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International Tax Planning
Brian Rowbotham, Managing [email protected]
Cindy Hsieh, Tax [email protected]
November 5, 2014
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Rowbotham & CompanyFounded in 1991
Offices in San Francisco and Silicon Valley
Areas of Service:International tax planning (corporate & individual)M&A, SEC ConsultingExecutive tax planning
- Compensation & option planning- Estate planning
ValuationsAssurance (Audits & due diligence)Litigation consultingCorporate & individual income tax complianceNew venture services
Member: Geneva Group International, 6th largest worldwide network of accounting and law firms worldwide
Website: www.rowbotham.com
Recruitment: Cindy Hsieh, [email protected]
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Overview
Income tax:-- Individual taxation focus-- Examples of expat calculation
Estate tax & Gift tax:-- Estate and Gift Tax Comparison Chart-- Gifting – General rules and examples-- Gifting – Foreign to U.S. Persons
International Tax Planning
International Tax Evasion
Tax Careers
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Key Questions To Ask In International Tax
Where is the income generated
Where is the service performed
What type of income (capital, ordinary, license, royalty, rent, etc)
Understand flow of money
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Income Tax
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Expatriates vs. ExpatriationExpatriates (“Expats”)
• The expatriation tax provisions apply to US citizens who have renounced their citizenship and to long term residents (as defined in IRC 877(e)) who have given up their green cards and ended their US resident status for federal tax purposes.
• An exit tax applies to these persons that is equivalent to the tax on a “deemed sale” of their assets
• Tax applies to persons with assets with fair market value in excess of $2 mm, or have an average income tax liability exceeding $155,000 (for 2013), over past 5 years.
• A person who is temporarily or permanently residing in a country and culture other than that of the person’s upbringing.
• Expats, including US citizens and green card holders are still taxed on their world wide income and are required to file income tax returns annually. Statistics show that 65% of expats are not aware of their annual filing obligations.
Expatriation
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2014 Income Tax Rates
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Example – High Tax Jurisdiction
Facts• U.S. Citizen
• Lives and works in Japan, 45% tax rate
Foreign tax credit disallowed [a] / [b] x [c]= $99,200 / $200,000 = 49.6% x $90,000= $44,640 disallowed portion
$90,000 paid- $44,640 disallowed FTC= $45,360 usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Japanese Tax Return 2014 USA Tax Return
Wage
Tax Rate (45%)
200,000
90,000 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
(99,200) [a]
100,800 33,264(33,264)* [c]
$0
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Example – High Tax JurisdictionFacts• U.S. Citizen
• Lives and works in Belgium, 50% tax rate
Foreign tax credit disallowed [a] / [b] x [c]= $_______ / $200,000 = _____% x $90,000= $_______ disallowed portion
$100,000 paid- $_______ disallowed FTC= $_______ usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Belgium Tax Return 2014 USA Tax Return
Wage
Tax Rate (50%)
200,000
100,000 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( ) [a]
________________( )* [c]
$_______
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Example – High Tax JurisdictionFacts• U.S. Citizen
• Lives and works in Belgium, 50% tax rate
Foreign tax credit disallowed [a] / [b] x [c]= $99,200/ $200,000 = 49.6% x $90,000= $44,640 disallowed portion
$100,000 paid- $44,640 disallowed FTC= $55,360 usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Belgium Tax Return 2014 USA Tax Return
Wage
Tax Rate (50%)
200,000
100,000 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800 33,264( 33,264 )* [c]
$0
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Example – Zero Tax JurisdictionFacts• U.S. Citizen
• Lives and works in Dubai, 0% tax rate
Foreign tax credit disallowed [a] / [b] x [c]= $99,200/ $200,000 = 49.6% x $______= _______
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 – No Dubai Tax Return 2014 USA Tax Return
Wage
Tax Paid
200,000
0 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800 33,264( )*
$_________
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Example – Zero Tax JurisdictionFacts• U.S. Citizen
• Lives and works in Dubai, 0% tax rate
Foreign tax credit disallowed [a] / [b] x [c]= $99,200/ $200,000 = 49.6% x $0 tax paid= $0
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 – No Dubai Tax Return 2014 USA Tax Return
Wage
Tax Paid
200,000
0 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800 33,264( 0 )*
$33,264
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Expat Example Green Card Holder in Treaty Country
1. As a green card holder living outside of U.S., you can be taxed as a resident (Form 1040) or nonresident (Form 1040NR)
2. Income Tax Treaty overrides U.S. domestic tax rules3. Income earned whiled in treaty country as a GC Holder may be exempt and taxed in
foreign country only.4. Be aware of potential expatriation rule
Alternative 2:
Facts• U.S. Green Card Holder
• Lives and works in Japan, 45% tax rate
2014 Japanese Tax Return 2014 USA Tax Return
Wage
Tax Rate (45%)
200,000
90,000 [c]
Wage
FEI Exclusion
Taxable IncomeU.S. Tax Rate (33%)Foreign Tax CreditTax Due with U.S. return
200,000 [b]
(99,200) [a]
100,800 33,264(33,264)* [c] $0
Alternative 1:
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Expatriation Rule
Covered Expatriate
• - U.S. Citizen
• - Long-term resident (held green card 8 years or more)
Thresholds
• - Assets: $2million plus
• - Average income tax
• Past 5 years - $155,000
Required filing: Form 8854
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Estate & Gift Tax
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Gift and Estate Taxes
• Residents are subject on worldwide assets
• Nonresidents for gift/estate purposes are subject to tax on U.S. assets– Gift tax – §2501, Reg. § 25.2501-1– Estate tax – §2101, Reg. § 20.0-1
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Gift and Estate: Domicile
• For gift/estate tax purposes, residents are defined by one’s domicile– Permanent home– Facts and circumstances– Intent
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Gift and Estate: Domicile
Examples: • U.S. citizen living abroad
– Domicile = U.S., subject on worldwide assets
• Green card holders living in U.S.– Domicile = U.S.
• Green card holders living outside U.S.– Domicile = Uncertain. Possibly non-domiciled in US
• Visa holders living in U.S.– Domicile = Uncertain. Likely non-domiciled in US
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Domestic: Estate & Gift Tax Rates and Exemption Amounts
For Decedents Dying During: Top Estate Tax Rate Exemption Equivalent **
2009 45% $3,500,000
2010 0% $5,000,000
2011 35% $5,000,000
2012 35% $5,120,000
2013 40% $5,250,000
2014 40% $5,340,000
Non-U.S persons only get $60,000 in lifetime exemption
Unlimited gift marital deduction available for U.S. spouseLimited gift for non-U.S. spouse: $145,000
Annual exclusion - $ 14,000 – Resident and nonresident
Gifts using exemption reduce estate tax exemption dollar for dollar
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Gift / Estate Tax: Comparison
Gift tax resident
(domicile)
Gift tax nonresident
(non-domicile)
Estate tax resident
(domicile)
Estate tax nonresident
(non-domicile)
Annual exemption 2013, 2014
$14,000 on worldwide
assets
$14,000 on U.S.
properties
Excess:tax rate
40% 40% 40% 40%
Lifetime exemption
$5.34mm (2014)
None $5.34mm (2014)
$60,000 on U.S.
properties
Gift Tax - Nonresidents
* Law uncertain for treatment of US Partnership interest for the purpose of estate tax
Type of assets Gift Tax Estate Tax
Cash in U.S. banks Yes No
U.S. Bonds No Yes
Non-U.S. Govt bonds No No
U.S. Stocks No Yes
U.S. Partnership * No Yes
U.S. Corp stocks No Yes
Real Property in U.S. Yes Yes
Tangible Properties in U.S.
Yes Yes
Non-U.S. Assets No No
Gifting: Gifting Car vs. Gifting Cash To Buy A Car
MomChina
YouStudent
Mom pays for a car in USA
No Form 3520 is required since amount is under $100,000 USD
MomChina
Bank of Beijing
Your Accountat Bank of America
in California
Your Accountat the
Bank of Beijing
No U.S. gift exposure
You are transferringmoney to yourself
$30,000 Car - Gift from parent (14,000) 2013 Annual Gift Exclusion
16,000 Gift taxable income exposure
6,400 Gift tax liability exposure to donor (Assumed 2014 max rate of 40%)
YouStudent
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Gifting: Down Payment For Condo
MomChina
YouStudent
Bank of Beijing$300,000
Bank of AmericaIn California
Calculating the tax upon gifting:
$300,000 Cash Gift ( ) 2014 Annual exclusion
$______ Gift tax exposureX 40% 2014 Max rate$_______ Tax Exposure to Donor
• Are you required to file Form 3520?
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Gifting: Down Payment For Condo
MomChina
YouStudent
Bank of Beijing$300,000
Bank of AmericaIn California
Calculating the tax upon gifting:
$300,000 Cash Gift ($14,000) 2014 Annual exclusion
$286,000 Gift tax exposureX 40% 2014 Max rate$ 114,400 Tax Exposure to Donor
MomChina
Your Accountat Bank of America
in California
Your Accountat the
Bank of Beijing
No U.S. gift exposure
You are transferringmoney to yourself
Bank of Beijing$300,000
YouStudent
• Yes, you are required to file Form 3520 because amount is equal to or more than $100,000 USD 24
Top Tax Rates
Income Tax - Operating Income
Capital Gains on Sale
Estate Tax Risk [40% Rate]
39.6% 39.6% 39.6% 39.6%
20% 20% 20% 20%
Yes Yes * Yes * No
NR
USRP
NR
USRP
NR
USRP
NR-1
USRP
NR-2
(4)(1) (2) (3)Direct and Indirect Ownership (a)
(1) Foreign Person
(2) U.S. or Foreign LLC
(3) U.S. or Foreign Partnership
(4) U.S. or Foreign Trust
Top Tax Rates
Income Tax - Operating Income
Second Level Dividend Tax
Capital Gains on Sale
Estate Tax Risk [40% Rate]
35% 35% 35% 39.6%
30% 30% 30% -0-
35% 35% 35% 20%
Yes No No No
NR
USRP
NR
USRP
NR
USRP
(8)(5) (6) (7)Corporate Ownership (b)
(5) U.S. Corporation
(6) Foreign Corporation
(7) Foreign / U.S. Corporation
(8) Hybrid Structure
USRP
NR
99%
1%
(for 99% owner)
(a) For nonresident individuals and high net worth families. (b) For corporate and institution investors.
Limited Liability Company Partnership Trust
U.S. Inc. Foreign Corp.
U.S. Inc.
Foreign Corp. Foreign Mgmt.Corp.
* Depends on whether situs of the entity is U.S. or foreign.
Foreign Hybrid
Foreign Investment in U.S. Real Property
International Tax Evasion
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Tax HavensThe U.S. National Bureau of Economic Research has suggested that roughly 15% of countries in the world are “tax havens”. Tax haven countries tend to be small and affluent, with good governance and strong secrecy laws.
Countries/jurisdictions commonly referred to as tax havens:
• Bermuda
• British Virgin Islands
• Cayman Islands
• The Channel Islands of Jersey and Guernsey
• The Isle of Man
• Jebel Ali Free Zone in the United Arab Emirates
• Netherlands Antilles
• Turks and Caicos Islands
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Use of Tax Haven
Portfolio Assets (stocks, bonds, cash)
Non-U.S. Resident
BVI Corporation
NonresidentCitizens
U.S. Residents
Portfolio Assets (stocks, bonds, cash)
okay
Not goodBVI Corporation
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Why Tax Haven Does Not Work For U.S. Taxpayers
U.S. Resident
BVI Corporation
• In general, holding assets in a controlled non-U.S. corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting
• Controlled Foreign Corporation rules will convert capital gain (taxable at 20%) into ordinary income (taxed at 39.6%)
• Investment income will be taxed currently to U.S. resident – no deferral
Portfolio Assets (stocks, bonds, cash)
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How Tax Haven May Work
• Foreign corporation owned less than 50% by U.S. persons will not result in immediate taxation
• Since U.S. does not have income tax treaty with BVI, the profit distributions (dividends) will be taxed at ordinary income tax rate
• However, be aware of passive foreign investment company (PFIC) rules!
U.S. Resident Non-U.S. Resident
BVI Corporation
Portfolio Income
49% 51%
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Disclosure Forms
(*) Potential criminal prosecution can result for non-reporting.
Potential PenaltiesIRS Forms for Non-compliance (*)
(1) Non-U.S. Corporation 5471 $10,000 / year per company
(2) Non-U.S. Partnership 8865 $10,000/ year per entity
(3) Non-U.S. Disregarded Entity 8858 $10,000/ year per entity
(3) Non-U.S. Trust & Gift 3520 35% of distribution 3520A 5% per month up to 25%
(4) Transfers of Assets to 926 25% of value, a non-U.S. corporation maximum of $10,000
(5) Non-U.S. Bank FINCEN 114 50% of highest balance Account Report (TDF 90-22.1) in prior years
(6) Non-U.S. Specified 8938 $10,000/year to $50,000 Asset – New for 2011
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Tax Evasion: Offshore AccountsHiding money in offshore bank accounts:
•Form TDF90-22.1 Foreign Bank Account Report (“FBAR”)•Civil penalty and criminal prosecution
Bank secrecy from the IRS is now history: •Swiss Bank – UBS Scandal•HSBC India, Credit Suisse, Deutsche Bank
Offshore Voluntary Disclosure Initiative #1 – Ended Oct. 15, 2009• 30,000 taxpayers came forward• Collected $3.4+ billion in taxes and penalties• 20% penalty
Offshore Voluntary Disclosure Initiative #2 – Ended Sept 9, 2011• 12,000 taxpayers came forward• Collected $1+ billion in taxes and penalties as of Sept 2011• 25% penalty
Offshore Voluntary Disclosure Initiative #3 – Announced in January 2012. Indefinite Ending Date• 27.5% penalty• Collected over $5B so far from the past initiatives• New: Streamline process announced July 2014 for non-willful taxpayers
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Tax Career
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How To Get Into A Tax CareerTake accounting and tax classes, list on your resume
Get an internship with public accounting firms
Get an internship or part-time job in accounting departments of private companies
Volunteer:
Volunteer Income Tax Assistance (VITA) http://publicservice.berkeley.edu/vita
Tax-Aid http://www.tax-aid.org/
UC Berkeley Winter Externship
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Reading Materials
IRS Publication 519
– US Tax Guide for Aliens
IRS Form 1040, Form 1040NR & Instructions
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