
Foreign discretionary trusts − Facts and circumstances −Must include current year excess
distribution, plus non-excess distribution in DNI
−TAM 200733024 Sale of PFIC Deemed 50/50 between U.S.
beneficiaries
Tax Implications − Disregarded status − Partnership − Corporation
Expatriation
Exit Tax − Deemed sale of all assets day before expatriation − Mark-to-market − Deferral on certain assets
What is an Expatriate? − U.S. citizens − Long-term residents
Must be lawful long-term resident for 8 of last 15 years before expatriation
− $124,000 average net income for past 5 years; or
− Net Worth in excess of $2mm; or − Failure to file and pay tax for prior 5 years
Expatriation
expatriate − Foreign Trust
FACTA
trust it is presumed to have U.S. beneficiaries
Passive Foreign Investment Company −Reportable even if no income
recognition event occurs
FACTA
Specified Foreign Financial Assets − Purpose −Who Must File − Foreign Financial Accounts − Financial Interest −Definition of United States − Filing Threshold and Due Date −What this means for the future
Reporting Foreign Financial Assets Purpose
− FBAR Identify money laundering
− Specified Foreign Financial Assets (Sec. 6038D of the Code) Identify and combat tax evasion
Who Must File? − FBAR
Signature authority or interest in foreign financial accounts exceeding $10,000
− Sec. 6038D Interest in specified foreign financial
assets exceeding applicable threshold
U.S. citizens, permanent residents, part-year resident aliens, residents of U.S. territories, U.S. entities, trusts and estates, and Native Americans
−Sec. 6038D U.S. person means
−Same as FBAR except Native Americans are excluded
Reporting Foreign Financial Assets
FBAR −All 50 states, District of Columbia,
territories (American Soma, Mariana Islands, Puerto Rico, Guam, USVI), and Native American lands
Sec. 6038D −Same as FBAR but excludes Native
American lands
Reporting Foreign Financial Assets Who Must File? − Filing Thresholds
Single (unmarried) TP living in U.S. −Total value of SFFAs exceeds $50,000
last day of the year or more than $75,000 at any time during the year
Same for MFS TPs living in U.S. MFJ TPs living in the U.S.
−Total value of SFFAs exceeds $100,000 on last day of the year, or more than $150,000 at any time during the year
Reporting Foreign Financial Assets Who Must File? − Filing Thresholds
Single and MFS TPs living abroad −Total value exceeds $200,000 on last
day of tax year or more than $300,000 at any time during the year
MFJ TPs living abroad −Total value of SFFAs exceeds
$400,000 on last day of the tax year, or more than $600,000 at any time during the year
Reporting Foreign Financial Assets Who Must File? − If no there is specified value
Deemed that the TP or TPs meet the filing requirements
−Not required to file if no income tax, or information return, is required
Foreign Financial Accounts −Sec. 6038D of the Code
Specified Foreign Financial Assets (SFFAs) − FBAR accounts, except signature
authority accounts − Financial accounts physically located
outside the U.S.
Foreign Financial Accounts −Sec. 6038D of the Code
Specified foreign financial assets not held in an account −Stocks, securities, bonds, etc. issued
by non-U.S. persons (includes CFCs) − Interest in foreign entity − Financial instrument or contract,
including real property lease, swaps, options, derivatives
− Foreign mutual funds, hedge funds, private equity funds (PFICs)
Reporting Foreign Financial Assets Financial Interest − FBARs
Deemed owner / legal title holder Deemed to have an interest if treated as
trust owner Beneficiary who has greater than 50%
interest in trust assets −Sec. 6038D of the Code
Required to report SFFAs if income, gains, deductions, credits, gross proceeds, or distributions are attributable or reportable regardless of receipt
Beneficiary knows of foreign trust interest −Receipt of distribution is knowledge
NRA Interest Reporting Sec. 6049 Returns Regarding
Payments of Interest −Regulation 1.6049-8
U.S. bank interest paid to NRAs on or after January 1, 2013
Restricts scope to individual NRAs resident of a information exchange agreements
Integral to effort of FACTA by showing cooperation with foreign governments
Information exchange agreements will rarely, if at all, be required in the future. With the new non-resident reporting regulation requiring U.S. institutions to report bank interest to treaty partners, the enforcement of SFFA reporting, and the soon to come FFI reporting, especially in cases where foreign governments will take on the responsibility, there will soon be free flow of information without the need of information exchange agreements.
Questions
Jack Brister, Principal International Tax Services
[email protected]
Introduction
So you have a U.S. Passport. Welcome to the club! Your membership comes with many privileges; status, safety, a expansive and a sophisticated financial system with an occasional collapse, and Oh! Yes!, the best part of all – subject to tax on your worldwide income from whatever source from where ever you reside. Great, huh!
U.S. Tax System
The U.S. tax system is one of the most complex schemes in the modern world. Many also believe it to be the most invasive.
Why is it so complex?
Why is the reporting so strict?
To Know is to understand
Complexity
Taxation of divorce / separation −Higher tax rate − Less tax benefits
Capital gains tax Depreciation Estate taxes Expatriation
Complexity
Legal authority −Hierarchy
Code Court rulings Principals of law Regulations Private letter rulings Tax Advice Memorandum (TAM) Private Letter Rulings (PLR) Notices and announcements Instructions, etc.
U.S. Tax Reporting
The U.S. tax reporting is largely a system based on voluntary compliance − “A system of taxation by confession.”, U.S.
Supreme Court Justice Jackson − Until WWII there was no payroll tax withholding. − Minimal third party information reporting to tax
authorities and limited withholding tax
With few exceptions, U.S. residents (i.e., U.S. persons - citizens, green card holders, resident alien, trusts, estates and entities) are required to make income tax, estate and gift tax reports
U.S. Tax Reporting
Global or Territorial? −Commissioner v.
Glenshaw Glass Co. 1955 U.S. Supreme Court case (348 U.S. 426) Court held it was the
intention of Congress when enacting § 61(a) of the Code “income derived from whatever source” to tax all income except that which was specifically exempted.
− Foreign Tax Credit
Cross-Border Tax Reporting
1921 capital gains taxed at a preferred rate of 12.5%.
1944 to 1964 income tax rates reached 92%. FPHC rules – 1954 FTC rules - 1954 CFC rules – 1964
1965 to 1981 highest income tax rate was 70%. 1982 to 2012 highest income tax rate has been 40%
1986 capital gains tax rates as high as 33%. PFIC rules enacted
Cross-Border Tax Reporting
Continued non-compliance with global reporting resulted in OVDIs and HIRE ACT
1996 foreign trust reporting rules enacted
2003 first offshore voluntary disclosure program a failure, less than 1,200 taxpayers
2009 strict penalty offshore voluntary compliance program a success – more than 17,000 taxpayers came forward
2010 HIRE ACT (FACTA) FGT definition expanded Additional PFIC reporting FFI and SFFA reporting
2011 OVDI a continued success as a result of stricter penalty regime IRS continues OVDI for 2012 forward
Foreign Trusts What is a Foreign Trust
− Court and control tests − Established in a foreign jurisdiction with
foreign trustee / fiduciary
Taxation − Grantor Trust
treated as foreign gift − Foreign grantor trust beneficiary statement
required Irrevocable
− Distributions to, and for, settlor or settlor’s spouse until settlor’s death
Income and expenses taxable to settlor
Foreign Trusts
Irrevocable with distributions available to persons other than settlor or settlor’s spouse
U.S. beneficiaries taxable on proportionate share of DNI −Required to report based on
beneficiary statement Accumulated income
Swan v. Commissioner PLRs
− IRS comments on Lichtenstein foundations Generally treated as a foreign grantor
trust −Other civil law based foundations
must be evaluated on facts and circumstances
Underlying Foreign Entities
treated as foreign corporations for U.S. tax purposes Limited liability
−Most foreign jurisdiction partnerships will be treated as partnerships
Foreign corporations −Controlled foreign corporations − Passive foreign investment
companies
Controlled Foreign Corporation −Any foreign corporation in which more
than 50% of the voting stock or total value of all stock is owned, directly or indirectly, by U.S. shareholders U.S. shareholder is a U.S. person that
owns at least 10% of the voting stock − Taxation
Anti-deferral regime −Subpart F income currently includible
Passive income, re-investment in U.S. property, foreign bribes, certain operating income, etc.
Underlying Foreign Entities
− U.S. beneficiaries Attribution rules
indirect ownership – IRC 958(a) constructive ownership – IRC
958 (b) − Indirect ownership focus is on control − Beneficiary may be deemed having sufficient
ownership / control, therefore be required to report Beneficiary is trustee, can vote shares, control or
influence over trustee − Courts rejected IRS assertions without sufficient
beneficiary control
Passive Foreign Investment Company − Foreign corporation in which 75% of
the gross income is passive; or the average of 50% of the assets is intended to produce passive income
− Taxation Purpose is anti-deferral
shareholders to report
Underlying Foreign Entities
Foreign discretionary trusts − Facts and circumstances −Must include current year excess
distribution, plus non-excess distribution in DNI
−TAM 200733024 Sale of PFIC Deemed 50/50 between U.S.
beneficiaries
Tax Implications − Disregarded status − Partnership − Corporation
Expatriation
Exit Tax − Deemed sale of all assets day before expatriation − Mark-to-market − Deferral on certain assets
What is an Expatriate? − U.S. citizens − Long-term residents
Must be lawful long-term resident for 8 of last 15 years before expatriation
− $124,000 average net income for past 5 years; or
− Net Worth in excess of $2mm; or − Failure to file and pay tax for prior 5 years
Expatriation
expatriate − Foreign Trust
FACTA
trust it is presumed to have U.S. beneficiaries
Passive Foreign Investment Company −Reportable even if no income
recognition event occurs
FACTA
Specified Foreign Financial Assets − Purpose −Who Must File − Foreign Financial Accounts − Financial Interest −Definition of United States − Filing Threshold and Due Date −What this means for the future
Reporting Foreign Financial Assets Purpose
− FBAR Identify money laundering
− Specified Foreign Financial Assets (Sec. 6038D of the Code) Identify and combat tax evasion
Who Must File? − FBAR
Signature authority or interest in foreign financial accounts exceeding $10,000
− Sec. 6038D Interest in specified foreign financial
assets exceeding applicable threshold
U.S. citizens, permanent residents, part-year resident aliens, residents of U.S. territories, U.S. entities, trusts and estates, and Native Americans
−Sec. 6038D U.S. person means
−Same as FBAR except Native Americans are excluded
Reporting Foreign Financial Assets
FBAR −All 50 states, District of Columbia,
territories (American Soma, Mariana Islands, Puerto Rico, Guam, USVI), and Native American lands
Sec. 6038D −Same as FBAR but excludes Native
American lands
Reporting Foreign Financial Assets Who Must File? − Filing Thresholds
Single (unmarried) TP living in U.S. −Total value of SFFAs exceeds $50,000
last day of the year or more than $75,000 at any time during the year
Same for MFS TPs living in U.S. MFJ TPs living in the U.S.
−Total value of SFFAs exceeds $100,000 on last day of the year, or more than $150,000 at any time during the year
Reporting Foreign Financial Assets Who Must File? − Filing Thresholds
Single and MFS TPs living abroad −Total value exceeds $200,000 on last
day of tax year or more than $300,000 at any time during the year
MFJ TPs living abroad −Total value of SFFAs exceeds
$400,000 on last day of the tax year, or more than $600,000 at any time during the year
Reporting Foreign Financial Assets Who Must File? − If no there is specified value
Deemed that the TP or TPs meet the filing requirements
−Not required to file if no income tax, or information return, is required
Foreign Financial Accounts −Sec. 6038D of the Code
Specified Foreign Financial Assets (SFFAs) − FBAR accounts, except signature
authority accounts − Financial accounts physically located
outside the U.S.
Foreign Financial Accounts −Sec. 6038D of the Code
Specified foreign financial assets not held in an account −Stocks, securities, bonds, etc. issued
by non-U.S. persons (includes CFCs) − Interest in foreign entity − Financial instrument or contract,
including real property lease, swaps, options, derivatives
− Foreign mutual funds, hedge funds, private equity funds (PFICs)
Reporting Foreign Financial Assets Financial Interest − FBARs
Deemed owner / legal title holder Deemed to have an interest if treated as
trust owner Beneficiary who has greater than 50%
interest in trust assets −Sec. 6038D of the Code
Required to report SFFAs if income, gains, deductions, credits, gross proceeds, or distributions are attributable or reportable regardless of receipt
Beneficiary knows of foreign trust interest −Receipt of distribution is knowledge
NRA Interest Reporting Sec. 6049 Returns Regarding
Payments of Interest −Regulation 1.6049-8
U.S. bank interest paid to NRAs on or after January 1, 2013
Restricts scope to individual NRAs resident of a information exchange agreements
Integral to effort of FACTA by showing cooperation with foreign governments
Information exchange agreements will rarely, if at all, be required in the future. With the new non-resident reporting regulation requiring U.S. institutions to report bank interest to treaty partners, the enforcement of SFFA reporting, and the soon to come FFI reporting, especially in cases where foreign governments will take on the responsibility, there will soon be free flow of information without the need of information exchange agreements.
Questions