Tax Issues For US Expatriates In Vietnam AmCham in HCMC 2 June 2009 Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 1
Presenter Richard Buchanan - Tax Partner Donald Wilson - Senior Tax Counsel Deloitte Vietnam rhbuchanan@deloitte.com donawilson@deloitte.com +84 8 3910 0751 (HCMC) Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 2
US Expat Tax 101 An Overview of US Tax Provisions Impacting US Expatriates Abroad Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 3
Tax on Global Income US citizens and RAs (resident aliens) are taxable on worldwide income as if they still lived in the US with the exception of section 911 benefits and use of foreign tax credits to offset US tax for taxes paid abroad on foreign source income. Since possession of lawful permanent residence status (so called green card status) triggers RA status for US tax, the desired immigration posture for a spouse will have significant US tax implications as she will become subject to US tax on worldwide income. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 4
Resident Aliens A green card holder becomes a RA for US tax on the 1st date admitted to the US as a lawful permanent resident. A substantial physical presence test can also make one a RA even w/o a green card: basically being in US over an average of 120 days per year for 3 years triggers RA status but actual test is a weighted average test of days in the US over prior 3 years with some exceptions for students and medical visits. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 5
Non Resident Alien Spouses Nonresident aliens (NRAs) are only taxed on US source income either by withholding of tax on FDAP income or be filing of US tax return on business or employment income. FDAP is fixed, determinable, annual or periodic income such as US source interest, dividends, royalties, etc. NRAs get limited personal exemptions and limited deductions and cannot file joint tax return with a US spouse. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 6
Expat Tax Benefits Under Section 911 A Foreign Earned Income Exclusion (FEIE) of up to $87,600 in wages or other earned income from work in a foreign country. A foreign housing amount may also be excluded. Both exclusions require the US person to meet certain qualifications and to elect the FEIE which may not be desired if working in a high tax country where use of just the foreign tax credit might be better. The excluded amounts are added back to determine the highest marginal tax rate applied beginning in 2006 and for subsequent tax years. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 7
Qualification for FEIE To obtain the FEIE one must have a tax home abroad and either be a BFR (Bona fide foreign resident for tax) or meet a physical presence test of 330 days abroad out of a 12 month period. Generally a short term assignment of one year or less will not qualify under section 911 for FEIE or housing exclusion but this may then allow for housing, per diems and other allowances to be excluded from US tax under other general rules for home away from home allowances. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 8
Housing Cost Exclusion Qualified housing expenses ( QHE ) that are not lavish and that are paid for or reimbursed by an employer may be partially exempt from US tax. From 2006 forward the calculation of the amount of housing subsidy excluded from income changed significantly and capped the amount of the benefit for the first time. Pre-2006 any amount of QHE was eligible for exclusion after deduction of a base housing amount ($14,016 in 2008) but now the total amount of QHE is capped at 30% of the amount of FEIE claimed OR the amount allowed by IRS in published lists by city. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 9
Housing Cost Exclusion For 2008 returns, the IRS approved amount of housing related expenses eligible for non taxable reimbursement is $46,800 for Hanoi and $42,000 for HCMC for a full year. The max based on full 30% of FEIE would be $26,280 for a full year. The max amount for Hong Kong as a point of reference is $114,300, Shanghai ($57,001), Bangkok ($57,100), Singapore ($64,500), and Melbourne ($28,900). Numbers are based on housing allowances for US State department personnel. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 10
Election and Revocation Election of FEIE and housing cost exclusions can be with timely filed return or an amended return by use of Form 2555. Election remains in effect for all subsequent years unless revoked. Cannot re-elect, once revoked, before the 6th tax year following the year the revocation was effective without obtaining the consent of the Commission of the IRS. Thus, elect wisely and be careful of revoking to get a benefit in only one year. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 11
Joint vs. MFS Returns A US person with a non US spouse may file a joint personal US income tax return and avoid the higher MFS (married filing separate) tax rates by making election to do so. Electing to file joint will essentially make the foreign spouse a RA for US tax purposes (but not immigration purposes) and subject the foreign spouse s worldwide income to US tax in the joint return. A joint return can also allow additional exemptions and itemized deductions to be claimed. If foreign spouse has income with low or zero tax then such income will now be at the US marginal rate. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 12
Electing Joint Return In year when foreign spouse become a RA during the tax year, a one time election can be made for that year only. A general election to file jointly can be made (under section 6013(g)) for any year and binding for all subsequent years until terminated. Result is both spouses are taxed on worldwide income but this allows foreign spouse s foreign earned income to be excluded under FEIE and for any foreign taxes paid by the spouse to be used as a foreign tax credit in US tax return. Once terminated, cannot re-elect. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 13
Estate and Gift Tax Issues with Non Citizen Spouse The unlimited estate tax marital deduction for transfers to non-citizen surviving spouses is disallowed, unless such property is placed in a qualified domestic trust (QDOT). The full value of jointly held property is includible in the estate of the U.S. citizen spouse. The unlimited gift tax marital deduction for transfers to non-citizen spouses is disallowed, but the annual exclusion from the federal gift tax is increased up to $125,000 annually to a non-citizen spouse. In certain situations the creation or termination of a joint tenancy where one spouse is a non-citizen is taxable. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 14
Foreign Bank Accounts Treasury issued in March 2009 a revised form for the reporting of foreign financial accounts (TDF 90-22.1 Report of Foreign Bank and Financial Accounts) and its instructions include clarification of those who must file and a requirement for more detail in reporting on accounts. The due date of this form is June 30 with no extensions. A taxpayer having an interest of more than 50% in a U.S. or foreign corporation, partnership, or trust with accounts in a foreign country is required to file if the aggregate value of all accounts attributed to the taxpayer exceeds $10,000 at any time during the calendar year. Increasing IRS enforcement focus may expose taxpayers to significant fines ($100,000/50% of balance in account for willful failure to file) and even criminal penalties (5 years in jail). Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 15
Recent US Tax Changes Impacting Expats The worst is yet to come? Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 16
FY 2010 Budget Resolution Conference Report On 29 April 2009, the House and Senate voted for a five-year, $3.5 trillion budget resolution conference report that reflects Obama s top priorities for this year middle class tax relief and comprehensive health care reform. $764 billion in middle-class tax relief over the next five years. However, the House will not consider any legislation related to those initiatives unless the bills include statutory PAYGO, the bills are fully offset under traditional scorekeeping, or statutory PAYGO has already been enacted into law. The conference agreement provides for unknown $97 billion in so-called loophole closers and revenue raisers. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 17
FY 2010 Budget Resolution Conference Report The Middle class tax relief includes:!$512 billion to extend middle-class tax cuts (the 10 percent bracket, the child tax credit, marriage penalty relief, and education incentives, as well as the other 2001 and 2003 tax cuts) for taxpayers making under $250,000;!$214 billion for three years of alternative minimum tax (AMT) relief;!$72 billion for estate tax reform, which would freeze the top rate at its 2009 level of 45 percent, and freeze the exemption amount at $7 million for couples ($3.5 million for individuals), indexed for inflation. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 18
FY 2010 Budget Resolution Conference Report The agreement has a funding increase for efforts to address the tax gap, directing approximately $8 billion to IRS enforcement activities. The number of individual Americans paying taxes in another country increased by 30 percent between 2003 and 2005 and the IRS must ensure that taxpayers with income abroad pay the taxes they owe. A provision allows for expedited procedures in considering health care legislation later this year. The tax writing committees are each to propose legislation that includes a reduction of $1 billion in mandatory spending by October 15 of this year to help finance comprehensive health care reform. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 19
FY 2010 Budget Resolution Conference Report Although a budget resolution provides a roadmap for tax and spending policy, the president does not sign the measure and it lacks the force of law. On the tax side, the House Ways and Means and Senate Finance Committees will use the priorities outlined in the measure as a springboard for crafting tax-relief and revenue-raising legislation. They may also take some additional cues from the White House more detailed version of the FY 2010 budget proposal which will likely limit tax benefits for companies that move jobs overseas. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 20
Obama Proposals: Press Release On 4 May 2009, Press Release for 2010 Budget announced int l enforcement and other reform proposals designed to raise $210 billion over 10 years. Changes to check-the-box rules for foreign entity characterization are not clear but full repeal seems unlikely. Plan to add 800 int l tax auditors. Corporate proposals target US MNCs by limiting deductions and use of foreign tax credits. Targeting of offshore foreign bank accounts and entities to raise $8.7 billion via increased information reporting and enhanced withholding taxes. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 21
Obama Proposals: the Greenbook The Greenbook is released 11 May 2009 with more details on proposals to raise $8.7 billion over 10 years. Strengthen the Qualified Intermediary ( QI ) Program: Withhold on FDAP payments to non-qi Intermediaries @ 30% and to any foreign entity unless it documents its beneficial owners Withhold 20% on gross payments from sales of securities to non-qis US individual must report transfers of money or property to foreign bank accounts or brokers except to QIs US banks and QIs must also report any transfers by US individual Any US person of QI must report if they form a foreign entity for a US individual Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 22
Obama Proposals: the Greenbook Foreign Bank Account Reporting ( FBAR ) tightened FBAR filing with tax return AND separately with Treasury Rebuttable presumption that ANY bank account with a non-qi is large enough ($10,000) to require FBAR Failure to file FBAR on account over $200,000 would have rebuttable presumption of willfulness and trigger enhanced penalty Extend the Statute of Limitations to 6 years (from 3 generally) from when the required disclosure is actually made Double the penalties to 40% for tax related to FBAR violations Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 23
No Escape The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) included provisions that would tighten the tax rules for U.S. citizens and long-term permanent residents who expatriate (i.e. give up US citizenship or green card) after June 17, 2008. If triggered, there would be (1) a mark-to-market obligation on property held by the expatriating individual, (2) a 30% withholding tax for certain deferred compensation items and foreign trust distributions paid to covered expatriates and (3) a transfer tax on certain gifts or bequests to U.S. citizens or residents from a covered expatriate. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 24
Vietnam Personal Income Tax Law Changes Highlights of on going changes Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 25
Agenda Vietnam PIT Changes in PIT Regulations PIT Temporary Deferral Tax Planning Concepts Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 26
Key Issues under 2009 Original Legislation Benefits in-kind fully taxable - Home leave taxable - School tuition taxable - Relocation allowance taxable - Housing fully taxable Taxation of non-employment income (capital gains, dividends, etc.) Taxation of worldwide income for Nationals and expatriate residents New definition of tax resident -! 183 days or 90 days rule - Subject to any applicable DTA Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 27
Post January 2009 PIT Revision Circular 62 issued on 27/03/2009 Home leave exempt School tuition exempt Relocation allowance exempt Corporate Membership may be exempt Housing capped at 15% of gross income Applicable retroactively from 1 January 2009 Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 28
PIT Deferral - 2009 Temporary PIT deferral on all eligible income in first 5 months of 2009. Monthly declaration still required For individuals who do not leave Vietnam before 30 June 2009 - Protection under a Double Tax Agreement - Non-discrimination clause?? - Most Tax Treaties with Vietnam have this clause (some exceptions: Thailand, Australia and France) Employees on gross remuneration only Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 29
PIT Deferral - 2009 Potential outcome: Full exemption for 6 months from 1 January How will year end tax finalization be calculated?? VND 200,000 (USD $12) extra PIT reduction for remaining months PIT Exemption on income from capital investment, dividends, capital assignment and securities transfer, royalties, franchising activities, continues from 1 July 2009 till the end of 2010, so exempt for entire year. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 30
Tax Planning Concepts Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 31
Personal Services Company Individual incorporates LLC Individual registers Service Company as LLC, applies VAT credit method; Individual hires himself, as employee, of the Service Company; Service Company enters into service contract with former employer and issues monthly invoices for services; Service Company s accounting records are in VAS; and Rental and other cost related to business are addressed to and paid by Service Company Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 32
Personal Services Company Tax benefit varies with income: $100,000: potential savings of $10,000+ $150,000: potential savings of $12,500+ $200,000: potential savings of $17,000+ Could drop ETR to range of 17% - 22.5% Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 33
Foreign Personal Holding Company (FPHC) From 1 January 2009, VN expatriates tax residents are taxed on Worldwide Income; Typical expatriates other income is: Dividends: 5% Interest (other then Vietnamese banks): 5% Rental income: up to 35% PIT Disposal of Securities and Real Estate Form FPHC and put all of family s shareholdings, bonds, bank deposits, and real-estate holdings in FPHC; No attribution of FPHC income to persons tax residents in Vietnam; Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 34
US Expatriates 100% Employment contract US LLC 100% Dividends Holds all other income producing assets VN LLC Service contract Employer in VN Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 35
Planning For PIT Changes for US Expats How to mitigate Vietnamese PIT but without US tax pitfalls Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 36
US Pitfalls to Avoid Transfers of property by US persons to foreign companies is taxable in the US unless the requirements of section 367 are met which includes informational filings. US shareholders of controlled foreign companies and foreign personal holding companies remain taxable on the passive income of such companies and on the personal service income in most situations so no US tax is saved by use of offshore companies. IRS international tax enforcement is attracted to US shareholders of offshore companies set up in perceived tax havens. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 37
Using the US Check-the-box Rules to Avoid Tax on Set Up US tax rules allow an election of corporate or non-corporate status for both US and foreign legal entities which are not per se corporations. A US LLC is generally not regarded as a taxable corporation for US tax purposes and if wholly owned is considered a nothing. A VN LLC can also be a nothing for US tax by election of the US person. Thus, a US expat can set up a wholly owned US LLC which will wholly own a VN LLC and from a US tax perspective nothing has happened and no transfers have taken place. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 38
US Tax Remains The Same The contract for the employee s services with his VN LLC will for US tax still be a contract directly with the US expat and eligible for all expat tax benefits. The dividends from the VN LLC to the US LLC are not recognized for US tax purposes. Dividends, interest, rents, etc. received by the US LLC will still be considered income directly received by the US expat eligible for any US tax reductions (e.g., cap gain rates) and all usual US tax planning (e.g., IRA contributions or other pension planning). Reduction of effective rate of VN PIT should avoid excess FTCs and allow for better US tax planning. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 39
Q & A Session Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 40
Presenter Richard Buchanan - Tax Partner Donald Wilson, Senior Tax Counsel Deloitte Vietnam rhbuchanan@deloitte.com donawilson@deloitte.com +84 8 3910 0751 (HCMC) Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 41
Disclaimer This presentation contains general information only and is based on the experiences and research of Deloitte practitioners. The views expressed are not binding on the tax authorities of the US or Vietnam and cannot be relied upon as accounting or tax advice. Deloitte is not, by means of this presentation, rendering business, financial, investment, or other professional advice or services. This presentation is not a substitute for professional advice or services, nor should it be used as a basis for any decision or action that may affect your tax position. Before making any decision or taking any action you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation. Copyright 2009 Deloitte Vietnam Company Limited. All rights reserved. 42
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