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.

Corporate Matters: One Clause that Should Be in Every Partnership Agreement

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Our practice involves the drafting of many different types of partnership agreements and other agreements governing the relationship among individuals involved in a common enterprise. These agreements include general and limited partnership agreements, operating agreements or limited liability company agreements, and shareholder agreements for corporations. In this article, all these types of entities are referred to as “joint ventures.”

During the initial client discussions with respect to these agreements we highlight and discuss the usual laundry list of matters that co-investors should consider at the time of formation. One matter that we believe should be addressed in every joint venture agreement is what happens upon the death of a member of the joint venture. For obvious reasons, many do not want to focus on this point. However, the procedure to be followed when surviving spouses and heirs inherit an ownership interest is best handled at the beginning of the joint venture. While it may appear that all joint venture members have similar interests, relationships can change very quickly, and the bottom line is that while one may be very interested in being in partnership with a certain individual, the same interest may not attach to that person’s spouse.

Ten Year Throwback

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Two years ago, a U.S. Senate investigation accused Ireland of granting Apple Inc. special tax treatment. This accusation sparked a seemingly never-ending investigation into the state aid granted by certain European countries to specific multinational companies. More recently, Apple, Starbucks, Fiat, and various other companies exposed in the “Luxembourg Leaks” scandal were accused of having paid substandard taxes as a result of agreements between those companies and the Netherlands, Luxembourg, and Ireland, which constituted illegal state aid.

Now, the European Commission (the “Commission”) is looking into the penalties that should be levied upon the income earned through these agreements. The Commission’s investigations into these advance rulings and advance pricing agreements (“A.P.A.’s”) between E.U. member-states and major U.S. multinationals could lead to tax adjustments dating as far back as ten years.

STATE AID

State aid is defined as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.” This does not include subsidies or tax breaks available to all entities. A measure of state aid constitutes an intervention by a state, or through state resources, that gives specific companies or industry sectors an advantage on a selective basis, thereby distorting competition and affecting trade between E.U. member states.

Pre-Immigration Tax Planning, Part III: Remedying The Adverse Consequences of the Covered Expatriate Regime

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INTRODUCTION

Following our previous articles regarding pre-immigration planning and the expatriation rules applicable to covered expatriates (see here and here), this article considers some techniques for implementation before and after expatriation, with the objective to reduce the adverse treatment of the covered expatriate regime to the extent possible depending on the specific facts and circumstances of each individual.

For a Green Card holder, expatriating prior to becoming a long-term resident would eliminate the application of the covered expatriate regime. For a U.S. citizen (other than children under certain situations), the circumstances that will allow for a tax-free expatriation are more restrictive. An individual is considered a covered expatriate if he or she meets one of three tests. Pre-expatriation planning can eliminate the application of the covered expatriate regime for some individuals, while for others additional planning may be needed to reduce the unfavorable effect of the covered expatriate rules.

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.

U.K. Implements 25% “Google Tax” on Diverted Profits

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The U.K. has implemented the controversial diverted profits tax on the profits of multinational companies that are “artificially diverted” from activity within the country. This 25% levy became effective on profits arising on or after April 1, 2015. At this point, it is unclear whether the outcome of the Parliamentary election on May 7 will impact the enforcement of the diverted profits tax, which was enacted without thorough examination by Parliament.

U.K. officials claim multinational corporations are manipulating the tax system and have imposed the 25% levy to prevent companies from avoiding a taxable presence in the U.K. This corporate diversions tax is aimed at entities that transfer profits to lower tax jurisdictions, away from the U.K. The diverted profits tax is being called the “Google tax” because it addresses the practices of well-known international entities such as Google Inc., Amazon.com Inc., and Starbucks Corp. that have used the U.K.’s permanent establishment and economic substance rules to craft tax advantages within the bounds of the law. Legislators have held hearings within the last year on how these three companies in particular have been able to generate billions of dollars in revenue in the U.K. but report little or no taxable profits.

The U.K. tax authority, Her Majesty’s Revenue and Customs (“H.M.R.C.”), introduced a draft of the diverted profits tax last fall and quickly implemented the legislation ahead of the May 7 election. There is great concern about the legislation’s complexity and that its hasty enactment will only result in future revisions, which will further complicate the matter. On the whole, the government is targeting transactions that it does not favor even though they are legal, and the tax itself is being criticized for undermining the Base Erosion and Profit Shifting project executed by the Organization for Economic Cooperation and Development.

An American Solution to Offshore Tax Evasion

Volume 2 No 5    /    Read Article

By Robert J. Alter (guest author)

The United States Department of Justice Tax Division and the I.R.S. have been ramping up an intense crackdown on offshore tax evasion, and while new budget cuts have vastly reduced I.R.S. resources, the cutbacks are having no effect on I.R.S. enforcement initiatives in this area. Robert J. Alter of McElroy, Deutsch, Mulvaney & Carpenter discusses the U.S. crackdown on offshore tax evasion and the various programs available to rectify noncompliance, including the Offshore Voluntary Disclosure Program, Streamlined Procedures, Delinquent International Information Return Submission Procedures, and Delinquent F.B.A.R. Submission Procedures.   See more →

India’s $6.4 Billion Tax on Foreign Investment

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Foreign institutional investors in India have been troubled by the demands from Indian tax officials to pay liabilities owed under the newly enforced minimum alternate tax (“M.A.T.”). India’s Finance Minister, Arun Jaitley, announced that beginning April 1, portfolio investors residing in countries that have tax treaties with India are fully exempt from the tax and will not have to pay the accompanying 20% levy on past capital gains.

The M.A.T. is essentially a minimum corporate tax that creates an overall tax of 20% on capital gains. Previously, foreign investors paid 15% on short term listed equity gains, 5% on bond gains, and nothing on long term gains.

In 2014, India’s Finance Ministry began issuing notices to foreign companies for the payment of the M.A.T. on past capital gains amounting to $6.4 billion, collectively. The Finance Ministry has not enforced the M.A.T. on foreign institutional investors for over 20 years, according to the international fund organization, Investment Company Institute Global. Foreign institutional investors have been contending that the M.A.T. should only apply to Indian companies, not foreign entities.

A Foreign Taxpayer’s Refund or Credit Could Be Limited by Upcoming Regulations

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In Notice 2015-10 (the “Notice”), issued on April 28, 2015, the I.R.S. stated that it was concerned about cases in which persons subject to withholding under Code §§1441-1443 (“Chapter 3”) or Code §§1471 and 1472 (“Chapter 4”) are making or will make claims for refunds or credits in circumstances where a withholding agent failed to deposit the amounts required to be withheld under §6302.

If a withholding agent fails to deposit an amount withheld under Chapters 3 or 4, or reported as withheld on Form 1042-S, and the I.R.S. issues a refund or credit for the amount, the I.R.S. may not be able to recover that amount because the claimant, and in some cases the relevant withholding agent, may be outside the United States. The new regulations aim to reduce the risk that the I.R.S. may issue improper refunds or credits for fictitious withholding or amounts that have not been deposited and are difficult to collect.

As will be seen below, the new regulations would limit a foreign taxpayer’s refund or credit to the amount deposited by the withholding agent. Though collecting undeposited amounts from withholding agents located outside the United States may be difficult for the I.R.S., one wonders about the fairness of limiting a foreign taxpayer’s refund or credit when the I.R.S. could use its greater resources to collect against the withholding agent.

“Trust” – A New Concept in Russia

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In recent years, Russia has introduced several economic and political reforms, including a deoffshorization policy that some would say appears to be sound economic policy but others would say is more politically motivated by the centralization of power in the office of the President. In principle, the idea is to make Russian legislation friendly for Western investors, although the context suggests otherwise. Nonetheless, Russia is attempting to westernize its domestic laws and introduce economic concepts that are familiar to Western businessmen.

BACKGROUND

In 2014, the Russian government came out with a plan that would attack capital flight by residents. This was the so-called “deoffshorization” of investments. Among other things, this legislation increases the tax burden of many offshore holding companies by requiring payment of Russian taxes in the absence of any repatriation of profits. It also requires the disclosure of beneficial owners in the accounting statements of these holding companies. Again, these are concepts that are popular among policy makers in Western Europe, albeit in a different context.

Now, the Russian government is contemplating introduction of the “trust” into the Russian legal system. New laws are anticipated that are intended to formalize Russian arrangements where the nominal owner and the beneficial owner are separate individuals.

Transfer Pricing Implications of the B.E.P.S. Action Plan

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Determined to eliminate so-called “double non-taxation,” as well as no or low taxation, associated with practices that are perceived to segregate taxable income from the activities that generate them, the Group of Twenty (“G20”) and the Organisation for Economic Co-operation and Development (“O.E.C.D.”) released their Action Plan on Base Erosion and Profit Shifting (“B.E.P.S. Action Plan”) in 2013. Included in the B.E.P.S. Action Plan are several provisions related to transfer pricing:

• Action 4: Limit base erosion via interest deductions and other financial payments;
• Action 8: Assure that transfer pricing outcomes are in line with value creation – Intangibles;
• Action 9: Assure that transfer pricing outcomes are in line with value creation – Risks and capital;
• Action 10: Assure that transfer pricing outcomes are in line with value creation – Other high-risk transactions; and
• Action 13: Re-examine transfer pricing documentation.

The O.E.C.D. has since delivered a number of reports and recommendations related to these actions, including revisions to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“Transfer Pricing Guidelines”), and it continues to perform additional work on deliverables scheduled for later this year.

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.

Pre-Immigration Income Tax Planning, Part II: Covered Expatriates→

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INTRODUCTION

Continuing on from our previous article concerning pre-immigration planning, this article will explain the tax rules by which an individual seeking to renounce his or her U.S. citizenship or green card status may be affected.

To relinquish U.S. citizenship or a green card, a formal act of relinquishment is required. Therefore, a green card holder who moves outside the U.S. will continue to be treated as a U.S. resident for tax purposes until he or she formally relinquishes green card status or it is rescinded by the government. A U.S. citizen residing outside the U.S. will have to formally relinquish his or her citizenship in order to be removed from the U.S. tax system. As a general rule, termination of U.S. residency becomes effective on the last day of the calendar year in which the status was relinquished. However, under certain circumstances, termination may be effective midyear.

Upon expatriation, should an individual be considered a “covered expatriate,” he or she may be subject to an exit tax, and following expatriation, any gifts and bequests made by such an individual may be subject to a succession tax in the case of U.S.-resident recipients.

For planning purposes, U.S. citizens wishing to relinquish their citizenship should determine if they are covered expatriates prior to undertaking any such action. Green card holders wishing to relinquish green card status must first determine if they are treated as long-term residents. If so treated, green card holders should determine if they are covered expatriates under the same tests applicable to U.S. citizens.

Corporate Matters: Help – My Delaware Entity Has Been Cancelled!

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We have received inquiries recently concerning Delaware entities that have been cancelled by the State. This situation is not as bad as it sounds, and after a few simple steps (and a couple of checks), the entity can be reinstated.

How Does it Happen?

In Delaware, a corporation becomes “void” for failure to file its annual report. The entity becomes “forfeited” if its registered agent resigns and is not replaced. Registered agents typically resign if their annual fee is not paid in a timely manner. The registered agent is required to give 30 days’ notice of its intention to resign and will have forwarded to the address of record delinquency notices from the State with respect to unfiled reports.

The certificate of formation of a Delaware limited liability company will be cancelled if the entity fails to pay its annual franchise tax for three consecutive years, or if it fails to replace its registered agent within 30 days.

Before a Delaware corporation becomes void or forfeited or a limited liability company has its certificate of formation cancelled, such entity first ceases to be in “good standing.” This occurs as soon as an entity fails to pay certain fees or to file annual reports. While in this status, an entity cannot make any filings with the State or sue in the courts of Delaware. It is also difficult to close any transaction where a good standing certificate is required. This situation may be cured by filing the outstanding reports and paying all outstanding franchise taxes.

“Helen of Troy” Inversions Continue

volume 2 no 4   /   Read article

By Rusudan Shervashidze and Andrew P. Mitchel

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The Joint Committee Report discovers that a better tax result is obtained when foreign low-tax profits are removed from the U.S. tax stream, leaving more for shareholders and executives. Is it an inversion or merely self-help? Andrew P. Mitchel and Rusudan Shervashidze explain.  See more →

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

volume 2 no 4   /   Read article

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 →

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Shifting Income and Business Operations

volume 2 no 4   /   Read article

By Stanley C. Ruchelman and Kenneth Lobo

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles.The report discovers that a better tax result is obtained when income is booked in low tax countries. Stanley C. Ruchelman and Kenneth Lobo explain.  See more →

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