Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice

Announcement 2013-41 (the "Announcement”), recently released by the I.R.S., provides correcting amendments to the Foreign Tax Account Compliance Act (“F.A.T.C.A.”) final regulations that were issued on January 17, 2013. One important clarification that we would like to highlight for our clients relates to an example that explains the application of the rules with respect to foreign financial institutions (“F.F.I.'s”) classified as such under the final regulations as foreign “investment entities.” The clarification of the example is helpful in avoiding F.F.I. classification in respect of family owned trusts and other foreign entities that solicit advice or receive fees for providing such services in respect of the entities’ investments.

Read the original Client Alert: Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice →

Foreign Account Tax Compliance Act Update: Electronic Registration Portal Opens

Announcement 2013-411 (the Announcement”), recently released by the I.R.S., provides correcting amendments to the Foreign Tax Account Compliance Act (“F.A.T.C.A.”) final regulations that were issued on January 17, 2013. One important clarification that we would like to highlight for our clients relates to an example that explains the application of the rules with respect to foreign financial institutions (“F.F.I.'s”) classified as such under the final regulations as foreign “investment entities.” The clarification of the example is helpful in avoiding F.F.I. classification in respect of family owned trusts and other foreign entities that solicit advice or receive fees for providing such services in respect of the entities’ investments.

Read the original Client Alert: I.R.S. Technical Correction to F.A.T.C.A. Regulations Clarifies Example Regarding Investment Advice →

Notice 2013-43 - Revised Timeline and Other Guidance Regarding the Implementation of the Foreign Account Tax Compliance Act

On July 12, 2013, the Internal Revenue Service (“I.R.S.”) released Notice 2013-43 (the “Notice”), which revises the timelines included in the final F.A.T.C.A. regulations for withholding agents and foreign financial institutions (“F.F.I.'s”) to begin their due diligence, withholding, and information reporting requirements. Specifically, the Notice provides for the following:

• A six-month extension for when withholding will begin (i.e., payments after June 30, 2014).
• A six-month extension for grandfathered obligations.
• A six-month extension for implementing new account opening procedures and certain due diligence obligations.
• A six-month extension for expiring withholding certificates. Thus, withholding certificates and documentary evidence that would otherwise expire on December 31, 2013, will expire instead on June 30, 2014.
• A six-month extension for qualified intermediaries (“Q.I.'s”), withholding foreign partnerships (“W.P.'s”), or withholding foreign trusts (“W.T.'s”) agreements that would otherwise expire on December 31, 2013.

Read the original Client Alert: Notice 2013-43 – Revised Timeline and Other Guidance Regarding the Implementation of The Foreign Account Tax Compliance Act (“F.A.T.C.A.”) →

Fiscal Cliff Averted - New Tax Changes

On December 31, 2012, sources stated that an agreement was reached regarding the fiscal cliff and the expiration of the Bush era tax cuts. The Senate passed the “American Taxpayer Relief Act of 2012” (the “Act”), early in the a.m. on January 1, 2013. The same evening, the House of Representatives followed suit. This memorandum addresses the principal changes made by the new legislation, both headline items and items affecting U.S. taxation of certain cross border income flows.

Background

On January 1, 2013, the Bush era tax cuts were set to sunset, meaning such tax cuts would, in general, have reverted to the rates then in effect under the Clinton presidency of the 1990s. These tax increases include (but are not limited to) the following:

• The highest marginal income tax rate would have reverted to 39.6% from 35%.
• The rate on qualifying dividends would have reverted to 39.6% from the preferential rate of 15%.
• The maximum rate on capital gains would have reverted to 20% from the preferential rate of 15%.
• The maximum rates on the gift, estate, and generation-skipping transfer taxes would have reverted to 55% from 35%.

Read the original Client Alert: Fiscal Cliff Averted – New Tax Changes →

2011 Voluntary Disclosure Program

On February 10, 2011, the I.R.S. announced a brief window for taxpayers to come forward and declare unreported foreign bank accounts. According to I.R.S. Commissioner Douglas Shulman, taxpayers with unreported foreign accounts or unreported income related to foreign assets have a “last, best chance” to come into compliance for a limited cost. For most filers, the 2011 Offshore Voluntary Disclosure Program (“OVDP”) will be less generous than the program in 2009. However, persons who resided abroad without knowing of their U.S. citizenship status may be entitled to a reduced penalty. The window to take advantage of the OVDP is extremely brief and those who do not move forward within the next 45 days may find that the window will close rather quickly. A full submission and tax payment must be made by August 31, 2011. Taxpayers who applied to the 2009 program can request application of the reduced penalty structure if applicable to their circumstances.

The Basic I.R.S. Offer

Most taxpayers who come forward under the OVDP will have to pay:

• Back taxes and interest on all unreported income with respect to foreign accounts and assets for the eight years from 2003 to 2010 – two more years than under the 2009 program, which covered 2003-2008;
• Accuracy-related penalties of 20% of the back taxes, and if applicable, up to 25% of back taxes for failure to timely file a return or pay tax shown on a filed return (a new feature);
• 25% of the highest aggregate balance of foreign accounts and/or value of covered foreign assets during the program term, compared to 20% under the 2009 program.

Read the original Client Alert: 2011 Voluntary Disclosure Program →

F.B.A.R. Update

On May 8, 2010, I.R.S. representatives and members of the private bar whose practice is concentrated on white collar matters participated on a panel addressing the current status of the voluntary disclosure program for unreported foreign financial accounts. The panel was sponsored by the American Bar Association Section of Taxation. The free flow of comments and responses among the participants was enlightening. Here are some of the highlights.

Expect more activity; the offshore voluntary disclosure is a priority

More than 97% of the participants have been accepted into the program. Although only a small fraction of participants have moved into the examination stage, about 225 agents have been trained and assigned to work in the program. Consequently, more activity from the I.R.S. is now expected. This corroborates recent activity in our practice where we have received telephone calls initiating examinations on a daily basis for the last week or ten days.

The I.R.S. understands the difficulty in gathering capital gain statements

A segment of our clients are having difficulties in gathering information from foreign financial institutions that is useful in computing capital gains from particular transactions. Rather, information on sales proceeds is provided in statements; costs are buried in earlier transaction statements. As the accounts were typically run on a discretionary basis and periodic statements were never mailed to customers of these institutions, tracking purchase price and sales proceeds is often extremely difficult. Apparently, the I.R.S. understands the difficulty that participants are having in matching the basis element against the sales proceeds in a capital gain information. A consensus existed among the panelists that, for the majority of taxpayers, a reasonable approach in measuring gains should be acceptable. The concept of flexibility at the agent level was stressed, although it was tempered by an I.R.S. concern that all participants in the program should be treated equally.

“Quiet Disclosure”

The I.R.S. is concerned about quiet disclosure. This is the I.R.S. term for taxpayers that file amended returns and amended or initial F.B.A.R. forms outside the program. Apparently there is a large segment of taxpayers who have decided to accept the risk of penalties rather than the certainty of, inter alia, the 20% penalty on the highest capital amount in the account. When dealing with quiet disclosure taxpayers, the I.R.S. suggested that its starting position would be that all failures to file F.B.A.R. forms are intentional, and the major penalty will be imposed. This view was met with significant skepticism by the private bar. The I.R.S. stated that those who go the quiet disclosure route will, if examined, be subject to intense scrutiny and full penalties.

Ongoing Voluntary Disclosure

Prior to issuing the special voluntary disclosure program for offshore accounts, the I.R.S. had a general voluntary disclosure program (“ongoing voluntary disclosure program”) which is still available for taxpayers that want to make a voluntary disclosure subsequent to the October 15, 2009, closing date. The problem encountered in the ongoing voluntary disclosure program is that it does not provide specific penalties or ceilings on penalties. Some members of the private bar commented that a penalty imposed on persons who are caught by the I.R.S. – viz., persons who do not come forward voluntarily – rarely exceeds 50% of the unreported amount in issue. If that is the typical ceiling for persons who are caught by the I.R.S., the penalty for those who come forward under the ongoing voluntary disclosure program should not exceed 25%. Without a significant discount in penalties, the incentive to come forward voluntarily is relatively weak.

The I.R.S. acknowledged the argument, but made no other public comment, except to say that the I.R.S. has no plans to issue another special deal.

Read the orginial Client Alert: F.B.A.R. Update →

New Treasury Report on the Obama Administration's Tax Proposals

On February 1, 2010, the Treasury published the "General Explanations of the Administration's FY 2011 Revenue Proposals” (the “2011 Green Book”), setting forth tax policy objectives of the Obama Administration (“the Administration”).

Several highlights from the 2011 Green Book are worth noting:

• The proposed tax rate hikes and the reduced deductions for high-income individual taxpayers remain unchanged and continue to be on track to take effect after 2010.

• The 2011 Green Book does not contain a proposal which would limit the availability of a check-the-box election with respect to certain wholly-owned foreign entities.

• Only interest expense that is properly allocated and apportioned to a taxpayer’s foreign-source income that is not currently subject to U.S. tax are deferred under the 2011 Green Book. Previously in the 2010 Green Book, all expenses other than research and development expenses were subject to deferral.

• Provisions tightening the earnings stripping limitations to interest expense would be directed only to expatriated entities that were formerly U.S. companies. Under the provision, the current law debt-to-equity safe harbor of 1.5 to 1 would be eliminated for expatriated entities and the 50% adjusted taxable income threshold for the limitation would be reduced to 25%. The carryforward for disallowed interest would be limited to ten years and the carryforward of excess limitation would be eliminated.

Read the original Client Alert: New Treasury Report on the Obama Administration’s Tax Proposals →

Foreign Account Tax Compliance Act of 2009

This memorandum is being circulated to provide a topside explanation of tax legislation now being considered in Congress affecting foreign trusts and foreign financial institutions. It is designed to facilitate the provision of bank information to the U.S. Government in order to track offshore investments of U.S. persons and to raise revenue from U.S. person’s who are beneficiaries of foreign trusts.

The bill is the “Foreign Account Tax Compliance Act of 2009.” Identical legislative language has been introduced in both Houses of Congress and it has the full support of the Administration. The bill has its roots in earlier legislative proposals submitted by the Senate Permanent Subcommittee on Investigation, but has pared away certain over-reaching provisions, including the creation of a tax haven country blacklist and certain negative presumptions in tax litigation arising from specified transactions. It is possible that the bill could be enacted in 2009 as a stand-alone legislation or with as a funding offset for estate tax reform or it could be combined with a larger general tax reform effort in 2010. It is also possible that aspects of the bill could be changed before it is enacted.

Read the original Client Alert: Foreign Account Tax Compliance Act of 2009 →

Treasury Report on Obama Administration Tax Proposals

We are pleased to provide this overview of key U.S. tax change proposals set forth in the Treasury “General Explanations of the Administration’s FY 2010 Revenue Proposals" (the “Green Book”) which was released on May 11. The proposals in the Green Book are based on various sources including prior Treasury and Joint Committee on Taxation studies, legislative proposals, and proposals of prior Administrations. Certain aspects of the proposals seem clear:

• They are meant to raise significant tax revenue to meet the nation’s fiscal crisis and government budget requirements.

• They do not consider taxpayer cost of compliance.

• They intend to fulfill President Obama’s campaign pledge of a widespread – but limited – tax cut for virtually all (95%) of U.S. taxpayers including small business, funded primarily with international tax reform and repeal of Bush Administration reductions in individual tax rates.

• They intend to fund the cost of President Obama’s planned health care reform proposals with limitations on itemized deductions for high bracket taxpayers, improvement in tax compliance and penalty enforcement and selective tax accounting changes.

• They impose significant record maintenance obligations for all persons participating in an investment in the U.S. and extend the period of limitations that will apply to violations of the record maintenance rules from three years to six years.

• They continue the agoraphobia first evidenced after the September 11, 2001, terrorist attacks on the U.S., but redirect its focus to U.S. persons that are tax cheats recycling funds to the U.S. through offshore banks.

Read the original Client Alert: Treasury Report on Obama Administration Tax Proposals →

Overview of the Principal Provisions of Jobs Act

We are pleased to provide this overview of the international tax provisions of the American Jobs Creation Act of 2004 (the "Act") signed by the President and entered into force on October 22, 2004.

Many comments have been made regarding provisions of the Act, noting both technical provisions and open issues. We trust this overview provides insight into the thought process that can be employed by U.S.-based multinational corporations and foreign investors in the U.S. in prioritizing strategies to deal with the Act’s provisions.

Read the original Client Alert: Overview of the Principal Provisions of Jobs Act →