International Tax Lawyers Madison | Importance of Avoiding International Tax Mistakes

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Let’s begin by answering a philosophical question. Why should you care? I mean after all, all of you here are Business Lawyers; So what if you make a Tax Mistake intentionally or unintentionally? After all you’re not Tax Lawyers.

Let me pose that question to you because all of you are here today for a reason; why do you care? Why did you come here? Why do you think it’s important for Business Lawyers to know how to avoid making International Tax Mistakes?

Any takers?

Audience member answer: “To keep our Clients out of jail.”

Okay, Good one!

Any other….?

Second audience member answer: “The Tax Consequences will affect the Bottom Line…. of your Business.”

Third audience member answer: “It will keep us out of jail too. That helps; don’t you think?”

Other comment: “So far, so good.” (Laughter)

Unknown audience member comment: “I think just to do anything confidently, you’ve got to know a lot about everything.”

Perfect; and I think all of you are right! If I were to summarize it, I would say that a Client will not appreciate if a Business Deal that you pulled together, no matter how perfect it is from the Business World Perspective, results in a tremendous increase in the Client’s Tax Liability, exposing the Client to huge IRS Civil Penalties and potentially Criminal Penalties because the Client could end up in jail for International Tax Noncompliance.

From the tax perspective, a badly structured Business Deal will boomerang back to you; first, in the form of losing a Client (because the Client will not stay with you after that), second, you might be facing a Legal Malpractice Lawsuit (which was mentioned here earlier) and the third thing is that potentially, it could be an Ethical Violation because you would be advising in a very Specialized Area in which you have no knowledge or experience. You might be endangering your Attorney License at that point.

Every Business Transaction Has Tax Consequences | International Tax Lawyers Indianapolis

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Now that we have established why we should care about making International Tax Mistakes, let’s discuss the five strategic traps which would expose you as Business Lawyers to making International Tax Mistakes.

I will follow along in this handout that you all have; hopefully everyone has it. Let’s start with the Business Purity Trap. A Business Purity Trap is an assumption that there is a purely Business Transaction that has no connection to Tax Law whatsoever and because there’s no connection to International Tax Law; obviously, there is no need to ask a Tax Advisor about this Transaction.

You cannot imagine how many times I see this. In one area where I see this most often is Business Formation, when Business Lawyers advise their Clients to form Business Entities and structure Business Transactions in a way that would entail information of different Business Entities throughout the world. Obviously, this gets their Clients into trouble because every Business Transaction has Tax Consequences.

Let me repeat that: Every Business Transaction has Tax Consequences.

Example of the Business Purity Trap | International Tax Attorney Florida

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Let me give you an example from my practice; it’s a fairly recent example. I had a Client who was operating a business in one of the Southern states of the United States.

Let’s say he had a product and that product wasn’t doing that well in the United States; so what he decided to do was to go to China to see if he could find a Market there. He went to China and found some people interested in that product. He then went to his Business Lawyer and the Lawyer said, “If you are going to operate in China, you shouldn’t be operating from the United States. Why don’t you open up a Company in Hong Kong?”

So the Client said, “That sounds like a great idea; why not open a Company in Hong Kong?” He then opens a Company in Hong Kong, then he goes to Lithuania. In Lithuania he decided that this was another country where he could potentially find clients for his product. He again talked to the Business Lawyer and the Business Lawyer suggested that he open a Company in Lithuania. The Client then goes to Russia (this is a Russian speaking client) and meets a friend and the friend says, “I like your business; why don’t we operate together?” The Client responded, “The Company in Lithuania is mine and I don’t really want any Partners.”

They both go to the Client’s Business Lawyer and the Business Lawyer suggested, “Very easy; why don’t you form a Company, a joint venture in Russia and then operate from there.” So then they own this Company together. Then he gets interested in another product and creates another Company. Then he goes to Poland because he thinks that in order to operate in Europe he would be better off having Accounts in Poland. Without the advice of the Business Lawyer he opens another Company in Poland by himself – six Companies total.

No Tax Advisor ever was consulted about opening up these Companies. Years go by, then he comes to me for a completely different issue but I’m a very detailed-oriented person as a Tax Attorney should be and I started asking about his other activities around the world and uncovering one Company after another. Then we realize that he’s got six Companies for three years and some of them for a little longer, for which no forms 5471 were filed: six Companies, six forms 5471 X 3, that’s eighteen X $10,000 penalties.

The Business Lawyer exposed his Client to $180,000 in penalties; for a Client with assets this size (this is not a Multinational company), that is a huge hit.

Remember, all Business Transactions have Tax Consequences.