Latvian Micro-Enterprise Tax Law Update | International Tax Lawyer Cleveland

On December 20, 2016, the Saeima (Latvian Parliament) approved new amendments to Latvian Micro-Enterprise tax law. While the modifications to the law represented a compromise solution, the overall tax rate went up.

History of Latvian Micro-Enterprise Tax Law

The Latvian Micro-Enterprise Tax Law first entered into force on September 1, 2010. It primary purpose was to establish a lower tax rate for very small businesses, which were defined as businesses with turnover not exceeded 100,000 euros per calendar year. If a business qualified as a small business, under the Latvian Micro-Enterprise Tax Law, it would pay only a 9% tax rate. This rate was included in everything – corporate income tax, social tax and personal income tax.

Changes to Latvian Micro-Enterprise Tax Law

The December 20 changes came after an intense dispute over the best approach to the small business tax. In fact, on November 23, 2016, the Saeima first approved amendments to the law that would lower the income tax to a mere 5%, but the small business owners would have been forced to withhold social insurance contributions from each employee.

In the end, the November 23 amendments were discarded. The December 20 version of the law simply increased the micro-enterprise tax rate to 15% and eliminated the November 23 social insurance contribution withholding requirement due to the fact that it would have been excessively burdensome for small businesses.

It is important to point out, however, that the new changes to the Latvian Micro-Enterprise Tax Law carved-out a limited one-year exception for businesses with a turnover of only 7,000 euros per year; these businesses will only pay a 12% tax rate. This reduced tax rate will only be in effect through December 31, 2017

Furthermore, the Saeima also repealed the November 23 amendment that would have terminated the Latvian Micro-Enterprise Tax Law on December 31, 2018. Instead, the Saeima asked the Latvian Cabinet of Ministers to submit the draft new tax law for small businesses.

Latvia Remains One of the Lowest Tax Jurisdictions in the European Union

Even with the recent changes to Latvian Micro-Enterprise Tax Law, Latvia remains a jurisdiction with one of the lowest tax burdens in the European Union. This fact is often not appreciated by the West European tax professionals, often due to their cultural prejudice against doing business in Eastern Europe. This omission in Latvia may be a serious mistake on their part, depending on the client’s situation.

Sherayzen Law Office follows the development of tax laws in Latvia and believes that there are situations where these laws can offer significant advantages to the firm’s clients for tax planning purposes.

US Airspace and the Definition of the United States | US Tax Lawyers

This article is a continuation of a recent series of articles on the exploration of the definition of the United States. As it was mentioned in a prior article, the general definition of the United States found in IRC § 7701(a)(9) has numerous exceptions throughout the Internal Revenue Code (“IRC”). The US airspace is another example of such exceptions. In this article, I would like to outline some of the ways in which the borders of the United States are defined in the context of the US airspace.

General Tax Definition of the United States Does Not Mention US Airspace

The general tax definition of the United States is found in IRC § 7701(a)(9). According to IRC § 7701(a)(9), the United States is comprised of the 50 states, the District of Columbia and the territorial waters. There is no mention of the US airspace.

This, of course, does not mean that US airspace never constitutes part of the United States. Rather, as I had explained it in a prior article, one needs to look at the specific tax provisions and determine if there is a special definition of the United States that applies to them.

Examples of Various IRC Provisions Including and Excluding US Airspace from the Definition of the United states

Indeed, there is a rich variety of treatment of US airspace that can be found within the IRC. Here, I will just mentioned three examples that demonstrate how differently the IRC provisions define the United States with respect to its airspace.

1. There is an esoteric but important IRC § 965 which deals with the Dividends Received deduction for repatriated corporate earnings. IRS Notice 2005-64 provides foreign tax credit guidance under IRC § 965 and specifically follows the general definition of the United States with the addition of the Continental Shelf. Then, the Notice states: “the term ‘United States’ does not include possessions and territories of the United States or the airspace over the United States and these areas”. Thus, the US airspace is excluded from the tax definition of the United States under IRC § 965.

2. The treatment of the US airspace is the opposite for the purposes of the Foreign Earned Income Exclusion (“FEIE”). Since FEIE allows a taxpayer to exclude only “foreign” earned income, the tax definition of the United States is crucial for this part of the IRC.

In general, the courts have ruled that the airspace over the United States is included within the definition of the United States with respect to IRC § 911. This means that, if you are flying over the United States, you are considered to be within the United States for the purposes of FEIE.

3. When we are dealing with the analysis of whether an individual is a US tax resident under the Substantial Presence Test, we are again back to the same situation as in example 1 – the US airspace is not included in the definition of the United States.

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US International Tax Lawyer Lectures at Alliance Française on Offshore Reporting

On December 7, 2016, Mr. Eugene Sherayzen, the founder of Sherayzen Law Office and a US international tax lawyer, gave a lecture at the Minneapolis chapter of Alliance Française. The topic of the lecture was an introduction to reporting of foreign income and foreign assets for individual taxpayers in the United States. The lecture was well-attended and raised a lot of interest among the participants.

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US International Tax Lawyer Explained the US Tax Residency Requirements

Mr. Sherayzen first focused on defining the crucial term of “US tax resident”. As he explained during the lecture, the starting point for legal analysis of any US international tax lawyer is often the determination of whether his client is a US person.

During the lecture, Mr. Sherayzen covered three categories of US tax residents – US citizens, US Permanent residents and individuals who met the requirements of the Substantial Presence Test.

He also distinguished the immigration-law concept of US permanent residency (i.e. green-card holders) from the tax concept of US tax residency. The US international tax lawyer also discussed certain exceptions to the Substantial Presence Test, focusing on F-1 and J-1 visas.

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US International Tax Lawyer Emphasized Worldwide Income Reporting Requirement

Then, Mr. Sherayzen explained to the audience that US tax residents are required to disclose and pay US taxes on their worldwide income, even if this income was already disclosed on foreign tax returns.

At that point, the US international tax lawyer observed that the worldwide income reporting requirement is one of the most violated laws. Mr. Sherayzen distinguished three groups of US tax residents who are not in compliance with this law.

The first group consisted of US tax residents who were born overseas and were not aware of the worldwide income compliance requirement due to their prior experiences in their home countries (especially those which adopted the territorial model of taxation).

The second group was described as a small group of persons who were aware of the requirement and willfully violated it.

Finally, Mr. Sherayzen distinguished a third group of individuals who knew about the worldwide income reporting requirement, attempted to comply with it to the best of their ability, but failed to do so due to their lack of sufficient knowledge of US tax laws. The US international tax lawyer specifically referenced the Assurance Vie accounts as a representative case for such violations due to huge differences between the US and the French tax treatment of these accounts.

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US International Tax Lawyer Described Top Three Reporting Requirements with Respect to Foreign Bank and Financial Accounts

The third part of the presentation was devoted to the discussion of the FBAR, Form 8938 and Form 8621 (PFIC) requirements with respect to reporting foreign bank and financial accounts. The discussion concerned the types of accounts that needed to disclosed, the reporting thresholds, the due dates and how the forms needed to be filed. Some history of the forms was provided; due to time limitations, however, only a limited introduction to FATCA was provided to the audience.

This discussion produced a lively Q&A exchange between the US international tax lawyer and the audience.

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US International Tax Lawyer Discussed the Reporting of Foreign Gifts and Inheritance

The fourth part of the discussion concentrated on the Form 3520 reporting of foreign gifts and inheritance, including the filing threshold and the penalties associated with the form. Mr. Sherayzen also explained that, in certain circumstances, Form 8938 may be applicable to foreign gifts and inheritance for the purpose of annual tax compliance.

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US International Tax Lawyer Introduced the Hypothetical to Illustrate How These Forms Might Apply in a Real-Life Situation

The final part of the presentation was devoted to the analysis of a hypothetical to demonstrate how all of these information returns could apply in a real-life situation. The focus of the hypothetical was on the French and French-Canadian issues. Mr. Sherayzen also invited the audience to participate in the legal analysis of the hypothetical which was enthusiastically welcomed by the audience.

The presentation concluded with an additional fifteen-minute Q&A session.

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First Quarter 2017 Underpayment and Overpayment Interest Rates

On December 5, 2016, the IRS announced that the First Quarter 2017 underpayment and overpayment interest rates will remain the same from the Fourth Quarter of 2016.

This means that, the First Quarter 2017 underpayment and overpayment interest rates will be as follows:

four (4) percent for overpayments (two (3) percent in the case of a corporation);
four (4) percent for underpayments;
six (6) percent for large corporate underpayments; and
one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The First Quarter 2017 underpayment rates are relevant not only for simple amended tax returns (with amounts due), but also for a number of other different reasons. Here, I would like to emphasize two particular reasons for the importance of the first quarter 2017 underpayment rates. First, it is used to calculate interest for the US taxpayers who participate in the OVDP or the Streamlined Domestic Offshore Procedures.

Second, the first quarter 2017 underpayment rates will be relevant to future PFIC interest calculation on any excess distributions (for default Section 1291 PFICs).

First Colombia-US Tax Treaty is Almost Ready | International Tax Lawyer

The first Colombia-US Tax Treaty nears the final stage of negotiations. This announcement was made on September 28, 2016, in Bogota, Colombia, by Colombian Finance Minister Mauricio Cardenas and U.S. Treasury Secretary Jacob Lew (the details of the meeting were published on the Colombian president’s website).

Despite the fact that United States and Colombia already signed a tax information exchange agreement on March 30, 2001, the two countries still do not have an income tax treaty that would protect its citizens and business from the effect of double-taxation.

There are a lot of expectations that the first Colombia-US Tax Treaty will benefit individuals and business in both countries. “La negociación de un tratado de doble tributación entre Colombia y Estados Unidos está cerca del fin, esperemos avanzar para lograr algo que los empresarios colombianos y los empresarios norteamericanos desean, al igual que muchos colombianos que dividen sus actividades entre los dos países”, said Mr. Cárdenas.

It is also possible that, upon ratification of the first Colombia-US Tax Treaty the Colombians who live in the United States and have businesses in Colombia will finally be able to benefit from the long-term capital gains tax rates that apply to qualified foreign dividends.

Of course, there is a still a long way to go for the first Colombia-US Tax Treaty. Even after the negotiations are successfully concluded and finalized, the first Colombia-US Tax Treaty will need to be signed and ratified by both countries before it enters into force. While it is reasonable to expect a relatively fast ratification in Colombia, the United States is a completely different story. Treaties can languish in the United States Senate for years before they are even considered.

Furthermore, Mr. Cárdenas and Mr. Lew may not have sufficient time to conclude the current negotiations. Before they may be done, a new president may be elected in the United States and he may take a different to negotiating with Colombia. If this happens, the conclusion of the negotiations and the ratification of the first Colombia-US Tax Treaty may be postponed even further into the future.

Sherayzen Law Office will continue to observe the situation surrounding the first Colombia-US Tax Treaty.