Broadcom Re-domiciliation Approved | International Tax Lawyer & Attorney

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On January 29, 2018, Broadcom Board of Directors approved the plan for Broadcom re-domiciliation in the United States. This move was expected after Broadcom’s November of 2017 pledge to president Trump that the company would return to the United States.

Broadcom Re-domiciliation: A Story of Tax Inversion and Tax Remorse

The story of the Broadcom re-domiciliation began fairly recently in February of 2016. At that time, Broadcom did what was very popular during the Obama administration – tax inversion. California-based Broadcom allowed itself to be acquired by Singapore’s Avago Technologies Limited with the result of creation of a single Singapore entity.

The real motivation for the inversion was lowering the corporate taxes. At that time, during the political climate that existed in the United States, Broadcom thought that it was a good move.

Now, Broadcom believes that the tax inversion might not have been such a great thing to do in light of the new developments and certain consequences that it did not seem to have anticipated prior to tax inversion. First of all, Broadcom’s business in the US has continued to expand as it stepped-up its acquisition strategy. Already in 2017, barely a year and a half after tax inversion, Broadcom has stated that the benefits of this business strategy outweigh the potential additional taxes it might have to pay when it returns to the United States (especially after the tax reform – see below).

Second and closely related to the first reason, as a foreign company based in Singapore, Broadcom is under constant scrutiny of the Committee on Foreign Investment in the United States (“CFI”). CFI focuses on the review of transactions that may result in control of a US business by a foreign person and the impact of such control on US national security. This is an irritating and expensive factor that continuously hinders Broadcom’s acquisition strategy in the United States.

Third, Broadcom apparently did not anticipate that the tax reform be so radical and so beneficial to corporations. There is one issue in particular that makes Broadcom re-domiciliation in the United States so important. At the time of its tax inversion, Broadcom established a deferred tax liability on its balance sheet with respect to integration of the company’s intellectual property (“IP”). Under the old law, this deferred tax liability would have become payable at 35% tax rate in the United States.

Now, under the Tax Cuts and Jobs Act of 2017 (“TCJA”), this deferred liability will be recognized in fiscal year 2018 as deemed repatriated foreign earnings at a much lower tax rate. This means that Broadcom re-domiciliation in 2018 will save the company a huge amount in taxes; or, as the company itself put it: “a material reduction in the amount of other long-term liabilities on our balance sheet”.

Broadcom Re-domiciliation Approved Within One Month of TCJA

The tax motivation behind Broadcom re-domiciliation became especially evident in light of the fact that the Broadcom Board approved it within just one month of the passage of TCJA. Moreover, in its filings with SEC, Broadcom directly stated that, as a result of TCJA, the tax cost of being a US-based multinational company has decreased substantially.

Sherayzen Law Office will continue to observe the impact of the recent tax reform on the behavior of US companies that went through tax inversion.

2018 FBAR Criminal Penalties | FBAR Lawyer & Attorney

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2018 FBAR criminal penalties should be on the mind of any US taxpayer who willfully failed to file his FBARs or knowingly filed a false FBAR. In this essay, I would like to do an overview of the 2018 FBAR criminal penalties that these noncompliant US taxpayers may have to face.

2018 FBAR Criminal Penalties: Background Information

A lot of US taxpayers do not understand why the 2018 FBAR criminal penalties are so shockingly high. These taxpayers question why failing to file a form that has nothing do with income tax calculation should potentially result in a jail sentence.

The answer to this questions lies in the legislative history of FBAR. First of all, it is important to understand that FBAR is not a tax form. The Report of Foreign Bank and Financial Accounts (“FBAR”) was born in 1970 out of the Bank Secrecy Act (“BSA”), in particular 31 U.S.C. §5314. This means that the initial primary purpose of the form was to fight financial crimes, money laundering and terrorism. In other words, FBAR was not created as a tool against tax evasion.

Hence, the FBAR penalties were structured from the very beginning for the purpose of punishing criminals engaged in financial crimes and/or terrorism. This is why the FBAR penalties are so severe and easily surpass the penalties of any tax form.

It was only 30 years later, after the enaction of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”), that the enforcement of FBAR was turned over to the IRS. The IRS almost immediately commenced using FBAR to fight the tax evasion schemes that utilized offshore accounts.

The Congress liked the IRS initiative and responded with the American Jobs Creation Act of 2004 (“2004 Jobs Act”). The 2004 Jobs Act further increased the FBAR penalties, including the creation of the non-willful penalty of up to $10,000 per violation.

2018 FBAR Criminal Penalties: Description

Now that we understand why the 2018 FBAR criminal penalties are so severe, let’s describe what they penalties actually look like. There are three different 2018 FBAR criminal penalties associated with different FBAR violations.

The first criminal penalty may be imposed under 26 U.S.C. 5322(a) and 31 C.F.R. § 103.59(b) for willful failure to file FBAR or retain records of a foreign account. The penalty is up to $250,000 or 5 years in prison or both.

When the willful failure to file FBAR is combined with a violation of other US laws or the failure to file FBAR is “part of a pattern of any illegal activity involving more than $100,000 in a 12-month period”, then the IRS has the option of imposing a criminal penalty under 26 U.S.C. 5322(b) and 31 C.F.R. § 103.59(c). In this case, the penalty jumps to incredible $500,000 or 10 years in prison or both.

Finally, if a person willingly and knowingly files a false, fictitious or fraudulent FBAR, he is subject to the penalty under 31 C.F.R. § 103.59(d). The penalty in this case may be $10,000 or 5 years or both.

Contact Sherayzen Law Office for Help With Past FBAR Violations

If you were required to file an FBAR but you have not done it, contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options. Our international tax law firm specializes in FBAR compliance and we have helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws while reducing and, in some cases, eliminating their FBAR penalties.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

US Taxpayers’ Nightmare Continues: FBAR Penalty Inflation Adjustment

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As if the FBAR penalties were not frightening enough, Congress has mandated the IRS to adjust the FBAR penalties to account for inflation. As a result, the already complicated and severe system of FBAR penalties became even more complex and ruthless. In this article, I would like provide a general overview of the FBAR penalty inflation adjustment and what it means for noncompliant US taxpayers.

FBAR Penalty Inflation Adjustment: The “Old” FBAR Penalty System

The FBAR penalty system was already complex prior to the 2015 FBAR penalty inflation adjustment. It consisted of three different levels of penalties with various levels of mitigation. The highest level of penalties consisted of criminal penalties. The most dreadful penalty was imposed for the willful failure to file FBAR or retain records of a foreign account while also violating certain other laws – up to $500,000 or 10 years in prison or both.

The next level consisted of civil penalties imposed for the willful failure to file an FBAR – up to $100,000 or 50% of the highest balance of an account, whichever is greater, per violation. It is important to emphasize that the IRS has unilaterally interpreted the word “violation” to mean that a penalty should be imposed on each account per year, potentially going back six years (the FBAR statute of limitations is six years).

The third level of penalties were imposed for the non-willful failure to file an FBAR. The penalties were up to $10,000 per violation per year. It is also important to point out that the subsequent laws and IRS guidance imposed certain limitations on the application of the non-willful FBAR penalties.

Finally, there were also penalties imposed solely on businesses for negligent failure to file an FBAR. These penalties were up to $500 per violation; if, however, there was a pattern of negligence, the negligence penalties could increase ten times up to $50,000 per violation.

FBAR Penalty Inflation Adjustment: Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015

Apparently, the Congress did not believe that these FBAR penalties were sufficiently horrific. Hence, it enacted a law awkwardly named Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Inflation Adjustment Act”) to “improve the effectiveness of civil monetary penalties and to maintain their deterrent effect.”

The 2015 Inflation Adjustment Act required federal agencies to do two things: (1) adjust the amounts of civil monetary penalties with an initial “catch-up” adjustment; and (2) make subsequent annual adjustments for inflation. It is important to note that only civil penalties, not criminal, were subject to the inflation adjustment.

While the annual adjustment requirement is fairly clear, the “catch-up” adjustment requires a bit more explanation. In essence, the catch-up adjustment requires a federal agency to adjust the penalty (as it was last originally established by an act of Congress) for inflation from the time of establishment through roughly the November of 2015. In other words, a penalty would be adjusted in one year for all of the inflation that accumulated between the time the statutory penalty was created and the time the 2015 Inflation Adjustment Act was enacted. The adjustment was limited to 2.5 times of the original penalty.

The end result of the penalty adjustment was a massive increase in federal penalties in 2016. For example, one OSHA penalty went up from $70,000 to $124,709.

New System under the FBAR Penalty Inflation Adjustment

Luckily, the FBAR penalties were last revisited by Congress in 2004 and the increase in FBAR penalties, while very large (about 25%), was not as dramatic as some of the other federal penalties. Nevertheless, the FBAR penalty inflation adjustment further complicated the multi-layered system of FBAR penalties.

The key complication came from the fact that the FBAR penalty became dependent on the timing of the IRS penalty assessment, bifurcating the already existing FBAR penalty system (that was broadly described above) into two distinct parts: pre-November 2, 2015 and post-November 2, 2015.

If an FBAR violation occurred on or before November 2, 2015, the old FBAR penalty system applies. This is also true even if the actual IRS assessment of the FBAR penalties for the violation occurred after this date. In other words, the last FBAR violation definitely eligible for the old statutory penalties is the one concerning 2014 FBAR which was due on June 30, 2015. Obviously, FBARs for prior years are also eligible for the same treatment.

If an FBAR violation occurred after November 2, 2015 and the FBAR penalty would be assessed after August 1, 2016, the new system of penalties (i.e. the one after the FBAR penalty inflation adjustment) applies. In other words, all FBAR violations starting 2015 FBAR (which was due on June 30, 2016) are subject to the ever-increasing FBAR civil penalties.

With respect to these post-November 2, 2015 violations, the exact amount of penalties will depend on the timing of the IRS penalty assessment, not when the FBAR violation actually occurred. For example, if the IRS penalty assessment was made after August 1, 2016 but prior to January 15, 2017, then maximum non-willful FBAR penalty per violation will be $12,459 and the maximum willful FBAR penalty per violation will be the greater of $124,588 or 50% of the highest balance of the account.

If, however, the penalty was assessed after January 15, 2017 but prior to January 15, 2018, the maximum non-willful FBAR penalty will increase to $12,663 per violation and the maximum civil willful FBAR penalty will be the greater of $126,626 or 50% of the highest balance of the account.

Contact Sherayzen Law Office for Help with Avoiding or Reducing Your FBAR Penalties

Whether you have undisclosed foreign accounts on which the FBAR penalties have not yet been imposed or the IRS has already imposed FBAR penalties for your prior FBAR noncompliance, you should contact Sherayzen Law Office as soon as possible to secure professional help. We have helped hundreds of US taxpayers to reduce and, under certain circumstances, completely eliminate FBAR penalties through properly made voluntary disclosures. We have also helped US taxpayers to fight the already imposed FBAR penalties through appeals to the IRS Office of Appeals as well as in a federal court.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

Cyprus Tax Amnesty Extended | FATCA Lawyer & Attorney

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For the second time now, the Cyprus Tax Amnesty has been extended. Let’s discuss in more detail the new deadline and the terms of the Cyprus Tax Amnesty.

Cyprus Tax Amnesty: Deadline Extensions

The original deadline for the Scheme for the Settlement of Overdue Taxes (the official name of the Cyprus Tax Amnesty) was October 3, 2017. The deadline, however, was extended for the first time to January 3, 2018. In early January of 2018, the deadline was further extended to the current deadline of July 3, 2018. Thus, the more recent extension gives Cyprus taxpayers another six months to bring their tax affairs in full compliance with Cyprus tax law.

Main Terms of the Cyprus Tax Amnesty

The Cyprus Tax Amnesty allows “qualifying applicants” to pay off their tax liabilities for prior years with up to 95% reduction in the interest and penalties that otherwise would have been or have already been imposed by the Cyprus tax authorities. The precise percentage of the reduction of interest and penalties depends on the number of monthly installment payments chosen by the taxpayer (i.e. if you pay off everything in full immediately, you get the full benefit of the 95% reduction in interest and penalties).

The Cyprus Tax Amnesty encompasses all outstanding tax liabilities that were incurred in the tax years up to and including 2015. The Amnesty also covers a great variety of taxes: income tax, capital gains tax, VAT, property tax, stamp duties, inheritance tax and certain special fees.

Cyprus Tax Amnesty: Qualifying Taxpayers

Since the main purpose of the Amnesty is to bring Cyprus taxpayers into full and ongoing compliance with Cyprus tax law, the emphasis is placed on assuring current compliance. This is done through the definition of “qualifying taxpayers” who are the only taxpayers eligible to participate in the Cyprus Tax Amnesty.

Qualifying taxpayers are defined as taxpayers who have been in full tax compliance from the tax year 2016 onwards – i.e. these taxpayers must have filed all of their Cyprus tax returns and paid all of their Cyprus tax liabilities for the tax year 2016 and all of the following tax years.

Cyprus Tax Amnesty is Part of a Trend Amplified by the IRS Offshore Voluntary Disclosure Program

The Cyprus Tax Amnesty is just one more example of the tax amnesty programs which have proliferated around the world in the recent years. This trend was greatly strengthened and really amplified to its current status by the establishment of the 2009 IRS Offshore Voluntary Disclosure Program (“2009 OVDP”). The 2009 OVDP, 2011 OVDI and 2012/2014 OVDPs together with enactment of FATCA have drawn the attention around the world and many countries began to imitate the successes of these US initiatives.

Sherayzen Law Office has helped clients deal with each of these major IRS voluntary disclosure programs as well as other voluntary disclosure options (like the Streamlined Domestic Offshore Procedures and the Reasonable Cause Disclosures). A voluntary disclosure program presents wonderful opportunities to taxpayers to settle their past tax noncompliance. This is why we sympathize with the Cyprus Tax Amnesty and see it as a positive development in the international tax law.

Specified Domestic Entity: Passive Test | FATCA Form 8938 Lawyer & Attorney

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This article is published as part of a long series of articles on the Specified Domestic Entity (“SDE”) Definition. In a previous article, I stated that the term “formed or availed of” consists of two legal tests: the Closely-Held Test and the Passive Test. Since I already explained the general requirements of the Closely-Held Test in another article, I would like to focus today on the Passive Test.

The Passive Test: Background Information

Starting tax year 2016, business entities classified as SDEs may be required to attach Form 8938 to their US tax returns. What entity is considered to be SDE? The answer is found in Treas. Reg. §1.6038D-6(a): “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

I already explained in a previous article that “formed or availed of” is a term of art and a requirement that an entity meets two legal tests: the Closely-Held Test and the Passive Test.

The Passive Test: General Requirements

The Passive Test consists of two threshold requirements: the Passive Income Threshold and the Passive Assets Threshold. If one of these Thresholds is satisfied, the Passive Test is met and a business entity would be considered as formed or availed of for the purposes of holding specified foreign financial assets. Let’s explore these two requirements in more detail.

The Passive Test: the Passive Income Threshold

The Passive Income Threshold is satisfied if “at least 50 percent of a corporation’s or a partnership’s gross income for the taxable year is passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). The definition of passive income includes:

“(A) Dividends,

(B) Interest;

(C) Income equivalent to interest, including substitute interest;

(D) Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;

(E) Annuities;

(F) The excess of gains over losses from the sale or exchange of property that gives rise to passive income described in paragraphs (b)(3)(i)(A) through (b)(3)(i)(E) of this section;

(G) The excess of gains over losses from transactions (including futures, forwards, and similar transactions) in any commodity, but not including –

(1) Any commodity hedging transaction described in section 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or

(2) Active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a);

(H) The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transaction; and

(I) Net income from notional principal contracts as defined in § 1.446-3(c)(1).” Treas. Reg. §1.6038D-6(b)(3).

The Treasury Regulations also contain certain exceptions to the definition of passive income (for example, for dealers).

The Passive Test: the Passive Assets Threshold

The Passive Assets Threshold is satisfied if at least 50 percent of the assets held by a corporation or a partnership for the taxable year “are assets that produce or are held for the production of passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). Such assets are called “passive assets”. Id.

The percentage of passive assets held by a corporation or a partnership during a taxable year is determined based on “the weighted average percentage of passive assets (weighted by total assets and measured quarterly).” Id. This is very similar to the PFIC test.

The regulations allow for two different methods of valuation of the assets for the purpose of the Passive Asset Threshold. The first method is Fair Market Value of the assets. The second method is valuation of assets based on the “book value of the assets that is reflected on the corporation’s or partnership’s balance sheet.” Id. Surprisingly, both US and an international financial accounting standard are permitted for the purpose of the valuation of assets (usually, only US GAAP is allowed).

Contact Sherayzen Law Office for Professional Help with FATCA Form 8938 Compliance

If you are concerned about whether your entity is required to file Form 8938 or you have any other FATCA-related questions, please contact Sherayzen Law Office for professional help. Sherayzen Law Office is an international tax law firm that specializes in the US international tax compliance, including FATCA Form 8938 compliance. We have helped hundreds of US taxpayers with their FATCA requirements and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!