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Posts Tagged ‘International Tax’

Nicole-DeRosaThis week’s blog post is written by Withum’s International Services Group member, Nicole DeRosa.

Who says taxes are logical? Even Albert Einstein agrees that “the hardest thing in the world to understand is the income tax.” While maybe not the easiest to understand, most taxes and tax exemptions are usually logical… except the few legitimate ones we found below.

china_round_icon_256China – Chopsticks Tax

In 2006, China introduced a 5% tax on disposable wooden chopsticks in an effort to preserve its vanishing forests. Annual production of disposable wooden chopsticks in China exceeds 45 billion pairs, which is equivalent to about 25 million trees – that is a lot of wood!

denmark_round_icon_256Denmark – Fart Tax

Yes, you read that correctly – the fart tax. In 2009, proposals to tax the flatulence of cows and other livestock was quite the hot topic in Denmark. Livestock contribute 18% of the greenhouse gases believed to cause global warming, according to the U.N. Food and Agriculture Organization.

united_states_of_america_round_icon_256United States – Tanning Tax

Much to the dismay of Jersey Shore’s Snooki, the Tanning Tax was passed in 2010 to help pay for healthcare reform and was meant to deter customers from using indoor tanning salons. The 10% tax was justified by evidence that tanning can lead to skin cancer.

mexico_round_icon_256_1Mexico – Obesity Tax

Aiming to curb unhealthy consumption habits, in 2013 Mexican lawmakers approved an 8% sales tax on high-calorie foods such as potato chips, sweets, and cereal. The controversial tax reform also targeted sugary drinks, increasing the price of sodas by one peso, approximately seven cents. Mexico isn’t the only country that has implemented such a tax. Denmark introduced a fat tax at one point on items that contained more than 2.3% saturated fat. California has implemented the first of this tax in the United States, effective January 1, 2015 called the Measure D Soda Tax which imposes a tax of one cent per ounce on the distributors of specified sugar-sweetened beverages. That’s not too sweet if you think about it!

irelandIreland – Artist Tax Exemption

Starving artists might never go hungry if they reside in Ireland! According the Taxes Consolidation Act of 1997, income earned by writers, composers, visual artists, and sculptors from the sale of their works is exempt from tax in certain circumstances.

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Canada and United States flagsThe U.S. Internal Revenue Service (“IRS”) has released revised Publication 597 (Rev. October 2015), “Information on the United States-Canada Income Tax Treaty” (the “Publication”). The 1980 United States-Canada income tax treaty was signed on 26 September 1980. It has been amended by five protocols, the most recent of which became effective on 1 January 2009.

The Publication provides information on the income tax treaty between the United States and Canada. It discusses a number of treaty provisions that most often apply to U.S. citizens or residents who may be liable for Canadian tax. Treaty provisions are generally reciprocal (the same rules apply to both treaty countries). Therefore, Canadian residents who receive income from the United States may also refer to the Publication to see if a treaty provision affects their U.S. tax liability.

The Publication discusses a number of treaty provisions that often apply to U.S. citizens or residents who may be liable for Canadian tax. Specifically, it discusses the following:

  • Application of the treaty (including saving clause)
  • Personal services
  • Pensions, annuities, social security and alimony
  • Treatment of “other income”
  • Investment income from Canadian sources
  • Charitable contributions
  • Income tax credits
  • Competent authority assistance
  • How to get tax help from the IRS and the Canada Revenue Agency

The Publication further notes that taxpayers who take the position that a U.S. tax is overruled or otherwise reduced by a U.S. treaty, referred to as a treaty-based return position, are generally required to disclose that position to the IRS using IRS Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).”

In addition, the revised Publication includes information on the relief provided by Revenue Procedure 2014-55 to eligible U.S. taxpayers who hold interests in certain Canadian pension plans, including registered retirement savings plans (“RRSP”) and registered retirement income funds (“RRIF”).

If you have any questions, please contact a member of Withum’s International Services Group at international@withum.com.

By Mark Farber, CPA, Partner, International Services Group | 212.751.9100 | mfarber@withum.com

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Clinton FoundationThe Clinton Foundation has recently been in the news for allegedly failing to report foreign-sourced contributions on its annual Federal Form 990, Return of Organization Exempt From Income Tax, dating back to 2010. In a May 19, 2015 letter to Internal Revenue Service (“IRS”) Commissioner John Koskinen, Marsha Blackburn, R-TN, along with 51 other members of Congress, requested that the IRS review the tax-exempt status of the Clinton Foundation. It should also be noted that the Clinton Foundation retained the services of a professional certified public accounting firm to audit its financial statements and prepare its Forms 990 for these years.

THE CLINTON FOUNDATION BACKGROUND

The Clinton Foundation was established in 1997 in conjunction with former President Clinton’s vision of creating a nongovernmental organization that could leverage the unique capacities of governments, partner organizations and other individuals to address rising inequalities and deliver tangible results that improve people’s lives. Its mission is to improve global health and wellness, increase opportunity for women/girls, reduce childhood obesity, create economic opportunity and growth and help communities address the effects of climate change.

FORM 990, SCHEDULE B REPORTING

Form 990, Schedule B, Schedule of Contributors, requires tax-exempt organizations to report detail with respect to certain contributions received by the tax-exempt organization that are reported in Form 990, Part VIII, Line 1. According to the Form 990, Schedule B instructions, a contributor (person) includes individuals, fiduciaries, partnerships, corporations, associations, trusts, and exempt organizations. In addition, Internal Revenue Code §509(a)(2), §170(b)(1)(A)(iv), and §170(b)(1)(A)(vi) state that organizations must also report governmental units as contributors. Contributions reportable on Schedule B include contributions, grants, bequests, devises, and gifts of money or property, whether or not for charitable purposes.

THE LETTER

In the Letter, Blackburn and her 51 colleagues cited two major issues surrounding the Clinton Foundation. First, they claim that the Clinton Foundation failed to accurately report foreign government grants received between 2010 and 2012. The Acting Chief Executive Officer of the Clinton Foundation responded by stating that “our error was that the government grants were mistakenly combined with other donations”. Former President Clinton expanded on this by stating that the omissions were “just an accident”.

Secondly, the Letter cited a Washington Post article dated May 3, 2015 which details the relationship between former President Clinton and Frank Giustra, both board members of the Clinton Foundation. The article indicates that Giustra has donated more than $100 million to the Clinton Foundation and that “Clinton has also gained regular transportation, borrowing Giustra’s plane 26 times for foundation business since 2005, including 13 trips where the two men traveled together”.

IRS EXEMPT ORGANIZATION MONITORING

The IRS has increased its awareness of the activities of tax-exempt organizations in recent years. In order to facilitate its monitoring of these organizations, the IRS welcomes the public to file complaints, which are known as referrals, of any known activities in which organizations are abusing their tax-exempt status. These referrals are sent to analysts in the IRS Exempt Organizations Classifications Office in Dallas, Texas where the IRS issues an acknowledgement of receipt of the referral. The IRS is not permitted to disclose whether or not an examination has been initiated, nor can it reveal the results of an examination to any party other than the examined organization.

Concurrent with these guidelines, the IRS responded to the Letter with a form letter dated June 3, 2015 stating that “there is an ongoing examination program to ensure that tax-exempt organizations comply with the tax law and they will consider the submitted information within that program”.

CONCLUSION

The Clinton Foundation, along with all other tax-exempt organizations, need to be careful to include all necessary disclosures in their annual Form 990 filings in order to be compliant and avoid being questioned by the public or the IRS about the validity of their tax-exempt status. In addition, potential penalties exist for failure to accurately complete a Form 990. Even when a tax-exempt organization such as the Clinton Foundation engages a professional certified public accounting firm, reporting issues, or the lack thereof, can still arise.

If you have any questions, please contact your WithumSmith+Brown professional, a member of WS+B’s International Services Group or email us at international@withum.com.

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A U.S. taxpayer was found ineligible for the foreign earned income exclusion under IRC section 911 with regard to his wages earned in Russia.  However, the U.S. Tax Court held that the taxpayer was not liable for accuracy-related penalties under IRC sections 6662 and 6664 with regard to the claimed exclusion.

The case involved a taxpayer who worked in the oil industry and was regularly posted to drilling locations overseas. During the years at issue, the taxpayer worked in Russia. When the taxpayer filed his U.S. tax returns, he excluded his wages earned in Russia from his gross income under IRC section 911(a).

IRC section 911(a) permits a “qualified individual” to exclude a limited amount of foreign earned income. Under IRC section 911(d)(1), a “qualified individual” must, among other requirements, maintain a tax home in a foreign country.

Under IRC section 911(d)(3), combined with IRC section 162(a)(2), an individual’s tax home is his principal place of employment. However, under IRC section 911(d)(3), an individual is not treated as having a tax home in a foreign country for any period during which the individual has his abode within the United States.

The U.S. Tax Court stated that a taxpayer’s abode is generally in the country in which the taxpayer has the strongest economic, family and personal ties, and in the present case, the taxpayer’s abode was in the United States. The U.S. Tax Court reached this conclusion on the grounds that:

  • the taxpayer owned a house in the United States;
  • while he was overseas, his first wife, his second wife and his daughter lived in the house or in his parent’s house located in the same city as his house;
  • the taxpayer regularly and frequently visited his family in the United States;
  • his business affairs were generally handled by his mother, whose address in the United States he used as his mailing address;
  • his driver’s license, voter registration, bank accounts and motor vehicles were all centered in the United States; and
  • his ties to Russia were entirely transitory and were not much beyond the minimum necessary to perform his duties there.

The U.S. Tax Court accordingly determined that the taxpayer was not eligible for the foreign earned income exclusion under IRC section 911.

However, the U.S. Tax Court declined to impose a 20% accuracy-related penalty under IRC section 6662(a) and (b)(1) because the taxpayer acted with reasonable cause and in good faith with regard to his underpayment of tax, which is an exception to the penalty under IRC section 6664(c)(1). The U.S. Tax Court found that the taxpayer reasonably relied on the advice of a competent tax professional, who advised that the taxpayer’s wages earned in Russia were eligible for the section 911 exclusion.

By Kimberlee Phelan, CPA, MBA, Practice Leader, WS+B’s International Services Group | 609.520.1188 | kphelan@withum.com

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side-img_international-264x214The IRS recently announced in Notice 2014-51, 2014-40 IRB that certain Mark-to-Market (“MTM”) taxpayers will be exempted from PFIC reporting rules, effective for tax years ending on or after December 31, 2013.

The IRS will be amending Reg. § 1.1298-1T to provide an exception from its PFIC reporting requirements for a U.S. person with respect to PFIC stock that is MTM under a non-section 1296 MTM regime.

BACKGROUND

PFIC is any foreign corporation if: (1) at least 75% of its gross income for its tax year is passive, or (2) at least 50% of the assets it held during the year produce passive income or are held for the production of passive income (Code Sec. 1297(a)).

Code Sec. 1291 through Code Sec. 1298 set out three tax regimes for shareholders that own stock of a PFIC:

  • Excess distribution rules under Code Sec. 1291;
  • Qualified electing fund (QEF) rules under Code Sec. 1293; and
  • MTM rules under Code Sec. 1296, which apply when an election under Code Sec. 1296(k) is in effect.

Subject to the coordination rules provided in Code Sec. 1296(j), Code Sec. 1291 does not apply if a MTM election under Code Sec. 1296(k) is in effect for the taxpayer’s tax year. Code Sec. 1291(d)(1) further provides that, subject to coordination rules similar to the rules of Code Sec. 1296(j), Code Sec. 1291 also does not apply in the case of PFIC stock that is MTM under any other provision of Chapter 1 of the Code (a “non-section 1296 MTM regime”), including Code Sec. 475 (“Mark to market accounting method for dealers in securities”).

Subject to both of these coordination rules, which are contained in Reg. § 1.1291-1(c)(4), U.S. persons that hold PFIC stock that has been marked to market under a non-section 1296 MTM regime are not subject to tax under any of the PFIC regimes. (Reg. § 1.1295-1(i)(3), Reg. § 1.1296-1(h)(3)).

So if a U.S. person makes a valid election to mark-to-market under Code Sec. 475 with respect to PFIC stock, that person will not be subject to any of the PFIC rules with respect to that stock. He or she will be subject to tax under the PFIC regimes with respect to any PFIC stock that is not MTM under a non-section 1296 MTM regime.

However, the current regulations under Reg. § 1.1298-1T do not provide an exception from the information reporting requirements for shareholders of PFIC stock that is mark to market under a non-section 1296 MTM regime. Thus, a U.S. person that owns PFIC stock that is MTM under a non-section 1296 MTM regime, was still subject to the rules under Reg. § 1.1298-1T which are applicable to direct and indirect shareholders that own PFIC stock.

Although regulations excepting MTM taxpayers from the PFIC reporting rules have not been finalized yet, dealers and other taxpayers who have made non-1296 MTM elections may rely on the rules in Notice 2014-51 for tax years ending on or after December 31, 2013.

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iStock_000003264435LargeRecently, Treasury Secretary Jacob Lew sent a letter to key members of Congress calling for the nation to embrace a “new sense of economic patriotism” and stop supporting corporations that are moving their tax home out of the U.S. to reduce their corporate income tax burdens by taking advantage of an existing loophole in the tax code.

The loophole, known as “corporate inversion,” is a transaction where a U.S.-based multinational group acquires a foreign corporation located in a country whose tax rates are lower than in the U.S. These reorganizations have the effect of changing the U.S. corporation’s domicile to a foreign country but typically results in little change to the U.S. operations of the entity. Although operations in the U.S. would continue to be subject to U.S. tax, the foreign operations conducted by the newly formed group would be subject to the lower foreign country tax rates. In addition, the foreign income is not taxed to the U.S. shareholders until dividends are paid. Moreover, the U.S. corporation may engage in earnings stripping transactions where deductible payments to the parent company reduce U.S. taxable income.

These transactions are particularly attractive to pharmaceutical and medical device companies who seem to have more choices of appropriately sized targets overseas and enjoy many benefits of a global presence. Popular destinations seem to be Britain, Ireland and Bermuda for their lower tax rates and other attractive R&D incentives. Transactions involving pharma and medical device companies have spiked in recent years, most notably the recent merger of Medtronic and Covidien, the attempted acquisition by Pfizer of AstraZeneca, and the AbbVie takeover of Shire, the largest inversion deal to date.

Here’s a summary of how the proposed inversion of Pfizer might have worked:

A newly created UK holding company would acquire the shares of both Pfizer and AstraZeneca. In the resulting structure, Pfizer and AstraZeneca would be subsidiaries of the UK parent and the former Pfizer shareholders would own 73% of the UK company and AstraZeneca former shareholders would own 27%. Pfizer hoped to shift profits to the UK, where the tax rate is around 21% as compared to 35% in the U.S.

For similar types of inversion transactions like the one proposed in the Pfizer deal, the U.S. government has attempted to curb the use of these inversion transactions:

  • Where shareholders of the U.S. corporation subsequently acquire over 50% of the new foreign parent corporation, section 367(a) causes a gain on the transfer of U.S. stock to the parent corp.
  • Where shareholders of the U.S. corporation subsequently acquire 60% or more, but less than 80% of the new foreign parent corporation, section 7874 prevents the U.S. corporation from using tax attributes, such as NOLs, to offset section the 367(a) inversion gain.
  • Where shareholders of the U.S. corporation subsequently acquire 80% or more of the new foreign parent corporation, section 7874 treats the new foreign parent company as a U.S. corporation for tax purposes, effectively removing any real U.S. tax savings from the transaction.

In triangular reorganizations, section 367(b) and Notice 2014-32 causes a potential taxable dividend as a result of a “deemed” distribution between parent and subsidiary on the acquisition of the target foreign corporation in exchange for parent stock.

Under Pfizer’s proposed new structure, the corporation would not have been considered a U.S. corporation for tax purposes under section 7874 because less than 80% of the foreign parent company would be held by the former U.S. shareholders. The U.S. corporation might have had to pay tax under the other anti-abuse regulations of section 7874 and section 367, however it planned to save over $1 billion in tax due to the tax rate differential alone, according to some reports. In other inversion transactions, some corporations were able to avoid the imposition of section 367(a) inversion gain by manipulating certain aspects of section 367(b)(“Killer B reorganization” rules), in order to make the transaction nearly tax free. Much tax planning goes into achieving these various tax savings from moving overseas and the transactions can get very complicated.

The letter from Secretary Lew calls for a lowering of the U.S. corporate income tax rate, among the highest in the world. At the very least, he asks Congress to pass laws to prevent or deter companies from using these inversion strategies, including retroactive laws to prevent tax savings on restructuring deals already agreed to, such as the recent Shire takeover. Despite bipartisan disagreement on how to address the tax loophole, tax reform in this area is likely to occur in some form. However, many tax practitioners and financial experts believe that these transactions will continue to be used at an increased pace until real reform occurs to lower U.S. corporate tax rates. In the meantime, patriotism aside, corporate management will maintain its allegiance to its shareholders and continue to strive to improve the corporate bottom line in the ever-increasing global economy.

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Joseph_Ruppe_03Joseph Ruppe, CPA

Senior Manager

WithumSmith+Brown

New York, NY

 

 

On July 8, 2014, The U.S. Department of Justice and the Internal Revenue Service (IRS) announced that a U.S. individual was sentenced to serve six months in prison and an additional six months and one day of home confinement for concealing more than $8 million in foreign bank accounts in India and Dubai.

According to the evidence presented in court, the U.S. taxpayer controlled several foreign bank accounts at HSBC in India and Dubai, including accounts held in the name of his wife and adult children. The taxpayer invested the funds in these accounts in certificates of deposit, which earned interest at rates as high as nine percent. The taxpayer funded these accounts by mailing checks from the United States and by transferring money from other undeclared bank accounts in Singapore and the United Kingdom to his family’s accounts in India.

In October 2013, a jury convicted the taxpayer of failing to report his family’s foreign bank accounts to the government on tax returns and Reports of Foreign Bank and Financial Accounts (FBAR). The jury also found that the taxpayer failed to report more than $1 million in interest income earned from these accounts between 2007 and 2009.

Prior to the sentencing hearing, the IRS assessed and demanded payment of a FBAR penalty against him for over $14 million.

U.S. persons must report their worldwide income on their taxes. In addition, they must file a FBAR annually if their offshore accounts total over $10,000 at any time.  If you have both failures, the IRS wants you to go into the Offshore Voluntary Disclosure Program. It involves reopening prior tax years, and paying taxes, interest and penalties, but no prosecution.

The IRS can assess a penalty on 50% of the highest balance in the account each year for willful failure to file the FBAR form. Therefore, the penalty can exceed the value in the account if the taxpayer does not file for several years.

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