International Tax Newsletter - Winter 2011-12 - United States
March 01, 2012
We include here brief descriptions and links for several U.S. international tax matters covered by EisnerAmper during recent months through February 2012:
FOREIGN DEFERRED COMPENSATION
As the global economy becomes increasingly integrated, many U.S. middle-market companies find themselves expanding into foreign markets including manufacturing, sales and distribution facilities abroad. In addition to hiring local nationals, they often must assign U.S. executives/employees, or third country nationals, to work in these new markets.
Among the host of issues confronting such companies, deferred compensation – whether for retirement or as part of executive agreements – is one of the most important, but at the same time complex and frustrating.
In an article on “IRC Section 409A and Foreign Deferred Compensation” first published in the Journal of Compensation and Benefits, we provide an important summary of the impact of U.S. regulations on deferred compensation plans for international operations.
2011 VOLUNTARY COMPLIANCE PROGRAM FOR EMPLOYEE VS. INDEPENDENT CONTRACTOR EXPOSURE
The U.S. Internal Revenue Service (IRS) has unveiled a Voluntary Compliance Program (VCP) that offers relief for businesses which may have misclassified workers as independent contractors, rather than employees. Such employers are potentially liable for significant additional taxes, penalties, and interest.
For a foreign business which has classified U.S. individuals conducting U.S. activities (perhaps incorrectly) as independent contractors, reclassifying them as employees may create a substantial risk of the foreign business being engaged in a U.S. trade or business or having a permanent establishment in the U.S. for U.S. income tax purposes, resulting in increased U.S. taxation.
IRS GUIDANCE FOR U.S. CITIZENS & DUAL CITIZENS LIVING ABROAD
The IRS understands that some U.S. citizens — including some who are also citizens of another country — who are residing outside the U.S. have failed to file federal U.S. income tax returns as well as Foreign Bank Account Reports (FBARs) to report their foreign financial holdings. While these individuals may be complying with tax filings and payments in their foreign countries of residence, they are not filing returns in the U.S. The IRS on December 13, 2011 issued updated guidance in the form of Fact Sheet FS 2011-13, with two principal aims:
- To clarify the issues facing U.S. citizens described above who wish to commence complying with U.S. law regarding their income tax returns and FBARs; and
- To offer a no-penalty opportunity for such compliance by those individuals.
In essence, this guidance provides that U.S. citizens or dual citizens residing abroad (1) with “no balance due” income tax returns — due e.g. to foreign tax credits or the U.S. foreign earned income exclusion — or (2) with “balance due” income tax returns but where the failure to file was due to reasonable cause, will not be assessed late filing or late payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late FBAR filings, if the failure to comply was due to reasonable cause.
THIRD OPPORTUNITY FOR VOLUNTARY DISCLOSURE OF OFFSHORE ACCOUNTS
Following two initiatives in 2009 and 2011, the IRS has announced a third offshore voluntary disclosure program (OVDP) for foreign financial accounts — this one with an indefinite deadline to apply.
- The new OVDP comes at a time when the U.S. has stepped up its focus on international tax compliance and its negotiations with several foreign banks to obtain the release of account information of U.S. customers.
- In addition, new reporting applicable to such foreign financial accounts and other foreign financial assets commence with 2011 income tax returns. The statute of limitations for omission of gross income which is derived from a reportable offshore asset is extended to 6 years if such income is in excess of $5,000.
- Moreover, under the Foreign Account Tax Compliance Act provisions, foreign financial and nonfinancial institutions will be required to disclose U.S. persons’ accounts beginning in 2013.
The terms of this OVDP could change in the future with the possibility of increased penalties for all or defined classes of taxpayers, or could be ended completely at any moment. Thus, this OVDP seems an opportunity for taxpayers with undisclosed foreign financial accounts to come into U.S. tax compliance without fear of criminal prosecution and with a clear understanding of what penalties will be imposed.
The overall penalty structure for this new program generally remains unchanged from the predecessor 2011 program, with one principal exception: The basic penalty has increased from 25% to 27.5% of the highest aggregate balance in unreported accounts during the eight full tax years prior to disclosure.
FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) AND RELATED DEVELOPMENTS
On February 8, 2012 much-anticipated proposed regulations which seek to implement the reporting and withholding tax regime under FATCA were issued. These incorporate guidance in previously issued FATCA Notices with refinements developed in response to comments, as well as guidance on topics not previously addressed, and total almost 400 pages.
The U.S. Treasury Department has also released a joint statement from the U.S., France, Germany, Italy, Spain and the United Kingdom regarding a possible intergovernmental approach to improving international tax compliance and implementing FATCA.
WITHHOLDING TAX ON DIVIDEND EQUIVALENT PAYMENTS
With respect to so-called dividend equivalent payments — which arise by use of a swap or other equity derivative that gives the economic equivalent of a dividend without the corresponding U.S. withholding tax treatment – temporary and proposed regulations extend the current favorable tax treatment through 2012 and clarify new withholding tax requirements beginning January 1, 2013.
REPORTS OF SPECIFIED FOREIGN ASSETS FOR 2011 ONWARDS
As mentioned further above, a specified individual or specified domestic entity generally must file Form 8938 with 2011 and later years’ annual income tax returns, identifying specified foreign financial assets and their values. Temporary Treasury Regulations were recently issued detailing what information needs to be reported for 2011 and later years by certain U.S. individuals, guidelines for valuing assets, exceptions to the reporting requirements, and penalties for failure to comply with the reporting requirements.
FRAMEWORK FOR U.S. FEDERAL BUSINESS TAX REFORM
The U.S. White House and Treasury Department recently released “The President’s Framework for Business Tax Reform.” While we generally focus our Tax Alerts on important legislative enactments, final regulations and final judicial decisions, this Framework may affect significant legislative developments.
COST SHARING ARRANGEMENTS
Final Treasury Regulations provide guidance on methods for determining taxable income from international and domestic cost sharing arrangements for co-developing intangible property among commonly controlled businesses.
CONTRACT MANUFACTURING ARRANGEMENTS
Where personal property sold by a controlled foreign corporation (CFC) is in turn manufactured, produced or constructed by one or more branches of the CFC in another country – even under a contract manufacturing arrangement with an outside business which is not part of the CFC – the income may be subject to current taxation by the U.S. as so-called subpart F income.
Final Treasury Regulations provide important rules for determining whether the outside manufacturer is treated as part of the foreign branch of the CFC – generally this is where the CFC does not make a substantial contribution to the manufacturing process through activities of its own employees – so that income from sales of the manufactured property are treated as subpart F income.
International Tax Newsletter - Winter 2011-12 Issue