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Focus. Cross-border business investments (including private equity)Outbound from the U.S. to foreign countriesAccidents and preventionHazards in the Internal Revenue CodeConceptual; based on real life. 2. Not the Focus. Individual income tax (Mesa Hodson)Expatriation or impatriation
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1. The Accidental Taxpayer Tax Tips for Crossing Borders
in Business and in Life
3. Not the Focus Individual income tax (Mesa Hodson)
Expatriation or impatriation
§911 exclusion
Income, estate and gift tax planning (Jerry Guillott)
Foreign inheritance and wealth taxes (UHY Global Network)
Inbound investors (another speech)
Taxation in foreign countries (numerous other speeches)
4. Typical Accidents Individual pays more U.S. tax because of how a foreign investment is structured
Anti-deferral provisions of IRC accelerate income recognition
Restructuring triggers U.S. tax
Double taxation due to asymmetries between foreign U.S. tax rules
5. Top Six Categories Subpart F Income
Passive Foreign Investment Company
Foreign Tax Credits
International Restructuring
Transfer Pricing
Punitive Provisions
6. Basic Tenets Deferral
Income of foreign corporations is not taxed until repatriated
Unless an accelerator applies
Income from other foreign investment arrangements is taxed currently
Branch income to U.S. owner
Partnership to U.S. partners
Recognition
Foreign tax credits
15% tax on qualified dividend income
7. 1. Subpart F Income Foreign Personal Holding Company Income
Dividends, interest, rents, royalties, capital gains
Personal service contracts
Foreign Base Company Sales Income
Foreign Base Company Services Income
Investment in U.S. Property
Recognized by U.S. shareholder in year the income is earned by foreign corporation
8. CFC Controlled foreign corporation (CFC)
>50% of vote or value is owned by U.S. Shareholders
U.S. Shareholder owns >10% of vote
Attribution and constructive ownership
9. Subpart F Inclusion Deemed dividend to U.S. Shareholder
Pro rata share of CFCs Subpart F income
Up to current E&P of CFC
Skips over intervening foreign entities
Actual dividend in same year treated as previously taxed income
Not eligible for 15% rate on dividends
10. Accidents Attribution from family members
spouse, children, grandchildren and parents
Attribution from corporations
If > 50% in value
Options are considered exercised if owned by U.S. persons, but not by foreign persons
U.S. partnership is U.S. Shareholder
Subpart F income flows through to U.S. partners even if they own indirectly <10% of CFC
Arrangements to avoid >50% of voting power
11. Prevention Examples of ownership avoiding CFC
No U.S. person owns >10% of voting power
> 10% shareholders collectively own < 50%
Invest through foreign rather than U.S. partnership
Elect to treat foreign entities below first tier as disregarded or as partnerships
12. Passive Income Foreign Personal Holding Company Income
Dividends, interest, rents, royalties
Capital gains
Personal service contracts
Exceptions
Look-thru rules (expire 12/31/09)
Active business
Same country
High tax
De minimis income
13. Accidents Incorporating a bank account offshore to collect passive income
Personal service contracts
Taxable presence in U.S.
Rental income that is not active
PFIC exposure for U.S. persons who are <10% shareholders
14. Prevention Avoid base companies with little business connection to foreign country
Look-thru rule for dividends, interest, rents, royalties from related CFC
CFC has right to designate who performs contract
Documenting where services are performed
Active marketing of rental property
Intangible property holding company with cost-sharing
15. Sales Foreign Base Company Sales Income
Purchase or sale involves related party
Items produced outside Salescos country
Sold for use outside Salescos country
Exceptions
Substantial transformation
De minimis
Branch rule
16. Accidents Establishing a sales company or agent in low-tax jurisdiction where products are not used
Assuming there is a look-thru rule
Using branches outside CFCs country of incorporation
Agents
17. Prevention New contract manufacturing regulations and the branch rule
50-50 ownership with foreign investor
Split management and control from where CFC is organized
18. Services Foreign Base Company Services Income
Performed for or on behalf of related person and
Performed outside Servcos country
Substantial assistance
Exceptions
Related to sale of property
De minimis
19. Accidents Subcontracting to related party in low-tax country
Getting substantial assistance from related U.S. party in excess of safe harbors
attribution of CFCs personnel to U.S.
Taxable presence in U.S.
20. Prevention 50-50 company with NRA relative
Assistance of related party is not substantial
Set up in low-tax country without need to subcontract
Arms length pricing
Agreements limiting activities
Split management and control from where CFC is organized
21. Investment in U.S. Property Loans to U.S. related party
Making foreign earnings available without distributing a dividend
Increase in investment in U.S. property = deemed dividend
Affirmative use of §956
22. Accidents Using CFCs cash to fund U.S. operations through a loan
CFC guarantees bank loan to U.S. related party
Shares of CFC serve as collateral for loan to U.S.
Cross-collateral arrangements on lines of credit
Acquiring shares of U.S. company
that is CFCs shareholder, or
is owned >25% by U.S. shareholders in the aggregate
23. Prevention Short-term loans
Pledging up to 66 2/3 of stock of CFC
Acquiring less than 25% of voting power of related U.S. company
24. 2. PFIC Passive Foreign Investment Company
Income or asset tests
Nasty surprise on disposition
Election to recognize income currently
Interaction with Subpart F
Once a PFIC, always a PFIC
25. Accidents Companies without significant hard assets
Too much cash
Receiving an excess distribution (including disposing of shares)
Amount allocated to each day in holding period of current year plus prior years
As far back as 1/1/87
Tacking of holding periods
Taxed at highest rate plus interest
Disposition of indirectly owned PFIC
U.S. Shareholder prior to 1/1/98
26. Prevention Qualified electing fund
Pro rata share of ordinary income and capital gain
Not qualified dividend income for 15% rate
Purging election
Attribution of active business from subsidiaries
Regular testing
Active assets such as receivables instead of passive assets such as cash
Exceptions
Start-up year
Change in business
27. 3. Foreign Tax Credits Direct credit
tax withheld from payments
tax paid by individuals (including as partners in partnerships), foreign branches and permanent establishments
Indirect (deemed paid) credit
U.S. corporate shareholder receives dividend
Tax paid by foreign corporation in which U.S. person owns >10%
28. Foreign Tax Credits Reduce U.S. income tax with foreign tax
Credit is limited to U.S. tax on foreign source income
Separate limitation for passive income
Excess tax carries back 1 year and forward 10
30. Gross vs. Net
31. Accidents Failing to supply foreign withholding agent with treaty information
Refund of over-withheld tax
Failing to document amount of foreign tax paid
Assuming that low rate of withholding will yield fully creditable tax
Overall foreign loss
32. Prevention Limit activities to those not creating a taxable permanent establishment in foreign country
Consider having permanent establishment instead of withholding tax on gross income
Include gross-up provision in agreements
Submit treaty documentation to withholding agent before payment is made
Estimate interest allocation and other expenses reducing foreign tax credit limitation
33. Asymmetries Foreign tax cannot offset U.S. tax on U.S. source income, e.g.,
Services performed in the U.S.
Income from sale of personal property including shares of stock
Exceptions for sales of
Inventory, if title passes outside U.S.
Certain depreciable property
Shares of stock of foreign affiliates
34. Services
35. Accidents Foreign withholding tax on payments for services performed in U.S.
Capital gains subject to foreign tax, especially from transferring shares of stock
Passing title in the U.S. on sales of inventory to foreign buyers
36. Prevention Build up amounts of low-tax foreign source income by passing title outside the U.S.
Check treaty for re-sourcing of income to country imposing tax
Include gross-up provision in agreements
Sell shares of foreign company in country where it is engaged in active business if shares are owned >80% by U.S. resident
37. Check-the-Box Election to treat foreign company as other than a corporation for U.S. tax purposes
Disregarded entity (1 shareholder)
Partnership (>1 shareholder)
Not all foreign entities are eligible
Foreign tax credits, losses, and other items flow through to owners; no deferral
Especially for individuals to take credit for taxes paid by foreign entities
No change for 5 years unless ownership change
38. No Elections for X & Y
39. Elections for X & Y
40. Accidents Foreign entity is a per se corporation
Assuming no election is necessary
Default rules for foreign entities are opposite of U.S.
Corporation in absence of election
Filing Form 8832 late or incomplete
Late election by return date without extension
9100 relief for retroactive election
Foreign entity must have Taxpayer Identification Number
Incremental U.S. tax because foreign rates are lower
Investments involving non-U.S. investors
Day before rule
41. Prevention Selective use of check-the-box election
15% rate on dividends from treaty countries (expires 12/31/10)
Verify in advance if foreign entity is eligible (Treas. Reg. §301.7701-2)
Check the box on lower-tier entities in order to avoid Subpart F and PFIC
Provide distributions for investors to pay incremental U.S. tax
Timing of election
42. Offshore Funds Foreign corporation as blocker
Future liquidity event
Preserving deferral for U.S. shareholders
Avoiding PFIC
43. Accidents Blocker is a CFC
Subpart F income (especially Subcos paying dividends after 12/31/09)
Not organized in a treaty country
Gain on sale possibly dividend
Limited use of foreign tax credits
Blocker is a PFIC
Lower-tier entities not eligible for check-the-box election
44. Prevention Examples of ownership avoiding CFC
No U.S. person owns >10% of voting power
U.S. shareholders collectively own < 50%
Invest through foreign rather than U.S. partnership
Elect to treat foreign entities below first tier as disregarded or as partnerships
45. 4. Restructuring Transfer of property
to a foreign corporation or partnership
in a nonrecognition transaction
Sale or other transfer of shares of foreign corporations
Liquidation of foreign corporation
Preservation of the ability to tax previously untaxed earnings
46. §367(a) - Outbound Nonrecognition transactions (e.g., §§351, 354, 368)
Transfer of appreciated property
Transfer of intangible property as if a license
Transfer of shares of a subsidiary
Recognizing gain
Exception for active business
47. §367(b) Inbound, etc. Nonrecognition transactions (e.g., §§332, 355, 368)
Liquidation of Sub 1 with undistributed earnings
Check-the-box election
Recognizing untaxed earnings as deemed dividend
Foreign-to-foreign transfers
48. §1248 Sale of Shares Capital gain treated as dividend to extent of E&P of Opco and Subco
Eligible for 15% rate on dividend from treaty countries (thru 12/31/10)
Indirect foreign tax credits
Sale, dividend, spin-off
If Opco sells Subco, similar treatment under §964(e) for Opco
If individual sells CFC
49. Accidents Failure to recognize income under §367
Active business transfer of hot assets
Failure to treat gain as dividend under §1248 or §964(e)
Failure to consider earnings of lower-tier entities for §1248
Sale within 5 years after foreign corporation ceases to be a CFC
Failure to report transfer of assets on Form 926
50. Prevention Check-the-box election on lower-tier foreign entities before transfer
Spin-off versus liquidation
All E&P for §367(b) vs. §1248 E&P
Compare alternatives such as sale of assets
51. §7874 Inversion Foreign corporation acquires assets of USCO by acquiring its shares
After the acquisition, former shareholders own >80% (60%)
Lack of substantial business activities in Forcos country
Forco treated as domestic corporation (>80%)
52. Accidents Transfer of shares of USCO in exchange for shares of Forco
Former shareholders include non-U.S. persons when determining 60% or 80%
Also applies to domestic partnerships
53. Prevention Business activity of expanded affiliated group where Forco is organized
Outbound F reorganization
Sale of shares
Legislative proposals?
54. Recast Step transaction
Form over substance
Tax avoidance motive or accident
Statutory and regulatory overrides
55. §304 - Redemption Sale of Sub 2 to Opco
Sales proceeds treated as dividend to Sub 1 to extent of E&P of Opco and Sub 2
Dividend not limited to amount of gain realized
Variations
Intentionally triggering §304
56. D Reorganization Sale as in §304 but Sub 2 is liquidated
Recharacterized as D reorganization with boot
Gain is taxed to extent of E&P of Sub 2 and Opco
Check-the-box election
57. Accidents Failure to consider possible recharacterization
Steps may comprise one transaction
Foreign tax on transfer of shares
No foreign tax credits
58. Prevention Review IRS characterization of similar transactions
Upstream sale
Whether foreign tax credits will offset U.S. tax
59. 5. Transfer Pricing Intercompany arrangements
Arms length (third- party) standard
Based on economic study of comparable situations
60. Tax Audits IRS audit adjustments to maximize income
Management and guarantee fees
Royalties for intellectual property including marketing intangibles
Margins on sales
Rents for use of assets
Interest on open account debt
Foreign tax authorities adjustments to maximize income in foreign country
OECD Guidelines
61. Accidents Double taxation resulting from adjustments
If no treaty, no competent authority relief
Non-OECD methods
Statute of limitations
Lack of contemporaneous documentation
62. Prevention Economic study as sword and shield
Specialized entities in low-tax countries
Intellectual property holding company
Finance company
Sales company
Contract manufacturer
Commissionaire to minimize income in high-tax countries
63. 6. Punitive Provisions Foreign Corrupt Practices Act
Illegal payments
Including from foreign subsidiary
Anti-Boycott Rules
Agreeing to cooperate with boycott
Form 5713
Treasury Report TDF90-22.1 on foreign financial accounts
IRS Forms 5471, 8865, 8858
64. FCPA U.S. taxpayer gets no deduction
Foreign subsidiary gets no deduction in determining earnings & profits
Even if not a violation of local law
Deemed dividend to U.S. shareholder
65. Anti-Boycott Boycott list: Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen
Reporting requirement
Even if no agreement to boycott
Tax implications of participating in boycott
Reduced foreign tax credit
Deemed dividend of foreign corporations earnings
Boycott factor or specific income
66. FBAR Treasury Departments requirement
U.S. persons must disclose foreign financial accounts
financial interest or
signature authority
aggregate value >$10,000
Due June 30 of following year
no extensions
67. Tax Reporting 5471
8865
8858
926
1116/1118
8832
5713
8621 Foreign Corporation
Foreign Partnership
Foreign Disregarded Entity
Transfer of property to foreign corporation
Foreign Tax Credit
Check-the-Box Election
Boycott Report
PFIC QEF
68. Accidents Payments may be legal; possibly tax deductible in foreign country
Foreign nationals not aware of U.S. rules
Failure to report; or providing incomplete information
Absence of contemporaneous documentation for transfer pricing
69. Prevention Comprehensive FCPA program
Annual compliance review
FBAR due June 30 of each year (no extensions)
File forms and complete all applicable schedules
Update transfer pricing documentation annually
70. Conclusions
Accidents are preventable
Remain eternally vigilant
Plan ahead!
71. UHY Advisors TX, LLC Meril Markley 713-407-3206
International Tax mmarkley@uhy-us.com
Jerry Guillott 713-407-3830
Gift & Estate Tax jguillott@uhy-us.com
Income Tax
Mesa Hodson 713-407-6508
Expatriate Tax mhodson@uhy-us.com
72. Q & A