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IMF Wants “Modern” Croatian Real Estate Tax | Tax Lawyer News

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On January 16, 2018, the International Monetary Fund (“IMF”) released its 2017 Article IV consultation notes with respect to Croatia. Among its recommendations is the introduction of a modern Croatian Real Estate Tax.

Croatian Real Estate Tax: IMF assessment of Croatian Economy

The IMF began on the positive note stating that, in 2017, Croatia continued its third year of positive economic growth, mostly supported by tourism, private consumption, trade partner growth and improved confidence. The IMF also noted that the fiscal consolidation was progressing at a much faster pace than originally anticipated with Croatia leaving the European Union’s Excessive Deficit Procedure in June of 2017. The international organization made other positive comments, particularly stressing that Croatia was overcoming its Agrokor crisis.

Then, the IMF turned increasingly negative. It first noted that, while the balance risks has improved, it was not satisfied with the high level of Croatian public and external debt levels. Then, it stated that the full impact of the Agrokor restructuring is not yet known. The IMF was also unhappy about the pace of structural reforms since 2013 (when Croatia became a member of the EU), further stating that Croatia’s GDP per capita stood at about 60% of the EU average and Croatian business environment remained less favorable than that of its peers.

Finally, the IMF expressed its concerns over the fact that the output did not recover from its pre-recessing level and stated that, in the medium-term, the Croatia’s economic growth is expected to decelerate. Hence, the IMF emphasized that Croatia needed to do more to improve its economic prospects.

Croatian Real Estate Tax: IMF Recommendations

What precisely does Croatia need to do in the IMF opinion? Mainly reduction of public debt.

How does the IMF recommend that Croatia accomplish this task? The IMF made a number of proposals that can be consolidated into five courses of action. First, enhance the efficiency of public services by streamlining public services. Second, keep the wages low and reform the welfare state policies (here, it probably means either slashing the state benefits or privatizing them). Third, relaxing the labor regulations, particularly in the areas of hiring and temporary employment. Fourth, enhancement of legal and property rights. Finally, improvement of the structure of revenue and expenditure.

This last enigmatic phrase is the keyword for reducing the expenses and the introduction of new taxes. In particular, the IMF wants to see an introduction of a modern Croatian real estate tax.

What is a “Modern” Croatian Real Estate Tax According to IMF

The IMF defined a “modern” Croatian real estate tax as a “real estate tax that is based on objective criteria” and the one that “would be more equitable and would yield more revenue than the existing communal fees.” The idea is that “a modern more equitable property tax could allow for a reduction of less growth-friendly taxes.” In fact, the additional revenue derived from this tax “could compensate for a further reduction in the income tax burden, the parafiscal fees, or even VAT.”

It should be noted that the Croatian government already listened to the IMF and tried to impose a Croatian real property tax starting January of 2018, but the implementation of the law was suspended in light of strong public opposition.

Sherayzen Law Office will continue to monitor the situation.

New 11 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On November 3, 2017, the IRS Large Business and International Division (“LB&I”) announced the rollout of additional 11 IRS Compliance Campaigns in addition to the 13 already existing campaigns. Most of these campaigns directly address the IRS concerns with respect to US international tax law compliance. Let’s explore these new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: What Does This Mean for Taxpayers?

The issue-based IRS Campaigns is the brand-new strategy of the IRS to maximize the utility of its strained resources. Unlike previous efforts, a Campaign basically focuses on a specific issue that may carry a significant non-compliance risk and, then, applies a variety of solutions (called “treatment streams”) to increase the compliance with respect to this issue. The treatment streams range from development of an externally published practice unit, potential published guidance to issue-based examinations.

From a taxpayer point of view, the new strategy means that, if the IRS announces a new campaign, US taxpayers associated with the risk issue at the heart of a new campaign are at increased audit risk.

New 11 IRS Compliance Campaigns: General Emphasis on International Tax Compliance

Seven out of total eleven campaigns are focused on international tax compliance. This means that the IRS continues to give priority to international tax enforcement. Hence, US taxpayers who own foreign assets or are involved in international business transactions are likely to be affected by the IRS campaigns and should make sure they are in full US tax compliance.

Let’s briefly describe each of the new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: 1120-F Chapter 3 and Chapter 4 Withholding

This campaign focuses upon verification of the withholding credits before the claim for refund or credit is allowed. To make a claim for refund or credit to estimated tax with respect to any U.S. source income withheld under chapters 3 or 4, a foreign entity must file a Form 1120-F. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A).

In other words, this campaign is designed to verify withholding at source for 1120-Fs claiming refunds.

New 11 IRS Compliance Campaigns: Swiss Bank Program

A non-surprising new addition to campaigns that will focus on tax and FBAR noncompliance of US beneficial owners of Swiss bank and financial accounts. The IRS will draw on the materials supplied to the DOJ by Swiss Banks as part of the Swiss Bank Program.

New 11 IRS Compliance Campaigns: Foreign Earned Income Exclusion

This campaign is likely to affect US taxpayers who reside overseas. The campaign will focus on taxpayers who claimed Foreign Earned Income Exclusion, but did not meet the requirements for claiming them. The IRS will address noncompliance through a variety of treatment streams, including examination.

New 11 IRS Compliance Campaigns: Verification of Form 1042-S Credit Claimed on Form 1040NR

The campaign’s goal is to ensure the amount of withholding credits or refund/credit elect claimed on Forms 1040NR is verified and whether the taxpayer has properly reported the income reflected on Form 1042-S.

New 11 IRS Compliance Campaigns: Agricultural Chemicals Security Credit

The first of the new four domestic campaigns. The Agricultural chemicals security credit is claimed under Internal Revenue Code Section 45O and allows a 30 percent credit to any eligible agricultural business that paid or incurred security costs to safeguard agricultural chemicals. The credit is nonrefundable and is limited to $2 million annually on a controlled group basis with a 20-year carryforward provision. In addition, there is a facility limitation as outlined in Section 45O(b). The goal of this campaign is to ensure taxpayer compliance by verifying that only qualified expenses by eligible taxpayers are considered and that taxpayers are properly defining facilities when computing the credit. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Deferral of Cancellation of Indebtedness Income

This is an interesting addition and a correct one to the campaigns; I also believe that this area suffers from high rate of noncompliance. This issue stems from the Great Recession of 2008; in 2009 and 2010, a lot of US taxpayers elected to defer their cancellation of indebtedness (“COD”) income incurred as a result of reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument. Such taxpayers should have reported their COD income ratably over a period of five years beginning in 2014 through 2018.

Furthermore, whenever a taxpayer defers his COD income, any related original issue discount (OID) deductions on the new debt instrument, resulting from debt-for-debt exchanges that triggered the original COD must also be deferred ratably and in the same manner as the deferred COD income.

The goal of this campaign is to ensure taxpayer compliance by verifying that taxpayers (who properly deferred COD income in 2009 and 2010) actually properly reported it in subsequent years beginning in 2014. The campaign will also look at situations where an accelerating event occurred and required earlier recognition of income under IRC § 108(i). The treatment stream for this campaign is issue-based examinations. The use of soft letters is under consideration.

New 11 IRS Compliance Campaigns: Energy Efficient Commercial Building Property

The goal of this campaign is to ensure taxpayer compliance with the section 179D (Energy Efficient Commercial Building Deduction). Section 179D allows taxpayers who own or lease a commercial building to deduct the cost or portion of the cost of installing energy efficient commercial building property (EECBP). If the equipment is installed in a government-owned building, the deduction is allocated to the person(s) primarily responsible for designing the EECBP. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Economic Development Incentives Campaign

The goal of this campaign is to ensure taxpayer compliance with respect to a variety of government economic incentives. These incentives include refundable credits (refunds in excess of tax liability), tax credits against other business taxes (for example, payroll tax), nonrefundable credits (refunds limited to tax liability), transfer of property and grants. The common problems targeted by this campaign are situation where taxpayers improperly treat government incentives as non-shareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Section 956 Avoidance

This campaign focuses on situations where a CFC loans funds to a US Parent (USP), but nevertheless does not include a Section 956 amount in income. The goal of this campaign is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the tax consequences of Section 956. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Corporate Direct (Section 901) Foreign Tax Credit

Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. The goal of the Corporate Direct Foreign Tax Credit (“FTC”) campaign is to improve return/issue selection (through filters) and resource utilization for corporate returns that claim a direct FTC under IRC section 901. This campaign will focus on taxpayers who are in an excess limitation position. The treatment stream for the campaign will be issue-based examinations. The IRS emphasized that this is just the first of several FTC campaigns. The IRS further specified that future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.

New 11 IRS Compliance Campaigns: Individual Foreign Tax Credit (Form 1116)

This campaign addresses taxpayer compliance with the computation of the foreign tax credit (“FTC”) limitation on Form 1116. Due to the complexity of computing the FTC and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect FTC amount. The IRS will address noncompliance through a variety of treatment streams including examinations.

UK Tax Haven May Be the Result of Brexit | US International Tax Attorney

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In her January 17, 2017 speech, the British Prime Minister Theresa May confirmed that the United Kingdom (“UK”) will leave the European Union (“EU”) and seek a free trade deal with the EU. The Prime Minister also appears to have made the threat of creating a UK Tax Haven if the deal is not struck.

UK Tax Haven: UK is Leaving the EU

Since the ground-breaking referendum vote to leave the EU in June of 2016, many analysts have predicted that the UK will not leave and seek some sort of a partial participation in the EU.

On January 17, 2017, the Prime Minister’s response to these doubters was clear: “No, the United Kingdom is leaving the European Union.” She also stated: “We do not seek to hold on to bits of membership as we leave.”

She also outlined the procedural roadmap to how the UK will leave the EU. In particular, the Prime Minister stated that the government would bring the final withdrawal agreement to the Parliament for a vote before the Agreement comes into force. Furthermore, the UK government will repeal the European Communities Act. Surprisingly, the Prime Minister further said that the existing body of the EU law will be converted into British law.

UK Tax Haven: The Freedom to Set Competitive Tax Rates

The Prime Minister’s speech also contained something of great interest to international tax lawyers. She stated that, once the UK leaves the EU, it will “have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”

Not surprisingly, the reporters, the opposition and some foreign leaders had interpreted this statement as a threat of converting the UK into a major tax haven for the European companies. It appears that the UK government plans to materializes this threat of the UK tax haven only if the UK is excluded from the EU single economic market as a result of a punitive EU action.

This threat of creating a major UK tax haven echos a similar threat made by the Chancellor of the Exchequer Philip Hammond. In his interview with a German newspaper “Welt am Sonntag”, Mr. Hammond stated that, if the UK is excluded from the EU market, the government will try to contain the damage of such a move by switching away from the European model of taxation.

Is the UK Tax Haven Likely to Become a Reality?

So, is the UK Tax Haven a certainty at this point? Probably not. I view this threat more as a negotiation tool rather than the certainty of enacting a certain plan. The UK economy is one of the most important and complex economies in the world; it is very unlikely that the British government will be even able to pursue a course of action of turning the UK into a full tax haven.

On the other hand, it is obvious that the British government will take advantage of the situation and seek to improve the country’s competitiveness through enaction of certain tax strategies. There is a high likelihood that the corporate tax rate may be lowered to a level where it is better than in most other EU countries, but cannot yet be considered as that of a tax haven.

Furthermore, it is possible that the UK tax haven will materialize only with respect to certain classes of taxpayers from certain countries. For example, the United States can be readily considered as a tax shelter for foreign individuals. The UK may be tempted to adopt a similar approach.

Finally, it is important to remember that the UK is already an attractive country from tax perspective. Its corporate rate is not high (it can even be called relatively low), there is no dividend withholding tax, favorable rules for expats, wide treaty network, and so on. Furthermore, the UK did not enact certain beneficial ownership transparency rules that other European countries already have in place.

Most likely, the UK just wishes to keep its options open for now and there is not going to be a UK tax haven in a traditional sense of this word, despite its threats to do so. International tax lawyers, however, should closely follow the UK developments for any tax opportunities that may become available to their clients.

Credit Suisse and Italy Settle Dispute Over Undisclosed Offshore Accounts

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On December 14, 2016, Credit Suisse and Italy settled their dispute over Credit Suisse undisclosed offshore accounts owned by Italian tax residents. The settlement between Credit Suisse and Italy was approved by a judge in Milan and obligates Credit Suisse to pay a total of 109.5 million euros – 101 million euros in taxes, interest and penalties; 7.5 million euros as a disgorgement of profits; and 1 million euros as an administrative penalty.

The settlement between Credit Suisse and Italy has ended an investigation by the Italian authorities into the bank’s involvement in helping Italians evade Italian taxes. The Italian government’s inquiry into the Credit Suisse’s role in Italian tax evasion appeared to be thorough and, at times, even combined with significant pressure. For example, in December of 2014, the Italian tax authorities raided the offices of a Credit Suisse’s subsidiary in Milan.

The agreement between Credit Suisse and Italy does not mean the end of the Italian tax authorities’ investigation of Italians with undisclosed offshore accounts. On the contrary, these activities will continue their relentless progress.

While a significant event, the settlement between Credit Suisse and Italy pales in comparison with the settlement between Credit Suisse and the US Department of Justice when Credit Suisse paid $2.6 billion.

Nevertheless, the settlement between Credit Suisse and Italy points to the continued global trend of increased focus on international tax compliance. The new trend really started with the IRS victory in the UBS case in 2008, gained steam with the 2009 Offshore Voluntary Disclosure Program and became worldwide with the passage of FATCA in 2010.

Countries throughout the world, including Italy, have followed the US lead in international tax enforcement. In fact, it appears that the European countries have gone further in some aspects than the United States, especially after the adoption of the Common Reporting Standard (CRS). While the United States refused to join CRS arguing that its revolutionary FATCA already achieved the same goals (and, thereby, effectively turning the United States into a tax shelter for nonresident aliens), the vast majority of the European countries adopted the CRS and applied unprecedented pressure on the financial industry to share the heretofore confidential information with various government tax authorities.

Switzerland has arguably felt more pressure than any other country in the world and has largely been forced to give up its much vaunted bank secrecy. After the US DOJ Program for Swiss Banks dealt the decisive blow to the Swiss bank secrecy laws, various European countries decided to take advantage of the Swiss banks’ defeat and swarmed into Switzerland to get their share of penalties and information regarding tax noncompliance of their own citizens. The recent settlement between Credit Suisse and Italy is just one more example of this continued European squeeze of the Swiss banks for money and information.

US–Hungary Totalization Agreement Enters Into Force

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On September 1, 2016, the US–Hungary Totalization Agreement entered into force. In this article, I will briefly discuss the main benefits of this Agreement to US and Hungarian nations.

US–Hungary Totalization Agreement: What is a Totalization Agreement?

The Totalization Agreements are authorized by Section 233 of the Social Security Act for the purpose of eliminating the burden of dual social security taxes. In essence, these are social security agreements between two countries that protect the benefit rights of workers who have working careers in both countries and prevent such workers and their employers from paying social security taxes on the same earnings in both countries.

Usually, such a situation arises where a worker from country A works in Country B, but he is covered under the social security systems in both countries. In such cases, without a totalization agreement, the worker has to pay social security taxes to both countries A and B on the same earnings.

US–Hungary Totalization Agreement Background

The US–Hungary Totalization Agreement was signed by the United States and Hungary on February 3, 2015 and entered into force on September 1, 2016. This means that Hungary now joined 25 other countries – Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, South Korea, Spain, Sweden, Switzerland and the United Kingdom – that have similar Totalization Agreements with the United States.

US–Hungary Totalization Agreement: Key Provisions

There are three key provisions of the US–Hungary Totalization Agreement which are relevant to Hungarian and US workers. First, protection of workers’ benefits and prevention of dual taxation. US workers who work in Hungary and are already covered under Hungarian social security system should be exempt from US social security payments, including health insurance (under FICA and SECA only), retirement insurance, survivors and disability insurance contributions. However, US–Hungary Totalization Agreement does not apply to the Medicare; US employees must still make sure that they have adequate medical insurance coverage. Similarly, Hungarian workers who work in the United States and are already covered by the US social security system should be exempt from Hungarian social security taxes.

The second key provision of the US–Hungary Totalization Agreement provides for a Certificate of Coverage. The Certificate can be used by an employee to remain covered under his home country’s social security system for up to 60 months. Additional extensions are possible upon approval by the host country.

Finally, under the US–Hungary Totalization Agreement, workers may qualify for partial US benefits or partial Hungarian benefits based on combined (or “totalized”) work credits from both countries. This means that, where there is insufficient number of periods (or credits in the United States) to claim social security benefits, the periods of contributions in one country can be added to the period of contributions in another country to qualify to these benefits.

Contact Sherayzen Law Office for US Tax Issues Concerning Hungarian Assets and Income

If you have foreign accounts and other assets in Hungary and/or income from these Hungarian assets, contact Sherayzen Law Office for professional help. We have helped hundreds of clients throughout the world, including in Hungary, with their US tax issues and we can help you!