Treatment of Business Profits under the Canada-US Tax Treaty

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In this article we will briefly examine the treatment of the business profits of a resident of a contracting State under the Canada-US Income Tax Convention, and the important definition of a “permanent establishment” for purposes of determining the potential taxability of income of such profits.

This article is intended to provide informative material for US taxpayers involved with US-Canada cross-border businesses, and is not intended to constitute tax or legal advice. Please contact the experienced international tax law firm of Sherayzen Law Office, Ltd. for issues involving the Canada-US Tax Treaty.

Business Profits under the Canada-US  Tax Treaty

Under the US-Canada Tax Treaty, the business profits of a resident of a Contracting State, “[S]hall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein.” (See the definition of “permanent establishment” in next section). Hence, if the resident of a Contracting State carries on, or has carried on, such business, then the business profits of the resident may be taxed in the other State but only to the extent attributable to the permanent establishment.

In determining the business profits of a permanent establishment, certain deductions incurred for the purposes of the permanent establishment, such as executive and general administrative expenses (whether in the State in which the permanent establishment is situated, or elsewhere) may be allowed. However, under the Canada-US Tax Treaty, a Contracting State is not required to allow the deduction of an expenditure which is not generally deductible under the taxation laws of such State.

Additionally, the Canada-US Tax Treaty states that “no business profits shall be attributed to a permanent establishment of a resident of a Contracting State by reason of the use thereof for either the mere purchase of goods or merchandise or the mere provision of executive, managerial or administrative facilities or services for such resident.”

Definition of Permanent Establishment under the Canada-US Tax Treaty

Article V of the Canada-US Tax Treaty provided the original definition of the term “permanent establishment”. As stated in the Canada-US Tax Treaty, the term is defined to mean “[a] fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.” Under the Canada-US Tax Treaty, permanent establishment includes: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. Furthermore, a building site or construction or installation project constitutes a permanent establishment provided that it lasts more than 12 months. In addition, “A person acting in a Contracting State on behalf of a resident of the other Contracting State other than an agent of an independent status to whom paragraph 7 applies shall be deemed to be a permanent establishment in the first-mentioned State if such person has, and habitually exercises in that State, an authority to conclude contracts in the name of the resident.” (Please see Article V of the Canada-US Tax Treaty for more specific examples of a “permanent establishment”).

The Fifth Protocol (the “Protocol”) to the Canada-US Tax Treaty, signed in September of 2007 and entered into force on December 15, 2008, further modified the definition of permanent establishment. Under the Protocol (Article 3, Paragraph 2), an “enterprise of a Contracting State” that provides services in the other Contracting State may be deemed to have a permanent establishment if it meets at least one of the following conditions:

“(a) Those services are performed in that other State by an individual who is present in that other State for a period or periods aggregating 183 days or more in any twelve-month period, and, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in that other State by that individual; or (b) The services are provided in that other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of that other State or who maintain a permanent establishment in that other State and the services are provided in respect of that permanent establishment.”

Further, the diplomatic notes of Annex B to the Protocol added that, “[t]he principles of the OECD Transfer Pricing Guidelines shall apply for purposes of determining the profits attributable to a permanent establishment”.

Elimination of Article XIV of the Canada-US Tax Treaty

The Protocal had further important impact with respect to services defined as “Independent Personal Services” – Article 9 of the Protocol eliminated Article XIV of the Canada-US Tax Treaty (“Independent Personal Services”). Under previous Article XIV a resident of a Contracting State performing independent personal services in the other Contracting State could be taxed if such “individual has or had a fixed base regularly available to him in that other State but only to the extent that the income is attributable to the fixed base.” The business profits rules explained above and the various definitions of permanent establishment now determine the taxability of such cases.

Contact Sherayzen Law Office for legal help with respect to Canada-US Tax Treaty

Treaty interpretation, international tax resolution and international tax planning may involve very complex issues, and it is advisable to seek the assistance of an international tax attorney in this area. This is why it is advised that you contact Sherayzen Law Office to secure professional legal help involving issues related to Canada-US Tax Treaty.

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FBAR Reporting of Foreign Gold and Silver Storage Accounts

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There is a great deal of confusion about the reporting of foreign gold and silver storage accounts on the Report of Foreign Bank and Financial Accounts (FBAR). In this article, I would like to set forth the general legal framework for the analysis of the reporting requirements for the foreign gold and silver storage accounts. However, it should be remembered that this article is for educational purposes only and it does not provide any legal advice; whether your particular foreign gold and silver accounts should be reported on the FBAR is a legal question that should be analyzed by an international tax attorney within your particular fact setting.

FBAR Background

FBAR’s official name is FinCEN Form 114 (formerly form TD F 90-22.1). Generally, the FBAR is used by US persons to report foreign bank and financial accounts whenever the aggregate balance on these accounts exceeds the threshold of $10,000. The FBAR applies to accounts which are directly, indirectly and constructively owned; it further applies to situations where a US person has signatory or other authority over a foreign account.

The above description contains numerous terms of art that have very specific meaning (even with respect to such common terms as “US person” and “accounts”). I only provide a very general definition of the FBAR here, but there is plenty of FBAR articles on sherayzenlaw.com that you can read to learn more about this requirement.

General Rule for Reporting of Foreign Gold and Silver Storage Accounts

In general, if you have a foreign gold and silver storage accounts, they are reportable on the FBAR as long as the threshold requirement is satisfied. However, as almost everything in international tax law, you have to look closely at the definition of terms. In this case, the critical issue is what situations fall within the definition of foreign gold and silver storage accounts.

What are Foreign Gold and Silver Storage Accounts?

It is important to understand that certain facts and details may play a great role in determining whether one has foreign gold and silver storage accounts – this is why it is so important to have an international tax attorney review the particular facts of your case.

Nevertheless, there are certain general legal concepts that provide helpful guidance to international tax attorneys in their FBAR analysis. The most important FBAR factors for determining whether a particular arrangement is defined as foreign gold and silver storage accounts are two interrelated concepts of “custodial relationship” and “control”.

Generally, where another person or entity has access and/or control of assets or funds on your behalf, the IRS is very likely to find that a custodial relationship exists and all such arrangements would be reportable on the FBAR as foreign gold and silver storage accounts. For example, if one buys gold and silver through BullionVault or Goldmoney (whether allocated or non-allocated), one creates foreign gold and silver storage accounts because BullionVault or Goldmoney would handle the transaction on your behalf and store the precious metals on your behalf (and, as mentioned above, even allocate your holdings to a particular gold or silver bar).

A word of caution: the IRS tends to interpret the definitions of “account” and “custodial relationship” very broadly and one must not indulge oneself with false thoughts of security because one thinks that he was able to circumvent a particular fact setting. Again, the existence of foreign gold and silver storage accounts is a legal question that should be reviewed by an experienced international tax lawyer.

Foreign Gold and Silver Storage Accounts: What about a Safe Deposit Box?

There is a situation that comes up often in my practice (particularly for clients with Australian, Hong Kong and Swiss accounts) with respect to FBAR reporting of precious metals – putting gold, silver and other precious metals in a foreign safe deposit box. There is a dangerous myth that safe deposit boxes are never reportable – this is incorrect.

In general, it is true that precious metals held in a safe deposit box are not reportable, but if and only if no account relationship exists. If there is an account relationship with respect to a safe deposit box, then it would be considered a reportable foreign gold and silver storage account for the FBAR purposes.

What does this mean? Let’s go back to the definition of a custodial relationship cited above – an account relationship exists whenever another person or entity has control of funds or assets on your behalf. If one applies this definition to a safe deposit box, then it is likely that the IRS will interpret any situation where an institution or person has access to a safe deposit box as an existence of an account. Moreover, the IRS is likely to find that foreign gold and silver storage accounts exist where an owner (direct or indirect) of the safe deposit box can instruct the institution to sell the gold from the safe deposit box.

Other Reporting Requirements May Apply to Foreign Gold and Silver Storage Accounts

It is important to mention that FBAR is just one of potential reporting requirements under US tax laws. Other reporting requirements (such as Form 8938, 8621, 5471, 8865 and so on) may apply depending on the nature of the foreign gold and silver storage accounts, form of ownership, whether a foreign entity is involved, and numerous other facts. You will need to contact an experienced international tax lawyer to determine your international tax reporting requirements under US tax laws.

Contact Sherayzen Law Office for Professional Help with Reporting of Foreign Gold and Silver Accounts

If you have unreported foreign gold and silver storage accounts, contact Sherayzen Law Office for professional help. Owner Eugene Sherayzen is an experienced international tax attorney who will thoroughly analyze your case, determine the extent of your current reporting requirements and potential non-compliance liability, analyze your voluntary disclosure options, and implement the preferred legal option (including preparation of all legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now!

OVDP lawyers: Recent News Regarding the DOJ Program for Swiss Banks

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For OVDP lawyers, one of the most significant recent developments in the US international tax law enforcement was the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (“Program”) announced by the US Department of Justice (“DOJ”) on August 29, 2013. Since the Program began functioning, more than a hundred Swiss banks (out of the approximate total of three hundred eligible banks) elected to enter the Program.

This article will briefly highlight some recent developments concerning Swiss banks participating in the Program, as well as the likely future focus of the DOJ efforts to locate the offshore accounts of US taxpayers (an important focus for OVDP lawyers and their clients). This article is not intended to convey tax or legal advice. If you have an offshore account, you should seek the advice of a tax attorney as significant penalties may be involved. Please contact the experienced OVDP International tax firm, Sherayzen Law Office, Ltd. for professional legal and tax assistance.

OVDP Lawyers: At Least Ten Swiss Banks Have Withdrawn From the Program

It appears that some of the Swiss banks entered the Program out of pure caution. According to a recent article in the Swiss newspaper, NZZ am Sonntag, at least ten Swiss banks have withdrawn their participation in the Program. The paper, citing anonymous sources, did not specify which banks withdrew. However, the banks reportedly determined that they had not broken applicable US laws, and according to various news reports, the DOJ had no objection to the banks withdrawing from the Program.

One Swiss bank that publicly announced that it was withdrawing last month is the Liechtenstein-based private bank, VP Bank. According to a news report citing an official statement, the bank noted, “Thorough internal investigations and external expert opinions showed that the conditions for continued participation did not exist…VP Bank therefore withdrew from the U.S. programme.”

For OVDP lawyers, this maybe an important fact that may affect the voluntary disclosure strategies of their clients.

OVDP Lawyers: Many Swiss Banks May Have to Wait Until 2015 to Resolve Disputes in the Program

An important issue for the Swiss Banks and OVDP lawyers is when the DOJ will reach the final resolution under the Program. In a recent article published in the Swiss financial newspaper, finews.ch, Shelby du Pasquier, a partner at the Geneva law firm Lenz & Staehelin representing more than twenty Swiss banks enrolled in the Program, gave the opinion that for most banks enrolled, settling disputes in the Program would last until spring of 2015. He noted that this was his “personal opinion” and not the official opinion of any of the twenty (unnamed) banks he represents. In a separate news report, Boris Collardi, CEO of Julius Baer, was quoted in July of this year as stating that he expects his bank to find a “fair and equitable solution” within the next few months. Du Pasquier seconded the opinion that Julius Baer will likely be one of the next large Swiss banks to settle, along with an unnamed “smaller bank.”

Du Pasquier also opined that the US DOJ is likely to increase scrutiny of accounts in other offshore jurisdictions, especially the Bahamas, Hong Kong and Singapore, and any Swiss bank subsidiaries operating in such countries.

At Sherayzen Law Office, Mr. Sherayzen already expressed his opinion that the IRS is already in the process of widening its scope of enforcement with the particular emphasis on the Carribean region, Central America, Hong Kong, India, Singapore in addition to its already deep involvement in Israel. Mr. Sherayzen also seconded the opinion that the resolution of the issues under the Program is unlikely to be reached for most of the participants in 2014; most likely, we are looking at 2015 and maybe even 2016 for the most difficult cases.

OVDP Lawyers: Several Swiss Banks Seek More US Customers for Offshore Accounts

While most Swiss banks no longer pursue US customers desiring offshore accounts and funds because of the recent increased IRS and DOJ efforts, several Swiss banks have actually increased marketing for this customer base. The new marketing efforts are legal if such offshore funds are properly registered with the US Securities and Exchange Commission (SEC), or other applicable authorities.

In a recent news article in swissinfo.ch, René Marty, CEO of UBS Swiss Financial Advisers (UBS-SFA) stated, “We only accept clients who have declared all their assets.” The Swiss Bank, Vontobel, not only registered with the SEC, but also established a branch in Texas to pursue US customers.

UBS-SFA, Vontobel, and Pictet North America Advisors are the Swiss leaders in this targeted market. Furthermore, from a practical perspective, these banks may provide the only option for US persons living overseas who have declared their offshore accounts, but are unable to open accounts in various Swiss banks that now view having US customers as a stigma.

For OVDP lawyers, it is important to advise their clients that these offshore banks are likely to be subject to additional US tax reporting requirements.

Contact Sherayzen Law Office for Help with Undisclosed Foreign Accounts and Other Foreign Assets

If you have undisclosed foreign accounts, you may be running a grave risk of IRS detection and investigation due to FATCA enforcement as well as the widening scope of IRS investigations as it goes through the piles of information it collected as a result of the voluntary disclosure programs and the Swiss Program for Banks. This is why you need the help of an experienced OVDP lawyer to properly advise you with respect to your voluntary disclosure options.

We can help you as we have helped hundreds of our clients around the world. Our international tax team is highly experienced in all voluntary disclosure options involving offshore accounts and other foreign assets. Our international tax compliance team will thoroughly review your case, identify the international tax issues involved, analyze the penalty exposure and the available voluntary disclosure options, and implement the preferred voluntary disclosure plan for you (including preparation of all legal documents and tax forms).

Contact US to Schedule Your Confidential Consultation.

Illegal Use of Offshore Accounts in the Caribbeans: Advisor Sentenced

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In an earlier article, we referred to a case where a investment advisors used offshore accounts in the Caribbeans to launder and conceal funds. On September 5, 2014, the IRS ad the DOJ announced one of these advisors, Mr. Joshua Vandyk, was sentenced to serve 30 months in prison.

Mr. Vandyk, a U.S. citizen, and Mr. Eric St-Cyr and Mr. Patrick Poulin, Canadian citizens, were indicted by a grand jury in the U.S. District Court for the Eastern District of Virginia on March 6, and the indictment was unsealed March 12 after the defendants were arrested in Miami. Mr. Vandyk, 34, pleaded guilty on June 12, Mr. St-Cyr, 50, pleaded guilty on June 27, and Mr. Poulin, 41, pleaded guilty on July 11. St-Cyr and Poulin are scheduled to be sentenced on October 3, 2014.

According to the plea agreements and statements of facts, All three advisors conspired to conceal and disguise the nature, location, source, ownership and control of $2 million (believed to be the proceeds of bank fraud) through the use of the Offshore Accounts in the Caribbeans. The Offshore Accounts in the Caribbeans are often used not only to conceal illegal funds, but also perfectly legal earnings of U.S. persons.

In addition to the use of the Offshore Accounts in the Caribbeans, the advisors assisted undercover law enforcement agents posing as U.S. clients in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners. Moreover, Mr. Vandyk helped invest the laundered funds on the clients’ behalf and represented that the funds in the Offshore Accounts in the Caribbeans would not be reported to the U.S. government.

According to court documents, Mr. Poulin established an offshore corporation called Zero Exposure Inc. for the undercover agents and served as a nominal board member in lieu of the clients. Mr. Poulin then transferred approximately $200,000 that the defendants believed to be the proceeds of bank fraud from the offshore corporation to the Cayman Islands, where Mr. Vandyk and Mr. St-Cyr invested those funds outside of the United States in the name of the offshore corporation. The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements with respect to the Offshore Accounts in the Caribbeans to the clients. Clients were able to monitor their investments in the Offshore Accounts in the Caribbeans online through the use of anonymous, numeric passcodes. Upon request from the U.S. client, Mr. Vandyk and Mr. St-Cyr liquidated investments and transfered money from the Offshore Accounts in the Caribbeans, through Mr. Poulin, back to the United States.

This case is just one more example of the increased IRS international tax enforcement with respect to the Offshore Accounts in the Caribbeans.

History and Success of the Main Voluntary Disclosure Programs

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In order to bring back into the system the non-compliant taxpayers with undisclosed foreign assets, the IRS created various offshore voluntary disclosure programs. The voluntary disclosure programs have been part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA). Recently, the IRS shared the statistics regarding the success of its three latest and most voluntary disclosure programs: 2009 OVDP, 2011 OVDI and 2012 OVDP (recently updated to become the 2014 OVDP).

Results for All Three Programs

The outcome of the three voluntary disclosure programs is indeed impressive. Overall, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.

Let’s take a closer look at each program.

2009 OVDP

This was the first of the “troika” of the latest voluntary disclosure programs. The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation.

Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years.

In the 2009 OVDP the IRS received 15,000 disclosures prior to the October 15, 2009 closing date. It resulted in the collection of $3.4 billion in back taxes, interest and penalties. It also led to another 3,000 disclosures after the closing date.

No doubt that the success of the 2009 OVDP was made possible by the IRS victory in the UBS case in August of 2008 and the action it started to take to follow-up on this victory. The UBS case became the turning point in the offshore compliance for U.S. taxpayers because the victory was achieved over one of the largest banks in the world in the country which was considered to be the most formidable fortress of bank secrecy for centuries.

2011 OVDI

While the 2009 program was the first of the post-UBS voluntary disclosure programs, the 2011 Offshore Voluntary Disclosure Initiative (OVDI) was the program that established the offshore voluntary disclosure programs as one of the main pillars of U.S. voluntary tax compliance. The 2011 OVDI was announced in February of 2011 and lasted until September 9 of that year (originally, it was supposed to close on August 31, 2011, but the IRS extended the deadline to September 9).

Generally, participants of this program paid a 25% miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5% or 12.5% penalties, but there were very strict requirements to qualify for this treatment.

The 2011 OVDI was extremely popular. It drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the 70 percent of cases that were closed that year.

2012 OVDP

After analyzing the results from the two prior voluntary disclosure programs and reflecting on the best way to induce tax compliance (while intensifying international tax enforcement and looking forward to the implementation of FATCA), the IRS created a new 2012 Offshore Voluntary Disclosure Program (2012 OVDP) in January of 2012 and 2014 OVDP now closed.

In constructing the 2012 OVDP rules, the IRS drew on its experience from the experience from the prior voluntary disclosure programs, revised the terms of the 2011 OVDI program and made the 2012 OVDP permanent until further notice. Under the 2012 OVDP, participants paid a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5% or 12.5% penalties remained in effect for certain taxpayers. This 2012 program has drawn 12,000 disclosures since its inception.

2012 Streamlined Option

In June of 2012, the IRS expanded its voluntary disclosure programs beyond 2012 OVDP and added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year.

2014 Changes to Offshore Voluntary Disclosure Programs

In June of 2014, the IRS announced major changes in the 2012 offshore account compliance programs. As a result of these changes, the taxpayers now currently have to analyze up to five different voluntary disclosure paths. The more prominent changes to the voluntary disclosure programs include: new 2014 OVDP with the double-penalty structure of 27.5% and 50%, major enhancement of the Streamlined Foreign Offshore Procedures, introduction of the brand-new Streamlined Domestic Offshore Procedures with its new 5% penalty structure, slightly modified Delinquent FBAR Submission rules, and slightly modified Delinquent Information Return Submission rules (which partially incorporates now the statutory Reasonable Cause exception).

The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.

Contact Sherayzen Law Office for Professional Advice Regarding Your Offshore Voluntary Disclosure Options

If you have undisclosed foreign accounts and other foreign assets, you are likely to face very steep penalties if the IRS discovers your non-compliance. This is why it is prudent to consider your voluntary disclosure options as soon as possible.

Sherayzen Law Office is a firm that specializes in international tax compliance and offshore voluntary disclosures. Our experienced international tax law firm can offer professional advice with respect to your voluntary disclosure options and conduct the entire offshore voluntary disclosure for you. Contact Us to Schedule Your Confidential Consultation Now!