Thursday, November 29, 2012

US and Mexico Sign Intergovernmental FATCA Agreement on Tax Compliance

On November 19, 2012, the U.S. and Mexico signed an intergovernmental agreement ("IGA") to improve international tax compliance including with respect to the Foreign Account Tax Compliance Act ("FATCA"). FATCA generally requires a foreign financial institution ("FFI") to identify U.S. account holders and report information regarding them to the Internal Revenue Service. If an FFI fails to comply, the FFI will be subject to a 30% U.S. withholding tax on income it receives on its U.S. investments.

More than 50 countries have engaged in discussions with the U.S. in response to FATCA. Mexico became the third country (the U.K. and Denmark were the first two countries) to enter into an IGA. Like the IGAs with the U.K. and Denmark, the US-Mexico IGA requires annual, automatic information exchange, on a reciprocal basis, with respect to financial accounts in 2013 and subsequent years. Under the IGA, Mexico will automatically provide to the U.S. information it collected from Mexican FFIs on financial accounts in Mexico held by U.S. residents, and the U.S. will also automatically provide Mexico with information it collects on financial accounts in the U.S. held by Mexican residents. Generally, the two governments will exchange the information within 9 months after the year-end. However, the information relating to accounts in 2013 is not required to be exchanged until September 30, 2015.

We will soon post a comprehensive summary of the US-Mexico IGA. 

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Tuesday, May 8, 2012

Information Reporting Requirements for Individuals with Foreign Financial Assets in 2011

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:

FBAR
FATCA
Purpose
Collect information re foreign financial accounts
Collect taxes
IRS
IRS auditor does not have FBAR
Auditor has both Form 8938 and tax return
Threshold Amounts
Aggregate $10,000 or more
Aggregate $50,000 or more
$50,000 is presumed met if insufficient information given
Reporting Form
TD F 90-22.1, filed in
Detroit
Form 8938, to be attached to Form 1040
Foreign hedge funds, private equity funds, etc.
Issue reserved
YES
Statute of Limitations (“S/L”) on penalty
6 years
3 years after entire return and Form 8938 are filed. Effective for returns filed for 2011.
Filing Deadline
June 30
When tax return is due (including any extensions)
Penalties
Nonwillful -$10,000
per year
Willful – Greater of $100,000 or 50% of account balance for each non-complaint year + possibly criminal penalties
$10,000/30 days; max = $50,000
40% on any understatement of gross income derived from an undisclosed foreign financial asset

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Unique 2012 Estate and Gift Tax Opportunities

The current U.S. estate and gift tax exclusion amounts (“exclusions”) are as high as they ever have been. In 2012, a U.S. individual can give away $5,120,000 without paying any U.S. gift tax. For a married couple, the aggregate amount is $10,240,000. Currently, the maximum U.S. estate and gift tax rates are 35%. New York levies no gift tax but imposes a graduated estate tax up to 16% on New York taxable estates over $1,000,000.

Unless federal legislation is enacted before December 31, 2012, the $5,120,000 tax exclusions will revert to $1,000,000 in 2013, and the maximum U.S. estate and gift tax rate will increase to 55%. The President’s 2013 budget proposes that the gift tax exclusion be reduced to $1,000,000 per person, whereas the estate and GST tax exclusions would be lowered to $3,500,000. While no one can predict with any confidence what the new transfer tax exclusions and rates will be, we encourage clients to consider the unique planning opportunities in 2012.

If a person makes a $5,120,000 gift today, there would be no U.S. gift tax.[1] In addition, the post-gift income from and any future appreciation on the gift would escape U. S. estate tax. For persons resident in states such as New York, the gift would not be subject to state gift tax and would also escape state estate tax. Set forth below are some illustrations of the possible benefits of 2012 gifts.

If a New York person dies in 2012 with a taxable estate of $11 million, his or her U.S. estate tax would be $1,628,600 and New York estate tax would be $1,226,800, for total estate taxes of $2,855,420, passing $8,144,580 to the family.[2]

If the same person (having not made any prior taxable gifts) makes a $5,000,000 gift in 2012, his total estate (U.S. and New York State) taxes (assuming 2012 rates) would be $2,390,020, for a net family benefit of $8,609,980 or a tax savings of $465,400. If the person dies in 2013, assuming no new legislation, we estimate the total estate taxes would be $3,350,000 for a net benefit of $7,650,000 or a tax savings of $2,045,000.

In addition, future estate tax on a gift made to descendants in trust can be deferred for many years through a “Dynasty Trust.” While transfers in trust for more than one generation may incur a generation-skipping tax (“GST”), in 2012 there is also a $5,120,000 exemption from GST. Like the estate and gift tax, the GST exemption is scheduled to revert to $1,000,000 in 2013.[3]

Gifts can be outright or in trust. They can consist of cash, securities, real property or tangible personal property. There are myriad ways to structure gifts, including techniques to leverage the potential estate and gift tax savings, such as valuation discounts or sales to a grantor trust and techniques in which the donor retains an interest in the gift, such as a grantor retained annuity trust (“GRAT”) or a qualified personal residence trust (“QPRT”).[4] The recommended structure will depend on the individual’s circumstances.

Please contact us if you would like to discuss how you might take advantage of this opportunity.


Robert W. Sheehan, Partner
E-mail:  rsheehan@curtis.com
Tel.:  212 696-6176

Alan S. Berlin, Partner
E-mail:  aberlin@curtis.com
Tel.:  212 696-6038

Tina E. Albright, Partner
E-mail:  talbright@curtis.com
Tel.:  212 696-6150

William L. Bricker, Jr., Partner
E-mail:  wbricker@curtis.com
Tel.:  212 696-6039

J. Dinsmore Adams, Jr., Counsel
E-mail:  dadams@curtis.com
Tel.:  212 696-6940

Marco A. Blanco, Partner
E-mail:  mblanco@curtis.com
Tel.:  212 696-6113


Eduardo A. Cukier, Partner
E-mail:  ecukier@curtis.com
Tel.:  212 696-6107




1. The basic exclusion for 2012 is $5 million which when indexed for inflation becomes $5,120,000. This figure assumes U.S. citizenship and does not account for previous taxable gifts.

2. Assuming death after 2012 and using 2001 rates which will be in effect in 2013 until legislation passes, the total estate taxes would be $5,395,000 for a net benefit of $5,605,000.

3. Indexed for inflation.

4. The donor must survive the term of the GRAT or QPRT to achieve the potential estate tax savings.

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Thursday, April 26, 2012

IRS Issues Regulations Requiring the Reporting of Bank Interest Paid to Nonresident Aliens

On April 17, the Treasury Department issued final regulations that require banks to report U.S. bank deposit interest paid to nonresident alien individuals who reside in designated countries having Exchange of Information Agreements[1] with the United States. Concurrently with the regulations, the IRS released Revenue Procedure 2012-24 which designates approximately 80 countries as having such agreements with the United States.
 
The preamble to the regulations states that the new regulations are “essential to the U.S. Government’s efforts to combat offshore tax evasion” because the IRS’ ability to obtain information from foreign jurisdictions is dependent on its ability to reciprocate. The IRS will provide information only upon a specific request. Upon receiving a request, the IRS will evaluate the requesting country’s current practices with respect to information confidentiality and will require the requesting country to explain the intended permitted use of the information under the relevant Exchange of Information Agreement and to justify the relevance of that information to the intended permitted use. The IRS will not provide information on deposit interest to a country if it determines that the country is not complying with its obligations to (1) protect the confidentiality of that information or (2) use the information solely for collecting and enforcing taxes.

Currently, the U.S. has an agreement with one country, Canada, under which it will provide information on an automatic basis. However, a number of countries including France, Germany, Italy, Spain and the United Kingdom have announced that they are in discussions to enter into automatic exchange agreements with the United States.

The regulations apply to payments of interest made on or after January 1, 2013. Payors must report the interest on Form 1042-S.

The Treasury Decision announcing the regulations is at: https://www.federalregister.gov/articles/2012/04/19/2012-9520/guidance-on-reporting-interest-paid-to-nonresident-aliens.

Revenue Procedure 2012-24 is at http://www.irs.gov/pub/irs-drop/rp-12-24.pdf.

1 The Exchange of Information Agreement may be either a standalone, bilateral agreement or contained within an income tax treaty.

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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.

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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).

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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.

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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.

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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.

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