Did You Say You Have a U.S. Passport? STEP Bahamas 7 June 2012 Jack Brister, Principal International Tax Services jbrister@mbafcpa.com
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 Social and economic engineering Examples 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 History of non-compliance with global reporting required action; cross-border reporting 1913 enacted current income tax regime. Highest rate 6% 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
What is a Foreign Trust Foreign Trusts Court and control tests Established in a foreign jurisdiction with foreign trustee / fiduciary Taxation Grantor Trust Revocable Distributions to persons other than settlor are 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
Taxation Nongrantor Trust 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 Additional tax Penalties
Civil Law Foundations What is the U.S. Tax Treatment? Trust / Entity 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 Foreign trust structures Underlying entities are generally 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
Underlying Foreign Entities 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 Controlled Foreign Corporation Reporting 10% or greater shareholders Foreign discretionary trusts 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
Underlying Foreign Entities 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 Reporting Hire Act now requires all U.S. shareholders to report
Underlying Foreign Entities Passive Foreign Investment Company Reporting 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
Check-The-Box Foreign Entities Presumed classification Public Companies Limited Companies Partnership Making the Election Current election Late election 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 Presumptions Tax avoidance Mechanics Immigration Tax Gift tax Imposed on U.S. person, not expatriate Foreign Trust Distributions of principal taxable as gift to U.S. recipient
FACTA Foreign Grantor Trust If U.S. person establishes a foreign trust it is presumed to have U.S. beneficiaries Passive Foreign Investment Company Reportable even if no income recognition event occurs Foreign Financial Institution Jun 2013 must sign agreement Pass-through
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
Reporting Foreign Financial Assets Who Must File? FBAR 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 Who Must File? United States Means 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.
Reporting Foreign Financial Assets 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.
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