Cross Border Tax Planning Checklist

Transcription

1 Cross Border Tax Planning Checklist & c o m p a n y l l p Accountants & International Tax Consultants nd Street, Suite 1200 San Francisco, California

2 Page 1 Income Tax Residents are taxed on worldwide income under U.S. income recognition rules. Income that is exempt in various countries may still be taxable in the U.S. A person becomes a resident in the U.S. as a result of meeting a physical presence test or by obtaining a resident visa (Green Card). In the year of one s move to the U.S., a person may be a dual status taxpayer, meaning that they are nonresident in the first part of the year, and resident in later part of the year. The physical presence test is the following: 1. Current year days are at least 31 days, and 2. The following 3 year formula is 183 or more, than one is a resident. Year Days Multiplier Total / /6 20 Total 184 = Resident Exceptions: - If one can establish by facts that they have a closer connection to a foreign country, or - If one is still taxable as a resident in their country of origin and the facts qualify the person under the treaty tie breaker tests, then one can still be a nonresident. The U.S. has tax treaties with over 60 countries. A nonresident may be subject to U.S. tax on income earned in the U.S. or on income from U.S. investments. The standard tax rate is 30%. This rate may be reduced under a relevant income tax treaty. While holding a green card and residing outside the U.S., an individual may be able to file a nonresident income tax return, if they meet certain tests in the relevant income tax treaty. This would allow one to exclude all foreign source income from U.S. taxation. Immigration issues may need to be addressed if one holds a green card and files a nonresident return. Gift and Estate Tax Residents are subject to gift tax and estate tax on worldwide assets. The definition of resident for gift and estate tax is based on one s domicile. Domicile is generally the place one considers their permanent home. A person with a nonresident visa can be considered to be domiciled in the U.S. if their facts show that they have permanently moved to the U.S. Gift Tax: Residents are exempt from gift tax on gifts up to $13,000 per year to any number of individuals. In addition, residents have a lifetime exclusion of $5 million. Gifts in excess of the annual and lifetime exclusions are taxed at a flat 35%. Nonresidents are subject to U.S. gift tax only on U.S. property. Nonresidents are entitled to the same annual exclusion of $13,000, but have no lifetime exemption. Estate Tax: Estates of U.S. residents are not taxable on amounts up to $5.1 million. The excess is taxed at a flat rate of 35%. Nonresident estates are taxed at rates ranging from 18-35% on U.S. property. The estate tax exemption for nonresidents is only $60,000. There may be relief under a relevant gift and estate tax treaty. There are 16 gift and estate treaties currently in force.

3 Page 2 The $5.1 million exemption and 35% tax rate will expire at the end of 2012 unless Congress passes legislation to extend the exemption and rates. If not, then the pre-bush tax rates come back into force: Estate exemption: $1 million Top tax rate: 55% Pre Arrival Planning & Considerations 1. Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one s country of origin, it may be necessary to obtain local counsel in order to coordinate legal tax planning issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany. 2. Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save tax. 3. Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S. 4. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax law. 5. Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 35%. Consider exercising such options prior to arrival. 6. Review deferred compensation and retirement benefits, to determine how to efficiently access these sources with minimum tax before and after arrival. 7. If you have a foreign plan, you should check into whether the vesting of plan benefits be taxable to you will in the U.S. 8. Plan the proper timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax. 9. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country. 10. If you are in the U.S. for a short period of time, you may be exempt from U.S. tax under the relevant income tax treaty. 11. Transferring appreciated assets to a foreign trust or foreign company will usually trigger current income tax on the appreciation if the transfer is made when you are a U.S. resident. 12. If you hold a green card for more than seven years, you may be subject to an exit tax on appreciated assets. For this reason, you may wish to defer obtaining a resident visa, and consider what expatriation strategies will minimize your exit tax.

4 Page Reporting bank balances and foreign investments is required under federal and state rules. The following lowing IRS forms need to be considered: - TDF Foreign Bank Account Report For balances in excess of $10,000 - From Receipt of any distributions or benefits from a foreign trust - Form Receipt of gifts or bequests over $100,000 from a foreign person - Form 3520A - Ownership in a foreign trust - Form 5471 Ownership in a foreign corporation - Form Ownership in a foreign partnership - Form Investment in a foreign investment company (e.g. foreign mutual fund) - Form New in 2011 Ownership of foreign financial assets exceeding $50,000 - Caution: Many foreign property holding structures may fall within these reporting requirements. Significant penalties may be assessed if appropriate reporting is not done. California Taxation 1. States usually tax incoming foreign nationals on worldwide income after becoming a resident. Treaty exclusions will generally not apply to state tax. 2. California s definition of residence is based on facts and circumstances. If you arrive in California with the intention of remaining indefinitely, or you ve had continued presence in the state for at least nine months, you are presumed to be a resident. However, one can rebut this presumption and still be a non resident if you have facts to show that your presence is temporary. 3. If you re leaving California for a work assignment for more than 18 months, you will generally be treated as a nonresident under California tax. You should also explore establishing a domicile in a state that has no income tax prior to leaving for a foreign assignment. Returning to one s country of Origin Expatriation Many U.S. residents and citizens decide to leave the U.S. and return to their home country due to family, culture and other reasons. What tax issues will arise if you terminate your U.S. residence? 1. When a green card holder or U.S. citizen returns to his country of origin, he continues to be subject to U.S. tax on worldwide income. Tax in one s home country as well as U.S. tax will also be due. Either one gives up their status in the U.S. or they ll face ongoing complexity with filing returns in two countries. 2. A U.S. citizen, or green card holder that has filed returns as a resident for more than 7 years is defined to be a long term resident. If a coverted expatriate gives up his U.S. citizenship or residency, and their assets exceed $2 million at such time, or they are paying annual U.S. taxes that exceed $150K per year, an exit tax will be imposed on appreciation as though all gains and income had been realized. This would result in capital gain on appreciation on stocks and securities and ordinary income on deferred income. There are strategies to minimize, or sometimes eliminate the exit tax. 3. Currently, there are new proposals in Congress that may tighten up the rules in this area if a person gives up his status due to tax motivated reasons. This will be a continuing area of uncertainty. For new immigrants, they may wish to defer applying for their green card or U.S. citizenship if they are uncertain about staying permanently in the U.S.

5 & Company Accountants & International Tax Consultants Brian has over 35 years of experience advising individuals and businesses on complex domestic and international tax issues. Current engagements include: Income and estate tax planning for executives entering the U.S. from Asia and Europe Software and social media companies based in Asia, Europe and the U.S. Global investment funds with portfolio and real estate investments U.S. companies with manufacturing and distribution outside the U.S. Complex tax audits and representation before the IRS related to recent IRS voluntary tax compliance programs where significant non-reporting penalties have been assessed Cross-border tax planning related to U.S. and foreign expatriation Corporate structuring and expansion including cross border M&A transactions Tax compliance related to the above Speaking Engagements: Mr. is a guest lecturer at the Haas Business School at the University of California, Berkeley. He has given presentations worldwide on tax and investment related issues to professional organizations worldwide, including: STEP programs in Geneva, Jersey Channel Islands, Mumbai, Zurich, Los Angeles and the Silicon Valley; International Tax Planning Association and the Offshore Investment programs in Luxembourg, Hong Kong, Shanghai, Puerto Rico, and Singapore. He has been a speaker at the World Economic Forums in Mumbai and New Delhi and maintains close ties to the Indian business community in the U.S. and abroad. Locally, he has given presentations to the CPA Society and to the San Francisco Bar Association. Articles and Publications: Mr. is a contributor to The CPA Report and Outlook the official journals for California accounting profession. He was recently featured on the cover of The CPA Report for his lead article on doing business in China. He has been a contributor to many international tax and investment journals, including a feature article in Thompson Reuters Venture Capital Journal about the lack of corporate governance that lead to the financial collapse. He has written spoken extensively on this subject in the U.S. and Europe as a result of his lead role in a 14 year investigation and asset recovery efforts related to the fraud and collapse of the Maxwell Empire in Europe in the 1990s. In 2005, he was profiled in the San Francisco Business Times as an entrepreneur in the accounting profession. Experience & Education: Mr. founded the firm in San Francisco in He was formerly a Sr. Tax Manager with the San Francisco and London offices of PriceWaterhouseCoopers where he advised international executives and companies. He was previously a tax consultant with Arthur Andersen. Mr. is a Certified Public Accountant, and earned his bachelors degree and MBA, with honors, from the University of California, Berkeley Haas School of Business. & Company is a firm of accountants and international tax consultants that provide accounting, tax and consulting services to individuals and businesses including closely held corporations, investment partnerships and funds, venture backed technology enterprises and large multinational companies, both public and private. The firm is registered with the Public Company Accounting Oversight Board (PCAOB), and is qualified to practice before the SEC. & Company has offices in San Francisco and the Silicon Valley and is a member of the AICPA and Geneva Group International, a worldwide association of independent professional firms.