Deidre G. O'Byrne, Partner, Withers Bergman, LLP & Paul M. Roy, Partner, Withers Bergman, LLP

Transcription

1 Deidre G. O'Byrne, Partner, Withers Bergman, LLP & Paul M. Roy, Partner, Withers Bergman, LLP 1 Agenda Essential International Tax Information Philanthropy and the tax motive US citizens and residents US citizens residing abroad Selected rules for non US persons Mexico, Canada, China and Hong Kong Country Specific Entities i Domestic Firms: benefits and drawbacks Foreign Organizations: benefits and drawbacks 2 Academic Impressions 1

2 Philanthropy and the Tax Motive Most philanthropists i t Are not motivated solely by tax benefits; but Do want to operate tax efficiently The US tradition of charitable giving is unique US tax laws have developed around this tradition Appreciated property, specialized trusts such as CLATs and CRTs, and Private Foundations 3 Philanthropy and the Tax Motive US rules inform other countries In the UK, for example, gifts of quotable shares and gifts of land are entitled to tax benefits based on fair market value European Association for Planned Giving Lifetime LegaciesCoalition 4 Academic Impressions 2

3 Philanthropy and the Tax Motive Subject to the principles of territoriality Philanthropic gifts and legacies are likely to be Exempted from tax Or taxed at a lower rate And there are preferential tax rates for income and gains of charities 5 Tax efficient giving US taxpayers Gifts to US Charitable Exempt Organizations as described in IRC Section 501(c)(3) Estate and gift tax deductions Gift reduces tax base Income tax deductions Deduction against donor s income 6 Academic Impressions 3

4 Tax efficient giving US taxpayers Gifts to US Charitable Exempt Organizations as described in IRC Section 501(c)(3) Gifts of certain appreciated assets, held for more than 12 months No tax on capital gain Publicly traded securities: market value deduction Art and other tangibles if put to a related use Gifts of other assets: generally deduction is limited to basis 7 Tax efficient giving US taxpayers Contrast gifts to non US charities No income tax deduction Note: US corporate income tax deduction requires both that the charity be a US charity and the gift be used in the US No gift or estate tax on gift Provided purposes are recognized as exempt Gain recognition on disposal 8 Academic Impressions 4

5 Limited Exception US gift and estate tax Non territorial for US citizens and residents (can give to non US charities) IRC Section 2055 estate tax deduction (includes no territoriality requirement) IRC Section 2522 gift tax deduction (includes no territoriality requirement) Does not necessarily help a non resident alien IRC Section 2106(a)(2) estate tax deduction requires contribution to domestic corporation or a charitable trust for use in the US 9 Effect of US Estate Tax Repeal Gift regime income and gift tax benefits continue to apply Estate and gift tax treaties Estate tax provisions cease to apply Gift tax provisions i continue to apply 10 Academic Impressions 5

6 Tax efficient giving UK taxpayers Gifts to UK Charities Inheritance tax exempt transfer on death and inter vivos No capital gains tax on disposal to charity below market value Gift Aid (Deduction against income tax and capital gains tax) Gifts of qualifying shares, securities and real property Deduction against income tax only High tax efficiency of gift of appreciated assets 11 Tax efficient giving UK taxpayers Contrast gifts to non UK charities Inheritance tax chargeable transfer Capital gains tax on disposal No income tax or capital gains tax relief for gift 12 Academic Impressions 6

7 Tax efficient giving Canadian taxpayers Income tax credit for gift to Canadian registered charity or a prescribed university up to 75% of net income May carry forward the income tax credit for five years Gifts of capital property treated as a disposition Capital gain must be reported, but can be reduced if fair market value of property is greater than its Adjusted Cash Base US universities can qualify as Canadian charities 13 Prescribed universities outside Canada Donations made to a prescribed university Eligible for tax credit for donations by individuals and trusts Eligible for tax deduction for donations by corporations 14 Academic Impressions 7

8 Prescribed universities outside Canada Conditions for prescribed status: Academic entrance requirement of at least secondary school matriculation Organized for teaching, study and research Empowered to confer degrees of at least the baccalaureate level Ordinarily includes Canadian students in the student body Requests to obtain prescribed status sent to Canadian Revenue Agency 15 Tax efficient giving Mexican taxpayers Income tax deduction Deductions to organizations with authorized donee status limited to 7% of taxable income Authorized donees are organizations registered under Article 97 of the Mexican income tax law Eligible to issue tax deductible receipts to donors Flat rate business tax deduction Allowed but also limited to 7% of taxable income 16 Academic Impressions 8

9 Tax efficient giving German taxpayers Income tax deduction Generally limited to 5% of total income (or 10% in the case of defined special charitable purposes) Rule for major donations Rule for donations to charitable foundations Inheritance and gift tax exemptions Donations within 24 months of the inheritance or gift 17 Tax efficient giving Chinese taxpayers Income tax deduction Individuals may deduct up to 30% of their taxable income for a public benefit contribution Public benefit undertakings are defined in the Public Welfare Donations Law Enterprise income tax deduction Essentially a corporate income tax Allows deductions up to 12% of taxable income 18 Academic Impressions 9

10 Tax efficient giving Hong Kong taxpayers Personal Assessment, Salaries Tax and Profits Tax A deduction is granted for donations of money to exempt institutions or trusts of a public character Deduction amount cannot exceed 35% of income Stamp Duty Ordinance Stamp duty will not be charged on a conveyance of immovable property or a transfer of Hong Kong stock Estate Duty Ordinance Charitable gifts to be used in Hong Kong (from donors dying before February 11, 2006) will not be deemed part of the dutiable estate, and property bequeathed for charitable use in Hong Kong will be allowed as an estate deduction 19 Tax efficient giving Indian taxpayers Income tax deduction 100% deduction for donations to government charities 50% deduction for donations to nongovernmental charities Total deductions may not exceed 10% of gross income In kind donations are not tax deductible 20 Academic Impressions 10

11 Selected Jurisdictions Permitted activities What is charitable? See Appendix I Must objects be exclusively charitable? Taxation issues territoriality Are you limited in practice by tax considerations? 21 Questions? 22 Academic Impressions 11

12 Selected Jurisdictions Degrees of regulation What hoops must you jump through? The risk and perception of abuse The smell test Money laundering and terrorist financing 23 Taxation and Territoriality Taxation benefits only apply to indigenous charities Taxation benefits only for gifts to indigenous charities Subject to Available treaty relief Current developments within the EU 24 Academic Impressions 12

13 The Territoriality Test Some jurisdictions (e.g. Israel) consider where funds are applied, and some jurisdictions (e.g. Switzerland) have local benefit rules US and UK consider the location of the charity 25 The Territoriality Test US income tax deduction requirement: Organized [in or] under the laws of a state of the US or Washington, DC All definitions of charitable or exempt purposes include foreign activities and would include a charity with no US activities UK requirements: Subject to the law of a constituent part of the UK Subject to the jurisdiction of courts in the UK 26 Academic Impressions 13

14 Treaty exemptions to territoriality Canada Income tax deduction US citizen/resident charitable contributions to Canadian charity deductible if Canadian charity would qualify as charity in US Subject to individual s Canadian source income and US charitable contribution limits 27 Treaty exemptions to territoriality Mexico Income tax deduction US citizen/resident charitable contributions to Mexican charity deductible if U.S and Mexico agree that the charity would qualify as charity in US Subject to individual s Mexican source income and US charitablecontribution contribution limitson contributions to public charities See IRS Information Letter Academic Impressions 14

15 Treaty exemptions to territoriality Israel Income tax treaty US citizen/resident charitable contributions to Israeli charity deductible if Israeli charity would qualify as charity in US Contributions cannot exceed 25% of taxable Israeli source income 29 Treaty exemptions to territoriality Germany Income tax treaty Only provides tax benefits to organizations Estate and gift tax treaty Exempts transfers to a charity in a Contracting State if: transfer is exempt from tax in that Contracting State and would have been exempt in the other Contracting State if it had been made to a charity located there. For US, mostly relevant to non resident aliens making a foreign contribution 30 Academic Impressions 15

16 Territoriality and developing law in Europe Centro di Musicologia Walter Stauffer v. Finanzamt München fur Körperschaften Court of Justice of the European Communities Judgment of the Court: September 14, 2006 Hein Persche v. Finanzamt Lüdenscheid Court of Justice of the European Communities Judgment of the Court: January 27, 2009 UK Budget Centro di Musicologia Walter Stauffer v. Finanzamt München fur Körperschaften An Italian charity owned German real estate that received rental income. Performed charitable activities under German law German charity would have been exempt Court found that this contravened EC Treaty with respect to restrictions on capital movement. Provided tax relief for charitable income (not for donations) 32 Academic Impressions 16

17 Hein Persche v. Finanzamt Lüdenscheid Donations by a German individual to a Portuguese charity Followed approach in Stauffer In kind gift deemed to be a movement in capital Unlawful to discriminate on basis that not indigenous if from another EU Member State Taxing state could require evidence that deductibility standards are met Onus to satisfy the taxing state is on the donor 33 Territoriality and developing law in UK UK Budget 2010 Legislation to extend tax relief to UK charity equivalents Creates a new definition of an organization eligible for charity tax relief Encompasses organizations outside the UK 34 Academic Impressions 17

18 What if exposed to two countries tax? UK residents who are US citizens Liable for US and UK Income / Capital Gains Tax on UK source income and gains US /UK tax treaty offsets UK tax paid against US tax liability Tax efficient gift to UK charity Eliminates UK tax liability But increases US liability by reducing UK tax credit 35 What if exposed to two countries tax? Tax efficient gift to US exempt organization Eliminates US tax liability But already covered by UK tax paid so no benefit Therefore require donation to be treated as a Gift to a UK charity for UK tax purposes Gift to a US exempt organization for US tax 36 Academic Impressions 18

19 What if exposed to two countries tax? Need to give to a dual qualified structure: Regarded as a UK charity for UK tax purposes Regarded as a US exempt organization for US tax purposes 37 What if exposed to two countries tax? A dual qualified structure & how it works US exempt organization wholly owns shares of English charitable company Make entity election (IRC Section 7701) English charity disregarded purely for US tax purposes (despite being entirely real for all other purposes) 38 Academic Impressions 19

20 Dual Qualified Charity Structure US Exempt Org Check the Box 100% share ownership UK Charitable Company Bank Account Contributions 39 Dual Qualified Tax Advantages Income Tax Advantages UK treats donation as outright to UK charity Gift Aid relief is available US treats donation as outright to US charity UK charity is treated as disregarded entity US charitable deduction is available 40 Academic Impressions 20

21 Dual Qualified Tax Advantages Capital Gains Tax / Gift Tax Advantages Gift of a capital asset with built in gain to UK Would not trigger UK capital gains tax Would be 100% deductible for US gift tax purposes 41 Dual Qualified Tax Advantages Inheritance Tax / Estate Tax Advantages (assets left to charity through Will) Exempt from UK inheritance tax 100% deductible for US estate tax purposes p 42 Academic Impressions 21

22 Dual Qualified Practicalities Donations (or gifts by Will) should always be made out to UK charity Board of Directors 43 Dual Qualified Practicalities Flexibility with respect to spending (but always consider UK charitable purposes) Questions about logistics: Exchange rate used to calculate deductions Difference in tax years between US and UK 44 Academic Impressions 22

23 Dual Qualified Example Donor is US citizen resident in UK Donor donates 1,000 to dual qualified charity (DQ) Gift Aid Declaration Allows DQ to reclaim 250 [20% * ( 1,000 / 80%)], together with supplement of 32 if made before April 2011 DQ realizes total of 1,250 ( 1,000 from donor and 250 from HMRC) 45 Dual Qualified Example US Tax Return Donor must substantiate gift with charitable receipt Receipt should show grossed up amount of gift ( 1,250) 1,000 amount given directly to DQ 250 transferred to DQ by HMRC on behalf of taxpayer US charitable deduction will be equal to 1, Academic Impressions 23

24 QUESTIONS? 47 Other options Friends organizations US resident affiliate organizations Domestic organizations Receive contributions in US and spend funds on behalf of foreign charities Cannot act as mere conduits Independent board must exercise control and discretion over funds 48 Academic Impressions 24

25 Other options Friends organizations Revenue Rulings and Do not help a US person with UK income taxes Charitable exception to Foreign Agents Registration Act 49 Other options Charities Aid Foundation UK charity that exists to provide services to charities and donors all over the world Promotes international giving CAF America for US donors Single gifts Create your own Donor Advised Fund 50 Academic Impressions 25

26 Other options Charities Aid Foundation CAF American Donor Fund for dual US UK taxpayers Allows a dual taxpayer to take advantage of Gift Aid and the US charitable deduction Three different ways to give Single donations Regular contributions to an account Trust Account (makes charitable donations from income and capital of an invested fund) 51 Other options Charities Aid Foundation CAF Benefits: Convenience Peace of Mind CAF Drawbacks: Administrative costs 52 Academic Impressions 26

27 Other options Transnational Giving Europe Network of European institutions Allows European cross border giving by using partners located in various European countries Fees: A 5% fee is taken on the donated amount for gifts until For higher gifts, 1% of the amount in excess of the is charged. The maximum fee is Practical Concerns of Currency control issues in China Export controls Finding reliable support US law firms will have networks abroad of foreign lawyers and accountants Use your attorney to find someone reliable; and interface with them 54 Academic Impressions 27

28 Practical Concerns of Hiring Incentives to Restore Employment Act of 2010 Encourages Foreign Financial Institutions to report information about US account holders 30% withholding tax imposed on payments to certain nonfinancial foreign entities if: Non financial foreign entity is beneficial owner of payments Exemption requirements are not met 55 Practical Concerns of FBAR Filing Requirements FBAR must be filed for each calendar year in which a US person has a financial interest in, or signature or other authority over, a foreign financial account Financial i account includes commingled d funds, such as mutual funds 56 Academic Impressions 28

29 Practical Concerns of Terrorist financing concerns It is a crime to provide financial or material support to individuals or organizations that have been identified by the US government as terrorists or controlled by terrorists Knowledge and intent are not required Office of Foreign Asset Control maintains lists of embargos and sanctions 57 Practical Concerns of Best practices for US based charities: Released by US Treasury Department Involves accounting for all funds received and disbursed, verifying all programs before disbursing grants, and compiling information about potential grantees 58 Academic Impressions 29

30 Case Study O Byrne University (OU) has launched a Science and Technology Research Center in mainland China, which is not a registered charity in China (few foreign institutions are). OU would like to set up a legal entity in China in order to 1) receive gifts from in-country in RMB (to be kept in RMB Chinese currency), and 2) pay costs in-country for their research center. OU has a fairly extensive network of Chinese graduates as well as ex-patriot citizens of the States who they believe have capacity and interest in their research, so they d like to start raising funds within China in RMB, none of which will be converted to dollars, and all of which will be kept in-country. If their donors are US citizens, are they able to receive a tax deduction for their gift made in foreign currency that benefits the US owned research center in China? Are there tax treaties that cover this scenario? Would they need to set up a WOFE (Wholly Owned Foreign Entity)? If so, what are the first steps they might take toward doing so? Additionally, for their alumni who are Chinese citizens, is a tax benefit available to them? What if OU was partnered with a Chinese University? How would that partnership change, if at all, the benefits? 59 FINAL QUESTIONS? 60 Academic Impressions 30

31 THANK YOU! Deidre G. O'Byrne, Partner, Withers Bergman, LLP Tel: & Paul lm. Roy, Partner, Withers Bergman, LLP Tel: Appendix I 62 Academic Impressions 31

32 US Exempt Organizations Internal Revenue Code section 501(c)(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, nosubstantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. 63 Charitable Purposes in England Lord MacNaghten s classification in Income Tax Special Purposes Commissioners v. Pemsel [1891] AC 531: Relief of poverty Advancement of education Advancement of religion Other purposes beneficial to the public Derived from preamble to Statute of Uses, Academic Impressions 32

33 Section 2, Charities Act 2006 New English charitable purposes The prevention or relief of poverty The advancement of education The advancement of religion The advancement of health or the saving of lives The advancement of citizenship or community development The advancement of the arts, culture, heritage or science The advancement of amateur sport 65 Section 2, Charities Act 2006 New English charitable purposes The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity The advancement of environmental protection or improvement The relief of those in need, by reason of youth, age, ill health, disability, financial hardship or other disadvantage The advancement of animal welfare The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services 66 Academic Impressions 33

34 Section 2, Charities Act 2006 The 13 th new English charitable purpose A sweep up provision Any other purpose recognized under existing charity law which may be reasonably considered as analogous to any of the specific heads or anything else already recognized; or which may be reasonably considered as analogous to the foregoing 67 Other Charitable Definitions Mexico: Organizations eligible to seek authorized donee status include those that: Provide aid to the needy (including subsistence, medical, psychological, education and training for employment, prevention and attention in disasters, intra family violence, legal, disasters, and funeral assistance, those working with refugees and migrants, and on gender equity issues); engage in education certified pursuant to the General EducationAct; scientific or technological research; environmental protection; support for culture and the arts; preserve national treasures; or defend and promote human rights; Grant scholarships; or Make grants to other authorized donees. 68 Academic Impressions 34

35 Other Charitable Definitions China: Activities that qualify as public benefit undertakings include: Disaster relief, poverty alleviation, assistance to the handicapped, and assistance to social organizations in needy circumstances; Education, scientific, cultural, public health, and athletic undertakings; Environmentalprotection and constructionofof public facilities; and Other public benefit undertakings promoting social development and progress. 69 Other Charitable Definitions Hong Kong: Acceptable charitable purposes follow Lord MacNaghten s definition: relief of poverty; advancement of education; advancement of religion; and other purposes of a charitable nature beneficial to the community not falling under any of the preceding heads. Note: while the purposes under the first three headings may be in relation to activities carried on in any part of the world, those under the last heading will only be regarded as charitable if they are of benefit to the Hong Kong community. 70 Academic Impressions 35

36 Other Charitable Definitions India: To be eligible for tax exemption, a not for profit entity must be organized for religious or charitable purposes. Charitable purposes include "relief of the poor, education, medical relief, and the advancement of any other object of general public utility." A 2009 Finance Act expanded chartiable purposes to include the "preservation of environment (including watersheds, forests, and widelife) and preservation of monuments or places or objects of artistic or historic interest" 71 IRS Circular 230 Disclosure: To Ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax related penalties under federal, state or local tax law or (II) promoting, marketing or recommending to another party any transaction or matter addressed herein. 72 Academic Impressions 36