As a US international tax attorney, I am fully aware of the crucially important role that the US international tax anti-deferral regimes (the Subpart F rules and PFIC rules) play in the Internal Revenue Code. Yet, the enormous complexity of the US international anti-deferral regimes often makes some people wonder about why we even have them.
As a US international tax attorney, I feel that it is important to educate the general public about the necessity of the anti-deferral regimes and how this necessity is deeply grounded in our tax system. I also wish to address here the issue of why the US anti-deferral regimes are so complex.
US International Tax Attorney: Anti-Deferral Regimes are a Natural Product of Our Tax System
The anti-deferral regimes is a natural legislative response to the anti-deferral strategies that originate from the deep policy contradictions that form the core of the US tax system. The most important of these contradictions arose from the recognition of income rules.
Generally, the US government imposes an income tax only when income is “recognized.” The recognition rules are complex, but there is a basic asymmetry in the treatment of individuals and corporation. On the one hand, the US citizens are taxed on their worldwide income which is usually (though, with important exceptions) recognized when it is earned.
On the other hand, in general and without taking into account any anti-deferral regimes, the individuals are not be taxed on the corporate income (even if this is a one-hundred percent owned corporation) until: (a) the income is distributed (for example, as a dividend), or (b) the shares of the corporation are sold.
In the past, US international tax attorneys would combine these rules with the fact that, in general, foreign corporation would not be subject on foreign-source income earned outside of the United States, to build an effective investment strategy – contribution of all investment assets to a foreign corporation in order to avoid current US taxation of the taxpayers’ investment income. If a US international tax attorney was able to extend this strategy indefinitely, then it brought his clients benefits almost as valuable as not paying taxes at all.
Obviously, such an indefinite offshore deferral of US taxation of otherwise taxable income was not considered consistent with the fundamental goals and policies of US government. This is why the US Congress deemed it necessary to enact various anti-deferral regimes to combat offshore tax avoidance.
US International Tax Attorney: Why Are There Two Anti-Deferral Regimes Instead of One?
Even a US international tax attorney would agree that having multiple esoteric anti-deferral regimes with complex interrelationship between each other cannot be the best way to combat offshore tax avoidance investment strategies. Yet, this is our present reality and it is important to understand why this is the case.
There are four reasons for having multiple anti-deferral regimes. First, the US Congress did not create all of the anti-deferral regimes at the same time. Rather, the anti-deferral regimes appeared gradually over time with multiple amendments and shifting IRS interpretations.
Second, undoubtedly, the political influence of various lobbies with competing policies has greatly hampered the creation of a more transparent anti-deferral regime and elimination of many loopholes and exceptions.
Third, as I explained above, the offshore investment policies arose from the basic contradiction between different income recognition rules of the Internal Revenue Code. This contradiction in itself necessitates a more complex approach to combating any strategies of US international tax attorneys that seek to exploit it. It is difficult to do so with only one anti-deferral regime.
Finally, the combination of the sheer complexity of international commerce, conflicting policy priorities (for example, the Congress does not want to stifle the US companies’ ability to compete overseas just for the purpose of completely closing off some offshore investments) and the great variety of various fact patterns makes it virtually impossible to address the offshore investment strategies in a simple way. This factor partially explains why there is such a variety of international tax rules that form part of the anti-deferral regimes.
Contact Sherayzen Law Office for Help with Anti-Deferral Regime Compliance and Planning
If you are a US person who owns a foreign business or foreign brokerage accounts, you are very likely to run into either Subpart F rules or PFIC rules. At this point, the extremely complex nature of these anti-deferral regimes makes it a reckless gamble to attempt to conduct business overseas without an advice from an experienced US international tax attorney.
This is why you should contact the experienced US international tax professionals of Sherayzen Law Office. We have helped clients around the globe to comply with and plan for the US anti-deferral regimes, and we can help you!