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South African Bank Accounts | International Tax Lawyer & Attorney Los Angeles California

Due to various waves of emigration from South Africa since early 1990s, there is a significant number of South Africans who live in the United States. Many of these new US taxpayers continue to maintain their South African bank accounts even to this very day. These taxpayers need to be aware of the potential US tax compliance requirements which may apply to these South African bank accounts. This is exactly the purpose of this article – I intend to discuss the three most common US tax reporting requirements which may apply to South African bank accounts held by US persons. These requirements are: worldwide income reporting, FBAR and Form 8938.

South African Bank Accounts: US Tax Residents, US Persons and Specified Persons

Prior to our discussion of these reporting requirements, we need to identify the persons who must comply with them. It turns out that this task is not that easy, because different reporting requirements have a different definition of “filer”.

The most common and basic definition is the one that applies to the worldwide income reporting requirement – US tax residency. A US tax resident is a broad term that covers: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and individuals who declare themselves as US tax residents. This general definition of US tax residents is subject to 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.

FBAR defines its filers as “US Persons” and Form 8938 filers are “Specified Persons”. These concepts are fairly similar to US tax residency, but there are important differences. Both terms apply to US citizens, US permanent residents and persons who satisfy the Substantial Presence Test. The differences arise mostly with respect to persons who declare themselves as US tax residents. A common example are the treaty “tie-breaker” provisions, which foreign persons use to escape the Substantial Presence Test for US tax residency purposes.

Determination of your US tax reporting requirements is the primary task of your international tax lawyer. I strongly recommend that you do not even attempt to do this yourself or use an accountant for this purpose. It is simply too dangerous.

South African Bank Accounts: Worldwide Income Reporting

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

South African Bank Accounts: FBAR Reporting

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (“FBAR”), requires all US Persons to disclose their ownership interest in or signatory authority or any other authority over South African (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. I encourage you to read this article (click on the link) concerning the definition of a “US Person”. You can also search our firm’s website, sherayzenlaw.com, for the explanation of other parts of the required FBAR disclosure.

The definition of “account”, however, deserves special attention here. The FBAR definition of an account is substantially broader than what this word generally means 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, FBAR has a very complex and severe penalty system. The most feared penalties are criminal FBAR penalties with up to 10 years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

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 South African 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).

South African Bank Accounts: FATCA Form 8938

Form 8938 is filed with a federal tax return and forms part of the tax return. This means that a failure to file Form 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 of filers: 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 income tax consequences (including disallowance of foreign tax credit and imposition of 40% 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 South African Bank Accounts

If you have South African bank accounts, you should contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

FBAR United States Definition | FBAR Lawyer & Attorney Minneapolis MN

The United States is defined differently with respect to different parts (and, sometimes even within the same part) of the United States Code. There is a specific definition of the United States for FBAR Purposes. In this brief essay, I would like to discuss the FBAR United States Definition and explain its importance to FBAR compliance.

Importance of FBAR United States Definition to FinCEN Form 114

Before we discuss the FBAR United States Definition, we need to the context in which it is used and why it is important for US international tax purposes. FBAR is a common acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. It used to be known under a different name – TD F 90-22.1.

FBAR is part of Title 31, Bank Secrecy Act, but the IRS has administered FBAR since 2001. The IRS primarily uses FBAR not to fight financial crimes (which was its original purpose), but for tax enforcement. In particular, the IRS found that FBAR is an extremely useful tool for combating tax evasion associated with a strategy of hiding money in secret foreign bank accounts.

FBAR’s draconian penalties is what makes this form the favorite with the IRS, but much hated by US taxpayers. The penalties range from a jail sentence to civil willful penalties and even civil non-willful penalties which may exceed a taxpayer’s net worth.

It is precisely these penalties which make it absolutely necessary for US taxpayers to understand when they need to file FBARs. One of the aspects of this understanding is the FBAR United States Definition, which allows one to determine two things. First, the FBAR United States Definition is used to define the United States for the purposes of the Substantial Presence Test. Second, the FBAR United States Definition allows one to classify bank accounts as foreign or domestic for FBAR compliance purposes.

FBAR United States Definition

31 CFR 1010.100(hhh) contains the FBAR United States Definition. Under this provision, the United States is defined as: the States of the United States, the District of Columbia, the Indian Lands (as defined in the Indian Gaming Regulatory Act) and the territories and insular possessions of the United States. As of February 3, 2019, the US territories and insular possessions refer to: Puerto Rico, Guam, American Samoa, US Virgin Islands and Northern Mariana Islands.

Contact Sherayzen Law Office for Professional FBAR Help

If you have undisclosed foreign accounts, you should contact Sherayzen Law Office for professional help. We have successfully helped hundreds of US taxpayers around the world with their FBAR issues, and We can help You! Contact Us Today to Schedule Your Confidential Consultation!

Broadcom Re-domiciliation Approved | International Tax Lawyer & Attorney

On January 29, 2018, Broadcom Board of Directors approved the plan for Broadcom re-domiciliation in the United States. This move was expected after Broadcom’s November of 2017 pledge to president Trump that the company would return to the United States.

Broadcom Re-domiciliation: A Story of Tax Inversion and Tax Remorse

The story of the Broadcom re-domiciliation began fairly recently in February of 2016. At that time, Broadcom did what was very popular during the Obama administration – tax inversion. California-based Broadcom allowed itself to be acquired by Singapore’s Avago Technologies Limited with the result of creation of a single Singapore entity.

The real motivation for the inversion was lowering the corporate taxes. At that time, during the political climate that existed in the United States, Broadcom thought that it was a good move.

Now, Broadcom believes that the tax inversion might not have been such a great thing to do in light of the new developments and certain consequences that it did not seem to have anticipated prior to tax inversion. First of all, Broadcom’s business in the US has continued to expand as it stepped-up its acquisition strategy. Already in 2017, barely a year and a half after tax inversion, Broadcom has stated that the benefits of this business strategy outweigh the potential additional taxes it might have to pay when it returns to the United States (especially after the tax reform – see below).

Second and closely related to the first reason, as a foreign company based in Singapore, Broadcom is under constant scrutiny of the Committee on Foreign Investment in the United States (“CFI”). CFI focuses on the review of transactions that may result in control of a US business by a foreign person and the impact of such control on US national security. This is an irritating and expensive factor that continuously hinders Broadcom’s acquisition strategy in the United States.

Third, Broadcom apparently did not anticipate that the tax reform be so radical and so beneficial to corporations. There is one issue in particular that makes Broadcom re-domiciliation in the United States so important. At the time of its tax inversion, Broadcom established a deferred tax liability on its balance sheet with respect to integration of the company’s intellectual property (“IP”). Under the old law, this deferred tax liability would have become payable at 35% tax rate in the United States.

Now, under the Tax Cuts and Jobs Act of 2017 (“TCJA”), this deferred liability will be recognized in fiscal year 2018 as deemed repatriated foreign earnings at a much lower tax rate. This means that Broadcom re-domiciliation in 2018 will save the company a huge amount in taxes; or, as the company itself put it: “a material reduction in the amount of other long-term liabilities on our balance sheet”.

Broadcom Re-domiciliation Approved Within One Month of TCJA

The tax motivation behind Broadcom re-domiciliation became especially evident in light of the fact that the Broadcom Board approved it within just one month of the passage of TCJA. Moreover, in its filings with SEC, Broadcom directly stated that, as a result of TCJA, the tax cost of being a US-based multinational company has decreased substantially.

Sherayzen Law Office will continue to observe the impact of the recent tax reform on the behavior of US companies that went through tax inversion.

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

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.

Tax Cuts & Jobs Act: 2018 Standard Deduction and Exemptions

The Tax Cuts and Jobs Act of 2017 made dramatic changes that affected pretty much every US taxpayer. This is the first article of the series of articles on the Act. I will start this series with the discussion of simple US domestic issues (such as 2018 standard deduction and personal exemptions), then gradually turn to more and more complex US domestic and international tax issues, and finish with the examination of the highly complex issues concerning E&P income recognition for US owners of foreign corporations and the new type of Subpart F income.

Today, I will focus on the 2018 standard deduction and exemptions.

Standard Deduction for the Tax Year 2017

Standard deduction is the amount of dollars by which you can reduce your adjusted gross income (“AGI”) in order to lower your taxable income and, hence, your federal income tax. The standard deduction is prescribed by Congress. If you use standard deduction, you cannot itemize your deductions (i.e. try to reduce your AGI by the amount of actual allowed itemized deductions) – you have to choose between these two options.

Standard deduction varies based on your filing status (there is an additional standard deductions of individuals over the age of 65 or who are blind).

For the tax year 2017, the standard deduction are as follows: $6,350 for single taxpayers and married couples filing separately, $12,700 for married couples filing a joint tax return and $9,350 for heads of household.

2018 Standard Deduction and Exemptions

Under the Tax Cuts and Jobs Act of 2017, the 2018 standard deduction will virtually double in size: $12,000 for single taxpayers and married couples filing separately, $24,000 for married couples filing a joint tax return and $18,000 for heads of household. All of these amounts will be indexed for inflation.

It is important to point out, however, that these increased standard deduction amounts will only last until 2025. Then, the standard deduction should revert to the old pre-2018 law.

Personal Exemptions & Impact of 2018 Standard Deduction

Personal exemption is an additional amount of dollars by which the Congress will allow you to reduce your AGI (already reduced by either standard deduction or itemized deductions). When IRC Section 151 was enacted in 1954, the idea behind a personal exemption was to exempt from taxation a certain minimal amount a person needs to survive at a subsistence level.

Personal exemption can be claimed for you and your qualified dependents; in case of joint tax returns, each spouse is granted a personal exemption. However, a personal exemption for a spouse can be claimed even if the spouses are filing separate tax returns, but certain requirements have to be met.

For the tax year 2017, the personal exemption amount is $4,050. The exemption is subject to a phase-out at a certain level of income.

The Tax Cuts and Jobs Act of 2017 repeals personal exemptions for the tax years 2018-2025. After 2025, the law reverts to the one that existed as of the tax year 2017. In other words, the increase in 2018 standard deduction will be at least partially offset by the elimination of 2018 personal exemption.

In some cases, where taxpayers claim many personal exemptions for their dependants, the elimination of personal exemptions may actually result in the increase in taxation (compared to the 2017 law) despite the increase of 2018 standard deduction. Of course, such an increase in taxation needs to take into account potential increase in child tax credit under the new law. Hence, in order to assess the full tax impact of the tax reform for large families, one needs to consider other factors in addition to just 2018 standard deduction.