As part of Congress’s expanded effort to ensure that foreign financial assets are reported to the IRS, individual taxpayers (including U.S. citizens, resident aliens (even if electing to be taxed as a resident of a foreign country under provisions of a U.S. income tax treaty), and certain nonresident aliens) must report the ownership of foreign financial accounts, securities, and other foreign financial assets if the total value of those assets during the year was more than the applicable threshold (generally, more than $50,000 end-of-year balance or more than $75,000 at any time during the year). Individual taxpayers reporting foreign financial assets must complete Form 8938, attach it to their annual income tax return, and file by the due date (including extensions) for that return. This new reporting requirement applies independently of, and in addition to, any required FBARs which are not filed with tax returns but rather filed separately by mail to Detroit, Michigan. Failure to file a complete and correct Form 8938 may result in significant penalties.
The information required by Form 8938 is extensive unlike an FBAR, which only requires summary information. In particular, assuming the applicable threshold is satisfied, Form 8938 requires taxpayers to (1) identify all foreign depositary, foreign security, and foreign custodial accounts, as well as other foreign financial assets not in a financial account reported on Form 8938 (including foreign stock and securities issued by foreign persons), owned during the year; (2) provide the maximum account balance or value of each asset during the year; and (3) list the amount of U.S. tax return items (for example, interest, dividends, gains, losses, deductions, and credits) attributable to these assets. In most cases, the maximum account balance or value of the asset will be its fair market value. A third-party appraisal of such maximum fair market value is not required, though taxpayers should be aware of specific rules that apply when translating the value of assets denominated in foreign currency into U.S. dollars for purposes of Form 8938. In addition, contrary to suggestions made by others, Form 8938 does not require any detailed reporting on activity in an account.
To address some of the confusion caused by the parallel FBAR and foreign financial asset (FATCA) reporting regimes applicable to individuals, we include the following comparison chart:
Wednesday, March 14, 2012
Information Reporting Requirements for Individuals with Foreign Financial Assets in 2011
Wednesday, February 22, 2012
The White House and the Treasury Department Unveils the President’s Framework for Business Tax Reform
Today the White House and the Department of Treasury issued a joint report on the President’s Framework for Business Tax Reform. The report is at http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-02-22-2012.pdf.
This report outlines what the President believes should be five key elements of business tax reform: eliminate tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth; strengthen manufacturing and innovation; strengthen the international tax system to encourage domestic investment; simplify and cut taxes for small businesses; and restore fiscal responsibility.
According to the report, the President’s Framework would reduce the corporate tax rate from 35 percent to 28 percent, noting however that at least several considerations relating to the corporate tax base (such as reforming depreciation schedules and limiting deductibility of interest) would be necessary for implementing the reduction. The Framework would also effectively cut the top corporate tax rate on manufacturing income to 25 percent or an even lower rate by reforming the domestic production activities deduction, and would expand, simplify and make permanent the Research and Experimentation tax credit; allow small businesses to expense up to $1 million in investments; and double the amount of deductible start-up expenses from $5,000 to $10,000. On the other hand, some of the other notable proposals in the Framework include imposing minimum tax on overseas profits, taxing carried interest as ordinary income, and eliminating certain temporary business tax provisions that have been deficit-financed.
Curtis Helps Omani Companies with Foreign Shareholdings Win Landmark Tax Judgment in Oman Supreme Court
Muscat, February 22, 2012 – Lawyers from Curtis, Mallet-Prevost, Colt & Mosle LLP helped two Oman-based clients of the firm win an important tax judgment handed down this week by Oman’s Supreme Court.
The Court decided in favour of the two Curtis clients, who were represented by James Harbridge and Kamilia Al Busaidy, that Omani companies who have shareholdings in companies outside Oman should not have to pay tax on dividends received between the inclusive period of 2002 through 2004, the years being considered in the matter.
“The issue was hugely important for our clients, one of which is a multi-national oil and gas entity and the other concentrating in the cement business,” said Mr. Harbridge, partner in the Curtis Muscat office. “The result highlights Curtis’ perseverance on our clients’ behalf.”
This decision overturned earlier decisions of the Omani Primary and Appeal Courts in 2010 that these overseas dividends were taxable, pursuant to a 2004 Supreme Court judgment. It is expected that the written Supreme Court judgment will make it clear that the ruling also applies to the tax years immediately prior and after: 2000, 2001 and 2005-2009 inclusive.
The favourable Supreme Court judgments therefore imply that tax payers who have received overseas dividends during the applicable years should not be taxed on this income, if they have already disputed the charges or if their assessments are yet to be completed. They are deemed to have accepted their tax liability if they have already paid tax in these respective years.
Following the judgment, dividends paid in the applicable years to any Omani company on shareholdings in foreign companies will no longer be viewed as taxable income.
Curtis, Mallet-Prevost, Colt & Mosle LLP is a leading international law firm providing a broad range or services to clients around the world. Curtis has 15 offices in the United States, the Middle East, Europe, Central Asia, and Latin America. The firm’s international orientation has been a hallmark of its practice for nearly two centuries. For more information about Curtis, please visit www.curtis.com or follow Curtis on Twitter (twitter.com/curtislawfirm) and Facebook.com/Curtis.Careers).
Wednesday, February 8, 2012
Proposed FATCA Regulations Are Released Today
The long-anticipated proposed regulations on implementation of the Foreign Account Tax Compliance Act (FATCA) were issued today. The IRS news release is at http://www.irs.gov/newsroom/article/0,,id=254068,00.html, and the text of the proposed regulations is at http://www.irs.gov/pub/newsroom/reg-121647-10.pdf. A public hearing is scheduled for May 15, 2012; comments must be received by April 30, 2012.
FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts, verify its compliance with its obligations pursuant to the agreement, and ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.
The proposed regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents. Registration of participating FFIs will take place through an online system which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.
According to the IRS, the proposed regulations would implement FATCA in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives, and the rules are intended to allow time for resolving local law limitations to which some FFIs may be subject. The IRS also states that the Treasury Department and the IRS will continue to work closely with businesses and foreign governments to implement FATCA effectively. The United States, France, Germany, Italy, Spain, and the United Kingdom announced today the intent to develop framework for intergovermental approach to sharing information under FATCA. The joint statement is at http://www.treasury.gov/press-center/press-releases/Documents/020712%20Treasury%20IRS%20FATCA%20Joint%20Statement.pdf. Notably, Switzerland is not a party to the joint statement.
The proposed regulations generally would become effective on the date of being adopted as final regulations.
Implementation of FATCA Guidance May Take Intergovernmental Approach, Remarked Acting Treasury Secretary
At the New York State Bar Association Tax Section’s Annual Meeting on January 24, 2012, Acting Assistant Treasury Secretary for Tax Policy Emily S. McMahon remarked on issues in the IRS implementing the Foreign Account Tax Compliance (“FATCA”). Generally, foreign institutions must enter into an agreement with the IRS to implement due diligence and reporting requirements, or suffer a 30% withholding tax on a broad range of payments.
Consistent with her prior remarks, Ms. McMahon hinted that the Treasury Department is “open to exploring an intergovernmental approach . . . that would address legal impediments to direct reporting” and that would be “mutually beneficial” to the United States and foreign governments. She also noted that the Treasury Department’s regulations will seek to minimize the administrative burden of FATCA and focus its application on circumstances that present a higher risk of tax evasion. For example, with respect to existing accounts, the regulations will permit substantial reliance on documentation previously collected during account opening procedures; for new accounts, the regulations will seek to align the review required for FATCA purposes with the procedures that financial institutions already follow to comply with anti-money laundering and “know-your-customer” rules.
In addition, the regulations will provide expanded categories of financial institutions that are “deemed compliant” with FATCA, as well as a previously announced exception for retirement plans. The regulations will phase-in FATCA reporting requirements over an extended transition period.
She noted that the Treasury Department is trying to resolve conflicts with privacy or other laws in foreign countries by communicating with a number of major U.S. trading partners about bilateral approaches to overcome legal impediments and facilitate FATCA compliance. The United States has in place a network of agreements with more than 60 countries, which already permit the a foreign government to provide the IRS with FATCA type account information.
Ms. McMahon suggested that one solution may be to allow a foreign financial institutions to report the information required by FATCA to their home country government, which would then transmit the information to the IRS. She noted that the Treasury Department expects to offer foreign countries reciprocity by providing information on U.S. accounts. Information regarding U.S. bank accounts is already available upon request to the IRS. Regulations have been proposed to ensure that the IRS has this information when requested by a foreign government. Information exchange agreements have been designed to safeguard such confidential information and to limit its use to legitimate tax enforcement purposes.
Finally, the Treasury Department will continue to develop multilateral, global approaches to the exchange of financial account information for tax purposes over the long term, under multilateral frameworks such as the Global Forum on Transparency and Exchange of Information, the OECD Treaty Relief and Compliance Enhancement project, and the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
Wednesday, January 18, 2012
IRS Announced Third Offshore Voluntary Disclosure Program
On January 9, 2012, the IRS announced that it is reopening the Offshore Voluntary Disclosure Program (“OVDP”) designed to bring taxpayers with direct or indirect undisclosed foreign financial accounts into compliance with United States tax laws. The IRS news release is available at: http://www.irs.gov/newsroom/article/0,,id=252162,00.html.
The 2012 program is very similar to the 2011 OVDP but has a few key differences. The maximum penalty has been raised from 25% in the 2011 OVDP to 27.5%. Unlike the prior programs, there is no set deadline for people to apply under the 2012 program; it will remain open indefinitely. However, the IRS may change the terms of the 2012 program prospectively (e.g., the IRS could increase penalties or even end the program entirely at any point). As with the 2011 ODVP, the penalty may be reduced in certain limited cases to 12.5% or 5%. Participants must file all original and amended tax returns and include payments for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
The IRS indicated that more details will be available within the next month on IRS.gov and will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.
Thursday, December 15, 2011
IRS Issues Guidance on Tax Returns and FBARs Filings by Dual Citizens Residing Outside the U.S.
On December 7, 2011, the IRS issued guidance (FS-2011-13) for dual citizens of the United States and a foreign country who have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). FS-2011-13is available at http://www.irs.gov/newsroom/article/0,,id=250788,00.html.
FS-2011-13 notes that penalties for dual citizens who fail to file their U.S. tax returns or FBARs will not be automatically imposed. As discussed in more detail in FS-2011-13, such taxpayers will not owe U.S. tax penalties if there is no U.S. tax owed (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) or if the failure was due to reasonable cause.
Reasonable Cause for Failure to File Tax Returns
Whether a failure to file is due to reasonable cause is based on a consideration of facts and circumstances. Reasonable cause relief is generally granted by the IRS if the taxpayer exercised ordinary business care and prudence in meeting the tax obligations but nevertheless failed to meet them. According to the guidance, reasonable cause may be established if the taxpayer shows that the taxpayer was not aware of specific obligations to file returns or pay taxes, depending on all facts and circumstances such as education, history of being subject to federal income tax or penalties, recent changes in the tax forms or law that the taxpayer could not reasonably be expected to know, and the level of complexity of a tax or compliance issue. The guidance also notes that a taxpayer may have reasonable cause for noncompliance due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was unaware of the requirement and could not reasonably be expected to know of the requirement.
Reasonable Cause for Failure to File FBARs
The guidance notes that factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. Factors that might weigh against a finding of reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return.
Wednesday, February 23, 2011
The Cost of Maintaining a Vacation Home or Pied-à-Terre in New York
The New York Tax Appeals Tribunal has issued an opinion reflecting a willingness to accede to state tax authorities’ aggressive approach with respect to non-New Yorkers who maintain vacation homes or pied-à-terres in New York. In Barker 1, the Tax Appeals Tribunal held that a couple who maintained a primary residence in Connecticut and owned a small vacation home near the Hamptons area of Long Island were considered New York residents for state tax purposes.
The couple lived in, and were domiciled in, Connecticut where they raised their three children. Mr. Barker commuted to a job in New York City and was, therefore, physically present in New York State more than 183 days during the year. The couple used their modest (approximately 1100 square foot) house in Long Island approximately 18 days a year but permitted Mrs. Barker’s parents (unquestionably New York residents) to use the house; her parents spent considerably more time there than the Barkers.
The tax tribunal concluded that the home was not a “mere … cottage, which is suitable and used only for vacations” (emphasis added); this would have been the only way the vacation home could not have been considered a “permanent place of abode.” The tribunal noted that “[t]here is no requirement that [a taxpayer] actually dwell in the [New York] abode, but simply that he maintain it.” Since Mr. Barker was present in New York at least 183 days in each year at issue (even though his presence was unrelated to the vacation home), the tribunal concluded that Mr. Barker was a New York resident subject to New York tax on his global income.
It is unclear how New York State tax authorities will apply the Barker decision but there are a number of significant concerns that owners of second residences in New York should consider. Of first importance, a person’s presence in New York state for 183 days or more during any year coupled with ownership of residential real estate may cause such person to be considered a New York resident taxable on all income from global (i.e., non-New York) sources. The exception for a “cottage” may be of limited utility. Moreover, actual usage of the residence may not matter.
Persons filing New York State nonresident tax returns are asked on their returns to indicate whether they maintain a residence in New York State and, if so, the number of days on which they are present in New York. For the first time this year, New York State residents who maintain a second residence in New York City must indicate on their New York State tax returns how many days they spend in New York City. This new requirement may signal an increase in interest in collecting tax from persons maintaining pied-à-terres in New York City.
1. In the Matter of the Petition of John J. and Laura Barker, New York Tax Appeals Tribunal, Docket 822324 (01/13/2011).
Thursday, February 17, 2011
Offshore Voluntary Disclosure Initiative
On February 8, 2011, the Internal Revenue Service (“IRS”) announced an Offshore Voluntary Disclosure Initiative (“OVDI”) designed to bring taxpayers with direct or indirect undisclosed foreign financial accounts into compliance with United States tax laws. The 2011 OVDI is modeled after a similar voluntary disclosure program in 2009, with two significant differences. First, the basic penalty imposed under the 2011 program (described below) is 25% rather than 20%. Second, the 2011 program covers eight years, 2003 through 2010, rather than six years as under the 2009 program. The OVDI will remain open through August 31, 2011.
Penalties
Taxpayers who participate in the OVDI will pay a penalty of 25% of the highest aggregate balance in foreign bank accounts or value of foreign assets in any of the eight years covered by the OVDI. This penalty, which may in limited cases be reduced to 12.5% or 5%, is in lieu of penalties otherwise incurred under Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (“FBARs”), and other penalties that would otherwise apply.
In addition, persons participating in the OVDI will be required to pay income tax on previously unreported income for all years 2003 through 2010 and will be subject to a 20% accuracy-related penalty on the amount of all such underpayments of tax. Failure to file and failure to pay penalties may apply, if applicable under an OVDI participant’s particular facts or circumstances. Interest will accrue on taxes owed.
Procedure
Taxpayers who choose to participate in the OVDI will be required to:
• Provide the IRS with copies of previously filed original or amended federal income tax returns for the tax years covered by the OVDI,
• File amended returns reflecting previously unreported income from foreign accounts and foreign entities,
• File complete and accurate FBARs,
• Pay taxes, penalties and interest in full, and
• Execute a closing agreement with the IRS.
In addition, the IRS requires submission of certain forms and statements that were not required in the 2009 program. All required documentation must be submitted on or before August 31, 2011.
Monday, December 20, 2010
Select Tax Provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), signed into law by President Obama on December 17, 2010, extends generally for two years certain tax code provisions that expired or will expire at the end of 2010.
Select income tax provisions of the Act include:
1. Relating to U.S. citizens and resident aliens
a. The highest ordinary income tax rate remains at 35% for all individuals through 2012.
b. The highest income tax rate on long-term capital gains and qualified dividend income remains at 15% for all individuals through 2012.
c. Itemized deductions for all individuals through 2012 are not subject to an overall limitation which would otherwise reduce the itemized deductions by up to 80%.
d. Individuals may exclude all gains from the sale of certain small business stock acquired at original issue in 2011.
e. Taxpayers may deduct private mortgage insurance premiums paid or accrued in 2011 in connection with acquisition indebtedness on a qualified residence.
f. Taxpayers may elect to deduct state and local sales tax in lieu of state and local income tax through 2011.
g. Taxpayers may offset the entire regular and alternative minimum tax liability for 2010 and 2011 by certain nonrefundable personal credits (e.g. dependent care credits, child credits, etc.).
h. The tax rate of the individual portion of the social security tax for remuneration received in 2011 is reduced by 2%, from 6.2% to 4.2%. In the case of self-employment, the social security tax rate for taxable years of individuals that begin in 2011 is also reduced by 2%, from 12.4% to 10.4%.
2. Relating to foreign shareholders of a regulated investment company (“RIC”)
a. For 2010 and 2011, foreign shareholders of a RIC are generally not subject to U.S. federal income tax and withholding tax on dividends designated as arising from the RIC’s certain interest income that would not be subject to U.S. tax if earned by the foreign shareholders directly. Similar rules apply to certain short-term capital gain dividends.
b. Also for 2010 and 2011, an interest in a RIC can not be treated as U.S. real property interest, and any distribution from a publicly traded RIC that is attributable to the sale of a U.S. real property interest, is exempt from U.S. federal income tax if the distribution is to a foreign shareholder who holds no more than 5% of the publicly traded stock. However, withholding tax otherwise required for distributions made prior to December 17, 2010 is not affected.
3. Relating to controlled foreign corporations (“CFCs”)
a. For 2010 and 2011, U.S. shareholders of a CFC are not taxed currently on the CFC’s active financing income.
b. Also for 2010 and 2011, U.S. shareholders of a CFC are not required to include any dividend, interest, rent and royalty income received by the CFC from a related CFC, to the extent such income is attributable to the related CFC’s income that is not dividend, interest, rent, royalty, or other “subpart F income” or income effectively connected with a U.S. trade or business.
4. Relating to the 100-percent expensing for certain business assets (“Bonus Depreciation”)
a. The 100-percent Bonus Depreciation is extended to qualified property placed in service before January 1, 2012 (or before January 2013 for certain longer-lived and transportation property).
b. The Bonus Depreciation will be 50% for qualified property placed in service in 2012 (or in 2013 for certain longer-lived and transportation property).
c. A corporation generally may increase its minimum tax credit limitation by the Bonus Depreciation with respect to certain property placed in service in 2011 or 2012 (or through 2013 in the case of certain longer-lived and transportation property).
The key non-income tax provisions made by the Act are to modify the estate, generation-skipping and gift tax provisions in a number of significant respects, including:
1. Providing that for 2011 and 2012, there will be a $5 million estate, generation-skipping and gift tax exemption (which will be indexed for inflation beginning in 2012) per individual and a maximum estate, generation-skipping and gift tax rate of 35%. The new exemption and tax rate generally apply in 2010, except that the gift tax exemption for 2010 remains at $1 million and the generation-skipping tax rate for transfers made in 2010 is zero;
2. Allowing the estates of decedents who died in 2010 to elect to pay no estate tax but have a modified carry-over basis regime for their heirs;
3. Adopting a portability concept for the new $5 million exemption from estate and gift tax, but not generation-skipping tax; and
4. Providing an extension for certain tax filings and disclaimers for decedents dying in 2010 before enactment of the new law.
The Act also extends for 2 years the code provision that excludes from the estates of nonresident decedents the stock of a RIC to the extent the RIC’s assets are debt obligations, deposits or other property that would be treated as situated outside the U.S. if held directly by the estates.
