international tax lawyer minnesota

IRS 2013 Budget Proposal Emphasizes International Tax Enforcement

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Every year, the President has to submit a budget request to U.S. Congress for federal agencies, including the Internal Revenue Service. In February of 2012, the IRS posted the following information regarding its budget.

Administration’s fiscal year (FY) 2013 budget request for the Internal Revenue Service is approximately $12.8 billion, a $944.5 million increase (8%) over the FY 2012 enacted level.

A significant portion of the increase from FY 2012 represents the Administration’s request to restore lost revenue resulting from reductions in IRS funding made over the past two years. This request is designed to provide the resources necessary to administer and enforce the current tax code, implement recent changes to the law to update the Code and serve the American taxpayer in a timely manner.

In FY 2011, the IRS collected $2.415 trillion in taxes, representing 92 percent of federal government receipts. The IRS processed more than 144.7 million individual returns during the 2011 filing season and issued almost 110 million refunds totaling $345 billion.

The IRS consistently achieves a high return on investment for its activities while running a fiscally disciplined operation. In FY 2013, the IRS expects to identify nearly $71 million in cost savings from increased use of electronic return filing, reductions in non-case related travel and streamlining operations.

Enforcement Program

IRS Enforcement Program is projected to receive the lion’s share of the increase. The FY 2013 budget includes $403 million in new IRS enforcement activities, which are expected to raise $1.48 billion in revenue annually at full performance, once new hires are fully trained and develop broader experience by FY 2015. This is a 4.3-to-1 return on investment. The return on investment is even greater when factoring in the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact.

The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by FY 2015. Investments such as these in IRS enforcement programs are especially important to further the IRS’ mission of improving tax compliance.

International Tax Compliance Emphasized by the IRS

International tax compliance is specifically emphasized by the IRS. The IRS will continue to address offshore tax evasion by individuals through a combined “carrot and stick” approach – special offshore voluntary disclosure program and increased examinations and prosecutions.

International tax compliance will also concern domestic businesses operating abroad and foreign businesses owned by U.S. taxpayers. In order to ensure business entity compliance, the IRS will provide additional international technical specialists to increase coverage of complex international transactions.

Contact Sherayzen Law Office for Tax Help with International Tax Compliance Issues

If you have any issues regarding international tax compliance with U.S. laws and regulations, contact Sherayzen Law Office. Our experienced international tax firm will review the facts of your case, analyze the available options, propose a concrete plan of action with respect to your U.S. tax compliance issues, and implement this plan (including drafting and completing the necessary tax documents and forms).

Final Regulations and Guidance Issued on Reporting Interest Paid to Nonresident Aliens under FATCA

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The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and mandates new reporting requirements, and amends existing IRC Sections.  Recently, the IRS issued final regulations and guidance regarding the reporting interest paid to nonresident aliens by certain financial institutions, as well as revenue procedure specifying foreign countries with which the U.S. has a information exchange agreement.  Nonresident aliens should be especially aware of these new rules, as many individuals will likely be affected by these rules.

TD 9584 (Guidance on Reporting Interest Paid to Nonresident Aliens), effective April 19, 2012, has the final regulations concerning the reporting requirements for commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits.

In general, beginning with interest payments made on, or after, January 1, 2013, covered financial institutions will be required to report deposit interest paid to certain nonresident alien individuals.  The IRS may then exchange information relating to tax enforcement with the officials of foreign countries.  Under the new Treas. Reg. §§ 1.6049-4(b)(5) and 1.6049-8(a), interest paid to nonresident aliens must be reported if the amount in aggregate is $10 or more.

The IRS views this ability to share such information as important to its goal of gathering information from other jurisdictions about US taxpayers who may be evading US tax by hiding assets offshore.  Additionally, the IRS enacted the new reporting requirements to limit US taxpayers with US deposit accounts from falsely claiming to be nonresident aliens in order to avoid paying US taxes on interest they receive from deposits.

IRS Classification of Foreign Entities: “Per Se” Foreign Corporations

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For the U.S. tax compliance purposes, it is very important to properly classify foreign business entities, because there are special IRS requirements associated with ownership of foreign business entities. For instance, a list of various tax forms is tied to particular classification (for example, certain U.S. taxpayers are required to file Form 5471 with respect to foreign corporations; a similar requirement (form 8865) would apply to certain filers with respect to a foreign partnership) and esoteric tax reporting requirements may need to be disclosed on your personal tax returns (such as subpart F income in case of Controlled Foreign Corporation).

The process of a foreign entity classification can be very complex.  In this article, however, I would like to discuss a shortcut available in certain situations  –“per se foreign corporations”. This term means the IRS decided to treat certain business entities as a foreign corporation irrespective of the taxpayer’s position.  For practical purposes, this means that, if your entity is on the list of the “per se corporations”, then it is a foreign corporation, there is no need to explore the issue further and “check-the-box” rules will not apply

Where to Look For the IRS List of Per Se Corporations

Once you are able to determine that you are dealing with a foreign entity and this entity is a business entity, you should check with the Treasury Regulation to see if this business entity is part of the long list of entities that the IRS considers as foreign corporations.  The list is detailed in Treas. Reg. §301.7701-2(b)(8).

List of Per Se Corporations

Treas. Reg. §301.7701-2(b)(8) classifies the following foreign entities as corporations (keep in mind that this may not be the most up-to-date list and you will need to check with the relevant updates of this regulation):

American Samoa, Corporation

Argentina, Sociedad Anonima

Australia, Public Limited Company

Austria, Aktiengesellschaft

Barbados, Limited Company

Belgium, Societe Anonyme

Belize, Public Limited Company

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Bulgaria, Aktsionerno Druzhestvo.

Canada, Corporation and Company

Chile, Sociedad Anonima

People’s Republic of China, Gufen Youxian Gongsi

Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or Compania Anonima

Egypt, Sharikat Al-Mossahamah

El Salvador, Sociedad Anonima

Estonia, Aktsiaselts

European Economic Area/European Union, Societas Europaea

Finland, Julkinen Osakeyhtio/Publikt Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbuka

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik Kogham

Republic of Korea, Chusik Hoesa

Latvia, Akciju Sabiedriba

Liberia, Corporation

Liechtenstein, Aktiengesellschaft

Lithuania, Akcine Bendroves

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Public Limited Company

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands, Corporation

Norway, Allment Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societate pe Actiuni

Russia, Otkrytoye Aktsionernoy Obshchestvo

Saudi Arabia, Sharikat Al-Mossahamah

Singapore, Public Limited Company

Slovak Republic, Akciova Spolocnost

Slovenia, Delniska Druzba

South Africa, Public Limited Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Publika Aktiebolag

Switzerland, Aktiengesellschaft

Thailand, Borisat Chamkad (Mahachon)

Trinidad and Tobago, Limited Company

Tunisia, Societe Anonyme

Turkey, Anonim Sirket

Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu

United Kingdom, Public Limited Company

United States Virgin Islands, Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or Compania Anonima

 

Exceptions, Inclusions and Complications With Respect To the List of Per Se Foreign Corporations

In addition to the list of entities above, the regulations also provide various inclusions, exceptions, and complications.  For example, a Nova Scotia Unlimited Liability Company (or any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law) will not be treated as a corporation. The same applies to Sendirian Berhad of Malaysia and some companies in India.

On the other hand, the IRS regards the whole family of “Sociedad Anonima” entities are considered corporations, disregarding their variable capital provisions (such as, “Sociedad Anonima de Capital Variable”).

The regulations further clarify the scope of terms such as “public companies” and “limited companies”.  With regard to Cyprus, Hong Kong, and Jamaica, the term “Public Limited Company” includes any Limited Company that is not defined as a private company under the corporate laws of those jurisdictions.  In all other cases, where the term Public Limited Company is not defined, that term shall include any Limited Company defined as a public company under the corporate laws of the relevant jurisdiction.

Furthermore, with respect to limited companies, a Limited Company includes companies limited by shares and companies limited by guarantee.

What if the company is named in a different but means the same thing as in the usual name? The regulations specifically state that “different linguistic renderings of the name of an entity listed in paragraph (b)(8)(i) of this section shall be disregarded”.  Treas. Reg. §301.7701-2(b)(8)(v).  For example, an entity formed under the laws of Switzerland as a Societe Anonyme will be a corporation and treated in the same manner as an Aktiengesellschaft.

Finally, very important complications may arise where a business entity is formed under the laws of more than one jurisdiction.  Detailed complex rules will determine whether such an entity should be treated as a corporation for U.S. tax purposes, in some cases over-ruling the classification patterns described in this essay.  This is a topic for a future article, though.

Contact Sherayzen Law Office for Legal Help With Foreign Business Entity Classifications

Classification of a foreign business entity for U.S. tax purposes is a very complex process.  This article only describes one of many variations and it does NOT constitute legal advice; only an international tax attorney looking at the specific circumstances of your case may determine how your foreign business entity should be classified.

If you have a foreign business entity and you are not sure how you should classify it and what will be the U.S. tax compliance consequences of such classification, contact Sherayzen Law Office. Our experienced international tax firm will analyze your business entity in detail,  help you find the correct classification (or adopt a classification that is likely to withstand an IRS challenge), and identify the necessary IRS tax reporting requirements.

Form 5472 Penalties

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In a previous article, we covered the basics of the IRS Form 5472. In this article we will explain the penalties that may apply for failure to comply with the form’s requirements.

Main Failure to File and Failure to Maintain Records Penalties

If a corporation fails to timely file the required Form 5472, a $10,000 penalty may be assessed. Furthermore, a reporting corporation that files a substantially incomplete Form 5472 will be deemed as having failed to file Form 5472, and penalties may apply.

An interesting twist in Form 5472 penalties is that, in addition to failure to file penalties, the IRS imposes substantial record-keeping penalties. A $10,000 penalty may be assessed for failure to maintain records, as required under IRS regulation Section 1.6038A-3. Under this regulation, “a reporting corporation must keep the permanent books of account or records… that are sufficient to establish the correctness of the federal income tax return of the corporation, including information, documents, or records (“records”) to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties.”

It is also important to note that, for the purposes of Form 5472 penalties, each member of a group of corporations filing a consolidated information return is treated as a separate reporting corporation, and each member is potentially subject to a separate $10,000 penalty, as well as being jointly and severally liable.

Additional Failure to File Penalties

If the IRS issues a failure to file notification, and the failure continues for more than 90 days after such notification, an additional penalty of $10,000 may apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period end.

Criminal Penalties

Under IRC Sections 7203 (Willful failure to file return, supply information, or pay tax), 7206 (Fraud and False Statements), and 7207 (Fraudulent returns, statements, or other documents), criminal penalties may potentially apply for failure to submit necessary information, or for filing false or fraudulent information.

Contact Sherayzen Law Office for Legal Help With Form 5472 Reporting Requirements

Complying with Form 5472 requirements and dealing with Form 5472 penalties usually requires professional review. Contact Sherayzen Law Office for tax assistance with Form 5472; our experienced international tax firm will determine whether you need to file Form 5472, explain how to comply with the form’s requirement, complete the form for you, and handle any necessary IRS negotiations.

Beneficial Owners, Treaty Shopping and the OECD Model Tax Convention

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Recently, the Organization for Economic Co-operation and Development (OECD) Committee on Fiscal Affairs asked for public comments concerning the interpretation of the term “beneficial owner” in the OECD Model Tax Convention. Since the OECD Model Tax Convention functions as a template for many nations negotiating bilateral tax treaties, any changes or clarifications to the model convention are important for international tax law purposes. Clarifications could potentially affect US taxpayers claiming tax treaty benefits.

This article will briefly explain the concept of a “beneficial owner”, its relation to “treaty shopping”, and the problems with the term as currently interpreted in the OECD Model Tax Convention.

Beneficial Owner

The term “beneficial owner” appears in Articles 10, 11, and 12 (relating to dividend, interest, and royalty payments, respectively) of the OECD Model Tax Convention. The concept is intended to allow only those who are the true, beneficial owners (and who receive such items of income) to claim exemptions from, or reduced rates of, withholding taxes in bilateral tax treaties between nations. Thus, the term is meant to prevent taxpayers from setting up conduits or similar entities to receive such income and to claim treaty benefits by “treaty shopping”. In general, agents, nominees, or conduit companies do not qualify as beneficial owners under the OECD Model Tax Convention.

Treaty Shopping

The term, “treaty shopping” usually occurs in situations in which individuals or corporations reside in one country, earn income from another (source) country, and yet have some other type of entity in a third country that enables them to attempt to benefit from a tax treaty between the source-of-income country and the third country. An example might be a foreign company located in one country (which owns a US company) creating an entity in a third country to receive dividends from the US company, and then claiming that the dividends are not subject to US withholding taxes because of a tax treaty between the US and the third country.

In light of this term, it becomes clear how the beneficial owner definition attempts to limit treaty shopping.

Problems with the Current Beneficial Owner Terminology

The current OECD terminology has been problematic in that it does not specify how the term beneficial owner is intended to be interpreted in the vast array of international laws. In some jurisdictions and tax courts (especially in countries following the common law), the term has been interpreted in a much different way than in others. This has lead to much confusion as well as risk of the same type of income not being subject to tax in some jurisdictions while being subject to double-taxation in others. The OECD request for comments has the goal of remedying this problem by clarifying the meaning of the term and providing further guidance.

The comment period ended July 15, 2011, and the OECD Committee on Fiscal Affairs’ Working Party met a few months ago to begin review of the comments.

Contact Sherayzen Law Office For Help With International Tax Treaties

If you have questions with respect to how a particular tax treaty applies to your situation, contact Sherayzen Law Office for legal help. Our experienced tax firm will assist you in assessing the potential impact of a tax treaty on your particular tax position.