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FACC Seminar (French-American Chamber of Commerce Seminar) | News

On October 19, 2017, Mr. Eugene Sherayzen, an owner of Sherayzen Law Office and a highly experienced international tax attorney, conducted a seminar titled “Introduction to U.S. International Tax Compliance for U.S. Owners of Foreign Businesses” at the French-American Chamber of Commerce in Minneapolis, Minnesota (the “FACC Seminar”). The audience of the FACC Seminar consisted of business lawyers and business owners.

The FACC Seminar commenced with the breakdown of the title of the seminar into various parts. Mr. Sherayzen first analyzed the tax definition of “owner” and contrasted it with the legal definition of owner. Then, he identified who is considered to be a “U.S. owner” under the U.S. international tax law.

During the second part of the FACC Seminar, Mr. Sherayzen discussed the definition of “foreign” (i.e. foreign business) and the definition of the concept of “business”, contrasting it with a foreign trust. At this point, the tax attorney also acquainted the attendees with the differences between the common-law and the civil-law definitions of partnership.

Then, the focus of the FACC Seminar shifted to the discussion of the U.S. international tax requirements. The tax attorney stated that he would discuss four major categories of U.S. international tax requirements: (1) U.S. tax reporting requirements related to ownership of a foreign business; (2) U.S. owner’s tax reporting requirements related to assets owned by a foreign business; (3) U.S. tax reporting requirements related to transactions between a foreign business and its U.S. owners; and (4) income recognition as a result of anti-deferral regimes.

Mr. Sherayzen first discussed the U.S. tax reporting requirement related to the ownership of a foreign business. In particular, he covered Forms 5471, 8865 and 8858. The tax attorney also introduced the catch-all Form 8938. In this context, he also explained the second category of U.S. international tax requirements concerning the assets owned by a foreign business.

The next part of the FACC Seminar was devoted to the U.S. tax reporting requirements concerning transactions between a foreign business and its U.S. owners. Mr. Sherayzen explained in detail Form 926 and Schedule O of Form 8865, including the noncompliance penalties associated with these forms. The tax attorney also quickly reviewed Form 8886 for participating in transactions related to tax shelters. The discussion of the complex penalty system of Form 8886 surprised the audience.

The last part of the FACC Seminar was devoted to the income tax recognition and other U.S. tax reporting requirements that arise by the operation of anti-deferral regimes. Both, the Subpart F and the PFIC regimes were covered by the tax attorney.

International Personal Services Sourcing Rules | International Tax Lawyer

In a previous article, I explained that US tax law sources personal services to the place where these services are performed. What about a situation where such services are performed partially in the United States and partially outside of the United States (hereinafter, I will call such services “international personal services”)? In this article, I will address this situation and discuss the US international personal services sourcing rules.

I will specifically limit my discussion in this essay to international personal services sourcing rules concerning non-corporate independent contractors. In the future, I will discuss the income source rules for corporations and employees, including the source of income rules concerning fringe benefits and stock options.

International Personal Services Sourcing: Two Main Situations

The rules concerning the sourcing of international person services income depend on how a contracting agreement structures the payment for such services. In this context, there are two most common categories of contracts.

The first category of contracts specifically designates part of the payment to cover the services performed in the United States and part of the payment to compensate for services performed in a foreign country. In this situation, we can easily apply the general rule and source each part of the payment to the place where services are performed. In other words, the payment for US services will be US-source income and the payment for foreign services will be foreign-source income.

Unfortunately, contractors rarely structure their agreements in this way, because they often fail to retain an international tax lawyer to review their contracts for US international tax issues. Business lawyers also often make the same mistake, because they fail to see the need to involve a tax attorney.

Hence, most contracts fall within the second category of contracts, where a contract does not allocate the payment between services performed in the United States and those performed in a foreign country. The general rule is of little help for these contracts; hence, the IRS developed a supplementary legal process for income sourcing in this type of a situation.

International Personal Services Sourcing: the Two-Step Allocation Process

If the contract does not divide the payment between the countries where the services are performed, then the taxpayer will need to engage in a two-step process.

First, the taxpayer should determine if the terms of the contract allow to make an accurate allocation of payment between the United States and a foreign country. Sometimes, a contractor may perform services so specific to a country that the allocation of payment is obvious, even though the contract does not expressly allocate the payment to this country.

Second, if no such accurate allocation is possible, then the taxpayer should allocate the payment “on the basis that most correctly reflects the proper source of income on the facts and circumstances of the particular case.” Treas. Reg. §1.861-4(b)(1). This appears to be a very general rule that opens up possibilities for creative tax planning, but, once we look at the history of this rule, we will quickly realize that one method – the Time Rule (described below) – limits its flexibility.

The current flexible rule is in force only since 1976. Prior to that year, the IRS required the allocation of payment strictly based on the Time Rule. The impetus to changing to a more flexible rule was a 1973 case from the Tenth Circuit, Tipton & Kalmbach, Inc v US, 480 F2d 1118, 32 AFTR2d 73-5334 (10th Cir 1973). In that case, the IRS determined that a re-enlistment bonus was a compensation for services which the taxpayer performed on the day he re-enlisted. The paradoxical result was the fact that the location of the soldier on the day of his re-enlistment determined the sourcing of the entire re-enlistment bonus.

Hence, the IRS infused more flexibility into the Time Rule by adopting the language currently found in Treas. Reg. §1.861-4(b)(1). Nevertheless, given this history, there is no question that the Time Rule remains the most persuasive method of income allocation for non-corporate individual contractors.

It should be emphasized, however, that dominance of the Time Rule should not deter a taxpayer utilizing alternative methodology (for example, the value produced by specific services) if it is more accurate. In other words, the Time Rule is the default methodology which the IRS will use to allocate the payment between the countries, but a taxpayer may use other alternatives as long as he can persuade the IRS that his methodology represents a more accurate allocation of income.

International Personal Services Sourcing: the Time Rule

The time has come to define the Time Rule. According to Treas. Reg. §1.861-4(b)(2)(ii)(E), under the Time Rule, the amount of payment allocated to the United States “is the amount that bears the same relation to the individual’s total compensation as the number of days of performance of the labor or personal services by the individual within the United States bears to his or her total number of days of performance of labor or personal services.” Taxpayers should use fractions in determining the allocations.

Let’s use an example to demonstrate the application of the Time Rule. A US Corporation signs a contract with Mr. Hause, a tax resident of Germany, to provide professional advice concerning incorporation of German heavy machinery into a Chinese factory owned by the corporation. The total price paid is $900,000; the work is performed within 180 days. Out of these 180 days, Mr. Hause spends 60 days in the United States working on the implementation plans and 120 days in China overseeing the implementation process. Based on the Time Rule, Mr. Hause spent 1/3 of his time in the United States and 2/3 in China; hence, $300,000 will be considered US-source income and $600,000 will be sourced to China. Of course, if Mr. Hause can show that the value of his work in China was far more important to the contract than his work in the United states, he can use an alternative methodology (which may still have to survive the IRS scrutiny during an audit).

Based on this example, you can see why the IRS likes the Time Rule – it is a relatively straightforward, objective calculation that can be easily implemented in almost any case.

Contact Sherayzen Law Office for Professional Help With International Personal Services Sourcing Rules and Other US International Tax Issues

Sherayzen Law Office can help you with all of your US international tax needs, including the international personal services sourcing rules. Our highly experienced international tax team has successfully helped US taxpayers around the globe to deal with their US international tax issues. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Interest Income Sourcing | International Tax Lawyer & Attorney

This article is a continuation of a recent series of articles on the US source of income rules. In this article, I would like to introduce the readers to the interest income sourcing rules.

Interest Income Sourcing: Definition of “Interest”

Let’s first understand what is meant by the word “interest”. It is very curious that there is no definition of this term in the Internal Revenue Code nor in the Treasury regulations. Indeed, when applied to real life situations, the tax definition of interest spreads to items which do not at first appear as interest income (the most famous example is the original issue discount); the contrary is also true – sometimes an income that appears to be interest income is not considered to be such by the IRS (for example, commitment fees).

Generally, “interest” is a payment for the use of money. In most cases, there is a relationship of indebtedness that accompanies the requirement to pay interest; however, this is not always the case. In fact, there are numerous rules and rulings that one must know in order to properly determine how the IRS will treat a certain payment.

Interest Income Sourcing: General Rule

Generally, the interest is sourced at the residence of the obligor. IRC § 861(a)(1). Thus, if the obligor resides in the United States, then the interest paid on the obligation will be considered as US-source income. This is the case even if the obligor is a foreign national who resides in the United States. On the other hand, if a US citizen resides in a foreign country, then the interest that he pays to his lender is a foreign-source income.

This rule may lead to a paradoxical situation. For example, if a US citizen resides in Spain and pays interest to a Spaniard, this interest would be considered as Spanish-source income. At the same time, if a Spaniard resides in the United States and pays interest to a US citizen who resides in Spain, then the interest would be considered as US-source income.

Generally, interest paid by domestic corporations and domestic partnerships follows the same interest income sourcing rules. There are, however, some exceptions to this rule. For example, with respect to banks, interest on deposits with a foreign branch of a domestic corporation is not considered to be US-source income. IRC § 861(a)(1)(A)(i).

I wish to emphasize that I am stating here a general rule only. There are various exceptions, especially with respect to the portfolio interest. Most of these exceptions are especially relevant to nonresident aliens who receive interest from the United States.

Contact Sherayzen Law Office for Professional Help With US International Tax Law, Including Interest Income Sourcing Rules

Sherayzen Law Office is a leading international tax law firm in the United States which has helped hundreds of US taxpayers with their US international tax issues. We can help you!

Contact Us Today To Schedule Your Confidential Consultation!

2018 Tax Filing Season | International Tax Lawyer News

On January 4, 2018, the IRS announced that the 2018 tax filing season for the tax year 2017 will commence on January 29, 2018. This date was chosen by the IRS to make sure its software incorporates the full impact of the Tax Cuts and Jobs Act of 2017 on the 2017 tax returns.

2018 Tax Filing Season: EITC and ACTC Refunds

Despite the fact that the 2018 tax filing season will begin on January 29, the IRS warned that taxpayers who will claim Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) will not receive their refunds until at least February 27, 2018.

2018 Tax Filing Season: Processing of Paper Tax Returns

Also, it is important to note that the processing of paper returns will begin only in mid-February, because the system updates will continue until that time. The IRS, however, will begin accepting both, electronic and paper tax returns, on January 29, 2018.

This is very important for taxpayers who file US international information returns, such as Forms 926, 5471, 8621, 8865, 8938, et cetera. A lot of these returns are voluminous and cannot be e-filed due to tax software limitations; hence, they must be filed on paper.

2018 Tax Filing Season: Deadline on April 17, 2018

The filing deadline to submit 2017 tax returns will be on Tuesday, April 17, 2018. Usually, the deadline would be on April 15, but, in 2018, April 15 falls on a Sunday and April 16 is a legal holiday in the District of Columbia (Emancipation Day). Under the tax law, legal holidays in the District of Columbia affect the filing deadline for federal tax returns; hence, the filing deadline moved by one more day to April 17, 2018.

US taxpayers who have to file international information returns should keep in mind that there are two categories of such returns: information reports which are filed with their 2017 tax returns and the information reports which are filed (or e-filed) separately from the 2017 tax returns. Forms 926, 5471, 8621, 8865, 8938 and other similar information returns must be filed with the original US tax returns.

On he other hand, FBARs (FinCEN Form 114) and Form 3520 should be filed separately from the taxpayers’ tax returns. The deadline for this category of returns, however, is the same as the deadline for the 2017 tax returns – April 17, 2018 (unless an extension is filed).

Contact Sherayzen Law Office for Help with Your US International Tax Compliance During this 2018 Tax Filing Season

If you have foreign income and/or foreign assets, or if you received a foreign gift or inheritance, you should contact Sherayzen Law Office for professional help in determining your US tax compliance obligations and the preparation of the required US international information returns.

Contact Us Today to Schedule Your Confidential Consultation!

Tax Cuts & Jobs Act: 2018 Standard Deduction and Exemptions

The Tax Cuts and Jobs Act of 2017 made dramatic changes that affected pretty much every US taxpayer. This is the first article of the series of articles on the Act. I will start this series with the discussion of simple US domestic issues (such as 2018 standard deduction and personal exemptions), then gradually turn to more and more complex US domestic and international tax issues, and finish with the examination of the highly complex issues concerning E&P income recognition for US owners of foreign corporations and the new type of Subpart F income.

Today, I will focus on the 2018 standard deduction and exemptions.

Standard Deduction for the Tax Year 2017

Standard deduction is the amount of dollars by which you can reduce your adjusted gross income (“AGI”) in order to lower your taxable income and, hence, your federal income tax. The standard deduction is prescribed by Congress. If you use standard deduction, you cannot itemize your deductions (i.e. try to reduce your AGI by the amount of actual allowed itemized deductions) – you have to choose between these two options.

Standard deduction varies based on your filing status (there is an additional standard deductions of individuals over the age of 65 or who are blind).

For the tax year 2017, the standard deduction are as follows: $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing a joint tax return and $9,350 for heads of household.

2018 Standard Deduction and Exemptions

Under the Tax Cuts and Jobs Act of 2017, the 2018 standard deduction will virtually double in size: $12,000 for single taxpayers and married couples filing separately, $24,000 for married couples filing a joint tax return and $18,000 for heads of household. All of these amounts will be indexed for inflation.

It is important to point out, however, that these increased standard deduction amounts will only last until 2025. Then, the standard deduction should revert to the old pre-2018 law.

Personal Exemptions & Impact of 2018 Standard Deduction

Personal exemption is an additional amount of dollars by which the Congress will allow you to reduce your AGI (already reduced by either standard deduction or itemized deductions). When IRC Section 151 was enacted in 1954, the idea behind a personal exemption was to exempt from taxation a certain minimal amount a person needs to survive at a subsistence level.

Personal exemption can be claimed for you and your qualified dependents; in case of joint tax returns, each spouse is granted a personal exemption. However, a personal exemption for a spouse can be claimed even if the spouses are filing separate tax returns, but certain requirements have to be met.

For the tax year 2017, the personal exemption amount is $4,050. The exemption is subject to a phase-out at a certain level of income.

The Tax Cuts and Jobs Act of 2017 repeals personal exemptions for the tax years 2018-2025. After 2025, the law reverts to the one that existed as of the tax year 2017. In other words, the increase in 2018 standard deduction will be at least partially offset by the elimination of 2018 personal exemption.

In some cases, where taxpayers claim many personal exemptions for their dependants, the elimination of personal exemptions may actually result in the increase in taxation (compared to the 2017 law) despite the increase of 2018 standard deduction. Of course, such an increase in taxation needs to take into account potential increase in child tax credit under the new law. Hence, in order to assess the full tax impact of the tax reform for large families, one needs to consider other factors in addition to just 2018 standard deduction.