Beyond Borders: International Issues for Nonprofits. June 18, 2013

Transcription

1 Beyond Borders: International Issues for Nonprofits June 18, 2013

2 Welcome We are pleased to welcome you to today s webcast. In order to qualify for your CPE Certificate, you will need to: Remain logged on for at least 50 minutes Respond to at least 3 of the 4 polling questions that will be presented We would appreciate if you would complete the evaluation survey following the event. A link to the survey will be ed to you automatically within the hour following the webinar. You may submit questions and we will try to address them during the program. However, if time does not permit us to answer a question posed during the webcast, it will be answered offline after the event. For those who meet the above criteria a CPE certificate will be ed to you or deposited into your Checkpoint Learning account. To apply for a complimentary Checkpoint Learning account visit the Executive College page at 2

3 Twitter Follow us on twitter for the latest on international issues for nonprofits and related Our hash-tag for this webinar is, which you can find at the bottom left hand side of each slide. 3

4 Speakers Brent Lipschultz, CPA, JD, LLM, PFS Partner Personal Wealth Advisory Practice Group Candice Meth, CPA, MBA Senior Manager Not-for-Profit Services 4

5 Topics Covered Best Practices Prior to Engaging in Foreign Activities: Reporting Foreign Activities Within Form 990/Form 990-PF Foreign Grant Making Office of Foreign Assets Control s ( OFAC ) Expenditure Responsibility Equivalency Determination Foreign Nationals and US Citizens Working Abroad Foreign Investments: Blocker Corporations Due Diligence FBAR Filing Forms 926, 8865, FATCA, and More What Should You Do If You Discover Reporting Deficiencies? 5

6 Questions About Foreign Activities Within the IRS Forms In the Core Form 990: Part IV Checklist of Required Schedules: Part V Other IRS Filings and Tax Compliance The TD F is what is known as the FBAR and we will be discussing that form and the requirements for filings later in the program. ***If you answered yes to any of these questions you then will be completing Attachment F to the

7 Schedule F Statement of Activities Outside the United States This schedule is completed if there are grants made to foreign entities/foreign individuals, if there is a foreign office, if there are foreign investments, or if there is a foreign program, etc. Transactions aggregated by Region (as defined in the instructions) are disclosed, not by country. The thresholds for program activities/grants are different than for foreign investments. 7

8 Schedule F Statement of Activities Outside the United States If the organization had aggregate revenues or expenses of more than $10,000 from or attributable to grant making, fundraising, business, investment, and program services outside the United States, or held investments outside the United States in foreign partnerships, foreign corporations, and other foreign entities with an aggregate book value of $100,000 or more at any time during the tax year, they are reported in Schedule F. Expenses incurred for services provided in the United States (for example, telemedicine and services provided over the Internet) that include recipients both inside and outside the United States should not be reported in Part I. Example, a charity buys a plane ticket for a speaker from Spain to travel to the U.S. to give a speech to their organization, the plane ticket purchased online would not be included in Schedule F. 8

9 Schedule F Statement of Activities Outside the United States Schedule F has a checklist that alerts you to the possible types of foreign filings an exempt organization might need to file use this as a tool! 9

10 Schedule F Statement of Activities Outside the United States Expenditure Responsibility/ Equivalency Determination: Charities seeking to make international grants do not need to follow the special rules that apply to private foundations, but they can learn a great deal from these legal requirements. At a bare minimum, a charity should consult the Office of Foreign Assets Control s ( OFAC ) website and double check that grants are not being given to a listed entity, or a country/region where there is an embargo. The penalties for engaging in such a prohibited transaction are severe. We will discuss these items in greater detail stay tuned!! 10

11 Polling Question 1 Does your organization: A. Invest abroad B. Employ foreign nationals C. Conduct foreign operations D. All of the above E. None of the above 11

12 Questions About Foreign Activities Within the IRS Forms There is also a question about foreign bank accounts in the Form 990-T!! One of the main reasons why a tax-exempt organization files a Form 990-T is due to unrelated income earned by investments. Those same investments may also trigger additional tax filings such as the 926, 8865, 5471, etc. IF the entity is completing those forms remember they get attached to the 990-T NOT the 990 because they are NOT subject to public disclosure!! If the organization has no reason to file a 990-T BUT needs to file one of these foreign filing forms, the IRS says to fill out a shell 990-T and attach the forms to it. 12

13 Questions About Foreign Activities Within the IRS Forms Within the Form 990-PF foreign activities are asked about or alluded to in the following areas Part VII-A Statement Regarding Activities Part VII-B Statement Regarding Activities for which Form 4720 may be required 13

14 What is Expenditure Responsibility? Expenditure responsibility requires The grant only be spent for the purpose made. Foundation receives complete reports on how the funds were spent by the grantee. Conduct of a pre-grant inquiry by the foundation identifying: Past history of grantee Experience of the grantee Management and activities of the grantee [see (b)(3)] Grants to political subdivisions and certain other organizations that do not hold a 501(c)(3) status 14

15 Why Does This Apply to Foreign Grants? International grant-making and expenditure responsibility Cross-border grant-making Foundation must exercise expenditure responsibility over grants to foreign charities that do not have tax exempt status as a public charity under Sect. 501(c)(3). Rev. Rul Grants will meet the requirements of Sect

16 Procedures for Expenditure Responsibility Procedures for making international grants utilizing expenditure responsibility Pre-grant inquiry Grant limitations (substantially similar to requirement for 501(c)(3) organizations) Grant terms (grantee must agree to submit full and complete annual reports on how money is spent and comply with grant) Grantee reporting capital assets: Two-year rule 16

17 Another Option Exists Equivalency Determination! Equivalency determinations Sponsoring organizations of donor-advised funds must exercise expenditure responsibility over distributions to foreign organizations or be subject to a 4966 excise tax. Foundations can make their own equivalency determination, in lieu of obtaining an IRS determination, or by a grantee affidavit or opinion of counsel that grantee meets the requirements of Sect. 501(C)(3) as a public charity. See Rev. Proc

18 When Is It Ok to Do Equivalency Determination Instead of Expenditure Responsibility? Grants from U.S. private foundations to foreign organizations that do not require expenditure responsibility include Good faith efforts by a foundation that the foreign charity is a Sect. 509(a)(1)(2)- or (3)-type organization Foreign governments, including instrumentalities and agencies thereof International organizations designated by an executive order under 22 U.S.C Examples are U.N., UNICEF, UNESCO, World Bank and International Monetary Fund 18

19 Office of Foreign Assets Controls ( OFAC ) Executive Order prohibits transactions between a foundation and any foreign organizations or group of individuals, deemed as terrorist, listed on the embargoed list of countries by the Treasury Department on foreign asset control. Use this website to search the Specially Designated Nationals List to ensure you are NOT giving a grant to a prohibited person or organization. Be careful of Friends of organizations!! List/Pages/fuzzy_logic.aspx **Checking this list before giving a grant is required for both Private Foundations and Public Charities, the penalties are severe!! 19

20 What Types of Records Should You Retain Regarding Foreign Grants Grantor recordkeeping Required for Private Foundations: Retention of records for IRS review of the agreement, grantor reports, and records of any independent audit or investigation of the grant, affidavit (equivalency determination) or proof of expenditure responsibility, minutes denoting Board approval of grant, documentation that the OFAC website was checked prior to approval of grant Recommended for Public Charities: affidavit (equivalency determination) or proof of expenditure responsibility, minutes denoting Board approval of grant, documentation that the OFAC website was checked prior to approval of grant 20

21 EMPLOYMENT OF FOREIGN NATIONALS AND US CITIZENS WORKING ABROAD 21

22 Individuals Living Abroad U.S. citizens or U.S. resident aliens living abroad are subject to same income tax laws as those living in the U.S. If you are U.S. person living abroad, the following additional forms may apply to you: Form Foreign Earned Income Exclusion Annual monetary limit on exemption from U.S. taxes on foreign earned income Form Foreign Tax Credit Form Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) File Form 673 with your employer to prevent U.S. tax withholding on income earned abroad and eligible for exclusion from U.S. taxes Applicability is limited to foreign earned income exclusion and housing exclusion 22

23 Individuals Living Abroad US citizens employed by American Employer are subject to US social security Cannot elect in or out of FICA Generally US citizens are subject to both US and foreign social security taxes if employed by US employer Totalization agreements eliminate double taxation 23

24 Nonresidents Employed in US An individual who is not a U.S. citizen is considered as an alien for U.S. tax purposes Who is a non-resident alien? Typically, if an alien satisfies substantial presence test in the U.S. or green card test, taxpayer is a resident alien Typically, all other aliens are non-resident aliens Exception to substantial presence test Explore the possibility to escape the substantial presence test by claiming the closer connection to a foreign country Use Form 8840 Closer Connection Exception Statement for Aliens 24

25 What are Nonprofits To Do When Hiring Foreign Nationals? Start the process early before the FN s start date. Find out payee s tax residency status and Visa obtain passport and Visa? On a J-1 Status as a teacher or researcher o NR status if on J-1 and been in US for less than 2 years in the last 6 years. On a F-1 Status as a student Review whether FN possesses Visa Type that does not allow income earnings in the US. Find out if payee intends to claim a tax treaty? Must have Social Security or ITIN (Form W-7) o Form W-8 BEN Will Need Form 8233 at least two weeks in advance of payment for IRS Processing 25

26 What are Nonprofits To Do When Hiring Foreign Nationals? Independent contractor vs. employee? Foreign independent contractors in US (Federal and state withholding) Voluntary Disclosure Program Where are services being performed? If services performed in US taxable 100% of service performed outside the US No US tax withholding Type of Payment- Services, Scholarship, Honoraria Compensation for services performed in the U.S. is U.S. sourced income and subject to U.S. tax withholding unless an exception applies If you are Nonresident Alien and you receive such compensation, there is a possibility that there is an exemption from U.S. tax withholding on such compensation o o Form 8233 Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual W-4 (NRA) (Single, 1 exemption unless from Canada, Mexico, or Korea) 26

27 What are Nonprofits To Do When Hiring Foreign Nationals? Type of Payment- Scholarship, Honoraria Income Effectively connected general withholding at 30% with exception: Scholarships and Fellowship Grants Exemptions from Taxation Candidate for Degree Used for tuition and fees at educational organizations Fees, book, supplies and equipment Exempt amounts not reported Reportable Amounts include Travel and Room & Board Withholding at 14% if NRA has F, M, J, Q visas Otherwise 30% withholding 27

28 What are Nonprofits To Do When Hiring Foreign Nationals? Withholding Compensation paid to NRA for services performed in US is subject to same withholding for US citizens and residents Compensation paid to NRA for independent personal services is generally subject to US withholding tax at a rate of 30% or lower treaty rate A FN that meets the substantial presence test is paid as a resident Must have ITIN and complete Form W-9 Withholding Exceptions Form 8233 for exemption from withholding on compensation for independent personal services Form W-8BEN for reduced or eliminated withholding on dividends, interest, and certain other income. 28

29 What are Nonprofits To Do When Hiring Foreign Nationals? Year end reporting forms- W-2 (employees) Form 1042 and S Reports certain income subject to withholding paid to NRA (independent contractors) Form 1040-NR: U.S. Nonresident Alien Income Tax Return 29

30 Polling Question 2 Foreign nationals working in the United States do not have to be concerned with U.S. and state taxes A. True B. False 30

31 FOREIGN INVESTING 31

32 What you Should Know Before Investing Some Questions to Ask: Will this foreign investment trigger Unrelated Business Income Tax ( UBIT )? Is there a blocker corporation option that will shield the organization from UBIT? What additional filings may be required because of this foreign investment? What are the redemption terms? Is there a 10% holdback rule, and if so will that lead to the organization needing to file an FBAR form? For a private foundation, make sure that your ownership of this investment or any side funds doesn t violate the excess business holding or jeopardizing investment rules. 32

33 Blocker Corporations What is a blocker corporation and why is it used to invest for tax exempts? Funds set up an offshore feeder corporation which foreigners and tax exempt investors typically invest Use Foreign corporations to hold foreign or US investments Blockers are usually formed in low or no tax jurisdictions Cayman Islands, BVI, Bermuda Blockers are used to avoid US trade or business income and UBIT Dividends from foreign corporations to tax exempts are not subject to tax Blocker corporation may be subject to FATCA as an FFI 33

34 Owning a Foreign Entity What forms will you need when you own a foreign entity? Foreign corporation Foreign partnership Foreign disregarded entity Foreign branch 34

35 Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation Purpose To report certain transfers of property to a foreign corporation Contributions of cash are also generally reported If a U.S. partnership is the transferor, the filing requirement shifts to the partners of the partnership 35

36 Form 5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations Similar to Form 1120 in some aspects Used if you do not make an election to treat a foreign corporation as a partnership or disregarded entity 36

37 Form 5471 Most common situations which require a filing: Category 2 - a U.S. citizen or resident who is an officer or director of a foreign corporation (FC) in which a U.S. person has (a) acquired enough FC stock that it now owns 10% or more or (b) acquired an additional 10% of FC stock Category 3 includes: A U.S. person who acquires stock in FC which, when added to pre-owned stock, is 10% or more of FC stock A U.S. person who acquires FC stock which, without regard to pre-owned stock, represents 10% or more of FC stock A U.S. person who disposes of sufficient amount of FC stock to reduce its interest to less than 10% of FC stock 37

38 Form 5471 Most common situations which require a filing: Category 4 includes a U.S. person who owned more than 50% of FC stock for an uninterrupted period of at least 30 days during FC s annual accounting period Category 5 includes a U.S. person who owned (directly, indirectly, or constructively) 10% or more of FC stock on the last day of FC s tax year, provided that FC was a controlled foreign corporation (CFC) for an uninterrupted period of at least 30 days during its tax year 38

39 CFC A controlled foreign corporation or a CFC means any foreign corporation if more than 50 percent of - 1) The total combined voting power of all classes of stock of such corporation entitled to vote, or 2) The total value of the stock of such corporation is owned by U.S. shareholders on any day during the taxable year of such foreign corporation Simply put, a U.S. shareholder is any U.S. person who owns 10% or more of the foreign corporation 39

40 Form 5471 A U.S. person is A citizen or resident of the United States A domestic partnership A domestic corporation An estate or trust that is not a foreign estate or trust Constructive ownership For instance, if Jane, a U.S. citizen, owns 70% of FCo1 and FCo1 owns 60% of FCo2. Is FCo1 a CFC? Is FCo2 a CFC? Complex rules for ownership through domestic or foreign trusts, estates, partnerships, etc. Multiple filers There can multiple filers for the same corporation for the same year because of the way the rules are drafted Exceptions are provided to avoid such duplicate filings in certain circumstances 40

41 Form 8832 Entity classification election Purpose To make an election: commonly known as Check the box election But why make a CTB election? An eligible entity, foreign or domestic, uses this form to elect how it will be treated for U.S. federal tax purposes For instance, an eligible foreign corporation may make an election to be treated as a partnership for U.S. tax purposes No impact on how it is treated in the foreign country Caution LLC in foreign country does not necessarily mean LLC as understood in the U.S. context When in doubt file a classification election form! 41

42 Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships This form is used when there are at least two owners of the foreign entity Used for true foreign partnerships At least one partner has unlimited liability Also used when you make an election on Form 8832 to treat the foreign entity as a partnership for U.S. tax purposes Similar to Form 1065 in some aspects 42

43 Form 8865 (cont d) Who has to file? Category 1 - A U.S. person who owned more than 50% of the capital, profits, or losses in the foreign partnership (FP) Category 2 - A U.S. person who owned 10% or more of the capital, profits, or losses in FP while the FP was a controlled foreign partnership (CFP - more than 50% owned by U.S. persons, each owning at least 10%) However, if the FP had a Category 1 filer at any time during the tax year, no person is a Category 2 filer Category 3 - A U.S. person who contributed property to FP in exchange for an interest therein if that person either: Owned directly or constructively at least a 10% interest in FP immediately after the contribution, or The value of the property contributed (when added to the value of any other property contributed by such person during the 12- month period ending on the date of the transfer) exceeds $100,000 43

44 Form 8865 (cont d) Who has to file? Category 4 - A U.S. person that had one of the following reportable events : Acquisition of a direct interest in FP that brings its ownership interest above 10% (e.g., 9% to 10%) Includes a change in proportional interest e.g., another partner withdraws Acquisition of an additional 10% direct interest since the last time that the U.S. person had a reportable event (e.g.,11% to 21%) Disposition of a direct interest that reduces ownership to below 10% (e.g., 10% to 8%) Disposition of a direct interest that reduces ownership by at least 10% less than the last time the person had a reportable event (e.g., 21% to 11%) 44

45 Form vs Return of U.S. Person Persons with Respect to Foreign Disregarded Entities Used for true disregarded entities Single owner with unlimited liability Also used when you do elect to treat the foreign entity as a disregarded entity Applies when there is only one owner v/s at least two owners required for partnership Tax owner vs. Direct owner Tax owner is the person that is treated as owning the assets and liabilities of the FDE for U.S. tax purposes Direct owner is the legal owner of the FDE 45

46 Form 8858 (cont d) The following U.S. persons that are tax owners, or own certain interest in foreign tax owners, of a foreign disregarded entity ( FDE ) are required to file: A U.S. person that is a tax owner of a FDE Category 4 or Category 5 filers of Form 5471 with respect to a controlled foreign corporation (CFC) that is the tax owner of a FDE Category 1 or Category 2 filers of Form 8865 with respect to a foreign controlled partnership (CFP) that is a tax owner of a FDE This Form is required if US Nonprofit operates outside the US in branch form through a foreign corporation that has elected to be a disregarded entity. 46

47 Overview of FBAR FBAR (Form TD F ) Report of Foreign Bank and Financial Accounts Filing requirement Filed with IRS but not a IRC requirement (Art 31) Who Must File? When do you have an interest in an account or asset? U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title. Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account. When Due? Received by June 30 (no extensions of time granted) Penalties If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply 47

48 FBAR What you need to know No FBAR filing requirements for hedge fund or private equity but required for foreign mutual funds (available to the general public and trade on a regular established securities market. No FBAR filing if open up account of a foreign branch in the United States Consider signature authority for officers of nonprofit Watch out for FBAR reporting for CFC Foreign Blocker 48

49 Polling Question 3 The Form TD ( FBAR ) is applicable to tax exempt entities A.True B.False 49

50 Penalties For Missing a Form 50

51 Penalties $10,000 per failure is a common starting point For some forms the penalties are even higher Watch out for criminal penalties 51

52 Voluntary Compliance Program Past FBAR filings can be made without penalty if? For taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, you should file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late. Through June 30, 2013, you may file electronically or by sending paper forms to Department of Treasury, Post Office Box 32621, Detroit, MI After June 30, 2013, you must file electronically. If you are unable to file electronically, you may contact the FinCEN Regulatory Helpline at to request an exemption. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns. 52

53 Voluntary Compliance Program Past International filings can be made without penalty if? A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. (The Form 5471 should be submitted with an amended return showing no change to income or tax liability.) Include at the top of the first page of each information return "OVDI - FAQ #18" to indicate that the returns are being submitted under this procedure. This is very important to ensure your returns are processed through this procedure. The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3520 if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns. 53

54 Polling Question 4 There is no relief for persons/organizations who file late FBAR forms A.True B.False 54

55 Best Practice Tips 1. Discuss with an international tax professional about your existing international activities (for instance foreign investments, foreign offices, foreign grant making, inheritance/ gifts from foreign persons, hiring of foreign nationals, etc.) to make certain the organization and officers are tax compliant. 2. Use the questions within the 990, 990-T, and 990-PF as a guide to what other forms you may need to be filing. 3. Prior to entering into a foreign investment, hiring a foreign national, or making a foreign grant, do your research!! Best practices suggest that organizations maintain documentation to support the decision to engage in these activities, and the oversight they have conducted. Remember to check the OFAC website! 55

56 QUESTIONS Brent Lipschultz, Partner EisnerAmper LLP Candice Meth, Senior Manager EisnerAmper LLP

57 IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.