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Factual Basis & Tax Planning | International Tax Lawyer & Attorney

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In a previous article, I discussed the necessity of balancing international tax planning priorities in order to obtain an optimal tax result. In this article, I will explain why international tax planning should be based on a carefully-studied factual basis.

Factual Basis as the Foundation for International Tax Planning

Young inexperienced lawyers often come up with a particular tax strategy and then they try to implement it independent of the actual facts on the ground. Irrespective of how brilliant such a strategy would be in the abstract, it is almost always doomed to become a failure.

Why? The answer is very simple: these lawyers turn international tax planning on its head. They build the second level of a house without ever building a foundation for it. No matter how well they plan out a strategy, it will fall apart almost immediately when it comes in conflict with the facts – how the business is run, its capital structure, its needs, its goals, its cash flow source, its operating model, its E&P, its foreign tax credit and numerous other important considerations.

Hence, the starting point of any tax planning should be a careful factual study of the business.

Studying Factual Basis as a Way to Uncover Potential Opportunities

In my practice, I have found that a careful study of a business may generate a number of potential planning opportunities that may have otherwise been ignored. For example, during a study of a company’s loan structure, one can sometimes find opportunities to treat these loans as equity investments and utilize much better currency exchange rates to build up the client’s basis in the company (potentially even resulting in a reversal of an entire capital gain upon the sale of this company).

Factual Basis: Four Most Important Components

While an attorney should study all relevant facts, there are four main components that he must cover. The components are: (1) organizational chart and capital structure; (2) operating model; (3) tax status and characteristics; and (4) analysis of financial statements. Let’s analyze each component in more detail.

Factual Basis Components: Organizational Chart and Capital Structure

You should start your factual analysis by building the organizational chart of the business and understanding its capital structure. What you need to do is to understand each entity within the corporate structure and the place it occupies in the overall business structure, identify the tax status of each business, understand the sources of cash and where it is used, create a diagram of debt and equity instruments (including whether these are related or unrelated party instruments), study how the business operates across the entire corporate structure, uncover which currencies are used in business (as well as any currency hedging) and review the withholding tax exposure/compliance.

This first component is likely to help you to identify the tax inefficiencies of the existing corporate structure and seek structural alternatives. I recommend that at this stage you plan for creating a more tax-efficient financing of foreign affiliates to maximize foreign country deductions, minimize tax imposed on interest income, reduce withholding tax and assure sufficient cash flow throughout the structure.

Factual Basis Components: Operating Model

The second component of your factual analysis (though it will probably come at about the same time as you start working on the first component) is the operating model of the business. In other words, what type of a business is it: manufacturing, sales, services or IP (development, ownership and/or usage of IP)? How does the business operate: local country manufacturing, local distributing/franchising, global service contracts, et cetera?

I recommend that you especially focus here (as a goal of your tax planning strategy) on: tax-efficient structuring of current and anticipated foreign operations to maximize tax deferral, tax-efficient financing of capital needs and development of strategy concerning IP development and licensing.

Factual Basis Components: Tax Characteristics

The third component is the one that tax attorneys are likely to like the most, because it is very close to their training and professional interest – the study of the tax characteristics of the corporate structure: income/losses, NOL, AMT, foreign tax credit position (carryovers), E&P, transfer pricing, local tax position and PTI (previously taxed income through Subpart F, 965 tax, GILTI tax, et cetera).

The focus of your tax planning goals here are centered around foreign tax credit, repatriation of earnings, minimizing Subpart F income and transfer pricing (i.e. allocation of profits between the US head office and its foreign affiliate companies).

Factual Basis Components: Financial Statements

Finally, the fourth component of your factual basis study consists of the financial statement analysis. You need to carefully review the financial statement with the focus on: Effective Tax Rate (“ETR”) reconciliation, deferred tax analysis, reinvestment, valuation and foreign currency. The focus of your tax planning goals here should be on low-tax deferral structures (for example, through indefinite reinvestment outside of the United States at a lower tax rate) and the most optimal foreign tax credit utilization.

Contact Sherayzen Law Office for Professional Help With International Tax Planning

If your US company conducts business outside of the United States, contact Sherayzen Law Office for professional help with your international business tax planning. We have helped companies plan their inbound and outbound transactions for US and foreign companies, and we can help you!

2021 Tax Filing Season for Tax Year 2020 Starts on February 12 2021

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On January 15, 2021, the IRS announced that the 2021 tax filing season for the tax year 2020 will start on Friday, February 12, 2021. On that day, the IRS will begin accepting and processing 2020 tax year returns.

The February 12 start date for individual tax return filers allows the IRS time to do additional programming and testing of IRS systems following the December 27 tax law changes that provided a second round of Economic Impact Payments and other benefits. This programming work is critical to ensuring IRS systems run smoothly. If the 2021 tax filing season were to open without the correct programming in place, then there could be a delay in issuing refunds to taxpayers. These changes ensure that eligible people will receive any remaining stimulus money as a Recovery Rebate Credit when they file their 2020 tax return.

“Planning for the nation’s filing season process is a massive undertaking, and IRS teams have been working non-stop to prepare for this as well as delivering Economic Impact Payments in record time,” said IRS Commissioner Chuck Rettig. “Given the pandemic, this is one of the nation’s most important filing seasons ever. This start date will ensure that people get their needed tax refunds quickly while also making sure they receive any remaining stimulus payments they are eligible for as quickly as possible.”

Last year’s average tax refund was more than $2,500. More than 150 million tax returns are expected to be filed during the 2021 Tax Filing Season, with the vast majority before the Thursday, April 15, 2021, deadline.

Under the PATH Act, the IRS cannot issue a refund involving the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) before mid-February. The law provides this additional time to help the IRS stop fraudulent refunds and claims from being issued, including to identity thieves.

The IRS anticipates a first week of March refund for many EITC and ACTC taxpayers if they file electronically with direct deposit and there are no issues with their tax returns. This would be the same experience for taxpayers if the filing season opened in late January. Taxpayers will need to check ‘Where’s My Refund’ on the IRS website IRS.gov under ‘Refunds’ for their personalized refund date. Overall, the IRS anticipates nine out of 10 taxpayers will receive their refund within 21 days of when they file electronically with direct deposit if there are no issues with their tax return.

Here are some important 2021 Tax Season deadlines:

A. Estimated Tax Deadlines: April 15, 2021; June 15, 2021; September 15, 2021; and January 15, 2022.

B. Individual Income Tax Returns: April 15, 2021 for US taxpayers who live in the United States; June 15, 2021, for US taxpayers who live outside of the United States (their tax payment deadline is still April 15); October 15, 2021, for extended tax returns; December 15, 2021, special extension for US taxpayers who reside overseas.

C. Partnership and S-Corporations: March 15, 2021; if extended, September 15, 2021.

D. C-Corporations: April 15, 2021; if extended, October 15, 2021.

E. Forms 3520-A: for calendar-year foreign trusts, March 15, 2021; extension is possible until September 15, 2021.

F. Form 3520: April 15, 2021; extension is possible until October 15, 2021.

G. FBARs: April 15, 2021; extension is possible until October 15, 2021.

H. International Information Returns filed with US tax returns (Forms 5471, 8621, 8865, 926, et cetera): same deadline as for the US income tax return with which these international information returns are filed.

Colombian Bank Accounts | International Tax Lawyer & Attorney Miami

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Even today many US owners of Colombian bank accounts remain completely unaware of the numerous US tax requirements that may apply to them. The purpose of this essay is to educate these owners about the requirement to report income generated by these accounts in the United States as well as the FBAR and FATCA obligations concerning the disclosure of ownership of Colombian bank accounts to the IRS.

Colombian Bank Accounts: Individuals Who Must Report Them

Before we discuss the aforementioned requirements in more detail, we need to determine who is required to comply with them. In other words, is every Colombian required to file FBAR in the United States? Or, does this obligation apply only to certain individuals?

The answer is very clear: only Colombians who fall within one of the categories of US tax residents must comply with these requirements. US tax residents include US citizens, US Permanent Residents, an individual who satisfies the Substantial Presence Test and an individual who properly declares himself a US tax resident. There are important exceptions to this general rule, but, if you fall within any of these categories, you need to contact an international tax attorney as soon as possible to determine your US tax obligations concerning your ownership of Colombian bank accounts.

Colombian Bank Accounts: Income Reporting

All US tax residents are subject to the worldwide income reporting requirement. In other words, they must disclose on their US tax returns not only their US-source income, but also their foreign income. The latter includes all bank interest income, dividends, royalties, capital gains and any other income generated by Colombian bank accounts.

The worldwide income reporting requirement also requires the disclosure of PFIC distributions, PFIC sales, Subpart F income and GILTI income. These are complex requirements which are outside the scope of this article, but US owners of Colombian bank accounts need to be aware of the existence of these requirements.

Colombian Bank Accounts: FinCEN Form 114 (FBAR)

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) mandates US tax residents to disclose their ownership interest in or signatory authority or any other authority over Colombian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. Every part of this sentence has a special significance and contains a trap for the unwary.

The most dangerous of these traps is the definition of an “account”. The FBAR definition of account is much broader than how this word is generally understood by taxpayers. For the purposes of FBAR compliance, this term includes checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset.

FBAR has its own intricate penalty system which is widely known for its severity. The FBAR penalties range from incarceration to willful and even non-willful penalties which may easily exceed the value of the penalized accounts. In order to circumvent the potential 8th Amendment challenges and make the penalty imposition more flexible, the IRS has implemented a system of self-imposed limitations, but it is a completely voluntary system (i.e. the IRS can, and in fact already did several times, disregard these limitations).

Colombian Bank Accounts: FATCA Form 8938

While Form 8938 is a relative newcomer (since tax year 2011), it has occupied a special place among the US international tax requirements. In fact, one could argue that it is currently as important as FBAR for US taxpayers with Colombian bank accounts.

The Foreign Account Tax Compliance Act (“FATCA”) gave birth to Form 8938, making it part of a taxpayer’s federal tax return. This means that a failure to file Form 8938 may render the entire federal tax return incomplete, and the IRS may be able to audit the return. Immediately, we can see the profound impact Form 8938 has on the Statute of Limitations for the entire tax return.

Given the fact that it is a direct descendant of FATCA, it is not surprising Form 8938’s primary focus is on foreign financial assets. Form 8938 requires a US taxpayer to disclose all Specified Foreign Financial Assets (“SFFA”) as long as he satisfies the relevant filing threshold. The filing thresholds differ depending on the filing status and the place of residence (i.e. inside or outside of the United States) of the taxpayer.

SFFA includes an enormous variety of foreign financial assets, including foreign bank and financial accounts. In fact, with respect to bank and financial accounts, Form 8938 is very similar to FBAR, which often results in double-reporting of the same assets. It is important to emphasize that Form 8938 does not replace FBAR, both forms must still be filed. In other words, US taxpayers should report their Colombian bank accounts on FBAR and disclose them again on Form 8938.

Form 8938 has its own penalty system which contains some unique elements. In addition to its own $10,000 failure-to-file penalty, Form 8938 directly affects the accuracy-related income tax penalties and the ability of a taxpayer to use foreign tax credit.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Colombian Bank Accounts

US international tax compliance is extremely complex. It is very easy to get yourself into trouble, and much more difficult and expensive to get yourself out of this trouble. If you have Colombian bank accounts, contact the experienced international tax attorney and owner of Sherayzen Law Office, Mr. Eugene Sherayzen. Mr. Sherayzen has helped hundreds of US taxpayers with their US international tax issues, and He can help You!

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!

2017 Tax Reform Seminar | U.S. International Tax Lawyer & Attorney

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On April 19, 2018, Mr. Eugene Sherayzen, an international tax lawyer, co-presented with an attorney from KPMG at a seminar entitled “The 2017 U.S. Tax Reform: Seeking Economic Growth through Tax Policy in Politically Risky Times” (the “2017 Tax Reform Seminar”). This seminar formed part of the 2018 International Business Law Institute organized by the International Business Law Section of the Minnesota State Bar Association.

The 2017 Tax Reform Seminar discussed, in a general manner, the main changes made by the 2017 Tax Cuts and Jobs Act to the U.S. international tax law. Mr. Sherayzen’s part of the presentation focused on two areas: the Subpart F rules and the FDII regime.

Mr. Sherayzen provided a broad overview of the Subpart F rules, the types of income subject to these rules and the main exceptions to the Subpart F regime. He emphasized that the tax reform did not repeal the Subpart F rules, but augmented them with the GILTI regime (the discussion of GILTI was done by the KPMG attorney during the same 2017 Tax Reform Seminar).

Then, Mr. Sherayzen turned to the second part of his presentation during the 2017 Tax Reform Seminar – the Foreign Derived Intangible Income or FDII. After reviewing the history of several tax regimes prior to the FDII, the tax attorney concluded that the nature of the current FDII regime is one of subsidy. In essence, FDII allows a US corporation to reduce its corporate income by 37.5% of the qualified “foreign derived” income (after the year 2025, the percentage will go down to 21.875%). Mr. Sherayzen explained that, in certain cases, there is an additional limitation on the FDII deduction.

Qualifying income includes: sales to a foreign person for foreign use, dispositions of property to foreign persons for foreign use, leases and licenses to foreign persons for foreign use and services provided to a foreign person. There are also a number exceptions to qualifying income.

Mr. Sherayzen concluded his presentation at the 2017 Tax Reform Seminar with a discussion of the reaction that FDII produced in other countries. In general this reaction was not favorable; China and the EU even threatened to sue the United States over what they believed to be an illegal subsidy to US corporations.

2018 Tax Filing Season | International Tax Lawyer News

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On January 4, 2018, the IRS announced that the 2018 tax filing season for the tax year 2017 will commence on January 29, 2018. This date was chosen by the IRS to make sure its software incorporates the full impact of the Tax Cuts and Jobs Act of 2017 on the 2017 tax returns.

2018 Tax Filing Season: EITC and ACTC Refunds

Despite the fact that the 2018 tax filing season will begin on January 29, the IRS warned that taxpayers who will claim Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) will not receive their refunds until at least February 27, 2018.

2018 Tax Filing Season: Processing of Paper Tax Returns

Also, it is important to note that the processing of paper returns will begin only in mid-February, because the system updates will continue until that time. The IRS, however, will begin accepting both, electronic and paper tax returns, on January 29, 2018.

This is very important for taxpayers who file US international information returns, such as Forms 926, 5471, 8621, 8865, 8938, et cetera. A lot of these returns are voluminous and cannot be e-filed due to tax software limitations; hence, they must be filed on paper.

2018 Tax Filing Season: Deadline on April 17, 2018

The filing deadline to submit 2017 tax returns will be on Tuesday, April 17, 2018. Usually, the deadline would be on April 15, but, in 2018, April 15 falls on a Sunday and April 16 is a legal holiday in the District of Columbia (Emancipation Day). Under the tax law, legal holidays in the District of Columbia affect the filing deadline for federal tax returns; hence, the filing deadline moved by one more day to April 17, 2018.

US taxpayers who have to file international information returns should keep in mind that there are two categories of such returns: information reports which are filed with their 2017 tax returns and the information reports which are filed (or e-filed) separately from the 2017 tax returns. Forms 926, 5471, 8621, 8865, 8938 and other similar information returns must be filed with the original US tax returns.

On he other hand, FBARs (FinCEN Form 114) and Form 3520 should be filed separately from the taxpayers’ tax returns. The deadline for this category of returns, however, is the same as the deadline for the 2017 tax returns – April 17, 2018 (unless an extension is filed).

Contact Sherayzen Law Office for Help with Your US International Tax Compliance During this 2018 Tax Filing Season

If you have foreign income and/or foreign assets, or if you received a foreign gift or inheritance, you should contact Sherayzen Law Office for professional help in determining your US tax compliance obligations and the preparation of the required US international information returns.

Contact Us Today to Schedule Your Confidential Consultation!