International Tax. Las Vegas, Nevada December 4-5, 2012

Transcription

1 International Tax 4 th Annual Southwest Tax Conference Las Vegas, Nevada December 4-5, 2012 Brian Phillip Lau Cindy Hsieh [email protected] [email protected] [email protected] nd Street, Suite 1200 San Francisco, CA USA (415)

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3 Table of Contents A. Inbound Strategies Foreign Corporations 1 Double Tax Structure 2 Branch Profits Tax 3. Start Up Best Structure 4 Start-Up Problems 5 Start-Up Solutions 6 Foreign Parent Objective: Avoid PE Status Foreign Nationals Income Tax 7 Definition of Income Tax Resident 8 Treaty Override of Green Card Test 9 Treaty Exclusion of Compensation Foreign Nationals Gift and Estate Tax 10 Definition of Residence 11 Gift and Estate Tax Rates and Exemption Amounts 12 Property Subject to Tax 13 Gifting Cash 14 Gifting Real Property 15 Income / Gift Problem 16 Income / Gift Strategy Income / Gift Strategy 2013 Investing in US Real Property 18 Typical Real Estate Structure 19 Foreign Ownership Structures for Real Property Foreign Nationals Pre Arrival 20 Checklist 21 Checklist B. Outbound Strategies Corporate Structures 22 Tax Havens Usually Don t Work for Taxpayers 23 Controlled Foreign Corporations 24 Subpart F Income Taxed Currently 25 Tax Havens Investment Income Deferral 26 Tax Havens Business Income Deferral 27 Tax Deferral and Dividends at Low Tax Rates Reporting 28 Filing Requirements 29 Offshore Voluntary Disclosure Initiative 30 Expatriation Speakers Bios

4 Foreign Corporations Double Tax Structure Double Tax: Withholding Non- Shareholders Corporate 2012 Treaty Country Dividends withholding tax ($100 41% tax) x 30%WH 18% Income: $100 Tax = 41% [Fed 35% + State 6%] 41% 41% Total Tax Rate: 59% 41% 1 Foreign Corporations Branch Profits Tax F Corp - Uncertainty re: Final Tax Liability - Exposure to Tax on other Activities Activities in the or partner in a partnership (1) Branch Profits Tax (2) on Dividend Equivalent Branch Profits Tax = 30% or Treaty rate Business Action Income = $100 Tax = 41% Annual Calculation Uncertainty about tax until year-end calculations of dividend equivalent (1) (1) Section 864 Effectively Connected Income (2) Section 884 Branch Profits Tax 2

5 Foreign Corporations Start-Up Best Structure Non- Shareholders GmbH Germany Subsidiary (Delaware) x x x Employees in Avoids parent company exposure to tax [Section 864 Permanent Establishment] Proper payroll withholding can be set up by subsidiary Problem Visa delays A subsidiary cannot legally employ non- employees 3 Foreign Corporations Start-Up Problems Non Shareholders GmbH Germany Operations In Europe Exposure to: Employees in Permanent Establishment issues [Section 864, ] Withholding tax required for employees Allocation of worldwide income and expenses to Branch tax exposure uncertainty [Section 884] State tax [California Unitary Taxation] 4

6 Foreign Corporations Start-Up Solutions Alt (1) Alt (2) Non Shareholders Non Shareholders GmbH Germany GmbH Germany Europe Operations GmbH Germany (1) Europe Operations Independent Contractor Corporation (2) (1): Foreign subsidiary for non- employees tax return for (1) nets to zero May be costly to form in home country x x x Operations x x x Operations (2): Independent advisory company can employ non- employees Saves costs of foreign subsidiary Avoids P.E. status Easy transition to Best Structure when visas approved 5 Foreign Corporations Permanent Establishment 1. Foreign Parent Objective: Avoid PE status 2. EXAMPLE: excerpt from -India Income Tax Treaty Article 5 Permanent Establishment The term permanent establishment includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f ) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources; (g) a warehouse, in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i ) a store or premises used as a sales outlet;. 6

7 Foreign Nationals Definition of Income Tax Resident Substantial presence test: Present in the at least 31 days in the current year; and Present in the for 183 days according to a formula: Year days multiplier / / Exceptions: (1) Taxpayer has a closer connection to a foreign country (1) (2) If current year s days exceed 182: only Treaty tie breaker test will override residence (2) Visas: H1-B, L-1, and other business or investment visas are generally not a factor for determining tax residence (1) Section 7701 (b) (2) Article 4 of most Income Tax Treaty 7 Foreign Nationals Treaty Override of Green Card Test Taxpayer Resides in home country Holds green card Taxed in both countries Treaty [Article 4] can override code section 7701(b) Nonresident status for is possible Other factors - All resident reporting required - Potential expatriation act if resident for more than 7 years - Immigration conflicts with 1040NR filing 8

8 Foreign Nationals Treaty Exclusion of Compensation Example: Article 15 of -German Income Tax Treaty - Dependent Personal Services Compensation is exempt if: - Presence in foreign country less than 183 days, and - Compensation paid by foreign employer, and - Compensation not borne by a permanent establishment 9 Foreign Nationals Gift & Estate Tax: Definition of Residence Residence for Gift and Estate: Domicile or permanent home - Resident in with work visa - Can be non-domiciled based on facts - Can be domiciled based on facts - Green card - Resides in : domiciliary - Resides outside : Non-domiciliary status possible 10

9 Foreign Nationals Gift & Estate Tax Rates and Exemption Amounts Rates for citizens and residents (1) For Decedents Dying During Top Estate Tax Rate 45% 35% 35% 35% 55% Exemption Equivalent $3,500,000 (2) $1,000,000 (1) Nonresidents: Gift tax exemption only $13,000 per year Estate tax exemption $60,000 (2) Expires December 31, Foreign Nationals Property Subject to Tax Cash in Banks (3) Bonds Non- Govt. Bonds Stocks Property Gift Tax (1) Estate Tax (2) Yes No No No No Yes No Yes Partnership [] (4) Real Property in Tangible Properties (5) Non- Assets No Yes Yes No Yes Yes Yes No (1) Gift tax: Section 2501 (2) Estate tax: Section 2101 (3) Cash in a bank considered tangible asset for gift tax (4) Law uncertain for treatment of Partnership interest for the purpose of estate tax (5) Tangible property includes cars, art, jewelry, collectibles 12

10 Foreign Nationals Gifting Cash Mom China You Student Bank of Beijing $300,000 Bank of America in California Calculating the tax upon gifting $300,000 Cash Gift (13,000) Annual exclusion 287,000 Gift tax exposure X 35% Max rate $100,450 Tax Mom China You Student Bank of Beijing $300,000 Student s Account at the Bank of Beijing Student s Account at Bank of America in California No gift exposure You are transferring money to yourself person is required to file Form 3520 because gift exceeds $100,000 USD No gift tax 13 Foreign Nationals Gifting Real Property Foreign Person Foreign Person Foreign Person real property To Person Inc. real property Partnership real property To Person To Person Gift tax: Taxable Not taxed Not taxed Income tax when sold: Capital gain tax Corporate rate of 35% Capital gain tax rate at 15% rate at 15% in 2012 in

11 Foreign Nationals Income / Gift Tax Problem Person Stock of Company X Long Term Stocks X 15% Capital gain rate 750,000 Federal tax Long Term Stocks X 10% CA tax rate 500,000 State tax $1,250,000 Total Income Tax 15 Foreign Nationals Income / Gift Strategy 2012 Person Person Mom China Stock of Company X LLC Gift interest in LLC to non- person. Uses up lifetime Gift exemption $5mm for 2012 LLC When X is sold: Not taxed per IRC 871 Saves $1.25m in income taxes Stock of Company X Stock of Company X 16

12 Foreign Nationals Income / Gift Strategy 2013 Person Person Mom China Stock of Company X LLC Gift interest in LLC to non- person. Use up $1mm life time Estate exemption for 2013 LLC When X is sold: Not taxed per IRC 871 Saves $1.25m in income taxes Stock X Stock of Company X Gift to mother ($1,000,000) Lifetime exemption (13,000) Annual Gift Exclusion $3,987,000 Taxable gift 35% Gift tax rate, max $1,395,450 Gift tax liability 17 Investing in Real Property Typical Real Estate Structure FP BVI Ltd. Real Property & Non- Stocks & Bonds Ownership of real property by non- person + Estate tax protection + No gift tax on transfers of non- stock real estate gains in BVI taxed at combined federal and state income tax rate of 40% Possible branch profits tax on dividend equivalent 18

13 Investing in Real Property Foreign Ownership Structures for Real Property CN CN CN CN CN (2) Non- Corp. (1) Non- Corp. LLC Inc. Inc. Federal Tax Operating Income USRP USRP USRP USRP USRP 35% 35% 35% 35% 35% Sale of Property Personal Tax Returns Due Estate Tax 15% 15% 35% 35% 35% Yes Yes No No No Yes Unclear Yes No No (1) Liquidation of foreign corporation [actual or by an election] will trigger a deemed sale and all appreciation will be taxed. (2) For a foreign person moving into the it may be best prior to arrival to contribute property to a company and liquidate the foreign company. 19 Foreign Nationals Pre-Arrival Checklist 1. Consider establishing a foreign or trust for estate planning purposes. If assets are located in one s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax 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 will save global 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 resident will be taxable in the 4. Review existing investment structures to determine whether there will be adverse tax impacts under tax laws. 5. Consider exercising options prior to arrival. Stock options, when exercised, usually generate ordinary income in the that is taxable at the top rate of 35%. 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 stock plan, you should check whether vesting will be taxable to you after entering the 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 tax. 9. If you are being relocated to the, consider whether you should be employed by the or foreign affiliate and whether you should be covered by social security in the or in your home country. 20

14 Foreign Nationals Pre-Arrival Checklist 10. If you are in the for a short period of time, you may be exempt from 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 resident. 12. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the US, you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer getting your green card if your stay in the US is not permanent. 13. Reporting bank balances and foreign investments is required under federal and state rules. The following IRS forms need to be considered: - TDF Foreign Bank Account Report For balances in excess of $10,000 - Form 3520 Receipt of any distributions or benefits from a foreign trust - Form 3520 Receipt of gifts or bequests over $100,000 from a foreign person - Form 3520A Annual return for a foreign trust - Form 5471 Return of person in certain foreign corporations - Form 8865 Return of person in certain foreign partnerships - Form 8621 Investment in a passive foreign investment company (e.g. foreign mutual fund) - Form 8938 New in 2011 Statement of Foreign Financial Assets (Balance in excess of $50,000) Caution: Many foreign holding structures may fall within these reporting requirements. Significant penalties will be assessed if appropriate reporting is not done. 21 Tax Havens Usually Don t Work for Taxpayers Resident BVI Corporation Portfolio Assets (stocks, bonds, cash) 1. In general, holding assets in a controlled non- corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting. 2. Controlled Foreign Corporation rules will convert capital gain (taxable at 15%) into ordinary income (taxed at 35%). 3. Investment income will be taxed currently to resident no deferral. 22

15 Controlled Foreign Corporation Shareholders Foreign Corporation CFC: 1. Foreign corporation where five or fewer shareholders own more than 50%. Section Ordinary income deferred if the CFC carries on an active trade or business. 23 Controlled Foreign Corporation Subpart F Income Taxed Currently Shareholders Shareholders CFC Holding Co. Subpart F Income CFC 1. Subpart F Income Section Foreign personal holding company - Foreign base company sales income - Foreign base service income - Foreign base company oil Subpart F Income 2. Subpart F Income treated as a deemed dividend and taxed currently at the highest tax rate [35%]. Sections 954, 956 & Exception: High tax jurisdiction [90% of tax rate]. 24

16 Corporate Structure Tax Haven Business Income Deferral Resident Non- Resident 49% 51% Tax Haven Investment Income 1. Foreign corporation owned less than 50% by persons will not result in immediate taxation. 2. Since does not have income tax treaties with tax havens, the profit distributions (dividends) will be taxed at ordinary income tax rate. 3. CFC versus PFIC status [Passive Foreign Investment Income]. Section Corporate Structures Tax Haven Business Income Deferral Resident Tax Haven Active Trade of Business 1. In cases where tax haven countries are used to conduct active trade or businesses, income may be deferred. 2. Distributions (dividends) will be taxed at ordinary income tax rates. 26

17 Corporate Structures Tax Deferral & Dividends at Low Tax Rates LP Investors Swiss Holding Company Tax Deferral (2) Swiss Co. (3) Dividends Qualified Dividend to Individual Investors at Lower Tax Rates (1) BVI Treaty Structure Benefit (1) By filing an election to be a pass-through entity, for tax, profits are considered earned by Swiss parent. (2) Swiss tax law will limit the tax on the Swiss Co. income. (3) Dividends paid to individual investors will be subjected to federal tax rate of 15% since dividends from a treaty company will be treated as a qualified dividend. Current law expires on December 31, Reporting Filing Requirements Potential Penalties IRS Forms for Non-compliance (1) (1) Non- Corporation 5471 $10,000 / year per company (2) Non- Partnership 8865 $10,000/ year per entity (3) Non- Disregarded Entity 8858 $10,000/ year per entity (3) Non- Trust & Gift % of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to % of value, a non- corporation maximum of $10,000 (5) Non- Bank TDF % of highest balance each year Account Report (6) Non- Specified 8938 $10,000/year to $50,000 Asset New for 2011 filing (1) Potential criminal prosecution can result from non-reporting. 28

18 Reporting Offshore Voluntary Disclosure Initiative Target: Non-Disclosure of Foreign Bank Accounts - Initial target: Swiss Accounts - New target: Accounts in all countries 2009 Initiative - Penalty on unreported accounts 20% 2010 Initiative - Penalty increased to 25% 2012 Initiative - Penalty increased to 27.5% Associated assets included 2012 Initiative for Small taxpayers Opting In vs. Opting Out of IRS Program 29 Reporting Expatriation Giving up Citizenship or Resident Visa Status Section 877A - All taxpayers to notify IRS if they wish to exit the Tax System - Exit tax may apply to Taxpayers with: - $2mm of assets (current fair market value), or - $151,000 (2012) average income tax liability for past 5 years - Tax applies to worldwide assets mark to market approach - Exclusion: $651,000 of built-in gain (2012) Filing: Certification on IRS Form 8854 Past 5 years filings to certify 30

19 & Company Speakers Bios Brian is a CPA with over 33 years of experience advising businesses and individuals on complex domestic and international income and estate tax planning. He is the founding partner of & Company LLP which is almost exclusively dedicated to businesses and investors needing both domestic and international tax and accounting services. His clients include private and public companies around the globe which consist of: and foreign institutional investors, multinational families and executives and non- investors doing business in the Mr. has advised clients in major domestic and international litigation and has also served on the boards of both privately held and publicly traded companies. Phillip Lau is an attorney practicing under the jurisdiction of the California Bar Association. Mr. Lau received his law degree from UCLA. Prior to returning to & Company, Mr. Lau served as a tax manager of an international oil corporation. Mr. Lau began his tax consulting career at and Company advising corporations and individuals. Cindy Hsieh joined and Company in Her experience includes providing tax consulting and compliance services for domestic and international businesses, and high net worth individuals. Ms. Hsieh specializes in tax planning and estate tax planning for multi-national families and has clients in the venture capital, high technology, and real estate sectors. Ms. Hsieh speaks fluent Mandarin. & Company is a full service Certified Public Accounting firm that provides audit, accounting, and domestic and international tax services to individuals and businesses, both public and private. & Company has offices in San Francisco and Silicon Valley and is a member of Geneva Group International, a worldwide association of independent professional firms. The firm is a member of the American Institute of Certified Public Accountants and is registered with the Public Company Accounting Oversight Board.