Incoterms 2010 FCA

/in , /by

In a previous essay, I already explained the importance of Incoterms to drafting of international contracts and discussed one of the Incoterms 2010 (EXW). In this article, I will provide a brief overview of another and more common Incoterms 2010 – FCA.

FCA (Free Carrier) means that the seller delivers (the Incoterms 2010 rules specify exactly when such even occurs) the goods to the carrier or another person designated by buyer at the seller’s premises or another named location. If FCA is used, the seller’s obligations are expanded to clearing the export license (where necessary) and otherwise comply with the customs requirements for exports in addition to providing the goods conforming with the contract specifications. There is no such requirements for securing an import license; rather, this is still the buyer’s obligation.

The buyer still makes the contracts of carriage and insurance under FCA. However, there are exceptions to this rule whether based on the buyer’s request or commercial practice. Furthermore, the buyer is not obligated to the seller to make such contract of insurance. If the buyer wishes to obtain the contract of insurance, the seller is obligated to supply the information necessary for the buyer to secure the contract of insurance.

There are fairly complex rules surrounding FCA with respect to the transfer of risk under FCA. Generally, the seller bears all risks of loss and damage up to the point of delivery of goods as specified by the Incoterms 2010 rules. However, there are important exceptions that may modify the main rule and force one of the parties (usually buyer) to bear the burden of risk from an earlier point.

Unlike EXW, the allocation of costs to the seller now explicitly includes all costs related to the customs formalities related to the export of the goods (inlcuding taxes, duties, and other export-related charges). The buyer’s obligation to pay costs is also expanded in certain circumstances, including the failure to provide certain notices to the seller. Likewise, there are specific exceptions to these rules.

It is also important to note here that Incoterms 2010 provide a number of specific requirements with respect to the notices that should be given by the parties to each other, packaging of goods, checking the goods, pre-shipment inspection, security-related information, and other numerous rules.

Whether you are a buyer or a seller, you are well-advised to consult an international contract attorney before you use any of the Incoterms 2010. The description of FCA provided in this essay is fairly basic and for general information only. It should not be relied upon in drafting the contract.

Contact Sherayzen Law Office NOW for Help with International Contracts

If you are about to engage in a transaction involving an international delivery of goods, contact Sherayzen Law Office for legal help. Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Incoterms 2010: EXW

/in , /by

Incoterms (the ICC rules on the use of domestic and international trade terms) constitute a critical part of an international sales contract.  Their most important contribution to the contract consist of a clear delineation of the parties’ respective obligations, thereby reducing the risk of misunderstanding and litigation.  Moreover, Incoterms are regularly updated and, therefore, incorporate the recent developments in global trade.  The latest update occurred in 2010 and, today, Incoterms 2010 constitute an invaluable part of an international trade attorney’s vocabulary.

In this essay, I want to provide a very brief overview of one of the most unfamiliar Incoterms 2010 – EXW.

EXW (Ex Works) means that the seller delivers the goods to the buyer when the seller places the goods at the disposal of the buyer on the seller’s premises (or at another specific named location).  The seller does not need to load the goods on any collecting transport.  It also does not need to clear the goods for export.

If EXW is used, the buyer bears all costs and risks when it takes the goods from the agreed point (usually, the seller’s premises).

In other words, among all of the Incoterms 2010, the seller has minimum obligations if EXW is used.

While EXW may appeal to the seller, one should use this Incoterm very carefully.  In addition to the fact that it is not easy to get the buyer to agree to EXW, there are certain disadvantages to using EXW.  For example, the obligation of the buyer to supply to seller the information regarding exports is very limited even though the seller may actually need this information for tax or export control compliance purposes.

Moreover, Incoterms do spell out certain conditions that may actually broaden the seller’s obligations. For example, the seller is obligated to supply the buyer with certain information necessary for security-clearance purposes.

Thus, despite all of its apparent simplicity, EXW should be used only where the situation warrants its use.  It is well advised that a non-professional should not engage in using Incoterms, such as EXW.  Rather, such decisions should be left to an international contract attorney who will have a better understanding of when to utilize EXW.

Contact Sherayzen Law Office for Help with Contract Drafting

If you are about to engage in a transaction involving an international delivery of goods, contract Sherayzen Law Office for legal help.  Our experienced international contract firm can assist you at every stage of your contract: negotiation, drafting and enforcement. We will provide a rigorous representation of your interests, protect your contractual rights, and strive to ensure that the contemplated transaction goes as smoothly as planned.

Foreign Earned Income Exclusion: 2011

/in , /by

Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

The income exclusion amount for 2011 has increased to $92,900 (in 2010, it was $91,500).

Remember, if your overseas earnings are above $92,900 for the tax year 2011, then you will be subject to U.S. income taxation on the excess amount. For example, if you earned $105,000 in 2011, then you will have to pay U.S. income taxes on $ 12,100.

It is also important to note, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion). For most expats, this means that the tax bracket is likely to start at 25% or higher. If you are self-employed, however, your situation may differ from this description.

Contact Sherayzen Law Office For Foreign Earned Income Exclusion Legal Help

If you are a U.S. taxpayer living abroad or you are planning to accept a job overseas, contact us to discuss your tax situation. Our experienced tax firm will guide you through the complex maze of U.S. tax reporting requirements, help you make sure that you are in full compliance with U.S. tax laws, and help you take advantage of the relevant provisions of the Internal Revenue Code to reduce your tax burden.

IRS Increases Deductions and Exclusions for the Tax Year 2012

/in , /by

The Internal Revenue Service recently announced that for tax year 2012, personal exemptions and standard deductions will increase, and tax bracket thresholds will rise because of inflationary effects. This article will explain some of these changes.

Personal Exemptions, Standard Deductions and Tax Bracket Changes

The increased amount of each personal and dependent exemption will be $3,800 (up $100 from 2011). The updated standard deduction will be $11,900 for married couples filing joint returns (up $300), $5,950 for single individuals and married individuals filing separately (up $150), and $8,700 for heads of household (up $200).

Tax-bracket thresholds will also increase for each filing status. For married couples filing a joint return, the 25% taxable income threshold will begin at $70,700, up from $69,000 for tax year 2011.

401(k) Contribution Changes

The IRS also announced that the maximum 401(k) contribution amount will increase by $500 to $17,000.

Foreign Earned Income Deduction

The IRS stated that the maximum foreign earned income deduction will increase by $2,200 to $95,100 for tax year 2012.

Estate and Gift Tax Exclusions

The basic estate tax exclusion will increase to $5,120,000 (up from $5,000,000 for calendar year 2011) for the estate of any decedent dying during calendar year 2012. Further, the aggregate decrease in value of an estate’s property cannot exceed $1,040,000 (an increase of $1,020,000 for 2011) for executors electing the special use valuation method for qualified real property.

The annual gift exclusion will stay at $13,000.

Conclusion

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Please consult IRS materials independently for further verification. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your US and international, and estate planning tax needs. Call our office (952) 500-8159 or email [email protected] for a consultation today.

Form 5471: General Overview of the Required Information

/in , , /by

The individuals who fall within the four categories of U.S. persons who are required to file Form 5471 find out very fast just how incredibly complex this Form is. In addition to various problems associated with GAAP compliance, tax year adjustments, understanding very complex corporate tax and accounting rules (as well as the difference between them), and the logistical concerns with respect to obtaining the information, the sheer volume and variety of the information that Form 5471 requires the files to supply makes the Form one of the most difficult compliance requirements in the Internal Revenue Code.

In this essay, I intend to provide a very general overview of the information that needs to be disclosed on Form 5471.

1. General Information

Form 5471 generally requires you to disclose your personal information (such as Social Security Number, address, tax year, and so on), corporate information (name of the corporation, when organized, its business and so on), as well as on whose behalf Form 5471 is being filed.

Despite its apparent innocence, there are at least two pernicious issues in this seemingly basic section. First, there are detailed rules on whose behalf Form 5471 may be filed.

Second, the Form requires you to state your ownership share of the corporation at the end of the year. Sounds simple? Not so fast – there are specific attribution rules which may increase your share ownership in the corporation. Failure to apply those rules may result in choosing incorrect filing category and, ultimately, IRS penalties for non-compliance.

2. Category of Filers

There are generally four categories of filers who are required to file Form 5471 (there used to be five, but the first category was repealed by Congress).

From the outset, Form 5471 requires you to choose the category of filers that apply to you. This is not a simple process as each category has specific requirements. Moreover, you may (and most taxpayers actually do) fit into more than one category. If this is the case, then you may have to file additional schedules that require more disclosures to the IRS.

3. Stock of the Foreign Corporation

In this Schedule A of Form 5471, you are required to describe the stock of the corporation – number and class of stocks. Usually, this is one of the most benign sections of Form 5471. Nevertheless, some of my clients have had problems with Schedule A because they never properly documented all of the classes of stocks and their attributes. This resulted in substantial delays and proactive business planning.

4. U.S. Shareholders of the Foreign Corporation

In Schedule B, you will need to provide the name of each shareholder according to Form 5471 instructions. For each listed shareholder, you will need to provide the name, address, identifying number (for example, social security number), number of shares held (at the beginning and the end of the annual accounting period), and the class of shares. Moreover, for each shareholder, you will need to supply the pro rata share of Subpart F income (which, in itself, is a complex matter).

5. Schedule C: Income Statement

Schedule C is one of the most important and time-consuming parts of Form 5471. The complications are numerous.

First, the Income Statement should be prepared and reported on the Form in accordance with U.S. GAAP. If the foreign company used GAAP to prepare the original statements, the task is not very hard. If, however, the foreign company did not initially use GAAP, the conversion of financial statements to the GAAP standard can be incredibly complex, especially in a foreign context.

Second, the Income Statement should be reported in the Functional Currency and US dollars. The currency translation issues (especially according to GAAP) may become very difficult.

Third, the Net Income part of the Income Statement on Form 5471 presents its separate challenges with its separation of net income from current income per books according to the GAAP standard.

Finally, you need to make sure that the Income Statement corresponds to the Balance Sheet, especially given all of the currency translation issues.

Remember, various items on the income statement must be supported by attached schedules.

6. Schedule E: Taxes

The first common challenge in this section is to correctly identify the taxes that need to be reported. The second common issue is that you need to consult the instructions to make sure that the currency translation rate is correctly identified and presented on the form. I have seen even experienced international tax accountants make mistakes in this area.

7. Schedule F: Balance Sheet

Schedule F may be the most difficult part of Form 5471 (although schedules H and I are very close in this dubious contest).

The problems are so numerous that I will not even attempt to list them in this essay. Rather, I want to point out several common themes that you are likely to deal with in preparing Form 5471.

First, the Balance Sheet should be prepared according to GAAP and all amounts should be reported in U.S. dollars.

Do not be surprised if this means using as many as three or four different currency translation rates according to GAAP. The end result will be that your Balance Sheet does not appear to balance out, forcing you to engage in highly complex accounting.

Second, there will be a shortage of available space to properly reflect all of the Balance Sheet issues.

Third, Retained Earnings may become your best friend and your worst enemy. In the hands of a sophisticated tax professional (accountant or attorney), Retained Earnings may be used to resolve outstanding issues. A novice, however, may spend long hours trying to figure out how to use Retained Earnings and still fail in this task.

Finally, remember that certain items on the Balance Sheet must be supported by attached statements.

8. Schedule G Questions

There are various types of questions listed in Schedule G. In some situations, they may easily be answered, whereas other situations will require a more detailed analysis.

9. Schedule H: Current Earnings and Profits

You should be prepared to spend a significant amount of time on this section. This is another highly complex part of Form 5471. Earnings and Profits is an esoteric part of accounting which has a complex relationship with taxation. When it comes to Form 5471, the foreign context and GAAP rules greatly exacerbate the difficulty of the issues involved.

At the end of Schedule H, you will need to translate the amounts into US dollars and provide the translation rate.

10. Schedule I: Subpart F Income

Another challenging section of Form 5471. Treaties have been written on Subpart F income. I will just mention here that this is a highly complex section on which you should prepared to spend some time.

11. Schedule J: Accumulated Earnings and Profits

Although this part of Form 5471 maybe time-consuming, it is not very complex. One common difficulty that I have encountered in my practice is a practical one – lack of properly prepared records. If the foreign corporation has not been subject to 5471 requirements in the prior years or not for all years of its existence, it may not have the records to calculate the accumulated earnings and profits. This may result a “snowball” effect that it is more and more difficult to comply with Schedule J requirements unless one goes back many years to calculated the accumulated Earnings and Profits.

12. Schedule M

This form only applies in the context of a controlled foreign corporation (CFC). This is another time-consuming part of Form 5471 which concentrates on the transactions between the CFC and the shareholders and other related persons. It may take awhile before you figure out just what exactly should go on this form, especially if there are outstanding loans from and/or to shareholders.

13. Schedules O: Parts I and II

This part of Form 5471 allows the IRS to keep track of any corporate re-organizations, acquisition and disposition of the corporation’s stock, and other organization and asset related matters. Relatively speaking, this is not a complex part of the Form, but it has its own issues that may arise during its preparation.

Conclusion: Contact Sherayzen Law Office NOW for Help With Drafting Form 5471

Based on the very general overview of 5471 requirements, it becomes clear that you should not attempt to complete Form 5471 on your own. Nor should you expect any help from the IRS. There is not a single department that you can call to have your questions answered. Form 5471 specialists are limited to examiners to whom you will not have direct telephone access.

Therefore, if you fall within one of the categories of taxpayers who are required to file Form 5471, please contact Sherayzen Law Office. Our experienced international tax firm will help you prepare the necessary documentation, complete Form 5471 and file it on your behalf. If you have not filed your Forms 5471 for prior years, we will help you deal with this situation and guide you through the IRS voluntary disclosure process.