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Factual Basis & Tax Planning | International Tax Lawyer & Attorney

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

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.

§318 Sidewise Attribution Limitation | US International Tax Attorney

This article explores the third main limitation on the general IRC (Internal Revenue Code) §318 corporate stock re-attribution rules – §318 Sidewise Attribution Limitation.

§318 Sidewise Attribution Limitation: What is “Sidewise Attribution”?

A sidewise attribution occurs when corporate stock owned by an owner of a business entity (or a beneficiary of a trust or estate) is first attributed to this business entity (or estate or trust) and then re-attributed again to another owner of the same business entity (or another beneficiary of the same trust or estate). In other words, stock deemed to be owned by an entity due to the ownership of that stock by an owner or beneficiary of the entity is re-attributed “sidewise” to another owner or beneficiary of the same entity.

Sidewise attribution may have far-reaching income tax and tax reporting consequences, because it may result in a person with no real ownership of a corporation being treated as an owner of this corporation’s stock simply because a member of another entity (in which the first person also has an ownership interest) happens to own corporate stock of this corporation.

§318 Sidewise Attribution Limitation: §318(a)(5)(C) Prohibition

§318(a)(5)(C) describes the §318 Sidewise Attribution Limitation. Under §318(a)(5)(C), stock constructively owned by a partnership, estate, trust or corporation pursuant to §318(a)(3) is not treated as owned by this partnership, estate, trust or corporation for the purpose of treating a partner, beneficiary, or shareholder as owner of the stock. In other words, the sidewise attribution limitation prevents re-attribution of corporate stock to an owner of an entity where such stock is constructively-owned by an entity solely by virtue of ownership of this stock by another owner of the entity.

Let’s look at the following example to illustrate the §318 Sidewise Attribution Limitation: A and B are unrelated persons, they equally own a partnership P and A owns 100 shares of corporation X’s stock. In this situation, partnership P is a constructive owner of A’s 100 shares of X under §318(a)(3)(A). Without any sideways limitation, B would have been also treated as an owner of these 100 shares of X due to §318(a)(2)(A). Under §318(a)(5)(C), however, none of these stocks are attributed to B.

§318 Sidewise Attribution Limitation: Attribution from Actual Ownership Not Affected

It is important to emphasize that §318(a)(5)(C) applies only to the re-attribution of stock constructively owned as a result of the application of §318(a)(3). This prohibition does not affect the §318(a)(2) attribution of stock actually owned by an entity to its beneficiary, partner, or shareholder.

§318 Sidewise Attribution Limitation: Re-Attribution Under Other Rules

Additionally, stock constructively owned under §318(a)(3) may still be re-attributed under an attribution rule other than §318(a)(2). In other words, stock constructively owned under §318(a)(3) may still be re-attributed under the upstream corporate attribution rules or the option attribution rules of §318(a)(4) (see Treas. Reg. §1.318-4(c)(2)).

Moreover, re-attribution under the §318 family attribution rules still possible. A potential situation for such re-attribution would arise in a situation where corporate stock is attributed from an entity to its member and from this member to a qualified family member of the same entity. Berenbaum v. Commissioner, 369 F.2d 337 (10th Cir. 1966), rev’g T.C. Memo 1965-147.

Let’s look at a couple of examples to understand better the interaction between the §318 Sidewise Attribution Limitation and the re-attribution rules other than §318(a)(2).

Here is the first hypothetical fact pattern: A is a beneficiary of a trust T, B is another beneficiary of T, T is a beneficiary of an estate, and A owns 100 shares of a C-corporation X. Under §318(a)(3)(B), T is a constructive owner of 100 shares of X. Since T is a constructive owner of A’s shares of X, these shares are re-attributed to the estate under §318(a)(3)(A); §318(a)(5)(C) does not apply to this type of a re-attribution since it is not a sidewise attribution. On the other hand, the §318 Sidewise Attribution Limitation would prevent the re-attribution of A’s shares of X to B that otherwise would have occurred under §318(a)(2)(B).

Note, however, that, if B is A’s son (or other qualified relative under the §318 family attribution rules), then the re-attribution of A’s stocks of X to B is possible under §318(a)(1)(A).

Let’s now look at another fact pattern to understand the power of the option rule attribution vis-a-vis §318(a)(5)(C): A and B are beneficiaries of a trust T; T has an option to buy corporate stock from A. The most important point to understand here is the fact that T is considered here as an owner of A’s stock not under the upstream trust attribution rules of §318(a)(3)(B), but under the option attribution rules of §318(a)(4). Hence, the sidewise attribution limitation under §318(a)(5)(C) does not apply and B becomes a constructive owner of a his proportional part of A’s stock under the downstream trust attribution rules of §318(a)(2)(B).

Contact Sherayzen Law Office for Professional Help With US International Tax Law Compliance

US international tax law is incredibly complex and the penalties for noncompliance are exceptionally severe. This means that an attempt to navigate through the maze of US international tax laws without assistance of an experienced professional will most likely produce unfavorable and even catastrophic results.

Contact Sherayzen Law Office for professional help with US international tax law. We are a highly experienced, creative and ethical team of professionals dedicated to helping our clients resolve their past, present and future US international tax compliance issues. We have helped clients with assets in over 70 countries around the world, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

New July 15 Deadline for 2019 Tax Compliance | International Tax News

On March 21, 2020, the IRS moved the federal income tax filing and tax payment due date from April 15, 2020, to July 15, 2020. Let’s discuss the new July 15 deadline in more detail.

July 15 Deadline: Why the IRS Moved the Tax Deadline to July 15, 2020?

The IRS moved the deadline because of the huge logistical problems that have arisen as a result of the spread of the coronavirus pandemic in the United States. The coronavirus panic as well as the imposition of what can be described as curfew and other restrictive safety measures in many states have dramatically reduced the ability of tax professionals to effectively and timely help their clients.

It would have been unfair and unreasonable to require taxpayers to file their tax returns by April 15 during this unprecedented national crisis. Hence, President Trump and the IRS decided to prevent this injustice and moved the tax filing and tax payment deadlines to July 15, 2020. This was the right move to make and it is applauded by tax professionals around the country.

The legal authority for the deferral of the April 15 deadline came from President Trump’s emergency declaration last week pursuant to the Stafford Act. The Stafford Act (enacted in 1988) is a federal law designed to bring an orderly and systematic means of federal natural disaster and emergency assistance for state and local governments in carrying out their responsibilities to aid citizens.

July 15 Deadline: What Returns Are Affected?

The deferment of the April 15 deadline applies to all taxpayers – individuals, corporations, trusts, estates and other non-corporate filers, including those who pay self-employment tax. In other words, all Forms 1040, 1041, 1120, et cetera are now due on July 15.

All international information returns which are filed separately or together with the income tax returns are also now due on July 15, 2020. This includes FBAR, Forms 8938, 3520, 5471, 5472, 8865 and other US international information returns.

July 15 Deadline: When are the Tax Payments Due?

All tax payments which are generally due on April 15 are now due on July 15, 2020.

July 15 Deadline: Do I Need to Do Anything Else to Obtain Tax Return Deferral?

Taxpayers do not need to file any additional forms or call the IRS to qualify for this federal tax filing and payment relief. This deferral to July 15, 2020, automatically applies to all of the aforementioned taxpayers.

July 15 Deadline: Is Extension to October Still Possible?

This automatic deferral does not affect the ability of taxpayers to request extension of the July 15 deadline to October 15. Individuals will need to file a Form 4868 in order to request such an extension. Businesses will need to file a Form 7004 to request this extension.

July 15 Deadline: Can I file Before July 15, 2020?

Taxpayers can still file their tax returns prior to July 15, 2020. The IRS promises to issue most refunds within 21 days if returns are e-filed.

New IRS Updates Possible

The IRS will continue to monitor issues related to the COVID-19 virus. New updates will be posted on a special coronavirus page on IRS.gov.

Contact Sherayzen Law Office for Professional Help With Your US International Tax Compliance

The extended July 15 deadline is especially welcome for US taxpayers with foreign assets. The delays caused by coronavirus now become irrelevant and there is plenty of time to finalize both, 2019 US international tax compliance forms and offshore voluntary disclosures.

If you have undisclosed foreign assets and foreign income, contact Sherayzen Law Office for professional assistance. We have successfully helped hundreds of US taxpayers around the world to bring their US tax affairs into full compliance with US tax laws, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2020 2Q IRS Interest Rates | US International Tax Law Firm

On February 28, 2020, the Internal Revenue Service (“IRS”) announced that the 2020 Second Quarter IRS underpayment and overpayment interest rates (“2020 2Q IRS Interest Rates”) will not change from the first quarter of 2020. This means that, the 2020 2Q IRS interest rates will be as follows:

  • five (5) percent for overpayments (four (4) percent in the case of a corporation);
  • two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000;
  • five (5) percent for underpayments; and
  • seven (7) percent for large corporate underpayments.

Under the Internal Revenue Code, these interest rates are determined on a quarterly basis. The IRS used the federal short-term rate for February of 2020 to determine the 2020 2Q IRS interest rates. The IRS interest is compounded on a daily basis.

The 2020 2Q IRS interest rates are important to not just US domestic tax law, but also US international tax law. For example, the IRS will use these rates to determine how much interest a taxpayer needs to pay on an additional tax liability that arose as a result of an amendment of his US tax return through Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures. The IRS will also utilize 2020 2Q IRS interest rates with respect to the calculation of PFIC interest on Section 1291 tax.

As an international tax law firm, Sherayzen Law Office keeps track of the IRS underpayment and overpayment interest rates on a regular basis. Since our specialty is offshore voluntary disclosures, we often amend our client’s tax returns as part of an offshore voluntary disclosure process and calculate the interest owed on any additional US tax liability. We also need to take interest payments into account with respect to additional tax liability that arises out of an IRS audit.

Moreover, we very often have to do PFIC calculations for our clients under the default IRC Section 1291 methodology. This calculation requires the usage of the IRS underpayment interest rates in order to determine the amount of PFIC interest on the IRC Section 1291 tax.

Finally, it is important to point out that the IRS will use the 2020 2Q IRS interest rates to determine the amount of interest that needs to be paid to a taxpayer who is due a tax refund as a result of an IRS audit or amendment of the taxpayer’s US tax return. This situation may also often arise in the context of offshore voluntary disclosures.

Thus, the IRS underpayment and overpayment interest rates have an impact on a lot of basic items in US tax law. Hence, it is important to keep track of changes in these rates on a quarterly basis.