International Tax and Asset- Reporting for the Everyday Client

Transcription

1 International Tax and Asset- Reporting for the Everyday Client Jason B. Freeman, J.D., CPA Freeman Law, PLLC 2595 Dallas Pkwy., Suite 420 Frisco, Texas Copyright Freeman Law, PLLC. All rights reserved. 1

2 Jason B. Freeman, J.D., CPA Phone (214) Toll-free (855) Mr. Freeman is the managing member of Freeman Law, PLLC, a tax, white-collar, and litigation boutique law firm based in the Dallas-Fort Worth Metroplex with clients throughout the world. He is a tax attorney and adjunct professor at SMU s School of Law, as well as a licensed CPA. Mr. Freeman handles federal and state tax controversies and white-collar civil and criminal matters, as well as advises clients in tax planning and compliance matters. Mr. Freeman has been recognized multiple times by D Magazine as one of the Best Lawyers in Dallas for tax law, and by Super Lawyers and Texas Monthly magazine. He is the President of the North Texas chapter of the American Academy of Attorney-CPAs, serves on the Executive Board for the Texas Society of CPA's, and sits on the Board of Directors for the Dallas Society of CPAs. 2

3 The Everyday Client Tax Planning and Compliance has Evolved The Everyday Client has Changed 3

4 Polling Question Do you currently provide international tax reporting/compliance services to your clients? Yes No 4

5 Forms to Consider to Report a U.S. Person s Interest in Certain Foreign Assets FinCEN Form 114, Report of Foreign Bank and Financial Accounts ( FBAR ) Form 8938, Statement of Specified Foreign Financial Assets Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520-A, Information Return of Foreign Trust with a U.S. Owner Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations 5

6 Forms to Consider to Report a U.S. Person s Interest in Certain Foreign Assets Continued Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities 6

7 Overview of U.S. Income Taxation U.S. persons e.g., citizens, residents, and domestic corporations are subject to U.S. income taxation on their worldwide income regardless of the source. Foreign persons e.g., a nonresident alien or foreign corporation are generally subject to U.S. taxation on: U.S.-source FDAP and Income that is effectively connected with the conduct of a U.S. trade or business 7

8 Residency Tests Green Card Test Substantial Presence Test Election Tax treaty tie-breaker provisions U.S. Residency 8

9 Residency: The Substantial Presence Test The taxpayer must be physically present in the United States on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: All of the days the taxpayer was present during the current year, 1/3 of the days the taxpayer was present in the prior year, and 1/6 of the days present in the second year before the current year. But see certain statutory exceptions: The Closer Connection Exception Certain Visa Categories 9

10 The Substantial Presence Test: An Example Adam, a UK citizen, is physically present in the United States for 140 days in each of the years 2012, 2013, and Count the full 140 days of presence in 2014, days in 2013 ( 1 / 3 of 140), and days in 2012 ( 1 / 6 of 140). The total for the 3-year period is 210 days. Thus, Adam is considered a resident under the substantial presence test for

11 Polling Question True or False? A United States Resident is subject to tax on his/her worldwide income. 11

12 Asset-Reporting Requirements In 2012, Adam, a US citizen and resident, inherited a financial account from his grandfather, Pierre. The account is held with a French bank and has $500,000. Does Adam have any filing obligations? Can Adam repatriate the $500,000 to his bank in the United States? 12

13 The FBAR FinCEN Form 114 United States persons are required to file an FBAR if: The United States person had a financial interest in or signature or other authority over at least one financial account located outside of the United States; and The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year. 13

14 FBAR Penalties Non-willful violations - A penalty up to $10,000 per violation Willful violations - The greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation. Also a criminal violation up to $500,000 and 10 years. 14

15 The FBAR Filing - The FBAR is not filed with a federal tax return. But remember to check: Form 1040 Schedule B, Form 1120 Schedule N, Form 1041, box 3 on the Other Information section, Form 1065 Schedule B Deadline? Reporting Obligation - Reporting obligation even if account produces no taxable income. 15

16 The FBAR The term United States person means (1) A citizen of the United States; (2) A resident of the United States; and (3) An entity, including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes. 16

17 The FBAR Example: Matt is a citizen of Argentina. He has been physically present in the United States every day of the last three years. Is Matt a United States person for FBAR reporting purposes? Example: Kyle is a permanent legal resident of the United States. Kyle is a citizen of the United Kingdom. Under a tax treaty, Kyle is a tax resident of the United Kingdom and elects to be taxed as a resident of the United Kingdom. Is Kyle a United States person? 17

18 Reportable Foreign Accounts (1) Bank account. Includes savings accounts, checking accounts and time deposits. (2) Securities account. Includes an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. (3) Other financial account. 18

19 Foreign Account Rule: The situs of the account, not the institution, controls. Example: Ed, a United States citizen, purchased securities of a French company through a securities broker located in New York. Is Ed required to report these securities? Answer: No, because he purchased the securities through a financial institution located in the United States. 19

20 Financial Interest Financial interest. A financial interest in a bank, securities or other financial account in a foreign country means: (1) Owner of record or holder of legal title. (2) Other financial interest. 20

21 Signature or Other Authority Signature or other authority In general. The authority of an individual (alone or in conjunction with another) to control the disposition of assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. Certain Limited Exceptions and Special Rules may Apply 21

22 Common Fact Patterns Example: Megan, a United States resident, has a power of attorney on her elderly parents accounts in Canada, but she has never exercised the power of attorney. Is Megan required to file a FBAR? Example: Diana, a United States citizen, is a grantor of a Foreign Asset Protection Trust but does not control trust assets nor does she receive distributions from the trust. Must Diana report on a FBAR? Example: Domestic LLC is a DRE, and has a foreign financial account. Domestic LLC report on a FBAR? Must 22

23 Polling Question What is the new due date for filing an FBAR (applicable for next year s filings)? April 15th June 30th October 15th December 31st 23

24 Form 8938, Statement of Specified Foreign Financial Assets Independent reporting regimes: Form 8938 filing requirement is in addition to the FBAR filing requirement. A specified person that has any interest in a specified foreign financial asset during the taxable year must file Form 8938 with their annual return if the aggregate value of all such assets exceeds 24

25 Specified Person Any specified individual : (1) a U.S. citizen; (2) a resident alien for any portion of the taxable year; (3) a nonresident alien who has elected to be taxed as a U.S. resident under 6013(g) or (h); or (4) a nonresident alien who is a bona fide resident of Puerto Rico or a 931 U.S. possession What about specified domestic entities? 25

26 Interest in a Specified Foreign Financial Asset A taxpayer has an interest in a SFFA if: Any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the SFFA are or would be required to be reported, included, or otherwise reflected by the specified person on an annual return. 26

27 Polling Question Does filing an FBAR satisfy the obligation to file a Form 8938? Yes No? 27

28 Specified Foreign Financial Assets Generally, a SFFA includes any financial account maintained by a foreign financial institution. Note: Includes a financial account maintained by a financial institution that is organized under the laws of a U.S. possession. SFFA s also include: Brokerage accounts held with a bank or broker-dealer to the extent held for investment and not held in a financial account, Stock or securities issued by someone who is not a U.S. person, Any other interest in a foreign entity, and Any financial instrument or contract held for investment with an issuer or counterparty that is not a U.S. person. 28

29 Specified Foreign Financial Assets Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not SFFA s. Directly held precious metals, such as gold, are not SFFA s. A safe deposit box is not a financial account. Foreign real estate is not a SFFA. 29

30 Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report: Certain transactions with foreign trusts, Ownership of foreign trusts under the grantor trust rules, and Receipt of certain large gifts or bequests from certain foreign persons. 30

31 Form 3520 A U.S. person who, during the current tax year, received either: More than $100,000 from a NRA individual or a foreign estate (including foreign persons related to that NRA individual or foreign estate) that were treated as gifts or bequests; or More than $15,102 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that were treated as gifts. 31

32 Hypothetical Assume Adam, rather than transferring the $500,000 to his U.S. bank account, invests the funds in a new German Corporation ( German Co. ) along with a fellow investor, Betty, who is a German citizen and resident. Adam owns 51% of the entity, German Co. Does Adam have any filing obligations? 32

33 Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations Category 1 Filer No longer applicable. Category 2 Filer U.S. citizen or resident who is an officer or director of a foreign corporation where a substantial change in ownership occurs. Category 3 Filer U.S. person who acquires or disposes of sufficient stock in a foreign corporation. Category 4 Filer U.S. person who had control of a foreign corporation for an uninterrupted period of at least 30 days. Category 5 Filer A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year. 33

34 Form 926 A U.S. person must file Form 926 to report certain transfers of property to a foreign corporation: Transfers to a controlled foreign subsidiary under 351; Transfers in liquidation of a U.S. corporation into a foreign parent under 332; Transfers to a foreign corporation in a tax-free reorganization under 354, 356 or 361; Transfer of a foreign corporation in a tax-free spinoff under 355; and Certain transfers of cash. 34

35 Form 926 Cash Transfers Special Rules for Transfers of Cash: A U.S. person that transfers cash to a foreign corporation must report the transfer on Form 926 if: immediately after the transfer the person holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation or the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,

36 Hypothetical Assume German Co. earns gross income in the form of dividends and interest and makes some foreign currency gains during Also, Betty sold a 5-percent interest in German Co. to Craig, a US citizen and resident, on December 31, What are the filing obligations? 36

37 CFC Taxation If a FC is a CFC for an uninterrupted period of 30 days during the tax year, each United States shareholder who owns stock in such corporation on the last day in such year must include in gross income a pro rata share of the corporation's subpart F income for such year. 37

38 CFC s Controlled Foreign Corporation ( CFC ) A foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively), more than 50% of: o The total combined voting power of all classes of voting stock; or o The total value of the stock. A U.S. shareholder is a U.S. person who: Owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of voting stock of a CFC or Owns (either directly or indirectly) any stock of a CFC that is also a captive insurance company. (The 50% threshold above is lowered in the context of captive insurance companies.) 38

39 CFC 39

40 CFC? 40

41 Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Form 8621 is filed by a U.S. Person to: Recognize direct or indirect distributions from the PFIC; Recognize gain from direct or indirect dispositions of PFIC stock; or Make certain elections. 41

42 PFIC s Defined PFIC Tests: Passive Income Test 75% of more of GI is passive income Passive Asset Test 50% or more of assets produce, or are held for production of, passive income 42

43 PFIC Tax Regimes PFIC Tax Regimes: Excess Distribution (aka 1291 fund ) Qualified Electing Fund ( QEF ) Mark-to-Market 43

44 Hypothetical What if German Corp was a partnership rather than a foreign corporation? 44

45 Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships Category 1 filer: A U.S. person who controlled the foreign partnership at any time during the partnership's tax year. Category 2 filer: A U.S. person who at any time during the tax year of the FP owned a 10% or greater interest in the partnership while the partnership was controlled by U.S. persons each owning at least 10% interests. Category 3 filer: A person who contributed property during that person's tax year to a FP in exchange for an interest in the partnership, if that person either: Owned directly or constructively at least a 10% interest in the FP immediately after contribution, or The value of the property contributed (when added to the value of any other property contributed to the partnership by such person, or any related person, during the 12-month period ending on the date of transfer) exceeds $100,000. Category 4 filer: A U.S. person with a reportable event. Three categories of reportable events: acquisitions, dispositions, and changes in proportional interests. 45

46 How to Correct Past Compliance and Reporting Deficiencies The Offshore Voluntary Disclosure Program Quiet Disclosures Streamlined Filing Compliance Procedure Delinquent FBAR Submission Procedure Delinquent Information Return Submission Procedure 46

47 DISCLAIMER The information included in these slides is for discussion purposes only and should not be relied on without seeking individual legal advice. 47