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Personal Services Income Sourcing | International Tax Lawyer & Attorney

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This article continues our series of articles on the source of income rules. Today, I will explain the general rule for individual personal services income sourcing. I want to emphasize that, in this essay, I will focus only on individuals and provide only the general rule with two exceptions. Future articles will cover more specific situations and exceptions.

Personal Services Income Sourcing: General Rule

The main governing law concerning individual personal services income sourcing rules is found in the Internal Revenue Code (“IRC”) §861 and §862. §861 defines what income is considered to be US-source income while §862 explains when income is considered to be foreign-source income.

The general rule for the individual personal services income is that the location where the services are rendered determines whether this is US-source income or foreign-source income. If an individual performs his services in the United States, then this is US-source income. §861(a)(3). On the other hand, if this individual renders his services outside of the United States, then, this will be a foreign-source income. §862(a)(3).

In other words, the key consideration in income sourcing with respect to personal services is the location where the services are performed. Generally, the rest of the factors are irrelevant, including the residency of the employee, the place of incorporation of the employer and the place of payment.

As always in US tax law, there are exceptions to this general rule. In this article, I will cover only two statutory exceptions; in the future, I will also discuss other exceptions as well as the rule with respect to situations where the work is partially done in the United States and partially in a foreign country.

Personal Services Income Sourcing: De Minimis Exception

IRC §861(a)(3) provides a statutory exception to the general rule above specifically for nonresident aliens whose income meet the de minimis rule. The de minimis rule states that the US government will not consider the services of a nonresident alien rendered in the United States as US-source income as long as the following four requirements are met:

1. The nonresident alien is an individual;

2. He was only temporarily in the United States for a period or periods of time not exceeding a total of 90 days during the tax year;

3. He received $3,000 or less in compensation for his services in the United States; AND

4. The services were performed for either of two persons:

4a. “A nonresident alien, foreign partnership, or foreign corporation, not engaged in trade or business within the United States”. §861(a)(3)(C)(i); OR

4b. “an individual who is a citizen or resident of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation.” §861(a)(3)(C)(ii).

Personal Services Income Sourcing: Foreign Vessel Crew Exception

The personal services income performed by a nonresident alien individual in the United States will not be deemed as US-source income if the following requirements are satisfied:

1. The individual is temporarily present in the United States as a regular member of a crew of a foreign vessel; and

2. The foreign vessel is engaged in transported between the United States and a foreign country or a possession of the United States. See §861(a)(3).

Contact Sherayzen Law Office for Professional Help Concerning US International Tax Law, Including Personal Services Income Sourcing Rules

Sherayzen Law Office is a leading international tax law firm in the United States that has successfully helped hundreds of US taxpayers with their US international tax compliance issues. Contact Us Today to Schedule Your Confidential Consultation!

H.R. 7358 & Modified Residency-Based Taxation | International Tax News

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On December 20, 2018, Congressman George Holding, a Republican from North Carolina and a member of the House Ways and Means Committee, introduced The Tax Fairness for Americans Abroad Act of 2018 (H.R. 7358). According to the analysis below, Sherayzen Law Office believes that H.R. 7358 seeks to modify it in a manner that moves it closer to something that can be described as a modified residency-based model of taxation. Yet, in no way should H.R. 7358 be viewed as an attempt to completely repeal the current citizenship-based model of taxation.

Current US Tax Law: Citizenship-Based Model of Taxation

Currently, all US citizens are obligated to report their worldwide income and pay US taxes on this income irrespective of their actual place of residence. In other words, even if a US citizen resides abroad, he is a US tax resident and must file a US tax return to report his worldwide income.

The current US tax law does allow such citizens to exclude a certain amount ($104,100 in 2018) through the operation of IRC Section 911, commonly known as the Foreign Earned Income Exclusion.

The United States and Eritrea are the only two countries in the world that tax their citizens in this manner. Everyone else taxes their citizens based only on their actual place of residence or under even more restrictive territorial model of taxation.

Lack of Residency-Based Taxation Results in Higher Tax Burden for Americans Who Live Abroad

The current law imposes an enormous burden on over nine million Americans who live abroad. Not only do they have to comply with all local tax laws, but they are also forced to comply with all US international tax laws, including the numerous US international tax reporting requirements.

Undoubtedly, the Foreign Earned Income Exclusion (“FEIE”) helps on the income side, but it only applies to earned income; US taxes must still be paid on all passive income. Moreover, the FEIE is limited to a certain threshold amount of earnings, which can easily be exceeded by the salaries normally paid to mid-level and upper echelon of corporate executives as well as small business owners.

Furthermore, the unincorporated American owners of small businesses may still be subject to US self-employment taxes (despite the income exclusion under the FEIE). Their income may also be disqualified from FEIE under the infamous 30% rule.

The Tax Fairness for Americans Abroad Act of 2018: Moving Current U.S. Tax System In the Direction of Modified Residency-Based Model of Taxation

H.R. 7358 seeks to alleviate the suffering of millions of Americans by modifying the current citizenship-based model of taxation. It proposes to move the US tax system to something that is reminiscent of a residency-based model of taxation.

If it passes, H.R. 7358 would create a new IRC Section 911A which would apply to the new category of taxpayers – qualified nonresident citizens. Such qualified nonresident citizens could exclude from their gross income the entire foreign earned income and foreign unearned income. In other words, nonresident citizens would only have to pay taxes on US-source income (with one exception concerning gains from sale of personal property).

Who would be a “qualified nonresident citizens”? Basically, in order to qualify for this designation, a citizen would have to be a nonresident citizen, not make an election under the IRC Section 911 and make an election under the IRC Section 911A.

A nonresident citizen would be a US citizen who: (a) has a “tax home” in a foreign country; (b) is in full compliance with US income tax laws for the three previous tax years; and (c) either physically resides in foreign country for at least 330 full days during the relevant tax year OR is a bona fide resident of a foreign country for the entire tax year.

Modified Residency-Based Taxation is Proposed by H.R. 7358

It is important to understand that, as it is written at this moment, H.R. 7358 proposes to modify the current tax system, not establish a true residency-based system of taxation. Even if today’s version of the bill passes, all nonresident US citizens will continue to be US tax residents while they reside in a foreign country. In other words, what is really proposed here is a major expansion of the FEIE, not a complete repudiation of the citizenship-based model of taxation.

This is a highly important legal conclusion, because it allows us to clearly see the limits of the relief offered by H.R. 7358. For example, since nonresident citizens will continue to be tax residents, they will still need to file their Forms 8938 and FBARs. Moreover, it does not appear that the bill would affect the obligation to file other international information returns, such as Forms 3520, 5471, 8865, et cetera.

Additionally, it is unclear what would happen to income recognized under the tax deferral regimes, such as Subpart F rules and the GILTI tax. If this income is excluded, H.R. 7358 will become a powerful incentive to residing outside of the United States for a certain period of time in order to implement certain tax planning strategies.

Thus, instead of eliminating citizenship-based taxation, the bill simply attempts to continue the modification of the US international tax system in a way similar to the 2017 tax reform introduced on the corporate side.

Obviously, this is just the initial version of the bill. It is possible that a more overt repudiation of the citizenship-based model of taxation will be enacted, including the elimination of FBAR and Form 8938 requirements for nonresident citizens. It is also possible, however, that this bill will not be enacted in any format at all.

Broadcom Re-domiciliation Approved | International Tax Lawyer & Attorney

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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.

Guam & American Samoa Are Non-Cooperative Tax Jurisdictions | News

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On December 5, 2017, the European Union (the EU) Council published its list of the non-EU non-cooperative tax jurisdictions. The list included American Samoa and Guam unleashing strenuous objections from the United States.

Full List of Non-Cooperative Tax Jurisdictions

A total of seventeen countries made it to the list of non-cooperative tax jurisdictions: American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates.

Criteria for Inclusion in the List of Non-Cooperative Tax Jurisdictions

The list of non-cooperative tax jurisdictions was formed out of tax jurisdictions that failed to meet three criteria at the same time: transparency, fair taxation and the implementation of anti-base-erosion and profit-shifting measures.

The EU Reasoning for Including American Samoa and Guam on the List of Non-Cooperative Tax Jurisdictions

The EU reasoning for including American Samoa and Guam on the list of non-cooperative tax jurisdictions is a peculiar one because it does not seem to care about the fact that both jurisdictions are only US territories with no authority to separately sign international tax commitments (i.e. everything is done through the United States).

In particular, the EU Council specifically criticized American Samoa and Guam for three failures. First, American Samoa and Guam did not implement the automatic information exchange of financial information. Second, both jurisdictions did not sign the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Finally, neither American Samoa nor Guam followed the EU’s BEPS minimum standards.

US Objections to the Inclusion of Its Territories on the List of Non-Cooperative Tax Jurisdictions

In his letter to the Council of the European Union, the Treasury Secretary Steven Mnuchin strenuously objected to the inclusion of American Samoa and Guam on the list of non-cooperative tax jurisdictions. The Treasury Secretary set forth the following reasons.

First, he objected to the publication of the list per se as being “duplicative” of the efforts at the G-20 and OECD level.

Second and most important, Mr. Mnuchin stated that the EU reasoning does not make sense, because American Samoa and Guam “participate in the international community through the United States”. The fact that the United States agreed to implement BEPS minimum standards and the tax transparency standards should be considered as the agreement of American Samoa and Guam to do the same. In other words, he argued that American Samoa, Guam and the Untied States should be considered as one whole legal framework.

Based on this reasoning, Mr. Mnuchin urged the EU to immediately remove American Samoa and Guam from its list of non-cooperative tax jurisdictions. It should be noted that several other jurisdictions also rejected their inclusion on the list.

Sherayzen Law Office will continue to watch for any new developments with respect to this issue.