Insights Vol. 2 No. 5: F.A.T.C.A. 24/7

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I.R.S. OFFERS GUIDANCE TO TAXPAYERS SEEKING ELECTRONIC NOTIFICATION ON F.A.T.C.A. REPORTS

The Internal Revenue Service (“I.R.S.”) provided guidance to taxpayers who do not receive notification of the status of their reports once they have uploaded the data into the electronic system used to transmit information regarding overseas bank accounts to the I.R.S. under the Foreign Account Tax Compliance Act (“F.A.T.C.A.”). There has been growing concern among taxpayers as to what to do if they successfully upload a F.A.T.C.A. report into the International Data Exchange Service (“I.D.E.S.”) but do not get an International Compliance Management Model (“I.C.M.M.”) notification letting them know the status of the report.

The I.R.S. added a new Item D9 to its F.A.T.C.A. I.D.E.S. Frequently Asked Questions and Answers relating to data transmission. The I.R.S. has also stated that a similar question and answer was added to the F.A.Q.’s on the I.C.M.M., the I.R.S. system that ingests, validates, stores, and manages F.A.T.C.A. information once it is received.

Taxpayer Advocate Asks I.R.S. to Simplify Foreign Asset Reporting

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On April 13, the Office of the National Taxpayer Advocate (“N.T.A.”) urged the Internal Revenue Service (“I.R.S.”) to reduce foreign asset reporting requirements magnified by the Foreign Account Tax Compliance Act (“F.A.T.C.A.”). The N.T.A. is an independent organization within the I.R.S. that aids taxpayers in resolving issues with the I.R.S. It identifies issues and suggests changes to the I.R.S. and Congress to aid both the I.R.S. and all taxpayers.

Currently, U.S. persons with foreign bank accounts file two reports relating to such accounts: one report for the I.R.S. and the other report for the Treasury Department. In a recommendation to the I.R.S., the N.T.A. said on April 13 that taxpayers shouldn’t have to report assets on Form 8938, Statement of Foreign Financial Assets, if those assets are already reported or reflected on a Financial Crimes Enforcement Network (“FinCEN”) Report 114, Report of Foreign Bank and Financial Accounts (“F.B.A.R.”).

Form 8938 has been expanded to reflect changes under F.A.T.C.A., which requires foreign financial institutions to report U.S.-owned accounts to the I.R.S. or face, in some cases, a 30% withholding tax on their U.S.-source income.

In addition, the N.T.A. urged the I.R.S. to reduce the burden on taxpayers with accounts abroad who are bona fide residents of the foreign countries in which they live, suggesting that it should not require banks organized under the laws of those countries to report such accounts under F.A.T.C.A.

Insights Vol. 2 No. 4: F.A.T.C.A. 24/7

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POTENTIAL DISAGREEMENT BETWEEN THE U.S. AND I.G.A. JURISDICTIONS ON HOW TO TREAT NEW INDIVIDUAL ACCOUNTS

Based on the answer to Question 10 under the “General Compliance” heading of the I.R.S.’s F.A.T.C.A. Frequently Asked Questions And Answers webpage, the I.R.S. requires that financial institutions in I.G.A. countries refuse to open new individual accounts if they cannot obtain a Form W-8BEN or a self-certification from the account holder. Conversely, the governments of both the U.K. and Canada have taken the position that under their I.G.A.’s, resident F.F.I.’s can open new individual accounts without self-certifications as long as the accounts are treated as reportable accounts.

In a letter to the Treasury Department released on March 27, the Securities Industry and Financial Markets Association (“S.I.F.M.A.”) pointed to this potential disagreement as having inconsistent guidance coming out of the U.S. and other I.G.A. countries. Such inconsistency may hurt American banks with foreign operations. These banks will be placed at a disadvantage if they follow U.S. authority while their competition is allowed to follow less restrictive rules. S.I.F.M.A. does not take a position as to who is right in the disagreement, but expressed their concern about this dispute and the lack of any information on this and similar disputes over the meaning of important I.G.A. terms that will need to be resolved in the future.

I.R.S. TO PUBLISH TECHNICAL EXAMPLE DEMONSTRATING EXCHANGE OF INFORMATION

F.A.T.C.A. reports are to be submitted to the International Data Exchange Service (“I.D.E.S.”), which is a secure managed file transfer system that only accepts encrypted transmissions. The I.R.S. announced on March 2 that the I.D.E.S. gateway had been opened for countries and financial institutions to begin transmitting data.

The I.R.S. posted on a service called GitHub a new example showing F.F.I.’s how to create “data packets” of taxpayer account information to transmit using the I.D.E.S. The example also shows how to decrypt a notification.

GitHub is an open source repository hosting service that allows users to collaborate and share code and content. The I.R.S. has made it clear that they do not endorse any commercial product.

Moving Deductions into the U.S. as a Tax Planning Strategy

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By Stanley C. Ruchelman and Philip R. Hirschfeld

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. Taking a lead from the preceding article, the report discovers that a better tax result is obtained when deductible expenses are booked in high tax countries. Stanley C. Ruchelman and Philip R. Hirschfeld explain.  See more →

See all articles in this series →

Insights Vol. 2 No. 3: F.A.T.C.A. 24/7

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FOREIGN ACCOUNTS – UPDATE TO 2014 INSTRUCTIONS TO FORM 8938

Form 8938, Statement of Specified Foreign Financial Assets, requires the disclosure of certain foreign financial assets owned by U.S. citizens, resident alien individuals, and nonresidents who elect to be treated as resident alien individuals for U.S. tax purproses. (E.g., a nonresident alien having a U.S. citizen spouse may elect be treated as a U.S. resident for purpose of filing a joint income tax return.) Form 8938 is attached to the individual’s income tax return for the applicable year (starting with tax year 2011) and must be filed by the due date for said return, including extensions.

Updates to the 2014 instuctions for the Form 8938 reporting requirements were announced on March 10, 2015 and incorporate final Treasury Regulations under Internal Revenue Code (the “Code”) §6038D, adopted in December 2014. The final regulations are effective for taxable years beginning after December 19, 2011. The update contains additional information not included in the updated instructions for Form 8938. Taxpayers and their tax return preparers must review these recent changes to the form’s instructions to make sure it does not affect their filing obligations.

Dual Resident Taxpayers

A dual resident taxpayer, within the meaning of these regulations, is an individual who is considered a resident of the U.S. under the Code and applicable regulations because he or she meets the “Green Card Test” or the “Substantial Presence Test” and is also a resident of a treaty country (pursuant to the internal tax laws of that country). The updated instructions apply to dual resident taxpayers who determine their income tax liability for all or a portion of the taxable year as if they were nonresident aliens (pursuant to a provision of an income tax treaty that provides for resolution of conflicting claims of residence by the U.S. and its treaty partner).

Insights Vol. 2 No. 2: F.A.T.C.A. 24/7

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GLOBAL TAX TRANSPARENCY IS RISING

The Foreign Account Tax Compliance Act (“F.A.T.C.A.”) enacted in 2010 has been the driving force and the primary impetus for global tax transparency across borders. It has led to a ginormous administrative challenge for banks and other financial institutions as well as withholding agents in 2015. The O.E.C.D.’s recent release of the common reporting standard has led Treasury Department officials to view it as “the multilateralization of F.A.T.C.A.”

The U.S. has negotiated more than 100 Intergovernmental Agreements (“I.G.A.’s”) with nations across the globe to implement F.A.T.C.A and allow tax information to be shared between governments, which has set the stage for discussion for the onset of global exchange of tax information. More than 50 I.G.A.’s had already been signed and the remainder are treated as in effect and should be signed soon.

I.G.A. Challenge

The I.G.A.’s represent a growing trend in global tax transparency, though implementation has posed a challenge to some nations. Implementing an I.G.A. may require changes to local legislation, such as approving actions that are required to be taken under the I.G.A. and thus essentially making F.A.T.C.A. a part of the law of that country. The Internal Revenue service (“I.R.S.”) said in December 2014 that jurisdictions with I.G.A.’s treated as agreed-in-substance will have more time to get the pacts signed if they can demonstrate “firm resolve” to finalize them, which is subject to a monthly review. Given the uncertainty of whether all agreed-in-substance I.G.A.’s will eventually be signed, and what the language of the signed I.G.A. will provide, 2015 will pose a growing concern for foreign financial institutions (“F.F.I.’s”), who are required to navigate multinational F.A.T.C.A. compliance, and for banks, who must put new procedures in place.

Insights Vol. 2 No. 1: F.A.T.C.A. 24/7

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IN-SUBSTANCE I.G.A. JURISDICTION STATUS EXTENDED & AFFECTED F.F.I.’S MUST OBTAIN G.I.I.N.’S

Foreign financial institutions (“F.F.I.’s”) that are based in jurisdictions that have (or are treated as having) entered into a Model 1 Intergovernmental Agreement (“I.G.A.”) with the U.S. must register and obtain a Global Intermediary Identification Number (“G.I.I.N.”) as part of the process to properly certify its status as an F.F.I. that complies with F.A.T.C.A. Withholding for residents of Model 1 jurisdictions who do not comply with F.A.T.C.A. started on January 1, 2015.

Jurisdictions which are treated as having entered into a Model 1 I.G.A. include countries which have not yet signed, but have reached an agreement in principle to sign, a Model 1 I.G.A. Those countries are referred to as having an “in-substance I.G.A.” with the U.S. In early 2014, the I.R.S. announced that such in-substance I.G.A.’s can be treated as in effect and relied upon through the end of 2014. The I.R.S. F.A.T.C.A. webpage has a list of these in-substance I.G.A.’s. Announcement 2014- 38 provides that a jurisdiction that is treated as if it has an I.G.A. in effect (i.e., an in-substance I.G.A. country) but that has not yet signed an I.G.A. retains such status beyond December 31, 2014, provided that the jurisdiction continues to demonstrate firm resolve to sign the I.G.A. that was agreed in substance.

Announcement 2014-38 does not change the F.A.T.C.A. requirements relating to payments made on or after January 1, 2015. Therefore, F.F.I.’s subject to an in-substance I.G.A. will still need to meet the registration requirements and all due diligence and reporting requirements under F.A.T.C.A. to avoid withholding on payments received starting January 1, 2015.

F.A.T.C.A. INTERNATIONAL DATA EXCHANGE SERVICE WEB PAGES

The I.R.S. has added an additional web page to the F.A.T.C.A. International Data Exchange Service (“I.D.E.S.”). The I.D.E.S. system allows for the U.S. to securely exchange data with foreign tax authorities and F.F.I.’s. The I.D.E.S. enrollment process may be different based on the relevant I.G.A., but will generally entail the following steps:

1. Create a sender payload;
2. Encrypt an A.E.S. key;
3. Create a metadata file; and
4. Create a transmission archive.

2014 Tax Extenders Legislation Finally Approved

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SUMMARY

On December 19, President Obama signed into law the Tax Increase Prevention Act of 2014 (the “Act”). The Act extended more than 50 expired tax-related provisions through the end of 2014, allowing taxpayers to claim a number of tax deductions, credits, and other benefits for the 2014 tax year. Since the Act does not generally cover 2015 and later years, Congress will have to debate the merits of these many expiring provisions all over again in 2015. Taxpayers are once again faced with making decisions based upon the hope that Congress will act to renew the provisions.

Legislative materials indicate that the 2014 expiration date was based upon budgetary and political concerns. The Act is projected to cost U.S. taxpayers $41.6 billion over 10 years, with no new federal revenue to offset the cost. Half of the cost comes from the $7.6 billion credit for business research and development costs, a $6.4 billion tax break for renewable energy production plants, and a $5.1 billion tax exception that allows financial firms and other businesses to defer U.S. taxes on certain foreign profits.

EXTENDED PROVISIONS

The heart of the Act is the extension of many tax deductions and credits that expired on January 1, 2014.

Insights Vol. 1 No. 11: F.A.T.C.A. 24/7

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BITCOIN ACCOUNTS MAY BE SUBJECT TO F.A.T.C.A. AND F.B.A.R. REPORTING

Bitcoin and other virtual currency accounts held in foreign exchanges may be treated as a foreign financial account and thus be subject to F.B.A.R. reporting. Eventually, it is even possible that the foreign exchanges themselves may be considered foreign financial institutions (“F.F.I.’s”) that have to report the accounts to the I.R.S. under F.A.T.C.A.

This view follows caselaw where a court found that online accounts held for the purpose of foreign online gambling had to be reported on an F.B.A.R.

Currently, the I.R.S. treats virtual currency as property. However, some claim that it is only a short hop to apply the court's ruling in the online gambling case to digital currency accounts.

Speaking at the fall meeting of the American Bar Association Section of Taxation, a senior I.R.S. official said the I.R.S. doesn't have a stance yet on whether the currency is subject to F.B.A.R. or F.A.T.C.A. reporting, even though the agency is well aware of the issue.

RELAXED DEADLINE FOR REPORTING ACCOUNTS AS PRE-EXISTING

On November 17, the I.R.S. published a corrected amendment under which F.F.I.’s can treat all accounts that were opened before the date on which the F.F.I. signed an agreement with the I.R.S. to participate in F.A.T.C.A. (an “F.F.I. Agreement”) as pre-existing accounts for 2014 reporting purposes. Before this announcement was made, only accounts opened on or before June 30, 2014 were treated as preexisting accounts.

Expansion of Non-Willful Standard for Relief From Non-Filing of Gain Recognition Agreement Reduces Compliance Burdens

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BACKGROUND

Outbound transfers (as defined) of stock or assets, as well as reorganization transactions that involve a foreign party to the reorganization, are subject to Code §367 and the regulations thereunder. Code §367(a) deals with outbound transfers of stock or assets and attempts to prevent the removal of appreciated property from U.S. taxing jurisdiction before its sale or other disposition. Code §367(b) applies to certain inbound and foreign-to-foreign reorganization transactions and is aimed at preserving the ability of the United States to tax, either currently or at a future date, the accumulated earnings and profits of a foreign corporation attributable to the stock of that corporation held by U.S. shareholders.

In the case of an outbound transfer of assets consisting of tangible property for use by the transferee, a foreign corporation in the active conduct of a trade or business outside of the United States, no gain under §367(a)(1) is triggered. Otherwise, gain under Code §367(a) equal to the fair market value in excess of tax basis is triggered. Code §367(a)(2) and Treas. Reg. §1.367(a)-3, in pertinent part, provide for exceptions to the general Code §367(a) gain recognition for outbound transfers of stock or securities. These sections provide for non-recognition of gain where appropriate, upon entering into a gain recognition agreement (a “G.R.A.”).

Under a G.R.A., gain recognition under §367(a) generally can be avoided on the condition that a G.R.A. is entered into by any U.S. transferor who owns at least 5% of the transferee foreign corporation immediately after transfer. The 5% threshold for requiring a G.R.A. is determined based on the greater of vote or value, taking into consideration attribution rules. A U.S. shareholder who does not own 5% or more of the stock does not have to sign a G.R.A. in order to claim non-recognition treatment for their exchange of stock for stock. The foreign parent corporation that issues stock or securities to these U.S. transferors is treated as the transferee foreign corporation for purposes of applying the G.R.A. provisions.

Insights Vol. 1 No. 10: Updates & Other Tidbits

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ISRAEL ANNOUNCES ADOPTION OF O.E.C.D.’S COMMON REPORTING STANDARD

Israel has announced that it will adopt the Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard (“C.R.S.”) issued by the O.E.C.D. in February 2013.

The C.R.S. establishes a standardized form that banks and other financial institutions would be required to use in gathering account and transaction information for submission to domestic tax authorities. The information would be provided to domestic authorities on an annual basis for automatic exchange with other participating jurisdictions. The C.R.S. will focus on accounts and transactions of residents of a specific country, regardless of nationality. The C.R.S. also contains the due diligence and reporting procedures to be followed by financial institutions based on a Model 1 F.A.T.C.A. intergovernmental agreement (“I.G.A.”).

At the conclusion of the October 28-29 O.E.C.D. Forum on Transparency and Exchange of Information for Tax Purposes, about 50 jurisdictions had signed the document. The U.S. was notably absent as a signatory to the agreement. In addition to the C.R.S., the signed agreement contains a model competent authority agreement for jurisdictions that would like to participate at a later stage.

Insights Vol. 1 No. 10: F.A.T.C.A. 24/7

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CENTRAL AMERICAN COUNTRIES MOVE TO COMPLY WITH F.A.T.C.A.

While Mexico, the largest Central American nation, signed an I.G.A. in April of 2014, other Central American nations are also deciding to join the F.A.T.C.A. bandwagon. Panama, which has the greatest number of U.S. residents in Central America along with Costa Rica, are leading an effort to have Central America move towards compliance by the September 2015 deadline. In May 2014, Panama reached an agreement in substance to adopt an I.G.A., and has been treated as if an I.G.A. has been in effect since then. Costa Rica had already signed a Model 1 I.G.A. in December 2013.

Though Guatemala has not yet signed an I.G.A., many local financial institutions have registered for direct exchange with the I.R.S. under the Treasury Regulations. It was reported that nearly 100 foreign financial institutions (“F.F.I.’s”), including 18 banks, ten stock brokerages, and 28 insurance firms have registered with the I.R.S. to start sharing information by March 31, 2015, as required under the Regulations with respect to F.F.I.’s in non-I.G.A. jurisdictions. Edgar Morales, operation subdirector at banking trade group Asociación Bancaria de Guatemala, said that unlike Panama or Costa Rica, where aggregating these lists of U.S. resident account holders “will be much harder,” the process in Guatemala hasn’t been so complex because “there aren’t that many people who qualify under F.A.T.C.A. here.” Guatemala has a robust banking secrecy law that forbids banks from sharing customer data with other government institutions, and therefore banks that register with the I.R.S. have to obtain privacy waivers from customers to be able to reveal their information under F.A.T.C.A.

Action Item 6: Attacking Treaty Shopping

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BACKGROUND

Action Item 6 addresses abuse of treaties, particularly focusing on treaty shopping as one of the most important sources of B.E.P.S. The approach adopted amends the O.E.C.D. Model Convention that borrows from the U.S.'s approach to treaties but expands upon it in a way that can be very helpful to the U.S. and other developed countries if adopted by the C.F.E. next year in their final report. Among other measures, the report recommends inclusion of a Limitation on Benefits (“L.O.B.”) provision and a general anti-avoidance rule called the Principal Purpose Test (“P.P.T.”) to be included in the O.E.C.D. Model Convention. While it is expected the report will be finalized next year, whether countries will adopt the recommendations is the crucial factor that is still unclear.

RECOMMENDATIONS

The key recommendations can be found in Paragraph 14. It contains two basic recommendations:

• Countries should agree to include in the tax treaties an express statement of the common intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance through use of treaties.
• Countries should demonstrate their commitment to this goal by adopting an L.O.B. provision and a P.P.T. provision in income tax treaties.

The report also notes that special rules may be needed to address application of these rules to collective investment funds (“C.I.F.’s”). The provision should be supplemented by a mechanism that would deal with conduit arrangements not currently dealt with in tax treaties.

The U.S.-Sweden I.G.A.: A Practitioner's Perspective

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Sweden recently entered into an intergovernmental agreement (“I.G.A.”) with the U.S. to address the application of F.A.T.C.A. to Swedish financial institutions. The subsequent modifications to Swedish law to accommodate the I.G.A. were made public on August 11, 2014 in a proposal by the Ministry of Finance. The proposal added numerous modifications to the requirements for compliance and published the reporting forms that will be due starting next year. The complexity of F.A.T.C.A. compliance will trigger a number of changes in many areas of Swedish legislation, which are likely to be approved by the Swedish Parliament in the fall of 2014. It is clear that F.A.T.C.A. will make life more complex for the regulated groups.

F.A.T.C.A. will have a broad, sweeping effect on Swedish financial institutions (“F.I.’s”), including large Swedish banks, insurance companies, and private equity companies. These F.I.’s have been planning for F.A.T.C.A. and have implemented technology, procedures, and training that have caused them to incur in significant costs. However, based on personal experience, it appears that there is a large group of “institutions” that do not understand that they are in fact F.I.’s and must act accordingly. Recently, when discussing due diligence procedures mandated by F.A.T.C.A. with management of a Swedish permanent establishment, the response was simply “thanks for the heads up,” which indicated that the compliance requirements were not yet on the company’s radar.

Some of these institutions may revert to the simplest solution – barring Americans from being accepted as investors or account holders. This solution, however, is suboptimal for an F.I. as it eliminates a large group of Swedish/U.S. dual citizens from the client base. Of greater importance is the fact that barring Americans does not mean an institution can ignore F.A.T.C.A. F.A.T.C.A. requires disclosure of U.S.-controlled foreign entities that may be account holders at these institutions, a task that will require creating new on-boarding procedures and a review of all preexisting accounts.

Insights Vol. 1 No. 8: F.A.T.C.A. 24/7

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ISRAEL IS BECOMING THE I.R.S.'S STRICTEST ENFORCER OF F.A.T.C.A.

On May 4, 2014 Israel reached a Model 1 agreement with the U.S. Israel has shown a strong eagerness to accept F.A.T.C.A. In 2012, the Association of Banks in Israel urged the country's central bank, the Bank of Israel, to ask the government to reach a F.A.T.C.A. agreement with the United States. Earlier in 2014, even before the signing of the F.A.T.C.A. agreement, the Bank of Israel ordered Israeli financial institutions to begin to implement F.A.T.C.A. procedures, including appointing an officer to oversee F.A.T.C.A. compliance, identifying U.S. customers, making them sign I.R.S. declarations (such as I.R.S. Form W-9 or Form W-8BEN), and expelling any clients unwilling to do so. Israel has shown strong support and an eagerness to uphold the enforcement of F.A.T.C.A.

The Israeli Ministry of Finance has drafted proposed regulations that would impose criminal penalties on Israeli financial institutions (including banks, brokerage houses, and insurance companies) that do not comply with F.A.T.C.A. reporting obligations.

CANADIANS CHALLENGE F.A.T.C.A. AGREEMENT

On August 11, through the Alliance for the Defense of Canadian Sovereignty, two U.S.-born Canadians filed a lawsuit against the Canadian government asserting that the Canadian I.G.A. was unconstitutional.

A statement of claim at the Federal Court of Canada in Vancouver was filed against the defendant, the Attorney General of Canada, contesting the Model 1 reciprocal I.G.A. that Canada and the United States signed on February 5.

Current Tax Court Litigation Illustrates Intangible Property Transfer Pricing and Valuation Issues

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MOVING INTANGIBLE PPROPERTY ASSETS OVERSEAS PRESENTS BOTH BUSINESS AND TAX ISSUES

The movement of intangible property (“I.P.”) offshore by U.S. multinational corporations has always been subject to high levels of I.R.S. scrutiny. This remains true in the current tax environment. It is a given that U.S. multinational companies are subject to a high level of U.S. corporate income tax at federal and state levels and their non-U.S. business operations are typically subject to lower tax rates abroad. As a result, U.S. multinationals can lower their global tax expense by transferring I.P. to an offshore subsidiary company (“I.P. Company”), when it is appropriate and consistent with the conduct of their international business operations.

In a typical arrangement within a group, the I.P. Company licenses the use of the I.P. to other members. Royalties paid by the other group members (including the U.S. parent, if total ownership of the I.P. is assumed by the I.P. Company) is claimed as a deduction in the tax jurisdictions of each member that is a licensee. If an I.P. Box Company arrangement is in place or a special ruling obtained, the royalties received by the I.P. Company will be subject to a low tax rate. Assuming that arrangements are in place to remove the royalty income from the category of Foreign Personal Holding Company Income for purposes of Subpart F, the net result is reduced tax for book and tax purposes. This yields greater profits for the multinational group and increased value for its shareholders.

Two cases that are currently in litigation illustrate the I.R.S. scrutiny given to transfers of I.P. to an I.P. Company and the resulting U.S. tax issues that are encountered. The cases involve Zimmer Holdings and Medtronic.

Insights Vol. 1 No. 7: F.A.T.C.A. 24/7

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FOREIGN FINANCIAL INSTITUTIONS: WHO DEALS WITH THE I.R.S. ON F.A.T.C.A.?

On August 1, the Internal Revenue Service (“I.R.S.”) clarified in its F.A.T.C.A. Frequently Asked Questions (“F.A.Q.”) that the I.R.S.’s main contact with a foreign financial institution (“F.F.I.”) will be the “responsible officer” identified under Question 10 of the registration form (i.e., Form 8957, which should be completed on the I.R.S. F.A.T.C.A. portal and not in paper form). However, the I.R.S. reiterated that the responsible officer can authorize as many as five additional points of contact to receive F.A.T.C.A.-related information regarding the F.F.I. and to take other F.A.T.C.A.-related actions on behalf of the F.F.I.

Additionally, the responsible officer will receive an automatic e-mail notification to check the F.F.I.’s F.A.T.C.A. message board when certain messages are posted. For example, when the F.F.I.’s registration status changes, the responsible officer will receive an e-mail notification. Such e-mail notifications will include the last several characters of the F.F.I.’s F.A.T.C.A. identification number so that the officer can identify which F.A.T.C.A. account is being referred to. If no e-mail notifications are received, the responsible officer must verify that the e-mail address entered in Question 10 of the registration form is correct, as well as ensure that their spam blocker is not preventing e-mail notifications from getting through. Note that the responsible officer can only list one e-mail address on Question 10 of the registration form.

I.R.S. LIST OF REGISTERED F.F.I.’S

On August 1, the I.R.S. also updated its F.A.Q. on the list of registered F.F.I.’s. (“F.F.I. List”). The I.R.S. stated that it is possible that an F.F.I. that appears in the search tool on the I.R.S.’s website will not appear in a downloaded F.F.I. List in C.S.V. format.

Because some C.S.V.-compatible spreadsheet and database applications may only display a maximum number of records, an F.F.I. that is located on the list beyond that maximum limit may not be seen. To address this problem, the I.R.S. suggests that taxpayers try to use another spreadsheet and database application or text editor to open the downloaded C.S.V. file.

Tax 101: Tax Planning and Compliance for Foreign Businesses with U.S. Activity

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I. INTRODUCTION

The U.S. tax laws affecting foreign businesses with activity in the U.S. contain some of the more complex provisions of the Internal Revenue Code. Examples include:

• Effectively connected income,
• Allocation of expenses to that income,
• Income tax treaties,
• Arm’s length transfer pricing rules,
• Permanent establishments under income tax treaties,
• Limitation on benefits provisions in income tax treaties that are designed to prevent “treaty shopping,”
• State tax apportionment,
• F.I.R.P.T.A. withholding tax for transactions categorized as real property transfers,
• Fixed and determinable annual and periodical income, and
• Interest on items of portfolio debt.

One can imagine that it is no easy task to identify income that is subject to tax, to identify the tax regime applicable to the income, and to quantify gross income, net income, and income subject to withholding tax. Nonetheless, the I.R.S. has identified withholding tax obligations of U.S. payers as a Tier I audit issue.

Insights Vol. 1 No. 6: Updates & Other Tidbits

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THINK TWICE BEFORE EVADING TAXES (PART II) FOLLOW UP TO CREDIT SUISSE GUILTY PLEA

As we noted last month, Credit Suisse AG pleaded guilty to conspiracy to aid and assist U.S. taxpayers with filing false income tax returns and other documents with the I.R.S. Following Credit Suisse’s guilty plea to helping American clients evade taxes, New York State’s financial regulator is said to have picked Mr. Neil Barofsky as the corporate monitor for Credit Suisse Group AG. Monitors are chosen to act as the government’s post-settlement proxy, shining a light on the inner workings of corporations and suggesting steps to bolster compliance procedures.

Credit Suisse agreed to two years of oversight by New York’s financial regulator as part of its $2.6 billion resolution with the U.S. Credit Suisse’s settlement is the first guilty plea by a global bank in more than a decade, and the penalty agreed to is the largest penalty in an offshore tax case.

Insights Vol. 1 No. 6: F.A.T.C.A. 24/7

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INSTRUCTIONS TO KEY F.A.T.C.A. TAX FORMS RELEASED

On June 19, Instructions for the Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting, were released. The instructions provide useful guidance because they allow entities to attach alternative certifications based on an Inter-Governmental Agreement (“I.G.A.”) or the regulations instead of checking a box on the form.

On June 24, the Internal Revenue Service (“I.R.S.”) released final instructions on Form 8966, F.A.T.C.A. Report. The instructions provide that taxpayers must file Form 8966 for the 2014 calendar year on or before March 31, 2015. They will get an automatic 90-day extension for calendar year 2014 without the need to file any form or take any action.