Hapoalim Prepares for Settlement with DOJ | FATCA Tax Attorney

/0 Comments/in , /by

On October 6, 2016, Israeli bank Hapoalim Ltd. announced that, in order to cover the costs of a future settlement with the US Department of Justice (DOJ), it will add a $70 million charge to an existing $50 million provision in its third-quarter results. The expected settlement will cover Hapoalim’s role in helping US tax residents to evade their US tax obligations.

In its news release, Hapoalim stated that its representatives held an initial discussion with the DOJ on September 30, 2016, to discuss the future settlement. The bank did not indicate whether $120 million in charges that it booked to date is the actual amount that Hapoalim will pay under its settlement with the DOJ. Rather, the news release emphasizes the uncertainty that still exists with respect to the actual amount.

The issue of the DOJ investigation dates back to the year 2011. In its recent (June 30, 2016) financial statements Hapoalim confirmed that its Swiss subsidiary Bank Hapoalim (Switzerland) Ltd. had been notified by Swiss authorities in 2011 that it was being investigated by the US government as a result of the DOJ’s suspicions that the bank had assisted US clients in evading federal taxes. The Swiss subsidiary could not resolve this issue in 2013 in the DOJ’s Swiss Bank Program due to the fact that it could not be classified as a Category 2 bank.

It is important to remember that the DOJ is not the only institution that is going after Hapoalim. The State of New York is conducting its own review. In its news release, Hapoalim indicated that the $120 million charge is not related to the New York investigation.

While all of this legal uncertainty makes it difficult for Hapoalim to assess its future liability under any deferred prosecution agreement, one can compare its situation with Bank Leumi. In 2014, Bank Leumi Group entered into a Deferred Prosecution Agreement with the DOJ under which it paid $270 million ($157 million of this penalty was allocated to Bank Leumi’s Swiss accounts held by US taxpayers).

If we rely on this precedent, it appears that Hapoalim is greatly underestimating its penalty, because Bank Leumi and Hapoalim are fairly similar in size as well as their actions in soliciting US clients. One also must not forget about the possible future indictments of Hapoalim’s employees (at least in the United States) by the DOJ.

How IRS Can Get $718 Billion in Tax Revenue | International Tax Lawyer

/0 Comments/in , /by

On October 4, 2016, the US Public Interest Research Group, Citizens for Tax Justice, and the Institute on Taxation and Economic Policy issued a report called “Offshore Shell Games 2016: the Use of Offshore Tax Havens by Fortune 500 Companies”. The report calculates that eliminating all tax deferral on Fortune 500 US companies’ foreign earnings would allow the IRS to collect almost $718 Billion in additional US tax revenue.

Where does the Amount of $718 Billion Come From?

This amazing report targets the estimated $2.5 trillion in offshore earnings which are assumed to be mostly help by the US companies’ foreign subsidiaries in tax havens. The report calculates that the top 30 (meaning top 30 companies by the amount of offshore holdings) of the Fortune 500 companies account for two-thirds of the total, with Apple ($215 billion), Pfizer ($194 billion), and Microsoft ($124 billion) topping the list. It should be noted that some of the other estimates calculate the amount of total offshore earnings of US companies to be in excess of $5 trillion, i.e. double the amount used by the report.

The number of foreign subsidiaries owned by US multinationals is also impressive – the estimate runs as high as 55,000 subsidiaries owned just by Fortune 500 companies. The report states that, although many offshore subsidiaries do not show up in companies’ SEC filings, at least 367 of the Fortune 500 companies maintain subsidiaries in tax havens and the top 20 account for 2,509 of those entities. Subsidiaries of US multinationals reported profits of more than 100 percent of national GDP for five tax havens, including 1,313 percent for the Cayman Islands and 1,884 percent for Bermuda.

The most popular country for organizing the subsidiaries remains the Netherlands. However, Ireland, Luxembourg, Switzerland, Bermuda and Cayman Islands closely follow Netherlands in terms of their popularity among US multinationals.

How is $718 Billion Calculated?

The report sets forth its methodology for the calculation of $718 Billion. In essence, the report focuses on the data from 58 Fortune 500 companies to estimate the additional tax all of the companies would owe upon repatriation of funds to the United States. The final tax rate amount to about 28.8% of the repatriated income; the rest (i.e. the difference between the 35% US statutory rate and the 28.8%) is assumed to be the foreign tax rate that the companies will be able to use as a foreign tax credit to offset their US tax liability. Once 28.8% rates is applied to $2.5 trillion, the total amount of additional tax due to the IRS by the Fortune 500 companies is estimated to be close to $718 Billion.

This methodology, however, is not without its flaws. First, as I already referenced above that the amount of funds in foreign subsidiaries may be substantially higher than the estimated $2.5 trillion. Second, the report’s assumption of 6.2% of foreign tax rate may be too generous, especially for foreign companies owned by US persons for generations; in reality, a lot of companies are able to escape all taxation on a substantial amount of their income. Hence, the $718 Billion amount may actually be an understatement.

How Does the Report Propose to Collect the $718 Billion?

The report offers three approaches to the problem of collecting the $718 billion. The first approach is deceptively simple – end all tax deferral. The problem that I see with this approach is that it essentially expands US tax jurisdiction to foreign entities (which are non-resident alien business structures) to the extent that these entities automatically become US persons as soon as any US person becomes an owner of all or any part of them. In addition to the obvious legal problems with such an approach, there is also a potential to create a real chilling effect to US activities overseas. At the very least, the proposed course of action should be modified to include only controlled foreign entities and large US corporations.

The second approach is less radical; the report suggests tighter anti-inversion rules, elimination of the check-the-box election and the elimination of aggressive tax planning through intellectual property transfers. While many of these rules may be effective to combat future aggressive tax planning, they are unlikely to influence the current IRS inability to collect the $718 billion in additional tax revenue.

Finally, the report also lends support to the Obama administration’s (which is actually not a resurrection of older proposals) tax proposal to treat as subpart F income excess profits earned by a controlled foreign corporation from US-developed intangibles. The administration’s proposal is to expand the definition of Subpart F income to all excess income taxed at 10% or less (later expanded to 15%) would be included in subpart F. While a sensible proposal, it also seems to fall short of the expected $718 billion in additional tax revenue.

Also, it seems strange that all of the proposals seems to put foreign companies owned by small US firms and those owned by large US firms on the same footing. This kind of seemingly non-discriminatory approach has had a disproportionally heavy impact on small US firms’ ability to conduct business overseas due to lower resources that small firms can devote to the same type of tax compliance as that required of the Fortune 500 companies. 

IRS FBAR Audit and IRC Section 6103 | FBAR Tax Attorney Minneapolis

/0 Comments/in , /by

This article explores a certain relationship between tax returns and an IRS FBAR Audit. In particular, the critical question that I seek to answer in this writing is when the IRS is able to use US tax returns as evidence to support and/or commence an IRS FBAR Audit.

IRS FBAR Audit and the IRS Examination of US tax Returns

In discussing the relationship between the US tax returns and IRS FBAR Audit, the focus is on the information uncovered by the IRS during the examination of US tax returns that may be used to commence or advance an IRS FBAR Audit. It is possible, however, for the IRS to use a taxpayer’s tax returns in other contexts, not just examinations, to further an IRS FBAR Audit.

In a previous article, I already discussed the enormous amount of useful information that US tax returns contain and that can be used by the IRS to commence an IRS FBAR Audit. In addition to the obvious Schedule B, the tax returns contain foreign income documents, tax fraud evidence, patterns of noncompliance and other useful evidence that can be used in an IRS FBAR Audit.

This means that, in a lot of cases, there is a direct relationship between tax returns and the subsequent IRS FBAR Audits.

Tax Return Confidentiality Under IRC §6103(a) Prevents Automatic Disclosure for the IRS FBAR Audit Purposes

Despite their utility, there is one problem with the ability of the IRS to use tax return information in an IRS FBAR audit – US tax return information is confidential and protected from disclosure under IRC (Internal Revenue Code) §6103(a). This protection extends to the disclosure of tax returns and tax return information within the IRS, especially for use in investigating a Bank Secrecy Act (“BSA”) violation. Why are we discussing the BSA? The reason is simple – BSA is the legislation that created FBAR.

In other words, the tax return information (which is collected under U.S.C. (United States Code) Title 26 cannot be automatically shared within the IRS for the purposes of Title 31 FBAR violation. Rather, the IRS has to find a legal justification for the disclosure of this information. The usual proper statutory basis for this justification can be found in IRC §6103(h).

IRC §6103(h) and Authorization to Share Tax Return Information for the IRS FBAR Audit Purposes

The exploration of §6103(a) exceptions under §6103(h) leads us into a complicated world of tax analysis. I will try to simplify this analysis while reducing as much as possible the risk of leaving out important details.

In general, under IRC §6103(h), disclosure of returns and return information is authorized without written request to officers and employees of the Treasury Department as long as these officers’ and employees’ official duties require such disclosure for tax administration purposes. “Tax administration” is a term of art in this context – it is a fairly broad term that covers the administration, management and supervision of the Internal Revenue Code and “related statutes”, including assessment, collection and enforcement under the IRC and these “related statutes.” See §6103(b)(4).

The key question then is whether BSA is a “related statute”. If it is, then the IRS employees can use tax return and return information to commence an IRS FBAR Audit.

IRS FBAR Audit: Is BSA a “Related Statute”?

From the outset, it is important to emphasize that the IRS does not treat BSA as a “per se” related statute, because BSA reports are required a variety of purposes, not just tax compliance. For example, FBARs can be used for such government purposes as counter-terrorism, money-laundering investigations and law enforcement in general.

Therefore, the IRS will deem the BSA as a related statute only if there is a good-faith determination that a BSA violation was committed in furtherance of a Title 26 violation or if such violation was part of a patter of conduct that violated Title 26. See IRM 4.26.14.2.3 (07-24-2012). In lay terms, the FBAR violation has to be related to a tax violation in order for the IRS to be able to utilize the taxpayer’s tax returns and tax return information in an IRS FBAR Audit.

Unfortunately, there is no clear-cut straightforward answer to when the FBAR is related to a tax violation. Rather, this determination should be made based on the facts and circumstance of each case.

IRS FBAR Audit vs. DOJ Criminal Investigation: IRC §6103(i)

It is important to emphasize that the “related-statute” limitation applies only to IRS examiners in a civil IRS FBAR Audit. If, however, a taxpayer is the subject of a criminal Department of Justice (“DOJ”) grand jury investigation, then the DOJ prosecutors are not subject to §6103(h). Instead they can use §6103(i) to access the taxpayer’s tax returns and tax return information.

Contact Sherayzen Law Office for Professional Help with an IRS FBAR Audit

If you are subject to an IRS FBAR Audit, contact Sherayzen Law Office as soon as possible for professional help. Without proper representation, an IRS FBAR Audit can lead to disastrous consequences to the taxpayer’s financial life due to imposition of the draconian FBAR Penalties.

Our experienced and highly-knowledgeable legal team, headed by Mr. Eugene Sherayzen, can help you! Contact Us Today to Schedule Your Confidential Consultation!

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

/0 Comments/in , /by

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.

Poland AEOI Rules Still Not Implemented | FATCA Lawyers

/0 Comments/in , /by

On September 29, 2016, the European Commission announced that it had asked Poland to fully implement into its domestic law Council Directive 2014/107/EU on mutual assistance in income and capital taxation matters (which amends the earlier Directive 2011/16/EU on mandatory automatic exchange of information between member states). The request came in after the realization that Poland AEOI Rules were still not implemented despite the deadline.

Poland AEOI Rules Implementation, CRS and Council Directive 2014/107/EU

After the United States adopted Foreign Account Tax Compliance Act (FATCA) into law, the OECD (including the European Union) created the Common Reporting Standard (CRS) which established the standard for what type of information needs to be automatically exchanged between signatory countries. AEOI is essentially the practical application of the CRS.

In December 2014, the EU Council adopted Directive 2014/107/EU, which extended cooperation between tax authorities to automatic exchange of financial account information (i.e. AEOI) and expanded the scope of information to be exchanged on an automatic basis to include interest, dividends, and other types of income. Virtually all countries, except Poland and Portugal, have implemented the directive on AEOI

The Delays in Poland AEOI Rules Implementation

In reality, Poland, like other member states, were requires to implement the directive into their national laws by January 1. According to Tax Analysts, the European Commission already sent a formal notice to Poland on January 27, 2016. Then, it send another formal notice in March of 2016. At that time, Poland replied that the government was working on transposing Directive 2014/107/EU into national law.

However, Poland AEOI Rules still have not been implemented. What is worse, it appears that the Polish government has taken no concrete steps into that direction. Poland also has yet to fully inform the Commission of its plans to meet that requirement.

What Happens if Poland AEOI Rules Implementation Stalls

While the latest Commission action comes at a difficult time in Poland (on September 28, 2016, Polish Prime Minister Beata Szydlo sacked Finance Minister Pawel Szalamacha), it may not save Poland from later EU actions. If Poland does not respond in a satisfactory manner within the next two months, the Commission may refer Poland to the Court of Justice of the European Union.