Cross-border personal tax services for executives Taxation of high net worth individuals a volatile environment 26 29 October 2014
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Presenter Marnix van Rij Private Client Services (PCS) Ernst & Young Belastingadviseurs LLP Page 3
HNWI tax environment Debate on inequality: Income inequality Wealth inequality Tax regime as an instrument to make adjustments Taxation of high net worth individuals (HNWIs) no orchestration A broad range of measures are implemented by different jurisdictions. It is a volatile environment for (mobile) HNWIs. Taxation of corporations: harmonization (OECD, G8, G20) Page 4
OECD BEPS action plan Action 1: address the tax challenges of the digital economy Action 2: neutralize the effects of hybrid mismatch arrangements Action 3: strengthen controlled foreign corporation (CFC) rules Action 4: limit base erosion via interest deductions and other financial payments Action 5: counter harmful tax practices more effectively, taking into account transparency and substance Action plan on BEPS Substance Action 11: establish methodologies to collect and analyze data on Action Plan on Base Erosion and Profit Shifting (BEPS) and the actions to address it Action 12: require taxpayers to disclose their aggressive tax planning arrangements Action 13: re-examine transfer pricing documentation Action 14: make dispute resolution mechanisms more effective Action 15: development of a multilateral instrument for amending bilateral treaties. Action 6: prevent treaty abuse Action 7: prevent the artificial avoidance of permanent establishment status Action 8: consider transfer pricing for Intangibles Action 9: consider transfer pricing for Risks and Capital Action 10: consider transfer pricing for other high risk transactions Page 5
HNWI tax developments Increase of overall personal income tax burden Tempting and politically expedient Few changes in top rates Many expanding tax base (e.g., limiting tax relief for pension contributions) The rise of solidarity surcharges on high earners Unifying or solidifying Unique events Australia: flood levy on incomes exceeding A$50,000 Structural damage imposed on government finances Greece: solidarity contribution on incomes exceeding 12,000 Italy: solidarity surcharge applying to workers employed in the financial sector Page 6
HNWI tax developments Capital gain taxes (CGT) taxing the few For the very richest Americans, low tax rates on capital gains are better than any Christmas gift Washington Post, 2011. Source of inequality vs. boosting the economy UK: CGT extended to nonresident individuals for UK residential property France: CGT at flat rate of 24% replaced by progressive taxation with a top rate of 45% Page 7
HNWI tax developments Wealth taxes Recurrent taxes on net wealth have been in decline among many countries in advance of the global financial crisis. Recently, a number of countries have introduced (or debated the introduction of) such taxes. Wealth taxes are an area that should be monitored closely in the future. Inheritance and estate taxes a political hot potato Mobility of capital and people Visibility of gap between rich and poor Taxation of business property Page 8
HNWI tax developments Inheritance tax Provision in other tax Source: EY review: taxation of wealth in EU, 2014 No inheritance tax Page 9
HNWI tax developments Page 10
HNWI tax developments Page 11
HNWI tax developments A rising wave of tax enforcement HNWI divisions Growth of exchange of taxpayer information Tax treaties Tax information exchange agreements Multilateral conventions Foreign Account Tax Compliance Act (FATCA) New opportunities to make voluntary disclosures Page 12
What to do Develop and refresh your tax philosophy Build tax risk management thinking into everything you do Understand that tax planning remains relevant today Review current structures and positions Be fastidious in meeting your compliance and reporting obligations Page 13
Surround yourself with the right teams EY member firm PCS EY member firm 178 Senior cross-border PCS professionals 28 regions 50 countries Page 14
Case study Page 15
Mark and Sophie (Part one of two) Mark, a Dutch citizen, is a retired executive. During his working life, he has worked as a board member for several multinationals in various jurisdictions. Until December of last year, he was a board member of a US company. Mark is married to Sophie, a US citizen. Mark has three mature children (living in Spain, the Netherlands and Switzerland) born out of his previous marriage. Based on their marriage contract, Mark and Sophie have separated properties governed by the Dutch matrimonial property regime. Mark is a global citizen. During the year, he spends a significant part of his time in the US, where Sophie lives in her New York apartment. This apartment is financed with a loan from Mark. Throughout the year, Mark and Sophie spend many long vacations in Southeast Asia, Africa and Southern Europe. Mark is a Dutch tax resident (center of vital interests principle), but contemplates to shift his tax residency. Page 16
Mark and Sophie (part two of two) Mark owns: Real estate in the Netherlands and Italy Securities accounts in the US and the UK Vested stock options of his last employer (US company) Outstanding debts provided to Sophie and his children Sophie owns: Real estate in the US Securities accounts in the US Mark has a last will that includes a choice for Dutch estate law. The beneficiaries of Mark s estate are his children and a Dutch charitable foundation. Sophie has a last will that includes a choice for Dutch estate law. The sole beneficiary of Sophie s estate is a Dutch charitable foundation. Let s identify Mark s and Sophie s relevant tax issues. Page 17
The Rackspace experience Page 18
Introduction Kris Blue, Director Mobility & Tax Compliance Rackspace: Managed cloud hosting Approximately 6,000 employees globally Entities in nine countries Employees in three additional countries Young global mobility program Expectations of steady population growth Page 19
What s the problem with employing HNWIs? Page 20
What s the problem with employing HNWIs? High compensation + Executive title + High visibility + Cross-border employment Increased risk of attracting unwanted attention Slide courtesy of Rackspace Page 21
Examples of unwanted attention Individual taxation: Temporary workplace relief Statutory residency Banking laws Foreign trusts (US) Specified foreign financial asset reporting (e.g., FATCA) Foreign bank account reporting Passive foreign investment companies (PFIC) Specialized investigative units: Internal Revenue Service (IRS) Global High Wealth Industry Group HM Revenue & Customs (HMRC) High Net Worth Unit Slide courtesy of Rackspace Page 22
Examples of unwanted attention Corporate tax considerations: Payroll tax compliance Scrutiny of short-term business visitors Permanent establishment Other issues: Immigration Citizenship and permanent residency status Short-term business visitors Employment laws Slide courtesy of Rackspace Page 23
The four horsemen Slide courtesy of Rackspace Page 24
First horseman Details: US to UK Racker Assignment to UK as Managing Director International Issue HMRC inquiry into temporary workplace relief claim: Larger than average allowances due to position and pay scale Potentially highlighted due to high visibility position Slide courtesy of Rackspace Page 25
Second horseman Details: US to Switzerland Racker Assignment to Switzerland as Managing Director International Extensive UK business travel Issue one: Quasi-tax equalized Issue two: Taxability of restricted stock units (RSUs) in multiple jurisdictions Issue three: Payroll reporting and remittance obligations in UK Slide courtesy of Rackspace Page 26
Second horseman responsibility for taxes Compensation US taxes UK taxes CH taxes Base Racker RAX Racker Bonus Racker RAX Racker Equity Racker Racker Racker Cost-of-living adjustment (COLA) RAX RAX RAX Housing RAX RAX RAX Tax on tax RAX RAX RAX Private medical RAX RAX RAX Slide courtesy of Rackspace Page 27
Third horseman Details: US to UK (initially), then Switzerland Racker Assigned to Switzerland as VP International Finance Relinquished US Green Card, married to US citizen Issue one: Immigration Issue two: Ongoing tax ramifications of relinquishing Green Card Covered expatriate under Internal Revenue Code (IRC) 877A Payroll complications due to eligible deferred compensation Slide courtesy of Rackspace Page 28
Fourth horseman Details: UK to US Racker Chief Legal Counsel and member of senior leadership team and international leadership team Frequent business traveler High visibility due to Securities and Exchange Commission (SEC) filings Issue one: Taxability in US Issue two: Equalization Slide courtesy of Rackspace Page 29
What to do Develop and refresh your tax philosophy Build tax risk management thinking into everything you do Understand that tax planning remains relevant today Review current structures and positions Be fastidious in meeting your compliance and reporting obligations Slide courtesy of Rackspace Page 30
Questions? Page 31