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Archive for the ‘Foreign tax’ Category

IRS, Treasury issue additional guidance to combat inversions

The Obama administration continued to take action to combat corporate inversions by issuing two sets of regulations that target inversions and earnings stripping. An inversion results in a U.S. parent corporation of a multinational group being replaced by a foreign parent corporation. The government previously issued guidance in 2014 and 2015 on inversions. At the same time, the government said that Congress needs to enact legislation as part of a more comprehensive strategy on inversions. (more…)

IRS releases 2016 adjusted foreign housing allowances

IRS releases 2016 adjusted foreign housing allowances; many locations remain high-cost areas

London, the UK. Red bus in motion and Big BenThe IRS has issued the 2016 inflation adjustments to the foreign housing expenses limitation used for calculating the exclusion under Code Sec. 911(c) for tax years beginning on or after January 1, 2016. The maximum inflation-adjusted limitation on housing expenses for 2016 is $30,390, and the minimum is $16,208. (more…)

IRS proposes new tax on gifts and bequests from expatriates

giftThe IRS has issued proposed regulations under Code Sec. 2801 to implement a new tax on transfers of property from individuals who abandon U.S. citizenship or residency (a “covered expatriate”) and who later make a gift or bequest to a U.S. taxpayer (individual or U.S. trust). The tax applies to transfers of property on or after June 17, 2008 from an individual who expatriated on or after that same date. (more…)

IRS rules on corporate inversions maintain tight standards

Final IRS rules on corporate inversions maintain tight standards for “substantial business activities”

The IRS has issued final regulations on corporation inversions, which are a type of transaction by which a U.S. corporation reincorporates in a foreign jurisdiction by replacing the U.S. parent with a foreign parent. Inversions have proved controversial, with many lawmakers and policy makers criticizing them as vehicles for large businesses to evade U.S. taxes.

In some cases the inversion transaction can be legitimate if, for example, it has substantial business activities in the foreign country. The IRS’s newly finalized guidance affirms the government’s tight standards for determining whether a corporate group has substantial business activities in a foreign country. In general, the final regulations adopt without substantial changes the 2012 temporary regulations that require 25 percent of the corporate group’s employees, assets, and income to be connected to the country of the group’s foreign parent. The final regulations apply to acquisitions completed on or after June 3, 2015.

Background

According to the Obama administration and other lawmakers, some U.S. corporations have escaped U.S. taxes by incorporating a foreign parent to head a multinational group. By having a foreign parent, foreign subsidiaries would avoid U.S. taxes, and the group could claim certain tax benefits (such as interest deductions and “earnings stripping”) to reduce taxes on U.S.-source income, the administration reported.

Criticism has increased in recent years after a number of large U.S. pharmaceutical companies announced inversions or attempted to plan one. As such, the government has taken an active role in attempting to curb the practice. Recently, for example, the IRS issued administrative guidance (Notice 2014-52) intended to reduce some of the benefits of inversions.

Substantial business activities

Temporary regulations adopted in 2006 provided a facts and circumstances test for determining substantial business activities. Temporary regulations adopted in 2009 retained the facts and circumstances test, but eliminated examples and a 10-percent safe harbor that were in the 2006 regulations. The government then issued temporary regulations in 2012 that removed the facts and circumstances test and replaced it with a 25-percent bright-line test for the employees, assets and income of the expanded affiliated group (EAG) (the group that includes the foreign parent and the U.S. subsidiary).

Changes in final regulations

The IRS has clarified that an entity is not a member of the EAG unless it is an EAG member on the “acquisition date” of the inversion. However, members of an EAG are determined by considering all transactions related to the acquisition, including transactions that occur after the acquisition date.

Under the deemed corporation rule in the 2012 regulations, a partnership is treated as a corporation and a member of the EAG if more than 50 percent of its interests are owned by members of the EAG. In the final regulations, the IRS adopted a look-through rule that, to determine the corporations in the EAG, treats each partner of a partnership as holding its proportionate share of stock held by the partnership.

In applying the 25-percent tests under the existing anti-abuse rules, certain assets, employees or income are excluded from the numerator, but included in the denominator, where the transfer of these items is associated with a plan that has a principal purpose of avoiding Code Sec. 7874. The IRS modified the test to exclude items associated with a transfer of property to the EAG from both the numerator and the denominator. Otherwise, the IRS affirmed the anti-abuse rules.

The test for a group’s assets requires that the asset be physically present in the particular foreign country on the date of the inversion, and that the asset be physically present in that country for more time than in any other country during the prior year. The IRS modified the test so that assets used in transportation do not have to be physically present on the inversion date.

IRS revises FATCA reporting for certain foreign retirement, pension and savings accounts

The IRS has announced in Updated Instructions to Form 8938, Statement of Specified Foreign Financial Assets, that certain retirement-type accounts located in jurisdictions with intergovernmental agreements (IGAs) do not have to be reported on Form 8938 for tax years beginning on or before December 12, 2014. This avoids a potential $10,000 reporting penalty. The applicable accounts are retirement and pension accounts, non-retirement savings accounts, and accounts satisfying certain regulatory conditions under Code Sec. 1471.

FATCA

The Foreign Account Tax Compliance Act generally requires U.S. citizens, resident aliens, and others with an interest in specified foreign financial assets that exceed the reporting threshold to file Form 8938 to report the assets. Specified foreign financial assets include certain assets that are not in an account maintained by a U.S. or foreign financial institution.

IGAs

The IRS has entered into IGAs with various foreign jurisdictions to implement FATCA’s reporting requirements. Under a Model 1 IGA, foreign financial institutions report their U.S. accounts to their home government, which transfers the information to the IRS. Under a Model 2 IGA, the institution reports its accounts directly to the IRS, supplemented by information exchanges between the governments.

Reporting Announcement

The IRS has now announced that, for tax years beginning on or before December 12, 2014, if the foreign jurisdiction has an IGA in effect (or is treated as having an IGA in effect) on or before the last day of the taxpayer’s tax year, certain accounts do not have to be reported on Form 8938 if the accounts are excluded from the definition of a financial account in the IGA. However, the accounts must be reported on Form 8938 for tax years beginning after December 12, 2014.

Update to Instructions, Form 8938

IRS revises FATCA reporting

IRS revises FATCA reporting for certain foreign retirement, pension and savings accounts

The IRS has announced in Updated Instructions to Form 8938, Statement of Specified Foreign Financial Assets, that certain retirement-type accounts located in jurisdictions with intergovernmental agreements (IGAs) do not have to be reported on Form 8938 for tax years beginning on or before December 12, 2014. This avoids a potential $10,000 reporting penalty. The applicable accounts are retirement and pension accounts, non-retirement savings accounts, and accounts satisfying certain regulatory conditions under Code Sec. 1471.

FATCA

The Foreign Account Tax Compliance Act generally requires U.S. citizens, resident aliens, and others with an interest in specified foreign financial assets that exceed the reporting threshold to file Form 8938 to report the assets. Specified foreign financial assets include certain assets that are not in an account maintained by a U.S. or foreign financial institution.

IGAs

The IRS has entered into IGAs with various foreign jurisdictions to implement FATCA’s reporting requirements. Under a Model 1 IGA, foreign financial institutions report their U.S. accounts to their home government, which transfers the information to the IRS. Under a Model 2 IGA, the institution reports its accounts directly to the IRS, supplemented by information exchanges between the governments.

Reporting Announcement

The IRS has now announced that, for tax years beginning on or before December 12, 2014, if the foreign jurisdiction has an IGA in effect (or is treated as having an IGA in effect) on or before the last day of the taxpayer’s tax year, certain accounts do not have to be reported on Form 8938 if the accounts are excluded from the definition of a financial account in the IGA. However, the accounts must be reported on Form 8938 for tax years beginning after December 12, 2014.

Update to Instructions, Form 8938

 

IRS clarifies streamlined process for disclosing offshore accounts

The IRS has provided guidance and clarifications for U.S. taxpayers who have failed to disclose offshore assets and pay taxes due. The new instructions apply to taxpayers who apply for relief under the streamlined filing compliance procedures and are effective for applications submitted on or after July 1, 2014. The streamlined program is available to all U.S. taxpayers, including resident aliens living in the United States and U.S. citizens living abroad.

Penalties

The streamlined program provides reduced penalties—five percent for taxpayers in the U.S.; zero for taxpayers living outside the U.S. The program is available only to taxpayers who can demonstrate that their actions were not willful. Taxpayers whose conduct may be willful can pursue relief through the IRS’s Offshore Voluntary Disclosure Program (OVDP). The latter program imposes a penalty of 27.5 percent, but protects participants from potential criminal liability. Taxpayers who previously applied under the OVDP, but who have not entered into a closing agreement, can apply for reduced penalty relief under the OVDP transition program and remain in the OVDP.

While practitioners welcome the additional guidance clarifications, many are concerned about the lack of IRS guidance on the facts and analysis that will be treated as willful conduct. Taxpayers cannot participate in both the streamlined program and the OVDP. A taxpayer who applies under the streamlined program but whose claim of nonwillful conduct is rejected cannot then reapply for relief under the OVDP program.

Required forms

U.S. taxpayers are required to report and pay taxes on worldwide income, including income from foreign assets. U.S. taxpayers who own foreign assets may be required to submit any of the following forms or reports to the government:

  • Form 1040, Schedule B (Part III) – foreign accounts;
  • Form 8938, Statement of Foreign Financial Accounts – overseas assets whose value exceeds certain thresholds; and
  • Form 114, Report of Foreign Bank and Financial Accounts (FBAR) – foreign accounts above $10,000.

FBARs must be filed with Treasury’s Financial Crimes Enforcement Network (FinCEN). The IRS has enforcement authority for FBARs.

Helpful clarifications

The IRS provided separate guidance—including streamlined procedures and frequently asked questions (FAQs)—for U.S. taxpayers residing in the U.S., and U.S. taxpayers residing outside the U.S. The new guidance is helpful, for example, because it explains how U.S. citizens, lawful permanent residents, and others who lived in the United States for a period of time can be treated as nonresidents by demonstrating that they did not have a U.S. “abode” or a “substantial presence” in the U.S. The guidance also explains which assets are counted for applying the penalty rates.

The IRS also provided guidance for taxpayers to submit delinquent information returns but who do not need to use the streamlined program or the OVDP to file returns and report and pay additional tax.