The Future of Ireland as a Place to Carry On Business in Light of Recent E.U. & O.E.C.D. Initiatives

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INTRODUCTION

Ireland has long been established as the onshore location of choice for the world’s leading multinational enterprises (“M.N.E.’s”). Although Ireland’s attractiveness as a location for foreign direct investment is based on a number of factors, the low corporate tax rate of 12.5% is crucial.

Ireland’s corporate tax regime has received persistent and pervasive scrutiny from international media in recent times, focusing on topics such as the “Double Irish,” the O.E.C.D. B.E.P.S. initiative, and the Apple investigation. What must not be forgotten in the midst of such coverage is that Ireland has nothing to hide and nothing to fear from any of the above issues. Ireland is a small jurisdiction, and as far back as the 1950’s, the cornerstone of the economy has been foreign direct investment (“F.D.I.”).

Ireland makes no secret of its wish to compete with other jurisdictions for F.D.I., and its highly competitive corporate tax regime, including the 12.5% tax rate, forms part of a broader strategy that allows Ireland to “play to win.”

This article will discuss some of the main O.E.C.D. and E.U. initiatives impacting Ireland and the effects such initiatives are likely to have on Ireland and the M.N.E.’s which are based here.

Deoffshorization in Russia: C.F.C. Legislation Comes into Effect

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Federal law No. 376 of November 24, 2014, On Amendments to Part One and Part Two of the Tax Code of the Russian Federation (concerning the taxation of controlled foreign companies and foreign organizations), and commonly referred to as the “C.F.C. Law,” came into force on January 1, 2015. It marks the beginning of deoffshorization of the Russian economy and introduces entirely new tax rules for Russian businesses having affiliates based outside Russia.

The C.F.C. Law introduces the following three new legal concepts, previously nonexistent in Russian tax legislation:

• Controlled foreign company (“C.F.C.”),
• Russian tax residence for foreign companies, and
• Beneficial owner of income.

The C.F.C. Law establishes the obligation of taxpayers to notify the tax authorities of their participation in foreign entities. It also establishes rules for computing and taxing C.F.C. profit and share transactions of companies that own real estate in Russia. It provides for recognition of foreign non-corporate structures (such as trusts, private foundations, partnerships, etc.) as separate taxpayers.

Following the O.E.C.D. lead in the B.E.P.S. proposals, these amendments have two broad goals: (i) they ensure business transparency and (ii) they combat the use of low-tax jurisdictions to obtain unjustified tax benefits.

CONTROLLED FOREIGN COMPANIES

A controlled foreign company is a foreign entity (or non-corporate structure) that is:

1. Not a tax resident of the Russian Federation and
2. Controlled by Russian tax residents, either legal entities or individuals (“Controlling Persons”).

Insights Vol. 2 No. 1: Updates & Other Tidbits

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TAX EVASION INDIAN STYLE: CRIMINAL OR CIVIL OFFENSE?

Judicial authorities in India are recommending that the country adopt a similar position as the United States with respect to offshore bank accounts. While investigating the “black money” held in undeclared Swiss bank accounts by 628 wealthy Indians, two of the judges recommended that tax evasion should constitute a criminal offense and not simply a civil one.

The scandal has been at the forefront of both political discussion and legal debate since there is a fine line that is being straddled between disclosing and punishing these tax evaders versus violating the confidentiality clause from the Indian-Swiss tax treaty. According to the treaty, these account names can only be revealed once charges identifying the specific individual have been filed.

In India, “black money” has always been an obstacle to tax collection. Black money constitutes undeclared income that has been “hidden,” profits from the undervaluation of exports, and earnings from fake invoices or unaccounted-for goods. Black money not only affects the national treasury, but has fueled corruption, too. According to the judges, classifying tax evasion as a criminal offense, and dealing with these lawbreakers more strictly should serve as a deterrent.

HAND IT OVER, MICROSOFT?

In conjunction with its audit of Microsoft’s cost-sharing transfer pricing methods for the 2004-2006 tax years, the I.R.S. has filed a petition for enforcement of an issued summons for 50 types of documents, including those relating to marketing, R&D, financial projections, revenue targets, employees, studies, and surveys.

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.

Corporate Matters: Is Your Deal Safe? How the F.C.P.A. Affects Mergers & Acquisitions

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Foreign-based companies that do not do business in the United States might understandably ask how the Foreign Corrupt Practices Act (“F.C.P.A.”) can impact them. The answer is unexpectedly and profoundly – if the foreign company becomes an acquisition target of a U.S. company.

As 2015 begins, it is no longer news to anyone that a U.S. company doing business abroad must have a robust anti-corruption and anti-fraud compliance program. An effective compliance program can prevent F.C.P.A. problems from arising or, if such problems do arise, reduce a company’s penalties. It is equally important to remember that the F.C.P.A. can have as significant an impact on a company’s merger and acquisition transactions as it can on its everyday operations. For that reason, a foreign company looking to partner with, or be acquired by, a U.S.-based entity, must make sure that its conduct does not adversely affect or jeopardize such efforts. Recent developments in 2014, as well as past history, illustrate this point.

The F.C.P.A. plays a significant role in mergers and acquisitions. An acquiring company is expected to conduct due diligence to ascertain the acquired entity’s F.C.P.A. compliance. If in the course of that due diligence, the acquiring company uncovers violations by the entity to be acquired, it is expected to disclose them and remedy them. Otherwise, it risks F.C.P.A. liability of its own. In guidance issued in 2012, the D.O.J. warned:

[A] company that does not perform adequate FCPA due diligence prior to a merger or acquisition may face both legal and business risks. Perhaps most commonly, inadequate due diligence can allow a course of bribery to continue—with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability.

B.E.P.S. Action 14: Make Dispute Resolution Mechanisms More Effective

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INTRODUCTION

The O.E.C.D. has continued to publish discussion drafts under its 15-part action plan (the “B.E.P.S. Action Plan”) for combatting base erosion and profit shifting (“B.E.P.S.”), with Action 14 being the most unique.

Action 14, entitled “Make Dispute Resolution Mechanisms More Effective,” provides as follows:

Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

While most components of the B.E.P.S. Action Plan address the problems caused by base erosion and profit shifting, the recently proposed discussion draft for Action 14 (“Discussion Draft” or “Draft”) addresses the mutual agreement procedures (“M.A.P.”) used to resolve treaty-related disputes. Action 14 addresses the current obstacles faced by taxpayers seeking M.A.P. relief to avoid economic double taxation and provides suggestions as to how to revise provisions in order to improve the integration of M.A.P. dispute resolution mechanisms. The O.E.C.D. describes it as a unique opportunity to overcome traditional obstacles and to provide effective relief through M.A.P. The Discussion Draft proposes complementary solutions that are intended to have a practical and measurable impact, rather than merely providing additional guidance which may not be followed.

B.E.P.S. Action 10 - Part II: The Transfer Pricing Aspects of Cross-Border Commodity Transactions

Read Publication The discussion draft on Action 10 (the “Discussion Draft”) deals with transfer pricing issues in relation to commodities transactions and the potential for Base Erosion and Profit Shifting (“B.E.P.S.”). The commodity sector constitutes major economic activity for developing countries and provides both employment and government revenue.

In seeking to create clear guidance on the application of transfer pricing rules to commodity transactions, the Discussion Draft identifies several problems and policy challenges and seeks to establish a transfer pricing outcome that is in line with value creation.

B.E.P.S Action 10 - Part I: Profit Split Method in the Context of Global Value Chains

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INTRODUCTION

There has been another release on Base Erosion and Profit Shifting (“B.E.P.S.”) deliverables. B.E.P.S. refers to the tax planning that moves profits to a low-tax jurisdiction or a jurisdiction that allows a taxpayer to exploit gaps in tax rules. These deliverables have been developed to ensure the coherence of taxation at the international level. The aim of these deliverables is to eliminate double non-taxation. The measures have been developed throughout 2014, and they will be combined with the work that will be released in 2015.

In the December 16th release on Action 10 (the “Discussion Draft” or “Draft”), Working Party No. 6 on the Taxation of Multinational Enterprises (“M.N.E.’s.”) released various factual scenarios, posed questions and invited affected persons to suggest answers. The goals of the Draft are to assure that transfer pricing outcomes are in line with value creation and to determine whether it is more appropriate to apply the profit split method in some circumstance instead of a one-sided transfer pricing method.

RELEVANT ISSUES

The Draft identifies relevant issues in the posed scenarios, asks questions, and invites commentary as follows.

Value Chains

The term “global value chain” describes a wide range of activity, from the consumption of the product to the end use and beyond. Therefore, one particular method of transfer pricing may not be appropriate.

B.E.P.S. Actions 8, 9 & 10: Assuring that Transfer Pricing Outcomes are in Line with Value Creation

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On December 19, 2014, the Organisation of Economic Co-operation and Development (“O.E.C.D.”) released a discussion draft on Actions 8, 9, and 10 of the Base Erosion and Profit Shifting (“B.E.P.S.”) Action Plan (“Discussion Draft” or “Draft”). Actions 8, 9, and 10 reinforce the goal of assuring that transfer pricing outcomes are in line with value creation.

In July 2013, the O.E.C.D. published the B.E.P.S. Action Plan for the purpose of establishing a comprehensive agenda to resolve B.E.P.S. issues. The B.E.P.S. Action Plan identifies 15 actions to combat B.E.P.S. and establishes deadlines for application of each action.

The Discussion Draft introduces revisions to Chapter I of the Transfer Pricing Guidelines and addresses the related topics in Actions 8, 9, and 10. Specifically, the Discussion Draft focuses on the development of the following:

(i) rules to prevent B.E.P.S. by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation.

(ii) rules to prevent B.E.P.S. by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterized.

(iii) transfer pricing rules or special measures for transfers of hard-to-value intangibles.

B.E.P.S. Action 4: Limit Base Erosion Via Interest Payments and Other Financial Payments

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Action 4 of the B.E.P.S. Action Plan focuses on best practices in the design of rules to prevent base erosion and profit shifting using interest and other financial payments economically equivalent to interest. Its stated goal is described in the following Action:

Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be coordinated with the work on hybrids and CFC rules.

On December 18, 2014, the O.E.C.D. issued a discussion draft regarding Action 4 (the “Discussion Draft”). The Discussion Draft stresses the need to address base erosion and profit shifting using deductible payments such as interest that can give rise to double non-taxation in both inbound and outbound investment scenarios. It examines existing approaches to tackling these issues and sets out different options for approaches that may be included in a best practice recommendation. The identified options do not represent the consensus view of the Committee on Fiscal Affairs, but are intended to provide stakeholders with substantive options for analysis and comment. This article discusses the Discussion Draft for Action 4 of the B.E.P.S. Action Plan.

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.

Tax 101: Understanding U.S. Taxation of Foreign Investment in Real Property - Part II

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This article examines the U.S. income, gift, and estate tax consequences to a foreign owner upon a sale or other disposition of U.S. real property, including a sale of real estate, sale of stock of a U.S. corporation, or a sale of a mortgage secured by U.S. real property.

In addition to (or sometimes in lieu of) rental income, many foreign investors hope to realize gain upon a disposition of U.S. real property. The Foreign Investment in Real Property Tax Act of 1980 (“F.I.R.P.T.A.”) dictates how gains are taxed from the disposition of United States Real Property Interests (“U.S.R.P.I.’s”). The law has a fairly extensive definition of U.S. real property for this purpose. Most significantly, the law provides for a withholding mechanism in most cases.

WHAT IS A U.S.R.P.I.?

A U.S.R.P.I. includes the following:

• Land, buildings, and other improvements;
• Growing crops and timber, mines, wells, and other natural deposits (but not severed or extracted products of the land);
• Tangible personal property associated with the use, improvement, and operation of real property such as:
• Mining equipment used to extract deposits from the ground,
• Farm machinery and draft animals on a farm,
• Equipment used in the growing and cutting of timber,
• Equipment used to prepare land and carry out construction, and
• Furniture in lodging facilities and offices.
• Direct or indirect rights to share in appreciation in value, gross or net proceeds, or profits from real property;
• Ownership interests other than an interest solely as a creditor, including:
• Fee ownership;
• Co-ownership;
• Leasehold interest in real property;
• Time-sharing interest;
• Life estate, remainder, or reversionary interest; and
• Options, contracts, or rights of first refusal.

Filing Requirements Upon Conversion of a Trust Between Foreign and Domestic Status

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INTRODUCTION

Whether a trust is categorized as a U.S. domestic trust or a foreign trust leads to different tax consequences and different filing obligations. This leads to the following questions: Which tax return must be filed when a trust is converted from a U.S. domestic trust to a foreign trust, and which applies when a foreign trust is converted to a U.S. domestic trust? A Chief Counsel Advice Memorandum, C.C.A. 201432022 issued on August 8, 2014, provides guidance on filing requirements in these fact patterns. Though it stated the obvious, the C.C.A. still leaves questions open, in particular with respect to grantor trusts. This article summarizes the conclusion reached by the C.C.A. and addresses issues for which clarification was not provided.

C.C.A. 201432022

In approaching the issue, the C.C.A. began by outlining the rules under which the filing status of a trust is determined for U.S. federal income tax purposes.

U.S. Trust versus Foreign Trust – General Tax Rules

Domestic trusts, like U.S. citizens and residents, are taxed on worldwide income, whereas foreign trusts, like nonresident aliens, are taxed only on U.S.-source income and income effectively connected with the conduct of business in the United States.

The Proposed United Kingdom "Diverted Profits Tax"

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INTRODUCTION

The United Kingdom proposes to introduce, on profits arising as of April 1, 2015, a “Diverted Profits Tax.” This is intended to override the normal international tax arrangements when H.M.R.C. (the U.K. tax authority) does not like the outcome. Domestic laws, O.E.C.D. practice, and a network of Double Tax Agreements provide a definition of “Permanent Establishment” defining what income is or is not taxable within the country of operation. Similarly, “Transfer Pricing” rules should enable the tax authorities to ensure that the price used for transactions between related entities is appropriate for calculating proper division of taxable revenue between the countries concerned. While many believe that these are not working as well as they should, the problems need a more subtle and sophisticated solution rather than a blunderbuss approach.

The “Diverted Profits Tax,” at a rate of 25% (mildly penal, compared with the Corporation Tax rate of 21%), is to be imposed if H.M.R.C. does not like the answer produced by these well-established procedures and succeeds in claiming, under this new law, that profits have, nevertheless, been “diverted.” The draft legislation sets out very detailed rules. These are available on the H.M.R.C. website, but those who follow matters very closely would be well-advised to continue to examine the extensive comments that are being made. The draft legislation gets very close to giving H.M.R.C. the power to determine unilaterally the level of taxable income. “Tax by administrative discretion” is a policy normally associated with authoritarian or left-wing governments. The United Kingdom may well, post-election, have a leftwing government who will be delighted to be presented with what, to them, is a very attractive measure.

APPROPRIATE STRATEGIES FOR AFFECTED BUSINESSES

What do those affected by the draft legislation and their advisers need to do or know? The provisions will not apply to S.M.E.’s, i.e., groups with less than £10 million of annual sales within the U.K. Others will need to consider their position very carefully and make contingency plans on the assumption that the provisions will be enacted, although perhaps in a substantially amended form. H.M.R.C. forecasts that the measure will eventually bring in £350 million per annum, but goes on to say that it “is not expected to have a significant economic impact.” American readers in particular will be well aware that there is a huge gap between the initially-forecast yield of a tax avoidance measure and the outcome. Hastily proposed and badly designed tax legislation is often more successful at creating economic damage than producing revenue or desirable changes in activities.

Insights Vol. 1 No. 11: Updates & Other Tidbits

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B.E.P.S. PROJECT FACES CHALLENGE IN ADDRESSING C.F.C. RULES

The O.E.C.D.’s pending base erosion and profit shifting action plan is due to face a significant challenge as to how to address controlled foreign corporations. Action 3, which strengthens C.F.C. rules, is set to be released in 2015. Currently, European case law restricts the scope of E.U. members establishing C.F.C. regimes.

Stephen E. Shay of Harvard Law School says the U.S. is encouraging the expansion of the C.F.C. rules as a way to solve several of the issues the B.E.P.S. action plan is trying to address, however, these new rules run the risk of being contrary to E.U. jurisprudence. The E.U.’s ability to adopt stringent C.F.C. rules is limited by the Cadbury Schweppes (C-196/04), a 2006 ruling from the Court of Justice of the European Union. The Court held that E.U. freedom of establishment provisions preclude the U.K. C.F.C. regime unless the regime “relates only to wholly artificial arrangements intended to escape the national tax normally payable.”

Without resolving the issue among E.U. countries, Action 3 may not be effective in appropriately addressing earnings stripping. However, Shay also added that Action 2, which neutralizes the effects of hybrid mismatch arrangements, so far appears to include an approach that works without C.F.C. rules.

CHARGES LAID AGAINST U.S. CITIZEN FOR MAINTAINING ALLEGED SECRET SWISS BANK ACCOUNTS

Department of Justice announced that charges have been laid against Peter Canale, a U.S. citizen and resident of Kentucky, for conspiring to defraud the I.R.S., evade taxes, and file a false individual income tax return. It is alleged that Canale conspired with his brother and two Swiss citizens to establish and maintain secret, undeclared bank accounts in Switzerland.

In approximately the year 2000, a relative of Canale died and left a substantial portion of assets which were held in an undeclared Swiss bank account to Canale and his brother, Michael. The brothers met with two Swiss citizens, who agreed to continue to maintain the assets in the undeclared account for the benefit of the Canales.

A Bad Month for Luxembourg

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Luxembourg made front-page news last month with the leak of hundreds of documents that had been signed when current European Commission President, Jean-Claude Juncker, was prime minister and finance minister of Luxembourg. The leak, exposed by the International Consortium of Investigative Journalists (“I.C.I.J.”), revealed confidential agreements approved by Luxembourg authorities that provided tax relief to more than 340 global companies.

The leaked documents implicated not only private companies but also revealed that the Canadian government received a tax ruling for its Public Sector Pension Investment Board, which manages pensions for all Canadian federal employees. The Canadian Pensions Board issued a statement addressing this ruling and claimed that since it is tax-exempt in Canada its ruling is not tax avoidance as it has “no tax advantage.”

The European Union Antitrust Authority is now expected to expand its ongoing illegal state aid probe using the leaked documents in its investigation. A high-level European Commission official said, “We expect to expand our current request for documents…These documents are now available. They are clearly relevant to the ongoing probe, which is a high political priority.”

POLITICAL PRESSURE

The leaked documents put Luxembourg in hot water, especially former prime minister and finance minister, Jean-Claude Juncker, who now faces great political pressure to explain his role in the scandal. He is accused of acting to enrich his country at the expense of its European partners. His actions are purported to have been in defiance of the E.U. spirit, which he hopes to represent as the new Commission President.

Foreign Correspondence: Notes from Abroad

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HOLIDAY SHOPPING, CANADIAN RETAIL PRICES AND TRANSFER PRICING CONTROVERSY

By Michael Peggs

When people think of massive transfer pricing cases, the driver typically is the diversion of profits to a low-tax jurisdiction. But transfer pricing issues are now filtering down to the level of retail shoppers facing retail price disparity in adjacent jurisdictions. A typical case is the premium that Canadian purchasers generally pay over prices charged in the U.S. for comparable products.

Before the internet, it was customary for Canadians to receive flyers in the mail from U.S. grocery and department stores. The flyers offered bargains for the holidays. The internet now allows instant price comparisons and greater choice for Canadian consumers. Disregarding sub rosa impediments to competition that permeate many areas of the Canadian economy – think of cultural preferences – Canadians have complained loudly that retail prices are unfairly high when compared with exchange-adjusted U.S. prices. A typical example is print media where the premium for pricing the Canadian edition was not reduced over the period in which the Canadian dollar reached parity with its U.S. counterpart.

The Canadian government is now preparing to give the Competition Bureau new powers to persuade U.S. multinationals with Canadian retail operations to lower prices or to achieve retail price parity, as will be determined. One hopes that Industry Canada will intervene with the Canada Revenue Agency (“C.R.A.”) before drafting legislation, as an unintended consequence may be a new round of Canadian transfer pricing controversy.

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.