International Tax Blog

Example of a Mini-Eduardo Saverin

So let’s say you are a wealthy U.S. citizen living in Singapore (I am not an advisor of Eduardo Saverin and I have no information about his situation).  You have $100,000 to invest over the next two years.  You want to keep your life as simple as possible, so you decide that you will invest the funds in a single Singapore mutual fund.  The mutual fund invests in stocks and securities in the Southeast Asian region, an area that is familiar to you.

On January 1, 2011 you invest the $100,000 in the Singapore mutual fund.  It pays dividends at an annual rate of 4%.  Thus, you receive dividends in 2011 of $4,000 and dividends in 2012 of $4,000.  On December 31, 2012 you sell the shares in the Singapore mutual fund for $110,000.

You file your U.S. tax returns for 2011 and 2012 and pay tax on the $4,000 of dividends for each year.  You are not really sure if the dividends qualify for the maximum 15% tax rate so you conservatively include them on your tax returns as non-qualified dividend income, paying tax at ordinary income rates.

You include the $10,000 gain on the sale of the Singapore mutual funds shares on your 2012 and pay long-term capital gains tax at a U.S. federal rate of 15%.

You know that there are some U.S. forms to file to report / disclose your interest in the Singapore mutual fund, but you want to keep your life simple and you decide you don’t want to deal with any of these additional reporting requirements --- you have paid your U.S. tax --- what else could the I.R.S. want?

Complexity

Is your tax situation really as simple as you hoped?  Absolutely not!  

You unwittingly invested in a “passive foreign investment company.”  Okay, the name sounds a bit ominous, but is it really that bad?  Passive foreign investment companies (“PFICs”) were created by Congress in 1986.  The Internal Revenue Code sections dealing with PFICs are 20 or so pages long and if you look in the regulations you will only see about 40 pages of regulations.

However, you need to look further.  In 1991, twenty-one years ago, the I.R.S. published proposed regulations on PFICs which have never been finalized.  The proposed regulations are not binding on taxpayers.  They are considered a body of informed judgment but accorded no more weight than the I.R.S.’s litigation position.  The proposed regulations are where the bulk of the rules related to PFICs are located.

Forty pages of proposed regulations doesn’t sound that bad.  The proposed regulations begin with the following:

A U.S. person that is a shareholder (within the meaning of paragraph (b)(7) of this section) of a section 1291 fund (as defined in paragraph (b)(2)(v) of this section) is subject to the special rules under section 1291 and these regulations with respect to gain recognized on direct and indirect dispositions of stock of the section 1291 fund and upon certain direct and indirect distributions by the section 1291 fund.

Maybe a little dense.  What is a section 1291 fund?  Are there various types of PFICs?  Why, yes.  Some of the types include “QEFs,” “pedigreed QEFs,” and “unpedigreed QEFs” (I am not joking --- see Prop. Treas. Reg. §1.1291-1(b)(2)).

Some of the other arcane terminology includes “nonqualified funds,” “prePFIC years and days,” “prior PFIC years and days,” “excess distributions,” “nonexcess distributions,” “deferred tax amounts,” and much more.  Just paging through the proposed regulations I see sexy tax things like “section 304 transactions,” “nonrecognition transfers,” and all sorts of good stuff for a tax advisor.

You correctly reported the dividend income as ordinary income on your U.S. tax return.  The one mistake in computing your U.S. tax liability for 2012 is that the gain on the sale of the shares of the Singapore mutual fund did not qualify for long-term capital gains treatment.  Instead, put simply, the gain must be spread over the years in which you held the shares (god forbid that you owned the shares for 15 years), you must calculate a hypothetical tax at the U.S. highest ordinary income tax rate for the applicable year, and then compute an interest charge (using variable interest rates), and complete a separate I.R.S. form regardless of whether these special rules apply to you.

So you started with $100,000, received earnings and gains from the Singapore mutual fund of $18,000, paid U.S. tax of say $6,000 (approximately 35% of $18,000), for next cash remaining of $112,000.

Enough with the complexity.  You live outside the U.S.,  You paid your U.S. tax.  What can the I.R.S. do?

Civil Penalties

This post does not discuss the potential criminal penalties for not telling the I.R.S. about your Singapore mutual fund.

On the civil side, the I.R.S. can impose monetary penalties.  First and foremost, for choosing not to file the FBAR (i.e., Form TD F 90-22.1), the IRS can impose a penalty of half of the account balance per year.  Thus, the penalty for 2011 would be $50,000 and the penalty for 2012 would be $50,000.  [The penalty may be less if you did not intentionally fail to file.]

Also, starting in 2011, there is a new I.R.S. form, Form 8938, that imposes a penalty of $10,000 (and can be greater) for failing to tell the I.R.S. about the foreign financial asset.

Thus, the penalties for the two years add up to $120,000.  

In summary, the $112,000 of cash remaining from the Singapore mutual fund goes to the I.R.S. and you still owe the I.R.S. $8,000.  You have been a loyal U.S. citizen all of your life and you want to remain a U.S. citizen and pay your U.S. taxes.  But when you begin to understand the complexity of the rules (the PFIC rules mentioned above are merely one of many complex tax situations for U.S. citizens living abroad) backstopped with the potentially bankrupting penalties, you start to wonder whether your life might be better off not being a U.S. citizen.

Maybe, just maybe, if the I.R.S. agent that you are dealing with is having a good day, you won’t owe all the penalties.  Of course, it is not the I.R.S.’ fault.  They didn’t make these rules --- Congress did.  Congress should really make it less onerous for U.S. citizens living outside the U.S.

Book Review: Transfer Pricing Answer Book 2012

I recently read the book: Transfer Pricing Answer Book 2012, and I highly recommend it for anyone wanting to learn the U.S. transfer pricing rules.

Transfer pricing generally refers to the price charged by a company to a subsidiary or related company for goods, services, or intangible property.  Transfer pricing typically comes up in international transactions, where the related parties are located in different countries.

The Transfer Pricing Answer Book 2012 has seven contributing authors including its editor, David Blair.  Mr. Blair authors or co-authors 12 of the 22 chapters.  Mr. Blair and the co-authors have skillfully explained transfer pricing in a plain-English way, at least as simple as you can get when dealing with a technical topic such as transfer pricing.

The book is in a Q&A format, with reasonably sized fonts, and the pages are not densely packed, which makes the reading easier.  The use of end notes, as opposed to footnotes, also makes the reading easier for someone who is not as interested in the technical details, while at the same time providing authority for individuals that need to dig deeper. 

The book is comprehensive.  It covers the basics of transfer pricing, the practicalities of conducting a transfer pricing analysis, and the various methods available for determining the appropriate transfer price of goods, services, and intangibles.

As indicated above, I recommend the Transfer Pricing Answer Book 2012 for anyone interested in learning about transfer pricing or anyone that needs a transfer pricing resource.

The publisher is the Practicing Law Institute and for those interested, the book can be purchased here.

International PLRs of the 19th week of 2012

Last week the IRS published the following Private Letter Rulings relating to international taxation. 

PLR 201219002: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23. 

PLR 201219004: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23. 

PLR 201219007: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c). 

PLR 201219009, PLR 201219010, and PLR 201219011: Foreign companies that made elections under Code §953(d) to be taxed as domestic corporations would qualify under as insurance companies under Code §831 if they were domestic corporations.

 

 

All Cash D Reorganization Video - Example 16, Loss of Basis

Last week we published a video of Example 15 of Temp. Treas. Reg. §1.358-2T(c).  Today we published a video of Example 16 of the same regulation.  This example shows how basis can be lost in an all cash D reorganization.  The video also shows how to avoid the loss of basis.

 

All Cash D Reorganization Video

Today we uploaded a video of the all cash D reorganization in Example 15 of Treas. Reg. §1.358-2T(c).

 

460 Published Expatriates for Q1 of 2012

Yesterday the Treasury Department published the names of certain individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency (“expatriated”) during the first quarter of 2012.

5/14/12 Update: Facebook co-founder, Eduardo Saverin, was on the first quarter 2012 list of published expatriates.  According to Saverin’s spokesperson, Saverin’s renunciation was prompted not by tax considerations but by U.S. rules that make it more difficult for U.S. citizens to live and invest overseas.  See WSJ Blog.

The number of Published Expatriates for the first quarter of 2012 was 460. The following graph shows the quarterly number of Published Expatriates since 2005.

International PLRs of the 15th and 16th Weeks of 2012

Last week and the week before, the IRS published the following written determinations relating to international taxation. 

PLR 201215005: Spin-off of domestic corporation to a foreign parent

[PLR?] 201215011: An organization with charitable activities outside U.S. did not meet the operational test of Code §501(c)(3) because it could not substantiate that its assets were used exclusively for exempt purposes.

Late entity classification elections for foreign entities to be treated as disregarded entities.  Form 8832.  Treas. Reg. §301.7701-3(c):

• PLR 201216001
• PLR 201216003
• PLR 201216004

Late entity classification elections for foreign entities to be treated as associations taxable as corporations.  Form 8832.  Treas. Reg. §301.7701-3(c). 

• PLR 201216012
• PLR 201216014
• PLR 201216021
• PLR 201216024

PLR 201216026: Acquisition of foreign target treated as qualified stock purchase under Code §338(d)(3), even though a portion of the shares were sold, causing the percentage owned after the sale to be below 80%.

Spin-Off to Foreign Parent Video

Today we uploaded a new video on PLR 201215005, a spin-off of a domestic subsidiary to a foreign parent.

 

Aiken Industries Video

Today we uploaded a new video on the 1971 Tax Court case of Aiken Industries.

 

Brazilian tax package

The following article was kindly provided by Attorney Glaucio Pellegrino Grottoli from the Brazilian law firm of Peixoto e Cury Advogados in São Paulo, Brazil.

Last week the Brazilian Government granted Brazilian Taxpayers a series of important benefits to enhance the economic activity. Below we explain in details each one of the benefits.

(i) Companies can now deduct , as current expenses, from the calculation basis of the Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) donations or patronage directed to institutions who prevent or fight cancer. The donation or patronage can also be made to institutions that treat people with disabilities. For individuals 100% of the donations and 80% of the patronage can be deducted from the calculation basis up to the cap of 6% of the tax due annually. For companies the deduction allowed are 50% for donations and 40% for the patronage up to the limit of 4% of the tax due and be taxed by the Real Profit method.

(ii) When IT companies sell hardware, software or technical assistance to public schools via public deeds there will be exemption of Excise Tax (IPI) and the revenue derived from the sales and services will not be subjected to the taxation of the Social Contributions on Gross Revenues ( PIS/COFINS ). This benefit also applies when IT companies provide goods and services to non-profit institutions or schools that provide learning to persons with some kind of disability.

(iii) In order to grant broadband access to the Internet a benefit related to construction projects was also part of the tax package. Brazilian companies who sell machinery, apparatus, instruments and equipment and building materials that will be incorporated in projects approved by the government, the Excise Tax (IPI) will be exempt and the revenues derived from those sales will not be subjected to the taxation of the Social Contributions on Gross Revenues ( PIS/COFINS). This benefit also applies to services provided to companies with an infrastructure project approved by the Brazilian Government.

(iv) Automotive industries that invest in technological innovation (as defined by the Brazilian Law) can now use a presumed credit of the excise tax in order to encourage the development of the industry in Brazil.

(v) The transfer pricing rules were substantially amended:

1. The method applicable in importations named “Resale price plus profit margin (PRL)” provided a profit margin of 60%. This margin was reduced to 20% (generally), 30% for chemical products, glass and glass products, cellulose, paper and paper products and metallurgy), and 40% for pharmaceutical chemicals and pharmaceutical, tobacco, equipment and optical instruments, photographic and cinematographic, of petroleum products, trade in machinery, apparatus and equipment for using in dental, medical and hospital services, and the extraction of petroleum and natural gas).

2. Standardization of rules for the calculation, regardless of whether the production process (adding value) is located in Brazil or not.

3. The freight and insurance paid by the importer, hired from a non-related company, can be excluded from the calculation method of transfer pricing. If the freight or insurance company is resident in a tax haven, the rule is not applicable.

4. Two new methods were established only for companies that import or export commodities. The methods use the stock market listing prices as the parameter price of the commodities. Considering that more than 60% of the exportation in Brazil are commodities, this benefits have been celebrated by taxpayers.

5. The interest paid on loans between related parties is now the Libor rate added of a variable spread rate defined by the Brazilian Central Bank (the old rule was the Libor rate plus a fixed rate of 3%), so if the interest obeys the new rule the financial expense will be deductible for IRPJ and CSLL.

6. Important: The automatic interest deductibility of loan agreements between related parties, if the agreement was registered in the Central Bank,  was revoked.  Now, the interest will be deductible only if rule “5” is obeyed.

7. This rule is mandatory for 2013, but can optionally be applied in 2012 by the taxpayer. 

(vi) Social Contribution on Payroll exemption – Since December 2011, the government has granted exemption on the Social Contribution on Payroll (20%) in exchange of a new tax on Gross Revenue in order to eliminate the informality (employee without the proper registration) in certain sectors of the economy listed below:

a) IT Companies and Hotels:

1. For IT companies, the benefit has been granted since December, but the Law has extended the benefit to call centers and design and development or design of integrated circuits companies. The benefit is also applied to Hotels;

2. Since December, the Contribution on Gross Revenue in exchange of the payroll tax, has been fixed at a 2,5% rate, but from August 2012,  the rate will be reduced to 2%;

b) Industry:

1. For some sectors of the economy, the benefit has been granted since December, but the Law has extended the benefit to other industries such as: Pharmaceutical, chemical, plastic, rubber, hides and skins, textiles, automotive, metallurgy, electronics and consumer goods;

2. Since December,  the Contribution on Gross Revenue in exchange of the payroll tax has been fixed at a 1,5%  rate, but from August 2012,  the rate will be reduced to 1%;

(vii) If a company has 50% of the gross revenue derived from exportation of goods, it can purchase inputs with suspension of the Excise Tax (IPI) and Social Contribution on Gross Revenue (PIS/COFINS), before the new regulations the percentage of the gross revenue derived from exportation was 70%.”


Glaucio Pellegrino Grottoli

Peixoto e Cury Advogados

Rua Mário Amaral, 20504002-020 - São Paulo - SP

55 (11) 3218-8444

55 (11) 3051-5696

glaucio.grottoli@peixotoecury.com.br

http://www.peixotoecury.com.br/en/

International PLRs of the 14th week of 2012

Last week the IRS published the following Private Letter Ruling relating to international taxation. 

PLR 201214018: Extension of time granted to file a Code §338(g) election for the qualified stock purchase of a foreign corporation by a foreign corporation. 

International PLRs of the 13th week of 2012

Last week the IRS published the following Private Letter Rulings relating to international taxation.

PLR 201213007: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c).

PLR 201213014: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23.

PLR 201213015: Taxpayer intended to change its classification of a foreign entity to partnership for federal tax purposes but mistakenly filed a Form 8832 to be treated as a disregarded entity, a status for which it was not eligible.

PLR 201213017: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c).

 

International PLRs of the 12th week of 2012

Last week the IRS published the following Chief Counsel Advice relating to international taxation.

CCA 201212008: Taxation of Green Card Holders at the Italian Embassy under the 1878 U.S.-Italy consular convention, the 1984 U.S.-Italy income tax treaty, and section 893.

CCA 201212020: Personal liability of the executor of an estate (fiduciary is liable only if it had notice of the claim of the United States before making the distribution).  The only asset in the estate was a foreign trust.

 

B Reorganization Video

Today we uploaded a video demonstrating a section 368(a)(1)(B) reorganization.

 

http://youtu.be/ibMhwzLV2BY

1997 Had More U.S. Expatriations Than 2011

Today I finished updating my expatriation graph back to 1997, the first full year that expatriation data was published in the Federal Register.

After looking at the data, I was quite surprised to see the big spike in 1997, with 1,812 expatriations.  The second quarter of 1997 alone had 1,205 expatriations.  In looking at the names listed in the federal register for the second quarter of 1997, I noticed many Asian names.  Then it occurred to me that Hong Kong reverted back to China on July 1, 1997 (right after the second quarter of 1997).

After doing a little research, for reasons that I don't fully understand (but likely having something to do with China not recognizing dual citizenship), it appears many Hong Kong residents renounced their U.S. citizenship just prior to the turnover of Hong Kong to China.  These Hong Kong expatriations triggered the 1997 spike in U.S. expatriations.

Thus, last year (2011) did not have highest number of expatriates in U.S. history, but perhaps 1997 did.  Further, with the trend apparent in the graph, I wouldn't be surprised if the number of expatriates in 2012 outstrips even the number in 1997.

The updated chart is shown below.

International PLRs of the 10th week of 2012



Last week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation.  There were no PLRs or CCAs for the 9th week and no international related PLRs or CCAs for the 11th week.

PLR 201210009:  Late Canadian registered retirement savings plan ("RRSP") deferral election.  The following is a quote from the PLR:

[The Taxpayer] retired and became eligible to receive benefits from two Canadian pension plans.  In addition, [the Taxpayer’s] mother, a Canadian citizen and resident, passed away in Year 3.  Because of these two events, [the Taxpayer] started doing independent research on various tax issues and he consulted a local accounting firm.  At this point, [the Taxpayer] first learned of the potential tax issues concerning RRSPs, including the need to make an election to defer U.S. taxation on income accruing in an RRSP pursuant to Article XVIII(7) of the United States-Canada Income Tax Convention (the “Treaty”).  In an effort to become and remain fully compliant, [the Taxpayer] retained tax attorneys with experience in international issues.

PLR 201210013:  Late Canadian registered retirement savings plan ("RRSP") deferral election.  The following is a quote from the PLR:

Taxpayer independently learned about the IRS offshore accounts tax compliance initiative by reading a newspaper.  Taxpayer performed independent research and became aware of the provision in the Treaty that provides for deferral of U.S. taxation of income accruing in an RRSP until there is an actual distribution of income from the plan.  Shortly thereafter, Taxpayer consulted a law firm to confirm his understanding of his U.S. tax obligations with respect to his RRSPs.  He was informed that in order to defer U.S. taxation on his RRSPs, an election must be made pursuant to Article XVIII(7) of the Treaty and Rev. Proc. 2002-23.  He also was informed about the requirement to file Forms 8891.

PLR 201210017: Late/retroactive passive foreign investment company ("PFIC") qualified electing fund ("QEF") election.  Treas. Reg. §1.1295-3(f).

PLRs 201210019 and 201210020: Domestic corporations were granted permission to change from the fair market value method to the alternative tax book value method of asset valuation for purposes of apportioning interest expense for their taxable years and for all subsequent taxable years.  Temp. Treas. Reg. §§1.861-8T(c)(2) and 1.861-9T(g)(1)(ii).

CCA 201210033:  The subject of the email is “6651 applicable to failure to file form 1042?” and the full text of the email is:

An addition to tax is imposed under section 6651(a)(1) for failure to file a return required under the  authority of Subchapter A of Chapter 61 (other than Part III) within the prescribed period.  § 6651(a)(1).   Form 1042 is a return required under the authority §6011, which is in Part II of Subchapter A of Chapter  61.  §6011(a); Treas. Reg. §1.6011-1(c); Treas. Reg. § 1.1461-1(b)(1).  See Ellwest Stereo Theatres of  Memphis, Inc. v. Commissioner, T.C. Memo. 1995-610, at *4; New York Guangdong Finance, Inc. v.  Commissioner, 588 F.3d 889 (5th Cir. 2009).  Therefore, failure to file Form 1042 will result in a penalty  under §6651(a)(1).

Attorney-Client Privilege Flowchart

Today our sister website, Tax-Charts.com, published a free flowchart of the attorney-client privilege.  The flowchart is shown below and is also available here.

International PLRs / CCAs of the 8th week of 2012

Last week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation:

PLRs 201208009 and 201208010: I.R.S. allowed an exception to the 60 month limitation on changing an entity’s classification.  The foreign entity was permitted to elect corporate entity classification less than 60 months after its previous change in entity classification to be treated as a disregarded entity because the foreign entity had a change of ownership of more than 50%.

PLR 201208020: Late entity classification election for foreign entity to be treated as an association taxable as a corporation.  The foreign entity “inadvertently failed to timely file Form 8832.”

CCA 201208028: A decedent’s estate was required to pay penalties under Code §6677(a) and (b) for late filings of Forms 3520 and 3520-A, unless there was reasonable cause.  The estate potentially owed the penalties imposed on the decedent for failing to file for several years.  Further, the estate itself should have reported the deemed transfer to the foreign trust under Code §684 upon the decedent's death.  In addition, the foreign trust's payment of the estate's U.S. federal estate taxes was treated as a constructive distribution from the foreign trust to the estate which should have been reported by the estate.

PLR 201208034: A realized gain from an upstream transfer of shares of stock of a foreign corporation in a consolidated group was deferred and was not triggered by a subsequent domestication and reorganizations of the foreign corporation.

 

10 Free New Tax Charts (Feburary 2012)

Last week we added 10 free charts to www.andrewmitchel.com, including 4 charts previously published on this blog.  The recently added charts can be found here. 

The charts include the following:

1. Dagres (Business Bad Debt Deduction for Private Equity Fund Manager)
2. Goosen (Golfer Endorsement Fees: Part Royalties & Part Services, Part U.S. Source Part Foreign Source)
3. Rev. Rul. 86-138 (Separate Statement of Items for Tiered Partnerships)
4. PLR 201122002 (Migration, “Uncheck” of DE & Downstream Merger into DE Treated as F Reorganization)
5. Reg. 1.301-1(f), Example 1 (Section 301 Distribution Greater Than E&P and Stock Basis)
6. Reg. 1.301-1(f), Example 2 (Section 301 Distribution Less Than E&P Results in Dividend Only)
7. Reg. 1.356-1(d), Example 1 (Stock Exchanged for Stock Plus Boot - Gain)
8. Reg. 1.356-1(d), Example 2 (Stock Exchanged for Stock Plus Boot - Loss)
9. Reg. 1.356-3(c), Example 2 (Excess Principal Treated as “Other Property” (i.e., Boot))
10. Reg. 1.897-1(d)(2)(i), Example (Loan With “Kicker” is a USRPI)

Section 911 Housing Cost Amounts Updated for 2012

Today the I.R.S. published Notice 2012-19, which provides adjustments to the limitation on housing expenses for specific locations in 2012.

Code §911(a) allows a qualified individual to elect to exclude from gross income an “Exclusion Amount” related to foreign earned income and a “Housing Cost Amount”.  The Exclusion Amount for 2012 is $95,100.

The Housing Cost Amount is generally defined as an amount equal to the excess of (A) the “Housing Expenses” of an individual for the taxable year, over (B) 16% of the Exclusion Amount.

For example, if an individual had Housing Expenses during 2012 of $20,000, the Housing Cost Amount that could be excluded from that individual’s income would be $4,784 (20,000 - [95,100 X 16%]).

Housing Expenses, however, are generally limited to an amount equal to 30% of the Exclusion Amount in effect for the calendar year ($28,530 for 2012).  Thus, the maximum Housing Cost Amount for 2012 which is excludible from income would generally be $13,314 ($28,530 - [95,100 X 16%]).

The I.R.S. is authorized to issue guidance to adjust the limit on Housing Expenses based on geographic differences in housing costs relative to housing costs in the United States.  Pursuant to this authority, the I.R.S. published Notice 2012-19 to provide adjustments to the limitation on Housing Expenses for high cost locations.

For example, the limitation on Housing Expenses for 2012 in Tokyo is $128,000.  Therefore, an individual living in Tokyo with housing expenses in 2012 of $128,000 or more could exclude from income an amount of $112,784 ($128,000 - [95,100 X 16%]).

An individual generally qualifies for Code §911 during the period which the individual meets the tax home requirement and either the bona fide residence requirement or the physical presence requirement.  If an individual only meets these requirements for a portion of the year, the amounts above are adjusted accordingly.

International PLRs / CCAs of the 6th week of 2012

This past week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation:

PLR 201206003: A CFC’s income from sales to related parties was not foreign base company sales income (“FBCSI”) under the same country manufacturing exception of Code §954(d)(1)(A).  The CFC was incorporated in Country 1 and the products were partly manufactured in Country 1 by an unrelated party.

PLR 201206010: Extension of time granted to file a Code §338(g) election for the qualified stock purchase of a foreign corporation by a foreign corporation.

PLR 201206012: Late entity classification election for foreign entity to be treated as an association taxable as a corporation.  “Form 8832 * * * was inadvertently not timely filed.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

PLR 201206013: Late entity classification election for foreign entity to be treated as disregarded entity.  “may have inadvertently failed to timely file Form 8832.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

CCA 201206014: Application of the statute of limitations (Code §6501(c)(8)) to an S corporation and certain of its shareholders.  After the HIRE Act, the entire tax return stays open and not just items related to the 5471.  Both the S corporation and 2 of its shareholders were required to file 5471s.

PLR 201206015: Income earned by a regulated investment company (RIC) from the ownership of a wholly owned subsidiary that is a controlled foreign corporation constitutes qualifying income, whether or not attributable to subpart F income, for purposes of Code §851(b)(2).

Same Boat But Another Ocean

Continuing our series on Famous Tax Quotes (quotes from court opinions and rulings with language that is colorful or that concisely states an important tax principle) today's tax quote is:

If 105% of gross receipts * * * does not satisfy the requirement, then 225% is in the same boat but another ocean.

PPL Corp. and Subs. v. Commr., ___ F.3d ___ (3d Cir. 2011)

International PLRs / CCAs of the 5th week of 2012

Today the IRS published the following Chief Counsel Advice relating to international taxation:

CCA 201205007: Credit card interest income earned by U.S. citizens and resident alien customers living outside the U.S. was foreign source income.  The CCA relied upon the substantial presence test to determine U.S. or foreign residency.  In addition, ATM fees earned related to ATM transactions located outside the U.S. were considered income from services that were performed in the U.S. and were therefore U.S. source income.

[I am not sure that I agree with the conclusion related to the ATM fees.]

Number of Expatriates for 2011

See here for updated expatriates chart 1997 - 2011

Today the Treasury Department published the names of individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency (“expatriated”) during the fourth quarter of 2011.

In 2011, the total number of expatriates was 1,781, a 16% increase from 2010.  Last year had the highest number of expatriates since at least 2004 (when I started keeping these records), and perhaps the most in any year in U.S. history.



According to the I.R.S., an estimated five to seven million U.S. citizens reside abroad.  Many of these individuals have never lived in the U.S. and never expect to live in the U.S.  However, these U.S. citizens must annually file U.S. tax returns.

For example, I spoke with a Canadian the other day who was born to two U.S. citizen parents in Canada.  This individual therefore is a U.S. citizen.  However, he has never lived in the U.S. and never expects to live in the U.S.  Despite that he has never lived in the U.S., he will have to file U.S. tax returns for his entire working life.  In addition, his U.S. tax returns are quite complicated because he pays income taxes in Canada and because he has financial assets located in Canada.  

Failing to disclose offshore assets to the I.R.S. can create huge potential penalties.  The potential penalties can be so large that they can bankrupt even the wealthiest of taxpayers.  Further, the cost of preparing a U.S. tax return for a U.S. citizen living abroad can be significant. 

The I.R.S. has recently been doing a lot of “saber rattling” with respect to the potential penalties for failing to disclose offshore assets.  The National Taxpayer Advocate, in her recent annual report to Congress, criticized the I.R.S. with respect to how it has handled recent offshore voluntary disclosure programs.

Lastly, with the recent enactment of the FATCA provisions, many U.S. citizens living outside the U.S. are unable to even open regular bank accounts.  Foreign banks simply don’t want to deal with what they perceive as U.S. complicated and overreaching tax rules.  

U.S. citizens permanently living abroad often hold citizenship of another country as well as U.S. citizenship.  If they renounce their U.S. citizenship, they can avoid not only the hassle and cost of annually filing U.S. tax returns, but also the difficulties associated with basic financial transactions.  I therefore expect the number of expatriations to continue to increase.

Update (February 2, 2012): Josh Gerstein of Politico notes that Anna Getty, an heir to the Getty oil fortune, appears to be on the latest list of expatriates.

 

International PLRs / CCAs of the 4th week of 2012

Last week the IRS published the following Chief Counsel Advice relating to international taxation:

CCA 201204008: A taxpayer's claim for refund of an overpayment was not timely where the taxpayer elected in a later year to deduct rather than credit foreign taxes paid in an earlier year, thereby generating an increased net operating loss carryback from the earlier year.

 

International Aspects of Mitt Romney’s 2010 Tax Return

Mitt Romney’s 2010 tax return had a number of international related items.  First, he has an interest in, or signature authority over, one or more financial accounts in Switzerland.  See Question 7 on Schedule B.  Presumably, he also filed an FBAR for the Swiss account(s).

Second, he had passive gross foreign source income of $1,525,982, with current year foreign income taxes paid on this income of $67,173.  He also had $81,461 of a carryforward of passive foreign taxes from prior years, and he will carry forward $18,397 of passive foreign tax credits to 2011.  He had an alternative minimum tax credit in the passive basket of of $77,565.  See Forms 1116.

Although he had no general category foreign source income for 2010, he paid $690 of foreign taxes in the general category for 2010, and he carried forward $100,010 of foreign tax credits in the general category to 2010.  His carry forward of general category foreign tax credits to 2011 will be $100,700.

Third, he filed Forms 8621 for seventeen passive foreign investment companies ("PFICs").  Four of these forms he made mark-to-market elections.  Ten of the forms made qualified electing fund (“QEF”) elections.  For one of the forms he appears to have made a QEF election in a prior year.  Lastly, two of the forms related to Code §1291 funds.

Fourth, he filed a Form 8865 to reflect that he had contributed $172,109 to a Cayman Islands limited partnership.

Fifth, he filed Form 5471 to disclose his wholly owned Bermuda investment holding company.  The company had a nominal deficit in current earnings during 2010 and reflected previously taxed income from prior Subpart F Income inclusions of $13,366.

Sixth, he filed two Forms 926 to disclose cash contributions to two Irish corporations.  One of the transfers was for $1,523,419 and the other was for $139,625.  Both contributions were non-taxable Code §351 exchanges.

International PLRs of the 3rd week of 2012

Last week the IRS published the following Private Letter Rulings relating to international taxation:

PLR 201203010: A non-self-propelled barge with two cranes affixed to its deck  that was owned by a CFC and used in the construction of offshore platforms in the U.S. Gulf of Mexico did not constitute U.S. property within the meaning of Code §956(c).

PLR 201203004: Spin-off including foreign entities. Code §355.

Uncompensated Use of Foreign Trust Property

As a result of 2010 changes to Code §643(i)(1), the use of foreign trust property by a U.S. grantor, a U.S. beneficiary, or a U.S. person related to the U.S. grantor or the U.S. beneficiary is treated as a distribution of the fair market value of the use of the property to the U.S. grantor or U.S. beneficiary.  The use of the property is not treated as a distribution to the extent that the trust is paid the fair market value for the use of the property within a reasonable period of time.

For example, say a U.S. individual is a beneficiary of a foreign trust that was created by a nonresident alien relative, and the foreign trust owns a family home located outside the U.S.  The family home is available for personal use by the U.S. individual and by other nonresident alien family members.  If the U.S. individual visits the home for a two week vacation, without paying rent for the two weeks, the U.S. individual will be treated as having received a distribution from the foreign trust in an amount equal to the fair market value of the use of the home for the two week period.

This deemed distribution would trigger a requirement to file Form 3520 for that year.  It is important to note that the penalty for failure to timely file Form 3520 is the greater of $10,000 or 35% of the deemed distribution, unless the failure can be shown to be due to reasonable cause and not to willful neglect.

An interesting question would be whether uncompensated use of the foreign home by a nonresident alien relative of the U.S. beneficiary, where the nonresident alien relative was also a beneficiary of the foreign trust, would trigger a deemed distribution and a Form 3520 filing requirement to the U.S. beneficiary.

Income Accruing in Foreign Retirement Plans

U.S. citizens that live and work outside the U.S. often participate in foreign retirement plans.  Similarly, non-U.S. citizens that move to the U.S. and become U.S. tax residents, after working outside the U.S., have often participated in foreign retirement plans.

A question that sometimes arises is whether the income accruing annually in the foreign retirement plans must be included on the individual's U.S. tax return.  The rule for this situation was concisely stated in Rev. Proc 2002-23:

Under the domestic law of the United States, an individual who is a citizen or resident of the United States and a beneficiary of a [foreign] retirement plan will be subject to current United States income taxation on income accrued in the [foreign retirement] plan even though the income is not currently distributed to the beneficiary, unless the plan is an employees’ trust within the meaning of section 402(b) of the Internal Revenue Code and the individual is not a highly compensated employee subject to the rule of section 402(b)(4)(A).

Thus, as long as the foreign retirement plan is an employees’ trust and the individual is not a highly compensated employee, then no inclusion is required.  On the other hand, if the foreign retirement plan is not an employees’ trust or if the individual is a highly compensated employee, then the annual increase in value of the foreign retirement plan is required to be included on the U.S. individual’s U.S. tax return.

There are often special rules in U.S. tax treaties that modify the taxation of pensions or retirement plans.  Consequently, the applicable treaty should always be reviewed to determine whether U.S. domestic law is overridden by treaty.

Forms 3520 and 3520-A are generally not required to be filed by a U.S. individual who is the beneficiary of a foreign retirement that is an employees’ trust.  However, U.S. individuals who are beneficiaries of other types of foreign retirement plans that are characterized as trusts for U.S. tax purposes may need to file Forms 3520 and 3520-A.

In addition, it is important to note that an FBAR and a Form 8938 may be required with respect to an interest in a foreign retirement plan.

New FBAR (Again) - Email Your Questions

The Treasury Department issued a new FBAR in January 2012.  This is the third revision of the form in less than one year.

The instructions to the FBAR (TD F 90-22.1, Report of Foreign Bank and Financial Accounts) were substantially revised in March 2011.  In November 2011, according to Willem Perez, there were two changes to the instructions (relating to the estimated time to complete the form and relating to amended forms).

The latest version of the form appears to only change who to contact if you have questions (page 7).  The old form (from two months ago) indicated that questions should be directed to the Detroit Computing Center Hotline at an 800 number.  Now the form specifies to call 866-270-0733 number for domestic callers and 313-234-6146 for international callers.

The new instructions also include an email address for questions: FBARquestions@irs.gov.  With taxpayers so concerned about FBAR penalties, providing an email address for questions is a step in the right direction.

International PLRs of the 2nd week of 2012

Last week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation:

PLR 201202007: Spin-off including foreign entities. Code §355.

PLR 201202011: Permission to make a second entity classification election within 60 months of the first entity classification election was granted. Treas. Reg. §301.7701-3(c)(iv).  Form 8832.  60 month limitation on check-the-box elections.

PLR 201202013: Late entity classification elections for two foreign entities to be treated as partnerships and one foreign entity to be treated as a disregarded entity.  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.  Form 8832.

PLR 201202015: Late entity classification election where "the Form 8832 * * * was inadvertently not timely filed" for a foreign entity.  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.  Form 8832.

CCA 201202021: Removing the limitation of deduction for interest under Code §163(j) does not qualify as a change in accounting method under Code §446.

International PLRs of the 1st week of 2012

This week the IRS published the following Private Letter Rulings relating to international taxation:

PLR 201201013: Late/retroactive PFIC QEF election

PLR 201201016: Gain on disposition of assets generating active financing income under Code §954(h) did not trigger Foreign Personal Holding Company Income

International PLRs of the 52nd Week of 2011

This week the IRS published the following Private Letter Rulings relating to international taxation:

PLR 201152007 - Late PFIC mark-to-market election

PLR 201152008 - Spin-Offs by U.S. corporation with foreign parent, with various deemed transfers

PLR 201152012 - Early re-election of 911 exclusion

PLR 201152013 - Late/retroactive passive foreign investment company ("PFIC") qualified electing fund ("QEF") election

PLR 201152015 - Drop of shares of Fsub2 into Newco2 (foreign) followed by a check-the-box election on Fsub2 (to treat Fsub2 as a disregarded entity of Newco2) was treated as an F reorganization, despite the fact that certain post reorganization transactions were treated as distributions.

International PLRs of the 51st Week of 2011

This week the IRS published the following Private Letter Rulings relating to international taxation:

PLR 201151008: Method for determining unearned premiumns and reserves for life insurance contracts in computing qualified insurance income of a controlled foreign corporation under Code §954(i)(4)(B)(ii).

PLR 201151010: Late entity classification election granted where the foreign entity "inadvertently failed to file a Form 8832"

PLR 201151017: Spin-Off with a foreign company that has American Depositary Shares

PLR 201151019: Consent was granted to revoke safe harbor method elections in computing foreign tax credits with respect to a dual capacity taxpayer under Treas. Reg. §1.901-2A(c)(1).

 

Expatriate Graph “Re-Clarified”

For roughly two years, I have been publishing a graph of the number of expatriates listed in the Federal Register (see Expatriation).  Earlier this year I was told that the individuals listed in the Federal Register generally only include individuals that meet the net worth test or the tax liability test under Code §877(a)(2).

I took a quick look at the statute, and I agreed.  Therefore, I wrote a blog post “clarifying” the graph. 

I recently decided to take a more detailed look at the rules when a reader of this blog informed me that his name was included in the Federal Register, even though he did not meet the net worth test or the tax liability test.  It turns out that my "clarification" was wrong.

The Federal Register includes, and therefore the graph includes, all renouncing U.S. citizens and all individuals that have terminated their U.S. lawful permanent residency status for which the I.R.S. has received information from one or more of three different sources.

According to Code §6039G(d), the individuals listed in the Federal Register include:

"[E]ach individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the [I.R.S.] receives information under the preceding sentence * * *."

In the “preceding sentence,” there are three sources from which the I.R.S. receives information.  

With respect to the first source, “any Federal agency or court which collects (or is required to collect) the statement under subsection (a) shall provide to the [I.R.S.]” certain information.  The statement under subsection (a) is only required for those individuals that meet the net worth test or the tax liability test (or that fail to certify they have met their U.S. tax filings for 5 preceding years).  

If this first source were the only source from which the I.R.S. were to receive information about individuals expatriating, then the Federal Register would generally only include individuals that meet the net worth test or the tax liability test.  However, there are two other sources from which the I.R.S. receives information about individuals expatriating.

The second source is from the Secretary of State, which is required to provide to the I.R.S. “a copy of each certificate as to the loss of American nationality under section 358 of the Immigration and Nationality Act which is approved by the Secretary of State.”

The third source is from “the Federal agency primarily responsible for administering the immigration laws,” which is required to provide to the I.R.S. “the name of each lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) whose status as such has been revoked or has been administratively or judicially determined to have been abandoned.”

Thus, if the I.R.S. receives information about individuals from the Secretary of State about the loss of U.S. citizenship, or receives information about individuals from the Federal immigration agency about the revocation of lawful permanent residency status, then these individuals’ names will also be included in the Federal Register.  The list in the Federal Register does not only include individuals that meet the net worth test or the tax liability test.

International PLRs of the 50th Week of 2011

This past week the IRS published the following Private Letter Rulings and other written determinations relating to international taxation:

In seventeen PLRs (PLR 201150001 thru 201150017), late entity classification elections were granted for foreign entities “due to inadvertence.”

PLR 201150019:  This lengthy PLR (21 pages) includes a Code §351 exchange, multiple Code §332 liquidations, a Code §368(a)(1)(C) reorganization, and a divisive Code §368(a)(1)(D) reorganization with a Code §355 spin-off.

PLR 201150021: Another lengthy PLR (29 pages) that includes a Code §304 transaction, multiple Code §351 exchanges (including preferred equity certificates, or “PECs”), three acquisitive Code §368(a)(1)(D) reorganizations, and one Code §368(a)(1)(A) merger.

CCA 201150029:  In this chief counsel advice the issue was whether the Code §6677 penalty for failure to file information with respect to foreign trusts under Code §6048 (see Forms 3520 and 3520-A) is a “divisible tax” such that a taxpayer would need to pay only a portion of the penalty to sue for a refund.  The CCA concludes that the penalty is not a “divisible tax” and that a taxpayer must pay the full amount of the penalty to challenge the entire penalty assessment under Code §6677 for a particular year.  However, if a taxpayer chooses only to contest a portion of the penalty relating to one or more particular failures to report, but not all failures, the taxpayer may pay that portion and sue for refund. 

 

 

Code §951 Inclusions Are Not Qualified Dividend Income

On December 7, 2011, the Tax Court published Rodriquez v. Commr., 137 T.C. No. 14 (2011).  In this case, the taxpayers filed tax returns including in gross income, under Code §§951(a)(1)(B) and 956, approximately $1.6 million for 2003 and approximately $1.5 million for 2004.  The inclusions represented their controlled foreign corporation’s earnings invested in U.S. property.

The taxpayers had treated the inclusions as qualified dividend income under Code §1(h)(11).  The I.R.S. argued, and the court held, that the Code §951 inclusions were not qualified dividend income because the inclusions were not dividends.  In Notice 2004-70, the I.R.S. had provided guidance that Code §951 inclusions did not constitute qualified dividend income under Code §1(h)(11), and the court in Rodriquez agreed with this conclusion.

Depending upon the circumstances, it may have made sense for the taxpayers in Rodriquez to make Code §962 elections for 2003 and 2004, where individuals can elect to be subject to tax at corporate rates but at the same time be allowed to claim deemed paid foreign tax credits under Code §960.

International PLRs of the 49th Week of 2011

This week the IRS published the following Private Letter Rulings relating to international taxation:

201149007 - Late entity classification elections for foreign entities

Loan With “Kicker” is a USRPI

Treas. Reg. §1.897-1(c) defines the term “United States real property interest” (“USRPI”) to mean any interest, other than an interest solely as a creditor, in either: (i) real property located in the United States or the Virgin Islands, or (ii) a domestic corporation unless it is established that the corporation was not a U.S. real property holding corporation within the period described in section 897(c)(1)(A)(ii).

Treas. Reg. §1.897-1(d)(2) provides that an interest in real property other than an interest solely as a creditor includes a fee ownership, co-ownership, or leasehold interest in real property, a time sharing interest in real property, and a life estate, remainder, or reversionary interest in such property.  

The term also includes any direct or indirect right to share in the appreciation in the value, or in the gross or net proceeds or profits generated by, the real property.  A loan to an individual or entity under the terms of which a holder of the indebtedness has any direct or indirect right to share in the appreciation in value of, or the gross or net proceeds or profits generated by, an interest in real property of the debtor or of a related person is, in its entirety, an interest in real property other than solely as a creditor.

The regulations include an example of where a loan that shares in the appreciation in the value of the real property is treated as a USRPI.  The chart below demonstrates the example (click on the chart to enlarge the image):

International PLRs of the 47th Week of 2011

This week the IRS published the following Private Letter Rulings relating to international taxation:

201147002 - Late entity classification election for foreign entity

201147003 - Early Re-election of 911 exclusion

201147022 - Late IC DISC election

201147023 - Late passive foreign investment company ("PFIC") qualified electing fund ("QEF") election

International PLRs of the 46th Week of 2011

This week the IRS published the following Private Letter Ruling relating to international taxation:

201146004 - Consent was granted for an extension of time for a foreign entity to make an entity classification election under Treas. Reg. §301.7701-3(a) by filing Form 8832.

 

Subpart F Income

The earnings of foreign corporations generally are not taxed in the U.S. until the foreign corporation repatriates its earnings through the distribution of dividends.  This is known as the concept of “deferral” (i.e., U.S. taxation is deferred until repatriation).  Various exceptions to deferral exist today (often referred to as “anti-deferral” regimes).  Subpart F income is one of these exceptions to deferral. Subpart F income only applies to Controlled Foreign Corporations (CFC’s).

A CFC, very generally, is defined as a foreign corporation in which U.S. persons own more than 50 percent of the corporation’s stock (measured by vote or value).  Stock ownership includes direct ownership as well as stock owned indirectly or constructively.

When a CFC earns subpart F income, the United States generally taxes the corporation’s U.S. shareholders currently on their pro rata share thereof.  Those shareholders are effectively treated as having received current income consisting of subpart F income.

Subpart F income typically is income that is relatively movable from one taxing jurisdiction to another and that is subject to low rates of foreign tax.  Subpart F income consists of various types of income.

Earnings and profits (“E&P”) of a CFC that have been included in the income of the U.S. shareholders are not taxed again when such earnings are actually distributed to the U.S. shareholders. These earnings are known as “previously taxed income” or “PTI.”

Various special provisions apply in the application of the subpart F rules, including “de minimis” and “full inclusion” rules, and an exception for certain income subject to high foreign taxes. Furthermore, the subpart F income of a CFC is limited by its current E&P.

Foreign Personal Holding Company Income
Foreign Personal Holding Company Income (“FPHC income”) is a major type of subpart F income.  Generally, it consists of passive income such as interest, dividends, annuities, net gains from sales of property that do not generate active income, net commodities gains, net foreign currency gains, certain rents and royalties, and income from personal service contracts.

An exclusion exists for certain dividends, interest, rents, and royalties received from related corporations where the payor corporation is organized and operating in the same foreign country as the recipient.  This exclusion, often colloquially referred to as the “same country exception,” is subject to various exceptions.  Another exclusion exists for rents and royalties received from unrelated persons in the active conduct of a trade or business.

A temporary exception (known as the "CFC look-thru rule"), which has been extended several times, excludes certain dividends, interest, rents, and royalties from FPHC income, even if the paying entity is not incorporated in the same country as the recipient.

Foreign Base Company Sales Income
Foreign Base Company Sales Income is income attributable to related-party purchases and sales of personal property made through a CFC if the country of the CFC’s incorporation is neither the origin nor the destination of the goods and the CFC itself has not “manufactured” these goods.

Special branch rules can deemed certain related party transactions.

Foreign Base Company Services Income
Foreign Base Company Services Income includes income from services performed by a CFC for or on behalf of a related party where the services are performed outside the country of the CFC’s incorporation.

There are also several other types of Subpart F Income not described here.

International PLRs of the 43rd Week of 2011

The IRS published the following Private Letter Ruling relating to international taxation:

• 201143016 - Consent was granted to revoke safe harbor method elections in computing foreign tax credits with respect to a dual capacity taxpayer under Treas. Reg. §1.901-2A(c)(1).

 

International PLRs of the week

Last week the IRS published the following Private Letter Rulings relating to international taxation:

• Late passive foreign investment company ("PFIC") qualified electing fund ("QEF") elections: 
  • 201142012
  • 201142013
  • 201142014
  • 201142015

• Late PFIC mark-to-market elections:
  • 201142017
  • 201142018
  • 201142019

• Late Canadian registered retirement savings plan ("RRSP") deferral election:
  • 201142021

2012 Inflation Adjustments for Individuals in the International Tax Arena

Last week the I.R.S. published Revenue Procedure 2011-52, setting forth inflation adjusted items for 2012.  In the international arena, some of the important inflation adjustments include:

$151,000 --- Code § 877(a)(2)(A) --- The average annual net income tax that must be imposed for the five taxable years ending before the date of the loss of United States citizenship (or cessation of long-term permanent residency) for an individual to be considered a “covered expatriate” under Code § 877A(g)(1).  This amount is up from $147,000 in 2011.  See Rev. Proc. 2010-40.

$651,000 --- Code § 877(a)(1) --- The amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate.  This amount is up from $636,000 in 2011.  See Rev. Proc. 2010-40.

$95,100 --- Code § 911(b)(2)(D)(i) --- Foreign earned income exclusion.  This amount is up from $92,900 in 2011.  See Rev. Proc. 2010-40.

$13,000 --- Code § 2503 --- The amount of the annual gift tax exclusion for gifts to any person.  This amount is the same at $13,000 as in 2011.  See Rev. Proc. 2010-40. 

$139,000 --- Code § 2523(i) --- The amount of the annual gift tax exclusion for gifts to non-citizen spouses.  This amount is up from $136,000 in 2011.  See Rev. Proc. 2010-40. 

$14,723 --- Code § 6039(F) --- Notice of large gifts received from foreign persons.  This amount is up from $14,375 in 2011.  See Rev. Proc. 2010-40.

New Brunswick Premier Caught in U.S. Tax Net

New Brunswick’s Premier (a premier is a province's head of government, much like a governor of a state in the U.S.), David Alward, recently announced that he is filing U.S. tax returns back to 2003.  Alward is a dual U.S./Canadian citizen.  He was born in Massachusetts, but has not resided in the U.S. since he was quite young.

An article by the Telegraph-Journal mistakenly attributes Alward’s current need to file U.S. tax returns with the Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment.  The Premier, as a U.S. citizen, is obligated to file U.S. tax returns just as any other U.S. citizen. 

Sometimes taxpayers living outside the U.S. are under the impression that they only need to file U.S. tax returns if they reside in the U.S. or if they have U.S. source income.  Although this would be correct for most other countries (most other countries tax based on residency), the U.S. is an exception.  All U.S. citizens, regardless of where they live and regardless of whether they may also be citizens of other countries, are subject to U.S. tax on their worldwide income. 

Double taxation can typically be avoided through foreign tax credits and/or income tax treaties.  However, in some instances, double taxation can result.

Goosen v. Commr. - Golfer Endorsement Fees

In a recent Tax Court case, 136 T.C. No. 27 (2011), the court was asked to determine the U.S. taxation of certain endorsement fees and bonuses received by a professional golfer --- Retief Goosen (a.k.a. the “Iceman”).

Goosen received golf tournament prize winnings as well as on-course and off-course endorsement fees.  For U.K. tax purposes, Goosen’s income was paid to two corporations in which he entered into employment agreements.  A portion of this income was then paid to him as a salary.

The Tax Court had to first determine whether the endorsement fees would fall within the category of royalty income or personal services income.  After deciding the type of income, the court had to determine the source of the royalties and services income.  Next, the court had to determine whether the different streams of income were effectively connected to a U.S. trade or business.  Lastly, for the U.S. source royalties that were not effectively connected income, the court had to determine whether the U.K.-U.S. Income Tax Treaty would apply to reduce the 30% U.S. tax on the royalties.

Below is a chart which shows the types of income earned by the Iceman and how the court held each type of income should be treated.  A PDF version of the chart can be found at Goosen.

Notice 2011-64: Countries Qualifying for Reduced Dividend Tax Rates

Since 2003, dividends paid to individual shareholders from either a domestic corporation or a "qualified foreign corporation" are subject to tax at the reduced rates applicable to certain capital gains.  A qualified foreign corporation includes certain foreign corporations that are eligible for benefits of a comprehensive income tax treaty with the United States.  Notice 2011-64 provides the most recent list of the U.S. income tax treaties that meet the requirements under Code §1(h)(11). 

The previous lists of the comprehensive income tax treaties were in Notices 2003-69 and 2006-101.  The newest list in Notice 2011-64 adds Bulgaria and Malta.  

Notice 2011-64 also specifies that for purposes of determining whether the limitation on benefits clause of the treaty is met, the foreign corporation must be "treated as though it were claiming treaty benefits, even if it does not derive income from sources within the United States."

The following is a list of the treaties from Notice 2011-64:

Australia
Austria
Bangladesh
Barbados
Belgium
China
Cyprus 
Czech Republic 
Denmark 
Egypt 
Estonia 
Finland 
France
Germany 
Greece 
Hungary 
Iceland 
India 
Indonesia 
Ireland 
Israel 
Italy 
Jamaica 
Japan 
Kazakhstan 
Korea 
Latvia 
Lithuania 
Luxembourg 
Malta
Mexico 
Morocco 
Netherlands 
New Zealand 
Norway 
Pakistan 
Philippines 
Poland 
Portugal 
Romania 
Russian Federation 
Slovak Republic   
Slovenia 
South Africa 
Spain 
Sri Lanka 
Sweden 
Switzerland 
Thailand 
Trinidad and Tobago 
Tunisia 
Turkey 
Ukraine 
United Kingdom 
Venezuela

 

Q2 of 2011 Had the Second Highest Number of “Published Expatriates”

Earlier this month the Treasury Department published the names of certain individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency (“expatriated”) during the second quarter of 2011.

Only expatriated individuals subject to Code §877 or Code §877A are listed in the Federal Register.  In general, this only includes expatriated individuals that have a net worth of at least $2,000,000 or that have an average annual U.S. income tax of more than $147,000.  For convenience, the expatriated individuals who have had their names published in the Federal Register are referred to as “Published Expatriates.”

The number of Published Expatriates for the second quarter of 2011 was 519.  This is the second highest number of quarterly Published Expatriates during the past seven years.  The only higher quarter during this time was the second quarter of 2010, with 560 Published Expatriates.

If current trends continue, the number of Published Expatriates for 2011 will exceed 2010 by 30% or more.  The following graph shows the quarterly average number of Published Expatriates since 2004.

The following graph shows the raw quarterly data of Published Expatriates since 2004.

The names of the Published Expatriates for the most recent quarter can be found here (see pages 312 to 319 of the PDF file).

U.K. Remittance Basis Charge (“RBC”) is a Creditable Tax

In Rev. Rul. 2011-19, the I.R.S. held that the U.K. Remittance Basis Charge (“RBC”) is an income tax for which a credit is allowable under Code §901.

The U.K. generally allows individuals who are U.K. residents but who are not domiciled in the United Kingdom (i.e., do not intend to live in the United Kingdom permanently) (non-domiciliaries) to elect each year to be taxed on an alternative basis.  The default basis of taxation for non-domiciliaries – as it is for any U.K. resident individual – is to pay U.K. income and capital gains taxes on their worldwide income and capital gains (gains), which is known as the arising basis of taxation.

The alternative method of taxation is the remittance basis, under which non-domiciliaries with non-U.K.-source income or gains can elect to be taxed on their non-U.K.-source income and gains only when they are remitted to the United Kingdom.  Remittance basis taxpayers also are subject to tax on their U.K.-source income and gains, which are taxed in the year in which they arose, under separate statutory provisions applicable to all U.K. resident individuals.

A special rule applies to U.K. residents who are non-domiciliaries age 18 years or older and who were U.K. residents in at least seven of the prior nine taxable years (long-term non-domiciliaries or “LTNDs”).  Under this rule, a LTND who elects the remittance basis of taxation is required to pay the RBC of £30,000 in addition to the remittance basis tax.

Rev. Rul. 2011-19 concludes that the RBC of £30,000 is an “income tax” for which a credit is allowable under Code §901.