Transcript INTERNATIONAL TAX UPDATE

INTERNATIONAL TAX UPDATE
BKR INTERNATIONAL
ANNUAL WORLDWIDE MEETING
OCTOBER 22, 2012
Consequences of Improper or Missed
Filings
A.
Extended statute of limitations
1.
IRC Section 6501(c)(8) extends statute of limitations in the case of a number of
commonly required forms if improperly filed or unfiled. This includes Forms 5471,
8621, 5472, 926, 8938, 8865, and 3520.
2.
Applies to entire return unless failure not willful. Increased reporting of indirectly held
PFICS by partnerships places extraordinary burden on tax preparers. Is section
1298(b)(5) self-executing?
3.
Period of limitations does not expire until 3 years after the date on which the IRS is
provided with the proper information
B.
Numerous monetary penalties with increasing maximums, reductions of foreign tax credits,
and criminal penalties
C.
Denial of non-recognition treatment for improper disclosures required with respect to crossborder mergers, acquisitions, reorganizations and other non-recognition transactions
D.
Withholding agent liabilities and penalties
1.
100% penalty for tax evaded, not collected or not accounted for and paid over
2.
Accuracy related penalty – 20% of underpayment of withheld tax if negligent, 75% if
civil fraud
3.
Addition to tax of 5% to 25% for negligent failure to file return or to pay tax (15% to
75% if fraudulent)
4.
Failure to deposit tax – 2% to 10%
5.
Per Form Penalties – Failure to file and furnish – 115% to 150%
6.
Failure to file return 5% per month
7.
Negligence and criminal penalties
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FATCA
A.
•
B.
Administration Processes Under Proposed Regulations
Responsible Officer (“RO”) must certify to the IRS that a participating foreign financial institution
(“PFFI”) has completed all mandatory due diligence at the conclusion of years 1 and 2 of the FFI
agreement:
•
Confirming that the PFFI has not engaged in assisting clients in the avoidance of FATCA,
•
Certifying the PFFI’s compliance with the FFI agreement on a periodic basis, and
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Disclosing material failures of compliance.
•
RO must register electronically and the RO’s identity must be verified. An RO that does not have
a social security number or an ITIN must apply for an identification number by filing Form 8956,
Application for Foreign Account Tax Compliance Act Individual Identification Number and
providing appropriate documentation. Once assigned, that number will be used to sign the FFI
agreement.
•
While FFIs with US affiliates may have ROs with identification numbers, the majority will not.
Event hose ROs that have identification will want to seriously consider whether they are willing to
comingle their personal and business affairs tot his extent. RO can designate Authorized Third
Parties, including US licensed tax professionals and in–house personnel to complete registration
process and sign the FFI agreement.
Intergovernmental agreements allow FFIs in foreign countries to report to partner country local
authorities, which would then transmit the information to the US automatically. Will vary by country but
may narrow scope of withholding required and may expand categories of deemed-complaint FFIs.
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FATCA – Impact on Structures
Due diligence by investment partnerships – need to establish and document foreign status.
Offshore private equity funds now generally include FATCA-related language in their
documents that typically contain the following elements:
A.
•
•
•
Investors are obligated to provide any information reasonably requested to support the fund’s efforts to
comply with FATCA reporting requirements
GPs have the authority to withhold at a 30% rate on distributions to a non-compliant investor. New
Form W-8 BEN is used to certify participating status. Participating foreign investors will likely be
required to file annual reports with the IRS, but as long as there are no US persons in the ownership
chain, it appears unlikely that they would be required to divulge any information about direct and
indirect owners. New Form W-8 BEN requires a foreign identification number.
Each investor indemnifies the fund and all other investors against any loss caused by such investor’s
failure to comply with information/certification requests
Start Dates for FATCA Withholding:
B.
•
•
•
January 1, 2014 for most US source income (e.g. interest and dividends paid by US issuers
January 1, 2015 for amounts realized on disposition of most US securities
January 1, 2017 for “foreign pass-through payments”
C.
Grandfather Rule: FATCA withholding will not apply to obligations outstanding on January 1,
2013.
D.
Proposed regulations expand on categories of deemed complaint FFIs.
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FATCA: Section 6038D
A.
Many practical compliance issues arise in connection with new filings that must now be made
on Form 8938, Statement of Specified Foreign Financial Assets.
•
•
Significant penalty exposure for undisclosed and improperly disclosed specified foreign financial
assets.
Many client sensitive internal issues implicated.
B.
Specified entity rules to apply for 2012 filings, which will expand the number of filers, which
were limited to individuals for 2011 filings. This will greatly increase the complexity of Form
8938 filings.
C.
Requirements, rules and procedures differ significantly from FBAR. Many articles have been
written on the myriad of differences which arise form the fact that FBARs derive form banking
statutes rather than tax statutes.
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CFCs and PFICs: Tax Planning
Vehicles?
A.
B.
CFCs and Section 1291 Fund PFICS can provide potential planning
vehicle for 3.8%
•
Subpart F inclusions are not dividends and, therefore, are seemingly
not includible in net investment income subject to tax under Section
1411(d).
•
Because subpart F inclusions are based on earnings and profits,
investment and other expenses subject to the 2% floor may be
deductible in full for income and surtax purposes.
Section 1291 Fund PFICS may provide Alternative Minimum Tax planning
benefits as well as state tax benefits.
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Voluntary Disclosure Programs/FBAR
A.
B.
C.
Decision to participate in formal IRS Offshore
Voluntary Disclosure Program versus informal
programs versus inaction. Program now open
indefinitely.
New York Department of Taxation and Finance
position on PFICs
Willful failure penalties (50% of foreign account
balance per year) may be more easily asserted
in view of the Appeals Court decision in
Williams (No. 10-2230 – 4th Cir. 2012)
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Foreign Trusts
A.
B.
C.
Use of default rule versus actual
computations
Detailed disclosures of transactions related
to foreign trusts are required on Form 3520
Distribution planning, modeling and
computations as well as investment strategy
can dramatically improve results
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Gifts
A.
NY banking law Section 675(b) – risk of
completed gift of 50% of account value when
joint account established unless clear
evidence of lack of intent to create true joint
tenancy
1.
B.
C.
Taxable gift if joint tenant is a non-citizen
Accounting for gifts to be reported to ensure
proper filing of Form 3520, Receipt of Foreign
Gifts
Determination of location of cash gifts made
by check or wire
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Foreign Portfolio Investments
A.
B.
C.
D.
E.
Portfolio interest exemption compliance
Improper withholding on investments –
over/underwithholding
Treaty certification – timing issues
EIN application and control
Documentation and compliance issues related to
payments or U.S. source income to foreign
persons, foreign partners in U.S. partnerships
and disposition of U.S. real property interests.
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Entity Classification Elections
A.
B.
C.
Ability to retrieve original election – IRS
confirmation critical
Follow-up of IRS confirmation and
storage and accessibility of
documentation
Tax relevance/renewal of election
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Year-End Conformity Issues
A.
B.
C.
IRC Sec. 898 requires adoption of shareholder
year-end by Controlled Foreign Corporations
(“CFCs”).
Properties owned by trust – must use calendar
year
U.S. and foreign partnerships with foreign
partners and no U.S. effectively connected
income must use tax year of majority U.S.
partner – even where partnership books are
maintained based on a different accounting
period
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