International Planning

Transcription

1 International Planning Presentation for Members and Friends of the Swiss-American Chamber of Commerce April 14, 2005 Company LLP Accountants International Tax Consultants San Francisco Palo Alto Company LLP

2 company llp ACCOUNTANTS CONSULTANTS san francisco palo alto Associated Firms Worldwide FIRM OVERVIEW Company is a certified public accounting firm with accountants and international tax consultants. Since the firm's founding in 1991, we have represented both businesses and individuals, including large multi-national companies. Our objective is to meet the needs of our clients and their expectations of quality-based services aimed at increasing profitability. With our global approach to client services, the firm responds to complex business challenges with experience and care. While the firm provides a wide range of tax services, we are frequently engaged by clients in the following areas: SEC audit practice including accounting for consolidations and reorganizations, post IPO services and Sarbanes-Oxley compliance. Merger and acquisition services, including multi-state income tax planning, nexus reviews, sales and use tax planning related to asset dispositions and corporate reorganizations, due diligence services and preparation of pro-forma financial statements. International tax planning and compliance, including cross-border M A consulting, foreign licensing of intangibles, branch tax issues for foreign companies expanding into the U.S. and outbound expansion by U.S. businesses. In addition to our corporate services, our practice includes extensive domestic and international income, gift and estate planning services for business executives, entrepreneurs and investors who are conducting or expanding their activities globally. Our business philosophy is to develop relationships with established institutions and professionals, locally and abroad, that can assist our clients. The firm maintains close ties to the venture capital/banking community and frequently makes strategic introductions for its clients. The firm is registered with the Public Company Accounting Oversight Board, which entitles the firm to practice before the SEC. With offices in San Francisco and Palo Alto, and associated firms throughout the U.S. and 80 countries worldwide, we deliver personalized services on a global scale. Our industry experience includes: Information Technology Software Bio Tech Real Estate Distribution Hotel Leisure Services Media Manufacturing Financial Services For further information, please visit our website at Montgomery Street, Suite 600, San Francisco, CA Tel: (415) Fax: (415) East Bayshore Road, Suite 302, Palo Alto, CA Tel: (650) Fax: (415) Web: consulting@rowbotham.com Member: AICPA, SEC Practice Section, and IA International, a worldwide network of accounting - and consulting firms

3 Interacting Tax Rules U.S. Domestic Tax Rules U.S. International Tax Rules Bilateral Tax Treaty Foreign Country Domestic Tax Rules Foreign Country International Tax Rules 2 Frequent Planning Opportunities Situations frequently requiring international tax planning: Managing U.S. tax residency Nonresidents conducting activities in the U.S. Pre-arrival to U.S. Departure from U.S. 3

4 U.S. Residency There are three principal ways to become a U.S. tax resident: Citizenship Green Card Substantial presence If a person is a U.S. tax resident and also a resident of a treaty country, a tie-breaker test applies California has a separate intent-based test Estate tax has also a separate intent-based test 4 Substantial Presence Test The substantial presence test met if both: Present at least 31 days in the current year; and Present 183 days or more using the following formula: Year days multiplier / / Exception: not present 183 days in current year and a closer connection to a foreign country 5

5 Income Tax Treaty Treaty includes tie-breaker test If you are defined to be a resident of both countries, the Treaty will determine whether you are a resident of the Switzerland or the United States Treaty will override green card and formula definition of residence Watch for conflicts between tax filing status and your immigration status 6 Welcome to California Residency Definition for California: Presumption of residence if presence exceeds 9 months Presumption can be rebutted based on facts Treaty will not exempt income earned in California California residents are taxed on worldwide income 7

6 U.S. Residence Gift and Estate Tax Planning General definition treats person as resident if the person enters the U.S. with the intention of staying indefinitely Nonresidents are taxed on U.S. Assets Residents (and U.S. Citizens) taxed on worldwide assets Marital exclusion limited for noncitizen spouse 8 Nonresidents Conducting Activities in the U.S. U.S. tax planning for nonresidents often involves planning to maintain nonresident status Residents are taxed on their worldwide income Nonresidents are taxed only on two types of income: U.S. Source FDAP Income Includes interest, dividends, rents, royalties Gross withholding tax at a 30% or lower treaty rate ECI Income effectively connected with a U.S. trade or business Generally includes services rendered while in the U.S. Generally excludes stock sales Includes sales of U.S. real estate Taxed at graduated rates with deductions Planning for nonresidents involves minimizing these types of income 9

7 Nonresidents Conducting Activities in the U.S. Additional planning opportunities include: Treaty articles to exclude income from services Treaty director s fees article Treaty pension article Per diem plans for expense reimbursement Totalization agreements regarding social security taxes 10 Per Diem Exclusions from Income for Short-Term Assignments Employee Total Compensation: $120,000 (annual) Per Diem Exclusion: $ 74,460 (maximum based on $204/day) Purpose of Per Diem: To allow for deduction of duplication of living costs Away from tax home Assignment should not be expected to exceed 12 months Employer must have an accountable plan Certain nontax limits may apply Visa applications may require certain levels of compensation Per diem plans that are excessive can be challenged 11

8 International Social Security Agreements Foreign Parent Employee Relocation U. S., Inc. U.S. Wage Withholding 12 Pre-arrival Planning Pre-arrival planning can include: Restructuring of foreign entities due to U.S. foreign trust and corporation rules to minimize tax and reporting Transactions to step-up the basis in assets Formation of foreign charitable foundations Gifting of intangible assets and foreign situs tangible assets Formation of dynasty trusts Offshore insurance structures Option exercise and 83(b) election 13

9 Going from Nonresident to Resident Status Nonresident vs. Resident Owner Nonresident vs. Resident Owner Foreign Holding Company (Form 5471) Foreign Trusts (Form 3520, 3520-A) Investments Trade or Business Investments Reporting requirements are complex Tax deferral strategies are easier to implement prior to establishing tax residence 14 Avoiding Penalties Report gifts from foreign persons in excess of $100,000 Report transfers to and from foreign trusts Report ownership of foreign trusts and foreign corporations Foreign bank account reporting 15

10 Foreign Trusts Complicated when there are U.S. beneficiaries Defined in the Internal Revenue Code as a trust: (1) Subject to U.S. court jurisdiction; and (2) The trustee or equivalent is a U.S. person U.S. person: Includes individuals and institutions 16 Pre-Arrival Formation of Trusts Trust settled prior to arrival Foreign Trust with: Foreign beneficiaries (1) U.S. beneficiaries U.S. Trust with: Foreign beneficiaries (unlikely) U.S. beneficiaries (1) Income taxed to settlor if trust established within 5 years of establishing U.S. residence 17

11 Inbound Basis Step-Up Strategy NRA Appreciated Assets A Strategies B F Co. Hybrid Company Contribution to F Co. is treated as taxable in the U.S. Tax basis steps up F Co. is liquidated prior to arrival in the U.S. Tax basis steps up 18 Death of Citizen Spouse H U.S. W Swiss Living Trust Assets Unlimited marital exclusion Reduced to $1.5 million for noncitizens 19

12 Qualified Domestic Trust H U.S. W Swiss Qualified Domestic Trust U.S. Trustee may be required 20 Formation of Foreign Charity Before Arrival To comply with Section % rule Nonresident Foreign Charity Resident Can decrease IRS Reporting and Regulations 21

13 Dynasty Trust Nonresident settlor assigns assets Domestic Trust Resident Beneficiaries Created by nonresident usually not subject to U.S. gift tax Assets not subject to estate tax if retained by trust Discretionary distributions 22 Foreign Insurance Structure Funding U.S. Resident $ Tax-free withdrawals Foreign or U.S. Trust Funding Borrowing Foreign Insurance Asset protection opportunities Exemption from U.S. income tax (useful for returning foreign nationals) Ability to liquidate tax-free after departure Investment Diversification 23

14 Exercising Stock Options Smartly: Timing is Everything 2003 Options Awarded (1) August 04 Arrival in U.S. Vesting (2) Exercise Options Worldwide Taxation Additional Vesting (1) Section 83(b) election may apply (2) Early exercise saves tax 24 Departure Planning Departure planning can include: Planning to avoid the 10 year trailing rule for eight-year green card holders Planning the timing of asset sales Foreign-side pre-arrival planning Closer connection and tax home to enable dual status returns Payment of deferred compensation under the treaty 25

15 Expatriation Rules Applies to: U.S. Citizens Long-term residents - 8/15 years with resident visa U.S. tax extends for 10 years after expatriation U.S. sourced income taxed U.S. assets subject to gift and estate taxes New reporting rules effective June 3, 2004 Tax avoidance not an issue Reporting required for 10 years if Average 5 year income tax is 124,000 Assets value equal or exceeds $2 million 30 day rule 26 Executive Severance Planning Lump-sum payment International Service (25 years) U.S. Period (2 years) Retiring in home country Source of income Timing of payment 27

16 U.S. International Tax Planning Unitary Tax Problem Caused by Employees in California Parent Co. Swiss Business Employees In California Unitary tax exposure Treaty will not apply to exempt activity from California tax 28 U.S. International Tax Planning Avoiding California s Unitary Tax Parent Co. Preferred California Structure Swiss Business Foreign Employment Subsidiary California Subsidiary (1) (1) Employees in California Employees in California (1) Waters Edge Election will prevent California taxation of your foreign parent company. 29

17 Unified Transfer Tax Rate Schedule for Residents Nonresidents (1) A B C D Taxable Amount Taxable Amount Tax (before credits) Tax Rate on Amount Over Not Over on Amount in col. A (2) between Col A B , % 10,000 20,000 1, ,000 40,000 3, ,000 60,000 8, ,000 80,000 13, , ,000 18, , ,000 23, , ,000 38, , ,000 70, , , , ,000 1,000, , ,000,000 1,250, , ,250,000 1,500, , ,500,000 2,000, , ,000, , Unified Transfer Tax Rate Schedule for Residents Nonresidents (1) Definitions Resident: (a) U.S. citizens and, (b) foreign nationals who meet the definition of resident. A resident is an individual who enters the U.S. with the intent to stay for indefinite period of time. Residence for U.S. gift and estate tax purposes is linked to one's domicile. The U.S. has negotiated gift and estate tax treaties with several countries. Such treaties may impact one's status as a resident. Nonresident: A foreign national who is not defined as a resident. Taxable Estate Resident: residents are taxed on their "gross estate" or assets held worldwide, defined as "the value at the time of death of all property, real or personal, tangible or intangible, wherever situated (IRC Section 2031). Nonresident: nonresidents are taxed on assets which are defined as property "situated in the United States" at the time of death (IRC Section 2103). Special rules may apply for up to 10 years after a U.S. citizen or resident expatriates. (see IRC Sections 877, 2107 and 2501 and articles in other sections of KnowledgeNet). Taxable Estate: Generally defined as the gross estate less deductions, as provided by the Internal Revenue Code (IRC Section 2051) 31

18 Unified Transfer Tax Rate Schedule for Residents Nonresidents (2) Tax credits are available, as follows: Exemption for Residents: Exemption and Tax Credit Year Previous Exemptions * New Exemptions * 2001 $675,000 $675, $700,000 $1 million 2003 $700,000 $1 million 2004 $850,000 $1.5 million 2005 $950,000 $1.5 million 2006 $1 million $2 million 2007 $1 million $2 million 2008 $1 million $2 million 2009 $1 million $3.5 million 2010 $1 million 0 (Taxes fully repealed) 2011 $1 million $1 million (old rules restored) 32 Unified Transfer Tax Rate Schedule for Residents Nonresidents *Exemption levels for residents (U.S. citizens and U.S. domiciliaries). The estates of taxpayers in this category are taxed on worldwide assets. The exemption level for nonresidents remains at $60,000. In addition to the increased exemption amounts, the top rate which is currently at 47% will be reduced gradually to 45% in The estate tax rates will most likely be subject to ongoing changes in the coming years. Individuals should review their trusts and wills to determine whether revisions need to be made. For example, bypass trusts often use the maximum exemption. This may no longer be your preferred choice as the exemption increases. Giving away assets now and paying gift tax now may no longer be a good strategy for some. In 2011, the rules and rates revert to the pre-law exemption amounts. If the law does not change, then 2010 is the appropriate year to die since the tax is zero due to an unlimited exemption. All code section references are from the Internal Revenue Code of 1986 as amended. 33

19 Company LLP Private Client Advisory Services Tax Planning: Year-end planning Alternative Minimum Tax Analysis Gift and estate tax plan reviews Living trust reviews Formation of private foundations Formation of family limited partnerships - estate tax savings - asset protection Retirement tax planning Trust and estate tax planning New business ventures Investment and Business Structures: Tax deferred exchanges of real estate Qualified small business stock opportunities Investment holding structures Review of stock selling strategies - Forward sales - Puts and calls, and exchange funds Executive stock option strategies Deferred compensation planning Tax opinions regarding complex tax strategies International: Cross-border tax strategies, tax treaty applications Pre-arrival planning for foreign nationals Pre-departure planning for U.S. residents and foreign nationals Liquidation of U.S. pensions Expatriation planning and rulings from IRS International gift and estate tax planning Formation of foreign foundations and foreign trusts Incorporating businesses abroad International insurance structures and analysis Tax planning for patents, copyrights and other intangible assets Tax Representation: Tax audits: settlement discussions and negotiations Tax penalty appeals Ruling requests Tax Return Preparation for: Individuals Trusts Partnerships Estates Company LLP Accountants and Consultants Associated Firms Worldwide San Francisco Office 400 Montgomery Street, 6th Floor San Francisco, CA Tel: (415) Palo Alto Office 2465 East Bayshore Blvd, Suite 302 Palo Alto, CA Tel: (650) Visit the firm s tax and financial content of the web at or contact us at consulting@rowbotham.com for more information.

20 Company LLP Tax Planning, Assurance Business Consulting Company LLP provides tax planning, SEC auditing and consulting, and litigation support services to businesses in a broad range of industries. We have significant experience in international and corporate tax planning, audit engagements and SEC accounting and cross border acquisitions. Our industry experience includes: information technology, software, bio tech, real estate, distribution, hotel leisure services, media, manufacturing, and financial institutions. MAJOR SERVICE AREAS Corporate Tax, Planning and Compliance Services New venture issues Selection of entity for new business Debt and equity capitalization Initial classes of stock Tax efficient structures for corporations and partnerships Corporate compensation and stock plan reviews Federal, state and international tax compliance reviews Income tax return preparation for federal, multi-state and consolidated returns State tax planning State income tax review Sales and use tax review and local tax nexus review Review of apportionment methodology Use of local vs. Delaware companies Corporate reorganization credits and incentives FAS 109 Tax Provision Services Determination of effective tax rate Disclosure of deferred tax assets and liabilties Purchase Accounting Issues Stock Compensation Issues Determination of Valuation Allowance and Release of Allowance Federal and State Audit representation Negotiate with Federal, State and local authorities Assurance and Consulting Services SEC filings - Member of Public Company Accounting Oversight Board (PCAOB) Corporate Governance and Sarbanes-Oxley Act of 2002 compliance and consulting Corporate bylaws Corporate governance guidelines Board of Director committee structure: Audit committee charter Compensation committee charter Executive committee charter Governance and nominating committee charter Code of Ethics for Senior Financial Officers Employee Code of Conduct Internal controls over financial reporting (Section 404 compliance) Audit - Member of the American Institute of Certified Public Accountants (AICPA) Review and compilations Start-up through IPO consulting Generally accepted accounting principles (GAAP) consulting Acquisition reviews Agreed - upon procedures for verifying specific information or transactions 401(k) audits Budgeting and cash management Business plans International Tax Planning Services Entity selection (domestic and foreign) for new ventures Foreign tax credit reviews Expanding operations overseas Foreign branch vs. subsidiary Transfers of assets Coordinating U.S. and foreign taxes Personnel relocation issues Benefit plans in U.S. and foreign jurisdiction Analysis of foreign country tax environment Foreign company expansion into U.S International structure planning Branch vs. incorporation Debt vs. capital consolidations Tax treaty analysis Withholding tax planning Transfer pricing Full study Documentation requirements to reduce penalty exposure Pricing and cost analysis to minimize foreign taxes Cost sharing agreements International compensation planning Per diem plan to reduce U.S. payroll taxes Tax treaty applications for transfers to U.S. Foreign deferred compensation plans International Social Security agreements for avoiding double tax Tax equalization plan drafts and reviews Stock option issues re: cross border moves Extra territorial Income exclusion Forming joint ventures with U.S. or foreign partners Real estate holding structures (special rules for foreign investors) Minimizing withholding and branch taxes Incorporation, operations and liquidation analysis Structuring cross border tax-free debt instruments Cross border mergers acquisitions Dual country tax coordination Allocation of purchase price GAAP local country accounting Reporting compliance Captive Insurance companies Analysis set up Supply chain management VAT/customs Cost sharing Contractual allocation of income

21 Merger Acquisition Services Valuation Services Due diligence for purchaser or seller Tax and business analysis Preserving corporate tax carryovers attributes Section 338 election and basis step-up State and local tax registrations Buy - Sell agreements Review for tax issues and risk analysis Review tax provisions for client Current and future tax issues Optimal method of merging or selling Negotiations for mergers and acquisitions Representation re: financial analysis of deals Corporate restructuring ("spin-offs") Liquidations - implementation and compliance Tax utilization of past years' losses Tax accounting research Capitalization issues Unicap analysis Asset acquisition and cost segregation reviews R and D tax credit reviews Compensation and benefits Executive stock option plans - review and implementation Corporate board and employee presentations Benchmarking for industry Section 125 benefit plans 401(k) plan implementation Bankruptcy Tax issues re: workouts and restructuring Tax compliance and loss utilization review Mergers and acquisitions Allocation of purchase or selling price Tax Planning, Assurance Business Asset purchase/sale Consulting negotiations Joint ventures Tax Cost segregation Property tax appraisals Net operating loss limitations Transfer pricing Foreign subsidiary reorganizations Estate and gift taxes Closely held Equity Employee stock ownership plans Investment portfolio holdings Business reorganizations Excess accumulation of earnings Reasonableness of compensation Issuance of stock options Litigation support and arbitration Financing Sale/leaseback transactions Equipment term loan appraisals Insurance Replacement cost appraisals Reproduction cost appraisals Proof of loss appraisals Bankruptcy "Fresh start" accounting Debtor-in-possession financing Litigation Support Services Financial analysis and damage award estimates Expert testimony Tax structured settlements Asset recovery services Cross-border litigation issues Introductions and Networking for Clients Banking, law and consulting Venture capital and investment banking International resources through associated firms worldwide Company LLP Accountants and Consultants Associated Firms Worldwide San Francisco Office 400 Montgomery Street, 6th Floor San Francisco, CA Tel: (415) Palo Alto Office 2465 East Bayshore Blvd, Suite 302 Palo Alto, CA Tel: (650) Visit the firm s tax and financial content of the web at or contact us at consulting@rowbotham.com for more information.

22 advisory team Brian, Managing Partner Practice Areas Mr. has 27 years of experience advising businesses and individuals in the U.S. and abroad on complex accounting, tax and MA transactions. He has been engaged as a consultant and expert witness in major international litigation involving bankruptcies, corporate fraud and asset recovery actions and has also served on numerous corporate boards for public and private companies. Education Certifications Mr. received his Bachelor's degree in Accounting, and his MBA, with honors, from the University of California, Berkeley. He is also a Certified Public Accountant and a member of the Tax Division of American Institute of Certified Public Accountants. Mr. previously taught graduate courses on corporate and partnership taxation at the University of California Extension program, and is a frequent guest lecturer on global tax planning for the undergraduate and graduate programs at the Haas Business School at the University of California, Berkeley. He is a frequent speaker for several U.S. and international tax planning organizations in the United States, Canada, Europe and Asia. Past lectures include presentations at the World Economic Forum and the Confederation of Indian Industry in New Delhi and Bombay about global taxation of the Internet, IBC Forums in Miami on international tax planning structures. Mr. chaired the annual International Tax Forum for the California CPA Society for several years and was the past President of the San Francisco CPA Society. br@rowbotham.com (415) , ext. 230 Prior to founding the firm in 1991, Mr. was a tax consultant at Arthur Andersen, and subsequently worked at PricewaterhouseCoopers where he managed a corporate tax group London and San Francisco. Mr. was born in Buenos Aires with British citizenship, and lived in Canada before moving to the U.S. and becoming a naturalized citizen in accountants Consultants 400 Montgomery Street, Suite 600 San Francisco, CA Tel: Fax: East Bayshore Road, Suite 302, Palo Alto, CA Tel: (650) Fax: (415) consulting@rowbotham.com