NewsLetter Asesoría Financiera, S.A.

Transcription

1 NewsLetter Asesoría Financiera, S.A. NEWSLETTER Nº 9/2015 (28 January 2015) Gal.la Sánchez Vendrell. Partner. Lawyer. CEO Tax amnesty for American citizens resident in Spain The US is one of the few countries that establish tax obligations on the basis of nationality and not residence, as the vast majority of countries do. As a result, American citizens living outside the US are obliged to file an income tax return, not only in their country of residence, but also with the US Internal Revenue Service (IRS), for income worldwide. It is vitally important to coordinate the two returns, in order to take full advantage of double taxation relief and pay only the right and required amount: thus, making professional advice from experts on taxation in both countries is essential. Furthermore, as if that were not enough already, since 2011 American citizens not resident in the US have been obliged to file an annual report on any bank accounts they hold outside the US, with severe penalties for failing to do so. There are very few American citizens who comply with these obligations - the majority because they are unaware of them - and, until now, such omissions did not usually have unpleasant consequences, since the IRS had difficulty detecting them. Since December 2014, however, Spanish financial institutions have been obliged to inform the US Treasury Department of accounts held by American citizens containing an amount equivalent to one million dollars or more. At the end of 2015, that obligation to inform will extend to accounts with a balance of 50,000 dollars or more. In other words, the IRS will soon

2 know the identity of those American citizens who have accounts abroad and will be able to establish whether they have complied with their tax obligations. It is not all bad news, however: in June 2014 the IRS announced a tax amnesty for American citizens not living in the US, allowing them to file their income tax return for the three previous years and to communicate the accounts held abroad in the last six years, free of any charges or penalties. There is no deadline for applications for this tax amnesty, but practitioners believe the program will be around 1 year. It will be a unique opportunity for American citizens resident in our country to regularize their taxation situation in their country of origin. In the event of not doing so, severe penalties are foreseen. US Citizens living in Spain Introduction to US Tax Unlike citizens of Spain who are only subject to tax in Spain if they live here or have income from sources within Spain, US citizens, even those with dual Spanish-US citizenship, are subject to US taxation on their worldwide income regardless of where they live or the source of their income because the US has a citizenship based tax system. Any US citizen with worldwide income of the equivalent of $10,000 (US dollars) is required to file a US tax return annually even if no tax is due. US citizens are also required to file annually a report of financial accounts held at financial institutions located outside the US. 2

3 Citizenship Taxation A Uniquely American Approach The US is the only major country to tax its citizens on their worldwide income no matter where they live. Equally important, the US applies its Internal Revenue Code to its citizens living outside the United States as if they were living in the United States. In other words, all aspects of the US Tax Code apply to US citizens living in Spain, creating tax situations for them that do not exist for their fellow citizens living in the US. Another not generally known fact is that everyone born within the borders of the US is a US citizen even if his or her parents were in the US only temporarily for study or work. Even if the person never obtains a US passport or social security number, he or she is a US citizen and subject to US taxation on his or her worldwide income. Not surprisingly, the conjunction of US birthright citizenship and citizenship taxation surprises many dual national US citizens living abroad. More often than not, these dual national Spanish-Americans are unaware of their US tax filing obligations and, as a result, are not current with their US tax filings. Foreign Bank Account Reports (FBAR) As if filing US tax returns was not pain enough, all US citizens are also required to file annually an FBAR (now called a FinCen 114) if the aggregate of the highest account balances in all of their financial accounts located outside the US exceeds the equivalent of $10,000 at any time during a tax year. The FBAR filing requirement is separate from the US income tax return and has a different filing deadline (June 30) than the tax return (June 15). Penalties for not filing FBARs can be significant. Non-willful failure is subject to a fine of up to $10,000 per account per year. Penalties for willful failure to file FBARs can involve civil penalties of as much as 50% of the high balance of each unreported account for each year that it is not reported and to criminal penalties. 3

4 A New US Enforcement Mechanism The Foreign Account Tax Compliance Act Until recently the US Internal Revenue Service (IRS) could not easily detect non-filing by US citizens living overseas. That changed dramatically in 2010, when the US Congress passed The Foreign Account Tax Compliance Act (FATCA for short). FATCA imposed two regimes: one affecting individual US citizens and one affecting non-us financial institutions. The first required US citizens beginning with the 2011 tax year to file an additional form with their US tax returns identifying foreign financial accounts. The second requires non-us financial institutions to report US account holders to the IRS. As of July 2014, Spanish financial institutions have had to institute due diligence procedures to establish when a new account is opened whether the account holder is a US person. These US accounts will be reported to the IRS beginning in As of December 2014, Spanish financial institutions will be required to report the existence of any pre-existing US accounts at their institutions that had a balance of $1 million or more. By the end of 2015, the pre-existing account requirement reporting will apply to accounts with a balance of $50,000 or more. In effect, FATCA turns the tables in favor of the IRS by making foreign financial institutions give the names of their US account holders to the IRS rather than forcing the IRS to discover these foreign financial accounts. In other words, the IRS will soon know which US citizens have financial accounts overseas and whether or not they have filed US tax returns or bank reports. Filing Delinquent US Tax Returns and FBARs the Streamlined Foreign Offshore Procedures On June 18, 2014, the IRS announced the adoption of Streamline Foreign Offshore Procedures (SFOP) for US citizens residing outside the US who can establish that their non-filing of US tax returns and FBARs was non-willful. Any US citizen living overseas who honestly did not know of their US tax and bank report filing obligations is eligible to use the SFOP. The SFOP requires US citizens to file tax returns for the three most 4

5 recent tax years for which returns have not yet been filed and FBARs for the six most recent tax years without incurring any FBAR or tax penalties. Any tax that may be due for any of the three years must be paid plus interest, but all non-filing and late-filing penalties are waived. The SFOP offers US citizens an excellent chance to become compliant with their US tax and bank report filing obligations without incurring penalties. Proper Coordination of Spain and US Tax Filings is Essential Therefore, as mentioned above, US citizens who are residents in Spain are obliged to file income tax return in Spain, and also with the US Internal Revenue Service (IRS), for income worldwide. This necessarily involves coordinating the returns to be filed in both countries, in order to make the most of any applicable deductions and exemptions to avoid double taxation and of all other possible tax benefits. It is therefore essential to count on experts on taxation in both countries in order to ensure not only a correct taxation but also to pay only the required amount, taking full advantage of deductions, exemptions and tax credits that may be applicable. At ASESORIA FINANCIERA we have experts on taxation both in Spain and in the US and we are therefore able to coordinate the returns to be filed in both countries, in order to make the most of any applicable tax advantages. Each case is different and should therefore be studied individually, so that clients rest assured that they have complied with their tax filing obligations in both countries and that they have only paid the required amount. You can contact us for any question or clarification you may have in reference to this matter. Gal.la Sánchez Vendrell. Partner. Lawyer. CEO 5