Tuesday, February 23, 2016

US The New Tax Haven?

A feature article in the Bloomberg suggests that some international families are moving their assets out of traditional offshore jurisdictions and into trusts in certain states of the US.
 
It notes that some level of secrecy is still available in the US because Washington has not signed up to the OECD Common Reporting Standard (CRS) for international information exchange, preferring instead its own Foreign Account Tax Compliance Act (FATCA).
 
 
By resisting new Global Disclosure Standards,
the U.S. is creating a Hot New Market,
becoming the Go-To Place to
Stash Foreign Wealth.
 

Everyone from London lawyers to Swiss trust companies are getting in on the act, helping the world's rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.
 
Some advisors discuss what type of trust can avoid both FATCA and GATCA reporting, including
GATCA reporting if the US is treated as a Participating Jurisdiction and the assets do not even have to be located in the US. Since this structure requires a US-resident trustee, the trust could also be structured to avoid US taxation.

The Economist adds that America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. The Tax Justice Network, a lobby group, calls the United States one of the world’s top three “secrecy jurisdictions”, behind Switzerland and Hong Kong.

No one knows how much undeclared money is stashed offshore. Estimates range from a couple of trillion dollars to $30 trillion. What is clear is that America’s share is growing.

Need Legal Advise? 
 

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Toll Free at 888-8TaxAid (888 882-9243).
 
 
 
 
 
Sources: 




  
 

The Bahamian Has Affirmed That It will Implement the OECD Common Reporting Standard (CRS) Through Bilateral Agreements

The Bahamian government re-affirmed that it will implement the OECD Common Reporting Standard (CRS) through a series of bilateral agreements, and not through automatic multilateral disclosure.

The Bahamas has chosen to embrace the 2018 start of automatic information exchange by entering into such treaties on a bilateral (country-to-country) basis rather than a multilateral one. Its first automatic exchanges with 'appropriate' partner countries will be in September 2018.

A similar policy has been adopted by Switzerland and Hong Kong, among others.

Do You Have Undeclared Income
From a Foreign Bank?
 
 
 
 Want to Know if the OVDP Program is Right for You?

 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
for a FREE Tax Consultation
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Sources:

IRS Issues Final Regs on § 6038D Domestic Entities Reporting on Foreign Financial Asset Which Eliminate Principal Purpose Test

The IRS issued final regulations requiring specified domestic entities to report specified foreign financial assets in which they have interests (T.D. 9752). The rules generally apply to tax years beginning after December 31, 2015.

Until now, the requirement to report “Specified Foreign Financial Asset” (SFFA) applied only to individuals, but the IRS is also authorized to apply the reporting requirement to any domestic entity that is formed or availed of principally to avoid reporting.


These regulations set forth the conditions under which a domestic entity will be considered a specified domestic entity required to undertake such reporting. These regulations affect certain domestic corporations, partnerships, and trusts.

Elimination of Principal Purpose Test 

Proposed Sec.  1.6038D-6(b)(1)(iii) provides that a corporation or partnership is treated as formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if either:
  1. At least 50 percent of the corporation or partnership's gross income or assets is passive; or 
  2.  at least 10 percent of the corporation or partnership's gross income or assets is passive and the corporation or partnership is formed or availed of by a specified individual with a principal purpose of avoiding section 6038D (the principal purpose test).
Under proposed Sec.  1.6038D-6(b)(1)(iii), all facts and circumstances are taken into account to determine whether a specified individual has a principal purpose of avoiding section 6038D.
 
The Treasury Department and the IRS believe that a 50-percent passive assets or income threshold appropriately captures situations in which specified individuals may use a domestic corporation or partnership to circumvent the reporting requirements of section 6038D. 
 
Furthermore, the Treasury Department and the IRS have concluded that taxpayers should be able to determine their reporting requirements under section 6038D based on objective requirements rather than a subjective principal purpose test. Therefore, these final regulations eliminate the principal purpose test for determining whether a corporation or partnership is a specified domestic entity.
 
However, the Treasury Department and the IRS will continue to monitor whether domestic corporations and partnerships not required to report under these final regulations are being used inappropriately by specified individuals to avoid reporting under section 6038D. If needed, the Treasury Department and the IRS may expand the definition of a specified domestic entity in future guidance.
 
Definition of Passive Income
 
Specifically, these modifications: (1) Clarify that ``dividends'' includes substitute dividends and expand ``interest'' to cover income equivalent to interest, including substitute interest, (2) add a new exception for certain active business gains or losses from the sale of commodities, and (3) define notional principal contracts by adding a reference to Sec.  1.446-3(c)(1). In addition, these final regulations add the exception for dealers that is described in Sec.  1.1472-1(c)(1)(iv)(B)(2).
 
These final regulations provide that the passive asset percentage is determined based on a weighted average approach similar to the rule in Sec.  1.1472-1(c)(1)(iv). Under this test, corporations or partnerships may use either fair market value or book value (as reflected on the entity's balance sheet and as determined under either a U.S. or an international financial accounting standard) to determine the value of their assets. Corporations or partnerships may be required to substantiate their determination of the passive asset percentage upon request by the IRS. See section 6001.

 
 
Annual Determination of Specified Person's Interest in a Domestic Partnership
 
Proposed Sec.  1.6038D-6(a) provides that whether a domestic partnership is a specified domestic entity is determined annually, and proposed Sec. 1.6038D-6(b)(3)(ii) provides that a partnership is closely held if at least 80 percent of the capital or profits interest in the partnership is held directly, indirectly, or constructively by a specified individual on the last day of the partnership's taxable year. 
 
These final regulations retain the rule in the proposed regulations for determining if a domestic partnership is closely held.
 
Clarification to Aggregation Rules
 
The proposed regulations provide that, for purposes of applying proposed Sec. 1.6038D-6(b)(1)(i) and the reporting threshold, all domestic corporations and domestic partnerships that have an interest in specified foreign financial assets and are closely held by the same specified individual are treated as a single entity, and each such related corporation or partnership is treated as owning the specified foreign financial assets held by all such related corporations or partnerships. 
 
These final regulations simplify the aggregation rules by eliminating the reference to treating all domestic corporations and partnerships as a single entity.
 
Domestic Trusts
 
Proposed Sec.  1.6038D-6(c) provides that a trust described in section 7701(a)(30)(E) is a specified domestic entity if and only if the trust has one or more specified persons as a current beneficiary. 
 
The term current beneficiary means, with respect to the taxable year, any person who at any time during such taxable year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains unexercised at the end of the taxable year). The Treasury Department and the IRS intend that a specified domestic entity include a trust whereby a specified person has an immediately exercisable general power of appointment, even if such specified person is not technically a beneficiary. 
 
These final regulations clarify that the term current beneficiary also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.
 
Expanding the Exceptions for Domestic Entities
 
The 2014 final regulations provide in Sec.  1.6038D-2(a)(7) that a specified person, including a specified domestic entity, is not required to file Form 8938, ``Statement of Specified Foreign Financial Assets,'' with respect to a taxable year if the specified person is not required to file an annual return with the IRS with respect to that taxable year. In the case of a specified domestic entity, the term ``annual return'' means an annual federal income tax return or information return filed with the IRS, including returns required under section 6012. See Sec.  1.6038D-1(a)(11). A Form 1041 is an annual return for purposes of Sec.  1.6038D-1(a)(11) of the final regulations.
 
The requirement under proposed Sec. 1.6038D-6(b) that to be a specified domestic entity at least 80 percent of the capital or profits interest in a partnership must be held by a specified individual on the last day of the partnership's taxable year establishes appropriate general criteria that, as a practical matter, should exempt most publicly traded partnerships from being specified domestic entities.
 
The Treasury Department and the IRS believe the exception under proposed Sec. 1.6038D-6(d)(1) for domestic entities that are not ``specified United States persons'' pursuant to section 1473(3), together with the exception for trusts whose trustees satisfy the supervisory oversight requirements and the income tax and information return filing requirements under proposed Sec.  1.6038D-6(d)(2), are sufficiently broad to except employer trusts that represent a low risk of tax avoidance from characterization as a specified domestic entity. 
 
Special Analyses
 
These regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). In the case of domestic corporations and partnerships, these regulations apply only when two separate tests are met. 
 
  1. The first requires that at least 80 percent of the entity must be owned, directly, indirectly, or constructively, by a specified individual, generally a U.S. citizen or resident. 
  2. The second test compares the entity's business income and assets with its passive income and assets. If more than 50 percent of the entity's annual gross income for the year is active business income and more than 50 percent of its assets for the taxable year are assets that produce or are held for the production of active income, then the entity is not subject to the reporting requirements under section 6038D. 
This two-part test reduces the burden imposed by these final regulations on domestic small business entities because closely-held domestic corporations and partnerships that are predominantly engaged in an active business generally will be excluded from reporting. 
 
Furthermore, small not-for-profit organizations that are tax-exempt under section 501(a) of the Internal Revenue Code and small governmental jurisdictions are not subject to these regulations.
 
For closely-held domestic corporations and partnerships that meet both tests, these final regulations limit the burden imposed.
 
  1. First, reporting is required only when the aggregate value of the entity's interests in specified foreign financial assets exceeds the reporting threshold under Sec.  1.6038D-2(a)(1).
  2. Second, the final regulations exclude the value of specified foreign financial assets reported on one or more of the following forms from being taken into consideration in determining whether the small entity satisfies the reporting threshold under Sec.  1.6038D-2(a)(1): Form 3520, ``Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts``; Form 3520-A, ``Annual Information Return of Foreign Trust With a U.S. Owner''; Form 5471, ``Information Return of U.S. Persons With Respect To Certain Foreign Corporations''; Form 8621, ``Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund''; or Form 8865, ``Return of U.S. Persons With Respect to Certain Foreign Partnerships.''
  3. Third, small entities that hold specified foreign financial assets generally will be excepted from reporting such assets if the assets are reported on one or more of the these forms, thereby further limiting the burden imposed by the final regulations on small entities.  
Have A Tax Reporting Problem?  
 
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Marini & Associates, P.A.
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888 882-9243).

 

 

Thursday, February 18, 2016

Foreigners Subject to a 15% FIRPTA Withholding Tax for Dispositions After February 16, 2016 -Ouch!

Foreign investors are generally not subject to US tax on US source capital gain unless it is effectively connected with a US trade or business, or it is realized by an individual who meets certain physical presence requirements.

Gains from the disposition of a U.S. real property interest (USRPI), however, are treated as income effectively connected with a US trade or business under the Foreign Investment in Real Property Tax Act (FIRPTA) under Code Sec. 897 and Code Sec. 1445. Stock or a beneficial interest in a US real property holding corporation (USRPHC) is a USRPI.

Regulations reflecting changes made by the Protecting Americans from Tax Hikes (PATH ) Act related to the taxation of, and withholding on, foreign persons that dispose of U.S. property will be published February 19, 2016. The final and temporary rules (T.D. 9751) increase the withholding rate under certain subsections of tax code Section 1445 from 10 percent to 15 percent. The new rate applies to dispositions after February 16, 2016.

However, the PATH Act provides for a reduced FIRPTA withholding rate of 10% in the case of a disposition of property which is acquired by the transferee for use by the transferee as a residence, and the amount realized for the property does not exceed $1,000,000, provided the exemption for a residence bought for $300,000 or less does not apply.

Need Tax Advice
On How To Minimize FIRPTA Tax? 
 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
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Wednesday, February 17, 2016

Treasury Announces Release of 2016 U.S. Model Income Tax Treaty With Info Sharing!


Today February 17, 2016, the Treasury Department issued a newly revised U.S. Model Income Tax Convention (the “2016 Model”), which is the baseline text the Treasury Department uses when it negotiates tax treaties.  The U.S. Model Income Tax Convention was last updated in 2006. 

“The 2016 Model is the result of a concerted effort by the Treasury Department to further our policy commitment to provide relief from double taxation and ensure certainty and stability in the tax treatment of treaty residents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.  “The 2016 Model includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,” he added.

Many of the 2016 Model updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model. 

The 2016 Model also includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. 

For example, the 2016 Model does not reduce withholding taxes on payments of highly mobile income—income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest—that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime.  In addition, a new article obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation.  The 2016 Model also includes measures to reduce the tax benefits of corporate inversions.  Specifically, it denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons. 

The Treasury Department has been a strong proponent of facilitating the resolution of disputes between tax authorities regarding the application of tax treaties.  Accordingly, the 2016 Model contains rules requiring that such disputes be resolved through mandatory binding arbitration.  The “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four U.S. tax treaties in force and three U.S. tax treaties that are awaiting the advice and consent of the Senate.

The 2016 Model reflects comments that the Treasury Department received in response to the proposed model treaty provisions it released on May 20, 2015.  The Treasury Department carefully considered all the comments it received and made a number of modifications to the proposed model treaty provisions in response to those comments.

The Treasury Department is preparing a detailed technical explanation of the 2016 Model, which it plans to release this spring.  The preamble to the 2016 Model invites comments regarding certain situations that should be addressed in the technical explanation for the so-called “active trade or business” test of Article 22 (Limitation on Benefits).  See the preamble page 5.  The deadline for public comments on this subject is April 18, 2016.


Article 26 would be broadened to allow information that is received from another State to be used for non-tax purposes.  In fact, the provision now would allow such information to be used for other purposes allowed under an MLAT in force between the two Contracting States that allows for the exchange of tax information.   



Article 26

EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE
 
1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or the domestic laws of the Contracting States concerning taxes of every kind imposed by a Contracting State to the extent that the taxation thereunder is not contrary to the Convention, including information relating to the assessment or collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes. The exchange of information is not restricted by paragraph 1 of Article 1 (General Scope) or Article 2 (Taxes Covered).

2. Any information received under this Article by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that Contracting State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to in paragraph 1 of this Article, or the oversight of such functions. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the preceding sentences of this paragraph, the competent authority of the Contracting State that receives information under the provisions of this Article may, with the written consent of the Contracting State that provided the information, also make available that information for other purposes allowed under the provisions of a mutual legal assistance treaty in force between the Contracting States that allows for the exchange of tax information.

3. In no case shall the provisions of paragraphs 1 and 2 of this Article be construed so as to impose on a Contracting State the obligation:
a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
b) to supply information that is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or
c) to supply information that would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of which would be contrary to public policy.

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other Contracting State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 of this Article but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 of this Article be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

6. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings).

7. Each of the Contracting States shall endeavor to collect on behalf of the other Contracting State such amounts as may be necessary to ensure that relief granted by the Convention from taxation imposed by that other Contracting State does not inure to the benefit of persons not entitled thereto. This paragraph shall not impose upon either of the Contracting States the obligation to carry out administrative measures that would be contrary to its sovereignty, security, or public policy.

8. The requested Contracting State shall allow representatives of the requesting Contracting State to interview individuals and examine books and records in the requested Contracting State with the consent of the persons subject to examination.

9. The competent authorities of the Contracting States may develop an agreement upon the mode of application of this Article, including agreement to ensure comparable levels of assistance to each of the Contracting States, but in no case will the lack of such agreement relieve a Contracting State of its obligations under this Article
 
View the 2016 Model and accompanying preamble here.

Tax Transparency is Here!
 
 
 
Are Your Tax Secrets Not So Secret Anymore?
 
 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243

 

 

The Swiss Bank Program is Over So What Countries are in the DoJ Sites Now?

On January 28, 2016 we posted DOJ Swiss Bank Program is Over After Netting $1.36 Billion! where we discussed that the Department of Justice announced on January 27, 2016 that it reached its final non-prosecution agreement under Category 2 of the Swiss Bank Program, with HSZH Verwaltungs AG (HSZH).  

The department has executed agreements with 80 banks, since March 30, 2015, when it announced the first Swiss Bank Program non-prosecution agreement with BSI SA.  By our count it is 94 banks - see our post 93 Swiss Banks Are Turning Over Your Names To The IRS - What Are Your Waiting For?, plus HSZH, but who's counting?

Swiss Bank Program demonstrates that foreign financial institutions with potential U.S. criminal tax liability can greatly mitigate their exposure by taking immediate actions, such as making voluntary disclosures of potential illegal activity to the Tax Division and implementing compliance measures to avoid further violations of U.S. tax law. In our post
DoJ is Following The Money Trail Disclosed By Swiss Bank's to Singapore and Israel! we quoted Chief Richard Weber of IRS-Criminal Investigation, 
 
“With each Additional Agreement, 
the World where Criminals can Hide Their Money 
is Becoming Smaller and Smaller. 
 
 
Those Who Circumvent Offshore Disclosure Laws
Have Little Room to Hide.”

Bloomberg reports that the flood of information is now giving U.S. investigators intelligence to try to build new cases against individuals and institutions in other countries, said Caroline Ciraolo, the Justice Department’s top tax prosecutor.
“The Money is Moving out of Switzerland to a Variety of Jurisdictions,” said Ciraolo, an acting assistant attorney general.
 
“We’re Following Leads and Following the Money, wherever that leads us.”

The data coming directly from Swiss banks are supplementing a separate trove the IRS gathered from 50,000 U.S. taxpayers who disclosed their offshore accounts and paid $7 billion in back taxes, fines and penalties since 2009. Many US taxpayers disguised their money in entities set up in tax havens outside of Switzerland. Of 54 banks that settled:
 
  • 18 held assets in corporations, foundations or trusts in Liechtenstein;
  • 15 in Panama;
  • 11 in the British Virgin Islands, and
  • 4 in Hong Kong.
The DOJ is getting some very valuable information served up on a silver platter as a result of the OVDP program and its non-prosecution agreements with Swiss banks. 
 
Following the success of the Swiss Bank Program, the Justice Department is now looking beyond Switzerland to financial institutions in other countries that may be havens for secret offshore accounts or undisclosed assets. Investigators are pursuing the wealth of leads generated through the Swiss Bank Program, and following those leads to countries such as:
 
  • Belize,
  • the British Virgin Islands,
  • the Cayman Islands,
  • the Cook Islands,
  • India,
  • Israel,
  • Liechtenstein,
  • Luxembourg,
  • the Marshall Islands,
  • Panama and
  • Singapore 
Non Swiss Foreign banks and financial institutions that serve U.S. customers are well-advised to heed the lessons of the Swiss Bank Program and other Justice Department enforcement actions commenced to date. Not to mention a little thing like 30% FATCA withholding for noncompliant foreign banks!
 
For US taxpayers with undeclared income from foreign accounts, only those taxpayers that request pre-clearance before their bank is discovered by the IRS and listed, will get the 27 1/2% OVDP penalty. The 50% penalty applies to all taxpayers with accounts at financial institutions or with facilitators which are named, are cooperating or are identified in a court filing such as a John Doe summons.
 
Do You Have Undeclared Income From the Foreign Bank?
 
 
 
 Want to Know if the OVDP Program is Right for You?

 
Contact the Tax Lawyers at 
Marini& Associates, P.A.  
 
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243