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Legal Entity Identifiers: Introduction to LEI | International Tax Lawyer & Attorney

The Legal Entity Identifiers (“LEI”) is a method to identify legal entities that engage in financial transactions. Let’s discuss LEI in more detail.

LEI: Background Information

The establishment of LEI was driven by the recognition by regulators around the world that there is a complete lack of transparency with respect to identifying parties to international transactions. Each business entity is registered at the national level, but another country’s authorities would have great difficulty identifying this entity in an international transaction, including whether this entity has taken consistent tax positions in both countries.

Establishment of LEI; Additional Initiatives

Hence, on the initiative of the largest twenty economies of the world (“G-20“), the Financial Stability Board (“FSB”) developed the framework of Global LEI System (“GLEIS”). FSB was created in 2009 in the aftermath of the financial crisis (it replaced the Financial Stability Forum or “FSF”).

Additionally, in January of 2013, a LEI Regulatory Oversight Committee (“ROC”) was created. ROC is a group of over 70 public authorities from member-countries and additional observers from more than 50 countries. The job of the ROC is coordination and oversight of the worldwide LEI framework.

On May 9, 2017, the ROC announced that it has launched data collection on parent entities in the Global Legal Entity Identifiers System – this is the so-called “relationship data”. The member countries (especially in the European Union (“EU”)) will use this data in a number of regulatory initiatives. For example, as of 2018, the EU uses the relationship data for the purposes of commodity derivative reporting.

How LEI Works

The LEI is a 20-character, alpha-numeric code, to uniquely identify legally distinct entities that engage in financial transactions. The code incorporates the following information:

1.the official name of the legal entity as recorded in the official registers;
2.the registered address of that legal entity;
3.the country of formation;
4.codes for the representation of names of countries and their subdivisions;
5.the date of the first Legal Entity Identifier assignment; the date of last update of the information; and the date of expiration, if applicable.

Here is how the numbering system works:

•Characters 1–4: A four-character prefix allocated uniquely to each LOU.
•Characters 5–6: Two reserved characters set to zero.
•Characters 7–18: Entity—specific part of the code generated and assigned by LOUs according to transparent, sound, and robust allocation policies.
•Characters 19–20: Two check digits as described in the ISO 17442 standard.

Jurisdictions With Rules Referring to LEI

Over 40 jurisdictions have rules that refer to Legal Entity Identifiers: Argentina, Australia, Canada, 31 members of the European Union and European Economic Area, Hong Kong, India, Israel, Mexico, Russia, Singapore, Switzerland, and the United States. IGOs such as Basel Committee on Banking Supervision and International Organization of Securities Commissions also use Legal Entity Identifiers.

Could LEI Be Used for CRS and FATCA Purposes?

Sherayzen Law Office, like many other commentators, believes that there is a possibility that the LEI would be a better alternative than Global Intermediary Identification Number (GIIN) for CRS and FATCA purposes. First of all, it would be more efficient to have one identification system across all compliance terrains. Second, Legal Entity Identifiers are actually more popular than GIINs. As of December 7, 2017, there were 830,477 LEIs issued versus a mere less than 300,000 GIINs.

October 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney News

On October 30, 2018, the IRS Large Business and International division (LB&I) has announced five additional compliance campaigns. Let’s discuss in more detail these October 2018 IRS compliance campaigns.

October 2018 IRS Compliance Campaigns: Background Information

By the middle of the 2010s, the IRS realized that the then-existing structure of the LB&I was not the best format to address modern noncompliance issues; it could not even accurately identify potential noncompliant taxpayers. Also, the IRS believed that LB&I was not applying the IRS funds in an efficient manner.

Hence, after extensive planning, the IRS decided to move LB&I toward issue-based examinations and a compliance campaign process. Under the new format, LB&I itself decided which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this approach made the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

Each campaign was preceded by strategic planning, re-deployment of resources, creation of new training and tools as well as careful taxpayer population selection through metrics and feedback. The IRS has also built a supporting infrastructure inside LB&I for each specific campaign.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018 and five campaigns on September 10, 2018. In other words, as of September 11, 2018, there were a total of forty-five campaigns. The additional five October 2018 IRS compliance campaigns bring the total number of campaigns to fifty.

Five New October 2018 IRS Compliance Campaigns

Here are the new October 2018 IRS Compliance campaigns that should be added to the already-existing forty-five campaigns: Individual Foreign Tax Credit Phase II, Offshore Service Providers, FATCA Filing Accuracy, 1120-F Delinquent Returns and Work Opportunity Tax Credit. Each of these five campaigns was identified through LB&I data analysis and suggestions from IRS employees.

October 2018 IRS Compliance Campaigns: Individual Foreign Tax Credit Phase II

IRC Section 901 alleviates double-taxation through foreign tax credit for income taxes paid by US taxpayers on their foreign-source income. In order to claim the credit, one must meet certain eligibility requirements. This campaign addresses taxpayers who have claimed the credit, but did not meet the requirements. The IRS will address noncompliance through a variety of treatment streams, including examination.

October 2018 IRS Compliance Campaigns: Offshore Service Providers

The goal of this campaign is purely punitive – to target US taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.

October 2018 IRS Compliance Campaigns: FATCA Filing Accuracy

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Under FATCA, Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by US account holders; the same applies to substantial (beneficial) US owners of these assets. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.

October 2018 IRS Compliance Campaigns: 1120-F Delinquent Returns

The campaign addresses delinquent (i.e. filed late) Forms 1120-F. Form 1120-F is a US income tax return of a foreign corporation. It must be accurate, true and filed timely in order for a foreign corporation to claim deductions and credits against effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than eighteen months after the due date of the current year’s return.

The IRS may waive the filing deadline where, based on its facts and circumstances, the
foreign corporation establishes to the satisfaction of the IRS that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F. The reasonable cause standard is described in Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 (dated February 1, 2018) established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.

The objective of the 1120-F Delinquent Returns campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risks for delinquent 1120-F returns. The IRS hopes to accomplish it by field examinations of compliance-risk delinquent returns and external education outreach programs.

October 2018 IRS Compliance Campaigns: Work Opportunity Tax Credit

This campaign addresses the consequences of the Work Opportunity Tax Credit (WOTC) certification delays and the burden of amended return filings. Due to delays associated with the WOTC certification process, taxpayers are often faced with the burdensome requirement of amending multiple years of federal and state returns to claim the WOTC in the year qualified WOTC wages were paid. This requirement, coupled with any resulting examinations of this issue, is an inefficient use of both taxpayer and IRS resources.

Pursuant to Rev. Proc. 2016-19, the IRS has agreed to accept the “WOTC year of credit eligibility” issue into the Industry Issue Resolution (IIR) program. The IIR is intended to provide remedies to reduce taxpayer burden, promote consistency, and decrease examination time to most effectively use IRS resources. The campaign’s objective is to collaborate with industry stakeholders, Chief Counsel, and Treasury to develop an LB&I directive for taxpayers experiencing late certifications and to promote consistency in the examinations of WOTC claims.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

July 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

On July 2, 2018, the IRS announced the creation of another five compliance campaigns. Let’s discuss these July 2018 IRS Compliance Campaigns in more detail.

July 2018 IRS Compliance Campaigns: Background Information

The IRS compliance campaigns is the end result of a long period of planning by the IRS Large Business and International division (“LB&I”). The idea behind the IRS compliance campaigns is to concentrate the LB&I resources in a way that deals with the potential noncompliance area in the most efficient way. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS rapidly added new campaigns in November of 2017, March of 2018 and May of 2018. As of July 1, 2018, there were 35 campaigns outstanding.

Five New July 2018 IRS Compliance Campaigns

Here are the new July 2018 IRS Compliance campaigns that should be added to the already existing thirty-five campaigns: Restoration of Sequestered AMT Credit Carryforward, S Corporation Distributions, Virtual Currency, Repatriation via Foreign Triangular Reorganizations and Section 965 Transition Tax.

Each of these campaigns was identified by the IRS through LB&I data analysis and suggestions from IRS employees.

July 2018 IRS Compliance Campaigns: Restoration of Sequestered AMT Credit Carryforward

This campaign deals with the complex issues concerning sequestered Alternative Minimum Tax (“AMT”) credit. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward, but some are doing so in any case.

Given the complexity of the issues involved, the IRS decided to make soft letters as the primary treatment stream for this campaign. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. The IRS will then monitor these taxpayers to make sure that they correct the problem and stay in compliance. The idea is to educate taxpayers on the proper treatment of sequestered AMT credits so that they self-correct all problems.

July 2018 IRS Compliance Campaigns: S Corporation Distributions

This is a very important campaign that will affect a very large number of small business owners. It will focus on three major problem areas. The first issue is failure to report gain upon the distribution of appreciated property to a shareholder. The second issue is the proper classification of a corporate distribution (of cash and property) as a taxable dividend. Finally, the third issue concerns non-dividend distributions to shareholders in excess of their stock basis; such distributions are taxable. The IRS adopted a more severe approach to this campaign. The treatment streams for this campaign include issue-based examinations, tax form change suggestions and stakeholder outreach.

July 2018 IRS Compliance Campaigns: Virtual Currency

This campaign is the IRS attempt to catch up with modern technology and properly tax transactions that involve virtual currencies. IRS Notice 2014-21 classifies virtual currency as “property” for federal tax purposes. Hence, any sales or exchanges that involve virtual currencies will be taxable in the United States.

The fact that these transactions take place outside of the United States would not affect the taxability of foreign currencies as long as a US tax resident is involved in these transactions. As Sherayzen Law Office has pointed out numerous times in the past, US tax residents are subject to taxation on their worldwide income. This rule includes virtual currencies.

This campaign involves highly complex issues and requires flexible approach to compliance enforcement. This is why the IRS will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations.

The IRS has expressly stated that its compliance enforcement activities will follow the general tax principles applicable to all transactions in property as outlined in Notice 2014-21. The IRS will also continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance and development of Practice Units.

Interestingly enough, the IRS stated that it will not create a voluntary disclosure program specifically to address tax non-compliance involving virtual currency. Instead, the IRS urges taxpayers with unreported virtual currency transactions to self-correct their returns as soon as practical.

July 2018 IRS Compliance Campaigns: Repatriation via Foreign Triangular Reorganizations

This campaign focuses on enforcement of Notice 2016-73 (“the Notice”) which the IRS issued in December of 2016. The Notice curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

July 2018 IRS Compliance Campaigns: Section 965 Transition Tax

This is a highly important campaign that focuses on the issue that will continue to plague US taxpayers for a long time – 965 transition tax. IRC Section 965 requires US shareholders (a term of art) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax as a lump-sum payment or in installments over an eight-year period. This means that some (and probably most) of these US shareholders should have paid some or all of the tax on their 2017 income tax return.

The LB&I already engaged in an outreach campaign in 2018 to reach trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations concerning the 965 transition tax. The IRS even circulated an external communication on this subject through stakeholder channels in April of 2018.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FDII Export Incentive | Foreign Business Income Tax Lawyer & Attorney

The 2017 Tax Cuts and Jobs Act (the “2017 tax reform” or “TCJA”) enacted a highly-lucrative incentive for US corporations to export directly from the United States – the Foreign-Derived Intangible Income (“FDII”) regime. In this article, I would like to introduce the readers in a general manner to the FDII export incentive contained in the TCJA.

FDII Export Incentive: TCJA

The creation of the participation exemption system posed a problem for the drafters of the TCJA – how does one stop US corporations from running all of their foreign business through a foreign corporation since foreign corporate profits may actually be transferred to the United States tax-free? Among other provisions of this complex law, the drafters utilized two powerful incentives for US corporations to export directly overseas.

The first one was a “stick” – the Global Intangible Low-Taxed Income or GILTI. The GILTI regime established what can be best described as a global minimum tax on the earnings of foreign subsidiaries of a US business entity.

The second approach was a “carrot” – the FDII export incentive. The FDII regime creates a powerful incentive for US corporations to export goods and services from the United States by creating a deemed deduction of a large percentage of corporate export income. In other words, the effective corporate tax rate is reduced through the FDII regime because a portion of a corporation’s export income is being deducted and never subject to US taxation.

FDII Export Incentive: General Description of the Deemed Deduction

The deemed deduction applies only to a US corporation’s FDII. FDII is basically a certain portion of corporate income from foreign sources determined by a formula established by Congress.

The formula requires a multi-step process. The first steps involve the determination of the Deduction-Eligible Income (DEI), Qualified Business Asset Investment (“QBAI”), Foreign-Derived Deduction-Eligible Income (“FDDEI”). Once all of these items are calculated, then the Deemed Intangible Income (“DII”) is figured out.

FDII is calculated last. The basic formula for FDII is: DII times the ratio of FDDEI over DEI.

The last step is to calculate the tax liability which involves the reduction of FDII by 37.5%. Thus, the effective tax rate for a corporate taxpayer (assuming the current 21% corporate tax rate stays the same) with respect to its FDII is only 13.125%.

It should be mentioned that the current deemed deduction will stay at 37.5% only through December 31, 2025. For the years after December 31, 2025, the deemed deduction will go down to 21.875%. This means that the effective tax rate on FDII will be 16.406%. Unless the law changes (which is possible), non-FDII corporate income will continue to be taxed at 21%.

FDII Export Incentive: Net Impact of the Deemed Deduction

Based on even just this general analysis of FDII, we can understand why the FDII export incentive is such an important part of the US corporate tax law. First, in most cases, the FDII deduction is a disincentive to shift foreign-source income from a US corporation to a controlled foreign corporation (“CFC”). A CFC may be subject to taxation under two different anti-deferral regimes, Subpart F or GILTI tax. Subpart F income will just force the recognition of foreign income by the CFC right away without any deemed deduction (i.e. this would be the worst-case scenario).

If the Subpart F rules do not apply, then the corporation may be subject to the GILTI tax. It is true that the effective corporate tax rate for GILTI, after its current 50% deemed reduction is only 10.5%. Nevertheless, FDII”s effective tax rate of 13.125% significantly reduces the difference from that what it would have been otherwise (i.e. between 10.5% and 21%). Moreover, when one factors in the additional administrative, US tax compliance and local tax compliance expenses, this difference may become nonexistent.

Second, the FDII deemed deduction makes US corporations more competitive worldwide, because they may now realize a higher profit margin even if they lower the prices for their products and services sold overseas.

Contact Sherayzen Law Office for Professional Help With FDII Calculations and International Business Tax Planning

If your business engages in selling products or services overseas, there are opportunities for international business tax planning from US perspective. Contact Sherayzen Law Office to take advantage of these opportunities through professional, creative and ethical tax help.

Contact Us today to Schedule Your Confidential Consultation!

Italian Bank Accounts | International Tax Lawyer & Attorney New York New Jersey

US tax requirements concerning Italian bank accounts can be quite burdensome and complex. The chief three US reporting requirements applicable to Italian bank accounts are: worldwide income reporting, FBAR and FATCA Form 8938. Let’s discuss each of these requirements in more depth.

Italian Bank Accounts: US Tax Residents and US Persons

Before we delve into the discussion of these requirements, we need to identify who is required to comply with these requirements. This task is complicated by the fact that each of aforementioned three requirements has its own definition of a required filer.

Nevertheless, we can readily identify the categories of required filers shared by all three requirements. These categories correspond most closely, but not exactly to the concept of US tax residents. “US tax residency” is a broad term which includes US citizens, US permanent residents, residents who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents.

This definition of a US tax resident is fully applicable to the worldwide income reporting requirement and very closely corresponds to the concept of the Specified Person of Form 8938. FBAR’s concept of “US Persons”, however, does differ more significantly from the definition of a “US tax resident”, but only in more unusual circumstances. The most common differences arise with respect to the treaty “tie-breaker” provisions to escape US tax residency and persons who declare themselves tax residents of the United States.

Additionally, I wish to caution the readers that even the definition of US tax residents which I just stated has a number of important exceptions, such as visa exemptions (for example, an F-1 visa five-year exemption for foreign students) from the Substantial Presence Test.

In other words, the issue of who the required filer is, requires careful analysis of the facts and circumstances of an individual. This is definitely the job of your international tax attorney; it is just too dangerous to attempt to do it yourself.

Italian Bank Accounts: Worldwide Income Reporting

All US tax residents must report their worldwide income on their US tax returns. In other words, US tax residents must disclose both US-source and foreign-source income to the IRS. In the context of the Italian bank accounts, foreign-source income means all bank interest income, dividends, royalties, capital gains and any other income generated by these accounts.

Italian Bank Accounts: FBAR Reporting

The official name of the Report of Foreign Bank and Financial Accounts (“FBAR”) is FinCEN Form 114. FBAR requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over Italian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000.

I wish to emphasize again that, while the term “US persons” is very close to “US tax residents”, it is not the same. The term “US tax residents” is slightly broader than “US persons”. I encourage you to search our website – sherayzenlaw.com – for articles concerning the definition of a US Person.

One aspect of the FBAR requirement, however, deserves a special mention here – the definition of an “account”. The FBAR definition of an account is substantially broader than how this word is generally understood in our society. “Account” for FBAR purposes 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, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Finally, no discussion of FBAR can be considered complete without mentioned the much-dreaded FBAR penalty system. It is complex and severe to an astonishing degree. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect only in the most egregious situations). The next layer of penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Finally, FBAR imposes penalties even on non-willful taxpayers.

All of the civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. One of the most important factors is the size of the Italian bank accounts subject to FBAR penalties. Additionally, since 2015, the IRS has added another layer of limitations on the FBAR penalty imposition. These self-imposed limitations of course help, but one must keep in mind that they are voluntary IRS actions and may be disregarded under certain circumstances (in fact, there are already a few instances where this has occurred).

Italian Bank Accounts: FATCA Form 8938

FATCA Form 8938 has been in existence since 2011. Unlike FBAR, it is filed with a federal tax return and considered to be an integral part of the return. This means that a failure to file File 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Form 8938 requires “Specified Persons” to disclose on their US tax returns all of their Specified Foreign Financial Assets (“SFFA”) as long as these Persons meet the applicable filing threshold. The filing threshold depends on a Specified Person’s tax return filing status and his physical residency. For example, if he is single and resides in the United States, he needs to file Form 8938 as long as the aggregate value of his SFFA is more than $50,000 at the end of the year or more than $75,000 at any point during the year.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to do duplicate reporting on FBAR and Form 8938.

Specified Persons consist of two categories: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching consequences for income tax liability (including disallowance of foreign tax credit and imposition of higher accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

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

Worldwide income reporting, FBAR and Form 8938 do not constitute a complete list of US reporting requirements that may apply to Italian bank accounts. There may be many more.

This is why, if you have Italian bank accounts, you should contact Sherayzen Law Office. We have a highly knowledgeable international tax compliance team headed by an experienced international tax attorney, Mr. Eugene Sherayzen. We have helped hundreds of US taxpayers with their US international tax issues, including reporting Italian bank accounts, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!