Business Service Income Sourcing | Business Tax Lawyer & Attorney Delaware

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Business service income sourcing is a highly important issue in US international tax law. In this article, I will explain the concept of business service income sourcing and discuss the general rules that apply to it. Please, note that this is a discussion of general rules only; there are important complications with respect to the application of these rules.

What is Business Service Income Sourcing?

Business service income sourcing refers to the classification of income derived from services rendered by a business entity as “domestic” or “foreign”. In other words, if a corporation performs services for another business entity or individual, should it be considered US-source income or foreign-source income?

Importance of Business Service Income Sourcing

The importance of business service income sourcing cannot be overstated. With respect to foreign businesses, these income sourcing rules determine whether the income derived from these services will be subject to US taxation or not. For US business entities, the sourcing of income will be a key factor in their ability to utilize foreign tax credit.

Moreover, in light of the 2017 tax reform, the sourcing rules are now important for qualification of various benefits that the new tax laws offer to US corporations.

Business Service Income Sourcing: General Rule

Now that we understand the importance of the business services income sourcing rules, we are ready to explore the General Rule that applies in these situations. Generally, the services are sourced to the country where the services are performed.

In other words, if the services are performed in the United States, then, the income generated by these services is considered US-source income. If the services are performed outside of the United States, then, the income is considered foreign-source income.

Business Service Income Sourcing: Services Performed Partially in the United States and Partially Outside of the United States

The general rule is clear, but what happens if services were only partially performed in the United States? Here, we are now getting into practical complications and we have to look at the Treasury Regulations.

The Regulations begin with the general proposition that the sourcing of income from services rendered by a corporation, partnership, or trust, should be “on the basis that most correctly reflects the proper source of the income under the facts and circumstances of the particular case.” Treas. Reg. §1.861-4(b)(1)(i). This is the so-called “facts and circumstances test”.

Then, the Regulations clarify that usually “the facts and circumstances will be such that an apportionment on the time basis, as defined in paragraph (b)(2)(ii)(E) of this section, will be acceptable.” Id. In other words, the Time Basis Allocation will be the default method for business service income sourcing, but it is possible to use other tests where it is reasonable to do so.

Curiously, the Regulations provide only one example of business service income allocation that involves a corporation, and this example does not utilize the Time Basis Allocation method.

Business Service Income Sourcing: Time Basis Allocation

The Time Basis Allocation method offers two ways to source income: the “number of days” allocation and the “time periods” allocation. Under the “number of days” variation, the business entity adds together the number of days worked by its employees who worked in the United States and the number of days they worked in a foreign country, figures out the percentages for each country and sources the income according to the percentage allocation. See Treas. Reg. §1.861-4(b)(2)(ii)(F).

Under the “time periods” variation, a tax year is split into distinct time periods: one where the employees of a business entity spent all of their time in the United States and one where they spent all of their time in a foreign country. The compensation paid in the first period is allocated entirely to the United States, whereas the proceeds paid in the second time period is considered to be foreign-source income. Id.

The Time Basis Allocation methodology works better for specific employees rather than a business entity as a whole, particularly the “time periods” variation. Often, a business entity would have its employees working at the same time in the United States and outside of the United States making it very difficult to use the “time periods” allocation. Even the “number of days” allocation becomes fairly complex if one has a large number of employees working back and forth between the countries.

Contact Sherayzen Law Office for Help With Your Business Service Income Sourcing

Sherayzen Law Office is a premier US international tax law firm that helps businesses and individuals with their US international tax compliance, including business service income sourcing. If you have employees who work in the United States and overseas, you need the professional help from our law firm.

Contact Us Today to Schedule Your Confidential Consultation!

FFI FATCA Requirements: Introduction | FATCA Tax Lawyer & Attorney

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Since July 1, 2014, the Foreign Account Tax Compliance Act (“FATCA”) has imposed a heavy compliance burden on Foreign Financial Institutions (“FFIs”). Many of these FFIs have struggled with developing a good understanding of their new FATCA requirements even to this day. In this brief essay, I want to provide a general overview of these FFI FATCA requirements so that readers can begin to develop an understanding of FATCA.

FFI FATCA Requirements: Background Information

FATCA was enacted into law in 2010. The most important idea behind the new law was to combat US tax noncompliance of US taxpayers with foreign financial assets.

There are several important parts of FATCA, but the most important one of them was forcing FFIs to identify US owners of foreign financial assets, collect certain information about them and share it with the IRS. Failure to do so meant facing a FATCA penalty in the form of a 30% withholding tax on the gross amount of all transactions with a noncompliant FFI. In essence, FATCA turned FFIs around the world into free IRS informants.

FFI FATCA Requirements: Three Categories

What precisely does FATCA require FFIs to do in order to be FATCA-compliant? If we look broadly at the FFI FATCA requirements, we can group all of these requirements into three broad categories. Each of these categories consists of a myriad of smaller but still fairly complex FATCA compliance requirements and requires a deep understanding of new FATCA terms.

The first and most important category of FATCA requirements is to collect the required due diligence information concerning all account holders, investors and payees. “Collecting” here means obtaining the required due diligence information and documentation. In other words, FATCA has to be part of an FFI’s “Know Your Client” (“KYC”) procedures.

Additionally, these new due diligence requirements apply not only to new customers, but also to pre-existing account holders. Pre-existing account holders are the account holders who already had accounts with an FFI as of the time FATCA was implemented (i.e. July 1, 2014) or sometimes a different date.

The second requirement is to report to the IRS three categories of persons: (a) all US account holders; (b) recalcitrant account holders; and © non-participating (i.e. FATCA-noncompliant) FFIs. This means that, under FATCA, FFIs must turn over to the IRS the identifying information concerning accounts held by US persons as well as point out the “bad apples” who refuse to comply with FATCA.

Recalcitrant account holders is a fairly complex FATCA term. In its most basic form, it refers to an account holder who does not supply the required FATCA information and who does not fall under any types of a waiver. In a future article, I will provide a more detailed description of this term, but, at this point, I would like to refer the readers to Treas Reg § 1.1471-5(g)(2).

Finally, the FFIs are charged with the requirement to coordinate FATCA withholding as necessary. In other words, the FFIs are required to impose FATCA noncompliance penalties on any FATCA non-compliant FFI, thereby turning FATCA in a worldwide self-enforcing system from which no FFI can escape.

FFI FATCA Requirements Are Interconnected

Needless to say that all three of these FFI FATCA requirements are deeply related to each other. For example, the due diligence requirement is essential to an FFI’s ability to properly comply with its FATCA reporting and withholding obligations. It is important to keep this connection between different FFI FATCA Requirements in mind while building an effective FATCA compliance system.

Contact Sherayzen Law Office to Find Out More About Your FFI FATCA Requirements

Sherayzen Law Office is a US international tax law firm that specializes in US international tax compliance, including FATCA compliance. We also help FFIs develop an effective FATCA compliance program as well as analyze existing FATCA compliance programs.

Contact Us Today to Schedule Your Confidential Consultation!

IRS Interest Rates for the Second Quarter of 2019 | PFIC Tax Lawyer & Attorney

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On February 25, 2019, the IRS announced that the IRS underpayment and overpayment interest rates will remain the same for the second quarter of 2019 as they were in the first quarter of 2019. The second quarter of 2019 begins on April 1, 2019 and ends on June 30, 2019.

This is an important announcement because these rates will have impact on various calculations and affect many US taxpayers. In particular, the second quarter of 2019 IRS interest rates will apply to the calculation of interest owed on any underpayment of tax as calculated on the amended tax returns. This includes the payments that US taxpayers must make pursuant to the Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Moreover, the increase in the interest rates for the second quarter of 2019 directly affects the calculation of PFIC interest due on any PFIC tax. It is important to remember that PFIC interest cannot be offset by foreign tax credit.

According to the aforementioned IRS announcement, the second quarter of 2019 IRS interest rates will be as follows: 

six (6) percent for overpayments (five (5) percent in the case of a corporation);
three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000;
six (6) percent for underpayments; and
eight (8) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest for the second quarter of 2019 is determined on a quarterly basis. The current year’s overpayment and underpayment interest rates are computed from the federal short-term rate determined during January 2019 to take effect February 1, 2019, based on daily compounding.

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.

Sherayzen Law Office Successfully Completes 2019 April 15 Tax Season

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Hundreds of filed complex tax forms and FBARs is the supreme evidence of the successful completion of the 2019 April 15 tax season by Sherayzen Law Office. Sherayzen Law Office is an international tax law firm that specializes in offshore voluntary disclosures and US international tax compliance.

Annual compliance occupies a special place in the firm’s practice. This part of our practice consists of almost entirely clients who were so satisfied with our services that they wanted us to handle their annual tax compliance. It is a proud testimony of the high quality, efficiency and professionalism of Sherayzen Law Office’s work.

Since there are more and more clients every year who wish to retain our services for annual compliance, this has been a very dynamic area of growth. It also means that, with each year, the deadline pressure is rising.

The 2019 April 15 tax season was no exception. A record number of clients placed their utmost confidence in our work and asked us to prepare their 2018 income tax returns, information returns and FBARs. Moreover, the tremendous complexity of the 2017 tax reform has further added to the difficulty of the 2019 April 15 tax season.

Mr. Eugene Sherayzen, the founder and owner of Sherayzen Law Office, recognized very early that this tax season is going to be the most difficult one yet in the firm’s existence. This why he expanded and trained additional workforce at the beginning of 2019, engaged in proper tax season planning, addressed ahead of time the needs of the ongoing audit and offshore voluntary disclosure clients and established aggressive deadlines for the firm.

Thanks to all of this work by Mr. Sherayzen and the firm’s employees, all of the annual compliance deadlines were successfully completed. Moreover, Sherayzen Law Office was also able to finalize the filings for all of the offshore voluntary disclosure clients according to the already-created (by Mr. Sherayzen) customized plans of offshore voluntary disclosure.

We are not planning, however, to simply enjoy the laurels of another success. We look forward to helping hundreds of new clients with their offshore voluntary disclosures, IRS audits and international tax planning. We also already started our preparation for June 15, September 15 and October 15 tax seasons.

If you are looking for an international tax firm to which you entrust your case, you should retain the services of Sherayzen Law Office! We are a team of highly-experienced US international tax specialists who have helped hundreds of US taxpayers with their US international tax compliance and offshore voluntary disclosures. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!