Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

by Jack Brister | Oct 10, 2024 | Taxes, 2024, Compliance, International, U.S.

Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

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Navigating the Global Tax Landscape in 2024 – Third Quarter Roundup

It’s been a busy year for global tax issues, between the Global Minimum Tax, worldwide calls for a wealth tax, and significant judicial decisions in the United States. Navigating these complex changes requires a keen understanding of the evolving legal and regulatory environment.

OECD Initiatives Move Forward

The year led off with discussions around the Global Minimum Tax, specifically, the continued rollout under Pillar Two of the Base Erosion and Profit Shifting (BEPS) initiative. The GMT, aimed at curbing profit shifting and ensuring a fairer tax regime, is reshaping international tax strategies. Many countries are adjusting their tax laws to comply, aiming to ensure multinational enterprises pay at least a 15% tax rate on profits.

The tax has been agreed to by 140 countries—but not the United States. Japan and South Korea have already enacted domestic Pillar Two legislation, and other countries, including the UK, Switzerland, Ireland, and Germany, have released draft legislation or publicly announced their plans to introduce legislation based on the OECD Model Rules.

The U.S. hasn’t signed on to the initiative yet—and is missing out on tax revenue as other countries opt-in. Though U.S. domestic tax regulations haven’t changed, American companies face potential impacts from the agreement. For example, U.S companies operating in Switzerland may need to pay a 15% tax in Switzerland, regardless of existing U.S. tax structures.

While the U.S.Treasury Department actively participates in discussions and contributes to technical aspects of the implementation, the next resident of the White House will have an impact on what the United States does next. Democratic Presidential candidate Kamala Haris has proposed increasing the corporate tax rate to 28% to boost revenue if she’s elected president, which raises questions about changes to the corporate tax base and the future of the OECD’s global tax deal.

The United Nations Weighs In

G20 leaders are also calling for a global tax on billionaires. And the United Nations is answering the call. As ministers from several countries have suggested a 2% tax for the global fight against poverty, inequality and climate change, the UN General Assembly started negotiations on a new fairer global tax architecture.

In the United Nations Framework Convention on International Tax Cooperation, the international organization seeks a way to better coordinate international tax policy, and to reform what they view as a flawed tax system, riddled with loopholes that permit corporations and wealthy individuals to avoid paying taxes. The convention has already met twice, determining the parameters that will guide the negotiation. Cross-border services were prioritized. The final draft of the parameters will go to a vote at the UN General Assembly near year-end.

U.S. Court Cases Question Wealth Tax Rules

While the rest of the world is looking to increase wealth taxes, pivotal court cases in the United States are setting new precedents that could have far-reaching implications for wealth management and tax planning. Moore v. United States involved whether the government could tax a company’s owners on income that is earned by the company, but that has not actually been distributed to those owners. The Tax Cuts and Jobs Act (TCJA) imposed a one-time tax on certain investors in foreign corporations that could offset lost revenue due to the broader corporate tax cuts contained in the TCJA.

The high court rejected the Moores’ challenge that the tax was a one-time federal tax, and that it did not violate the Constitution because it was a tax on income, which is permitted under the Sixteenth Amendment. The decision affirmed that the government could tax unrealized gains, even if the income had not been distributed to the shareholders, thereby expanding the scope of taxable income and setting a precedent for future taxation of unrealized gains.

While the ruling upheld the government’s ability to impose taxes on income that has not been directly received by the taxpayer, the opinion by Justice Brett Kavanaugh contained information about the ability to impose a wealth tax. In a footnote Kavanaugh says that his opinion does not resolve the question of whether Congress could impose a wealth tax and also suggests that certain wealth taxes could be unconstitutional.

The U.S. Presidential Election: Tax Cuts or Hikes Hang in the Balance

Heading into the end of the year, much attention will be paid to the U.S. presidential election. Besides evaluating each candidate’s tax policies, there is the pressing issue of the expiring tax breaks from the Tax Cuts and Jobs Act, as one estimate shows that over 60% of taxpayers could see higher taxes in 2026 if the provisions are not extended.

The fourth quarter of 2024 promises to be an interesting turn of tax and other financial events, as global policies shift, the U.S. presidential election takes place, foreign wars continue to escalate, and businesses grapple with integrating AI technology and an untethered workforce. Watch this space for breaking U.S and international tax news as it develops.

IWTA Provides Guidance and Know-How

Jack Brister and his capable team know U.S. and international tax statutes inside and out. We’re here for a consultation, an evaluation and as a trusted advisor and accounting partner. Whether you call Detroit, Dublin or Dubai your home, if you have investments, business or residences in the USA, we’re here to help.

Redefining the 16th Amendment: The Impact of the Mandatory Repatriation Tax on Ultra High Net Worth Clients

by Jack Brister | Sep 26, 2023 | Taxes, 2023, International, U.S.

Redefining the 16th Amendment: The Impact of the Mandatory Repatriation Tax on Ultra High Net Worth Clients

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Redefining the 16th Amendment: The Impact of the Mandatory Repatriation Tax on Ultra High Net Worth Clients

How has a relatively minor tax bill — $14,729 to be exact — turned into one of the most important tax cases for the United States? The matter at hand is whether the United States federal government can tax unrealized gains as income in Moore v. United States (Docket 22–800).

What is the Mandatory Repatriation Tax?

In 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law, introducing the mandatory repatriation tax (MRT), or transition tax, on pre-2018 profits that companies and some U.S. shareholders kept in sheltered accounts abroad. Prior to the Act, U.S. corporations were generally taxed on worldwide income, but foreign income could be deferred indefinitely by retaining earnings through a foreign subsidiary. Through Tax Code Section 95, MRT taxes profits regardless if shareholders receive the income.

Will SCOTUS Reinterpret the 16th Amendment?

The Sixteenth Amendment of the United States declares:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The Amendment was ratified in 1913 and granted Congress the authority to institute a graduated income tax on the earnings of American workers and paved the way for the modern income tax system as it is known today. Prior to ratification, the United States collected the majority of revenue from tariff and excise taxes. The 16th Amendment is credited to Senator Norris Brown of Nebraska, who first proposed the idea of a nationwide income tax.

There have been several Supreme Court cases regarding the Amendment, including a 1915 case where the Court declared income tax constitutional.

Taxing Unrealized Gains: Moore v United States

Will Moore v. United States become one of the most important cases in tax history? The case dates back to 2005 when Charles G. and Kathleen F. Moore invested $40,000 in a friend’s firm, KisanKraft, in return for 11% of common shares. KisanKraft, which supplied modern tools to small farmers in India, is more than 50% owned by U.S. persons and is considered a controlled foreign corporation (CFC).

Like many CFCs, KisanKraft has never distributed earnings to shareholders, instead reinvesting all earnings as additional shareholder investments and keeping the funds offshore. Prior to 2017, U.S. citizens would only pay taxes on CFC earnings that were distributed due to the provision in the U.S. tax code called “Subpart F” (26 U.S.C. § 951), which allowed for the taxation of certain types of a U.S. person’s CFC earnings when that U.S. person owned at least 10% of a CFC’s voting stock. U.S. shareholders meeting this ownership threshold could be taxed on their share of specific categories of undistributed CFC earnings, such as dividends, interest, and earnings invested in certain U.S. property.

However, Subpart F did not permit the U.S. government to tax U.S. shareholders on the CFC’s active business income held offshore. In other words, income generated by the CFC’s own business activities was only subject to U.S. taxation when it was repatriated to the U.S. through dividends, loans or investments in U.S. property. This traditional tax system allowed U.S. shareholders to defer U.S. taxation on foreign earnings as long as those earnings remained offshore.

But when then-President Donald Trump signed the Tax Cuts and Jobs Act into law, U.S. corporate taxation changed from a worldwide system, where corporations were generally taxed regardless of where their profits were derived, toward a territorial system, where corporations are generally taxed only on their domestic source profits.

Subpart F was modified by the MRT, and classified earnings derived after1986 as taxable income in 2017, regardless of whether the CFC distributed earnings. After Jan. 1, 2018, a CFC’s income taxable under Subpart F includes current earnings. But the Moores challenged this ruling.

From Farm Tools in India to SCOTUS

In 2018, the Moores learned that due to the MRT, their tax liability for the year 2017 increased by approximately $15,000, based on their pro rata share of KisanKraft’s retained earnings. The Moores paid the tax, but believing that this provision violated their constitutional rights, specifically the 16th Amendment, took the case to District Court.

The District Court ruled in favor of the government and denied the Moores’ cross-motion for summary judgment, determining that the MRT was a tax on income, and although it was retroactive, it did not violate the Fifth Amendment’s Due Process Clause. Following the upholding of the decision by the Appellate Court, the Moores filed a petition for a writ of certiorari on Feb. 21, 2023, which was granted by the Supreme Court on Jun. 26, 2023.

By agreeing to hear the case, the court faces a challenge that goes far beyond the Moores case and could have implications on the entire U.S. tax system.

The Future of Taxes for High Net-Worth Clients

At stake for the U.S. government is billions in revenue. According to the District Court documents, the government estimates the MRT will generate $340 billion in tax revenue for the United States, helping to offset other individual and corporate tax cuts, as well as broader international tax reform in the 2017 TCJA.

But is there more on the line for affluent investors as the Supreme Court interprets whether the 16th Amendment has a realization requirement for income? If the MRT is upheld, it could possibly introduce a variety of new wealth taxes on anything the government deems income. Yet, if the justices consider the tax unconstitutional, the current partnership and international tax treaties — which routinely tax unrealized income — are at stake.

Pre-Hearing Controversy

While Moore v United States is expected to be heard “soon,” there is no shortage of controversy within the high court itself regarding the case. On September 8th, The Hill reported that Justice Samuel Alito refused to recuse himself from the case after sitting for two interviews with an attorney involved in the case. The interviews, appearing in the Wall Street Journal Opinions section, prompted Senate Judiciary Chairman Dick Durbin (D-Ill.) and others to call for Alito’s recusal in the Moore case.

IWTA will continue to keep you abreast of further developments on the Moore v United States case, and advise on how the decisions affect you and your clients’ financial future.

International Tax Roundup: Third Quarter 2022

by Jack Brister | Sep 21, 2022 | International, 2022, Taxes

International Tax Roundup: Third Quarter 2022

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

International Tax Roundup: Third Quarter 2022

2022 has been an unpredictable year amidst soaring inflation and geopolitical unrest. In the tax realm, governments have been trying to hedge against this uncertainty by shoring up their budgets and addressing inconsistent tax enforcement. Unsurprisingly, much of this government activity has centered around taxpayers with means — high net worth domestic taxpayers and foreign investors. Below, we roundup some significant international tax developments concerning high net worth individuals and foreign investors in the first three quarters of 202

Singapore Hikes Taxes on Real Estate

Singapore has long been a top destination for foreign real estate investors due to its political and economic stability and low tax climate. During the COVID-19 pandemic, its popularity soared even higher as high net worth remote workers — particularly from Hong Kong — tried to establish roots in Singapore. Housing prices skyrocketed, causing the Singaporean government to impose higher taxes on certain residential property transactions.

In both residential and non-residential real estate transactions, Singapore assesses a Buyer’s Stamp Duty on property bought or acquired in the country. The taxable amount is the higher of either the purchase price or the property’s market value, and the government applies the tax on a graduated basis. In the case of residential transactions, the first $180,000 is assessed at a 1 percent rate, the next $180,000 at a 2 percent rate, the next $640,000 at a 3 percent rate, and any amount remaining after that is taxed at a 4 percent rate.

In May, the Singaporean government announced that it would apply a new 35 percent tax rate on residential property that is transferred to a living trust. That 35 percent tax will be assessed as an Additional Buyer’s Stamp Duty (ABSD). The new tax also marks the government’s latest change to the ABSD regime. In late 2021, the government increased the ABSD rate on foreigners buying residential property from 20 percent to 30 percent.

The Supreme Court Takes On FBAR

Over the past few years, federal district courts around the country have addressed a torrent of litigation on an unsettled and costly question in FBAR litigation — how should penalties for non-willful violations be calculated? The federal statute in play, 31 U.S.C. 5321(a)(5)(A), says non-willful FBAR penalties apply per violation but it does not specify whether a violation occurs for each unreported account or for each annual FBAR that is filed, which is a yearly compilation of a taxpayer’s foreign accounts.

The issue made its way up to the federal circuit courts of appeal, where a circuit split quickly developed. The Ninth Circuit has ruled that the penalties apply per form (U.S. vs. Boyd; No. 19-55585; 991 F.3d 1077), while the Fifth Circuit has ruled that they apply per account (U.S. vs. Bittner (No. 20-40597, 5th Cir. 2021)). The taxpayer in Bittner then petitioned the Supreme Court for a writ of certiorari. Historically, the Supreme Court has rarely handled tax cases, but in this case it has decided that the circuit split is too important to ignore. In June 2022, the Supreme Court granted the petition, and the court’s decision will have extremely important ramifications, whether it rules in favor of taxpayers or the IRS.

In Bittner, the Fifth Circuit said that the per-form interpretation clashed with the statutory text of the Bank Secrecy Act and its corresponding regulations.

The background in Bittner was that the government assessed $2.72 million in civil penalties against businessman Alexandru Bittner for failing to report his foreign financial accounts between 2007 and 2011. The U.S. District Court for the Eastern District of Texas reduced the penalties to $50,000, saying they applied per form and not per account.

On appeal, the government contended that the district court focused too narrowly on the regulations under 31 U.S.C. § 5314 to determine what constitutes a violation and ignored the text of 31 U.S.C. § 5314 itself. The Fifth Circuit, in its analysis of 31 U.S.C. § 5314, found that the text creates a statutory requirement to report each qualifying account or transaction. The regulations create a requirement to file those foreign account reports on an FBAR form.

IRS Eyes High Net Worth Taxpayers

The Biden administration’s newly enacted Inflation Recovery Act earmarks $80 billion for the IRS, which is a significant expansion of the Service’s budget. Over the past several years, Congress has significantly cut the IRS’ budget, which has caused a decline in enforcement. Lawmakers are expecting the IRS will increase its enforcement activity with the new cash, but the government says it will only focus on households earning more than $400,000.

A Global Look at Wealth Taxes

Lastly, in the wake of the pandemic, wealth taxation has become a trending topic around the world, and several governments have considered wealth taxes on high net worth individuals to raise revenue for public services. They include Colombia, South Africa, and Sri Lanka.

Even though wealth taxation has drawn increased attention around the world, the reality is that wealth taxes have generally been difficult to enact for several reasons, including valuation and concerns about alienating wealthy taxpayers. Some governments have rejected the imposition of new wealth taxes based on fears that those most affected would relocate to more tax-friendly locales or reconsider their domestic investments. Nonetheless, this will be an area to watch in the coming months.

Conclusion

These developments show that governments are actively reassessing their tax regimes in a tough time of economic uncertainty, and are willing to implement new strategies in order to raise revenue. Pan-globally, high net worth taxpayers and foreign investors should anticipate that taxing authorities may increase scrutiny into their financial affairs. Taxpayers who wish to keep abreast of these trends and changes should seek the advice of a trusted international tax advisor.

TIGTA Highlights the IRS’ FATCA Enforcement Woes

by Jack Brister | Jul 13, 2022 | Compliance, 2022, International, Taxes, U.S.

TIGTA Highlights the IRS’ FATCA Enforcement Woes

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

TIGTA Highlights the IRS’ FATCA Enforcement Woes

In the first 12 years of the U.S. Foreign Account Tax Compliance Act, the IRS has spent nearly $600 million on enforcement but has only managed to collect $14 million in penalties in return. This poor performance indicates that the agency strongly needs to revise its enforcement strategy according to a recent audit report by the Treasury Inspector General for Tax Administration.

Initially, the IRS had big compliance plans for FATCA and published a sprawling compliance roadmap addressing several aspects of FATCA. But years of budget constraints and other personnel resource issues led the IRS to shrink those plans to two compliance campaigns, which are handled by the IRS’ Large Business & International division.

The first campaign, Campaign 896, focuses on offshore private banking and U.S. taxpayers who have either underreported or failed to report their foreign assets on Form 8938. According to the IRS, over 330,000 taxpayers with foreign accounts exceeding $50,000 failed to file the form between 2016 and 2019. This means the government could collect at least $3.3 billion in penalties from the group, if each taxpayer pays the minimum FATCA penalty, which is $10,000.

The second campaign, Campaign 975, focuses on the accuracy of taxpayers’ FATCA filings, but the IRS has only been able to review one tax year — 2016 — leaving the agency far behind its goals.

All of this means that the IRS has a lot of work to do in monitoring FATCA and ensuring taxpayers are complying with the law. In an audit report published April 7, the Treasury Inspector General for Tax Administration described some of the IRS’ progress and setbacks with FATCA compliance. TIGTA conducted the audit to evaluate how the IRS has been using the information it gathers under FATCA to improve taxpayer compliance.

The most important takeaway is that the IRS is planning to increase its audits and reviews of U.S. foreign account holders, meaning that taxpayers with such accounts should prepare for increased scrutiny. If they have any unreported accounts, they should also evaluate voluntary disclosure and other options to potentially minimize any penalties from the government.

THE ABCs of FATCA

The U.S. government created FATCA to ensure transparency of U.S. taxpayers’ offshore financial accounts and combat tax evasion. Under the law, taxpayers with a certain threshold of foreign financial assets. must file Form 8938, Statement of Specified Foreign Financial Assets. The thresholds, which start at $50,000 and top out at $600,000, depend on the taxpayer’s marital status and whether they live in the U.S. or abroad. Foreign financial institutions also have reporting obligations. Those with U.S. taxpayer assets are required to share information about those clients’ financial accounts with the IRS. Institutions that fail to do soare subject to a 30 percent withholding rate on their U.S. source payments.

Updating Procedures and Tightening the Reins

The IRS has spent a lot of money on FATCA compliance — over $573 million dollars — yet it has only collected a small fraction of that amount — $14 million — in FATCA penalties. In light of this lackluster performance, TIGTA made six recommendations to the IRS, some of which the IRS said it has already implemented, and others it is currently working on.

The first TIGTA recommendation is that the LB&I (Large Business and International) Division needs to tighten its surveillance of taxpayers who underreport their foreign assets and step up its compliance activity for that group, including levying penalty assessments and conducting examinations on taxpayers who consistently underreport. The IRS said it has already implemented that recommendation. For a list of currently published LB&I campaigns click here.

The second recommendation is that the IRS should establish procedures for identifying taxpayers who fail to file Form 8938 and particularly focus on examinations or penalty assessments for that group. The IRS said it already has a filter that identifies potential non-filers. Importantly for taxpayers, the IRS revealed that it is currently conducting civil and criminal examinations on non-filing taxpayers and is considering penalties in examinations, when they are appropriate.

The third recommendation is that the LB&I Division needs to ensure that foreign financial institutions are also complying with FATCA, and should think about expanding the scope of Campaign 975 to address taxpayers and foreign financial institutions alike. The IRS said it agreed and that Campaign 975 is doing just that. According to the IRS, the agency has already reviewed about 4,000 foreign financial institutions and flagged potential noncompliance by 34 institutions. Although this is a good development, the seemingly small level of noncompliance suggests that the IRS should not devote extensive resources to this, and might be better served by focusing more heavily on individual taxpayers.

But TIGTA and the IRS disagreed over the auditor’s fourth suggestion. The IRS requires foreign financial institutions to include taxpayers’ taxpayer identification numbers on their FATCA report (Form 8966), but between 2017 and 2019 the IRS exempted some institutions, allowing more time to comply with the requirement. TIGTA believes the IRS should now issue a notice to foreign countries that their financial institutions must collect and provide the taxpayer identification numbers of U.S. individuals owning a foreign bank account.

The IRS believes this is not necessary because it issued a notice about this in 2017 (Article 2, Model 1A Reciprocal IGA; Notice 2017-46). TIGTA pushed back on this and wrote that the IRS should not assume that foreign financial institutions are aware of the 2017 notice and know what to do. They pointed out that less than half of the Form 8966s filed between tax years 2016 and 2019 had a valid TIN. The majority had an invalid TIN or completely lacked one. If the IRS does implement TIGTA’s recommendation, this could bring greater transparency to the agency’s investigations and compliance campaigns.

The fifth recommendation is that the IRS should establish goals, milestones, and timelines for FATCA campaigns in order to determine whether the campaigns are effective in meeting their objectives and affecting tax compliance. The IRS agreed with this and pledged to refine their metrics with respect to goals, milestones, and timelines.

Lastly, TIGTA recommended that the IRS should create an information sharing program that would allow the agency’s Small Business/Self-Employed division to access FATCA data and use it for examinations and collection actions. The IRS said it has implemented that recommendation.

A Tighter Leash for FATCA Compliance

The fact that the IRS already has implemented some of TIGTA’s recommendations demonstrates the agency’s seriousness about FATCA and ensuring that taxpayers and foreign financial institutions comply with the law. TIGTA’s report shows that the IRS’ FATCA issues are two-fold: first, the agency needs additional resources to oversee FATCA, but it also needs to better allocate the resources it does have. Considering that the Biden administration recently increased the IRS’ budget, a tighter leash for FATCA laggards and new FATCA-related compliance campaigns could be right around the corner.

The Cost of Non-Compliance With IRS Form 926

by Jack Brister | Jul 8, 2022 | Compliance, 2022, International, Taxes, U.S.

The Cost of Non-Compliance With IRS Form 926

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The Cost of Non-Compliance With IRS Form 926

The 16th amendment of the U.S. Constitution empowers Congress to collect taxes from U.S. persons from whatever source, with no limitations on the collections of taxes or worldwide income. All United States tax laws and regulations apply to every U.S. Person whether he/she is working in the United States or in a foreign country and entities formed under U.S. law. The IRS takes this opportunity increasingly seriously, and taxpayers need to do the same.

IRS Form 926 is the form U.S. citizens and entities including estates and trusts must file to report certain exchanges or transfers of property to a foreign corporation. This would include transfers of cash over $100,000 to a foreign corporation, or situations in which the transfer of cash resulted in owning more than 10% of the foreign corporation’s stock. This reporting requirement applies to outbound transfers of both tangible and intangible property.

The primary purpose of Form 926 is to ensure that taxable gain is recognized and tax is paid. The reason for the complexity is the attempt of U.S. tax law to formalize distinction between legitimate business operations outside the U.S. and transactions considered to avoid tax.

It is also designed to equalize the taxation between transactions within the U.S. and outside the U.S. In that way there are no significant advantages to transactions and operations outside the U.S..

Form 926 must be complete, accurate, and filed with the taxpayer’s income tax return by the due date of the return (including extensions).

Penalties are Severe and Limitless

In an attempt to prevent taxpayers from hiding assets offshore or earning unreported income overseas, the IRS has recently begun increasingly aggressive enforcement of cross-border corporate reorganizations, divisions, and liquidations.

The rules surrounding Form 926 are extremely complex, therefore, correct filing of the form requires a high level of scrutiny. There are literally dozens of stipulations and technical details that must be followed.

The failure to file, fully meet the filing requirements, or misrepresentation of assets can result in the levying of substantial penalties. For example, the statute of limitations doesn’t end until three years after the date Form 926 is filed. However, if the form was never filed to begin with, the statute of limitations clock hasn’t started yet. This means the IRS could assess a penalty at any time, even 20 years after the missed mandatory deadline.

Returns that are filed but that are not substantially complete and accurate are considered “un-filed” and may result in penalty assessments. Criminal penalties may apply to U.S. and foreign taxpayers who willfully fail to file a return (IRC 7203) or file a false or fraudulent return (IRC 7206 and IRC 7207).

Certain international information returns are also considered un-filed if the taxpayer does not provide required information when requested by the IRS, and penalties may be assessed even if the required return has been submitted.

If a taxpayer under-reports on Form 926 and that leads to a tax underpayment, they can receive a 40% penalty. Sometimes a tax penalty may be avoided if the filer can show that the misrepresentation was due to reasonable cause and they acted in good faith – but don’t count on it.

IRS: Ignorance of the Requirements is No Excuse

The IRS maintains that taxpayers who conduct business or transactions offshore or in foreign countries have a responsibility to exercise ordinary business care and prudence in determining their filing obligations and other requirements. The IRS’s position is that lack of information or misinformation is not grounds for dismissal of taxes and penalties; therefore, it’s incumbent on the individual taxpayer or entity to learn and comply with the rules related to Form 926. Engaging the services of a qualified tax consultant-CPA and law firm specializing in international tax and business transactions will ensure compliance is met.

For more information on U.S. tax rules as they apply to U.S. taxpayers that are foreign investors or hold foreign assets, refer to the following articles on the International Wealth Tax Advisors website:

Foreign Asset and FBAR Reporting

Foreign Trusts, Estates and Gift Tax

Foreign Assets and Foreign Trusts

IWTA Answers to Foreign Trust FAQs

IRS Voluntary Disclosure

GILTI Tax and Controlled Foreign Corporations

FATCA Filing: What U.S. Citizens Need to Know

Frozen: How the Revocation of the U.S. – Russia Tax Treaty Puts Global Trade on Thin Ice

by Jack Brister | May 18, 2022 | 2022, International, Taxes, U.S.

Frozen: How the Revocation of the U.S. – Russia Tax Treaty Puts Global Trade on Thin Ice

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Updated: May 18, 2022

We continue to monitor the U.S.-Russia tax treaty withdrawal along with economic and trade sanctions. It’s a constantly developing situation that profoundly affects global business and cross-border tax collection. Following is an update to IWTA founder Jack Brister’s article published in JD Supra on March 18, 2022.

New Developments

The Biden administration is poised to fully block Russia’s ability to pay U.S. bondholders. A temporary exemption deadline that gave Moscow leeway to pay coupons in dollars expires on May 25, 2022. The move could bring Moscow closer to the brink of default, Treasury sources told Bloomberg.

Tax Treaty Revocation in Action

The U.S. government had already been putting pressure on Russia. On April 5th the Treasury Department told multiple news outlets that it had suspended its tax information exchanges with Russia. That decision essentially blocks Russian authorities from obtaining tax information from the U.S. that would help their domestic collections, which could be a strong economic blow to the country.

Frozen: How the Revocation of the U.S. – Russia Tax Treaty Puts Global Trade on Thin Ice

Originally published on March 18, 2022 on JDSupra.

Permanent Normal Trade Relations (PNTR), commonly known as a nation’s most favored (MFN) status has been used in trade treaties for years. Using the MFN clause requires that a country that provides a trade concession to one trading partner must extend the same treatment to all of its partners. Used by the World Trade Organization the loss of this status can expose a country to discriminatory import tariffs.

Through the MFN status, the 164 members in the World Trade Organization treat each other equally, benefitting from highest import quotas, lowest tariffs and fewest trade barriers for goods and services. Members are allowed to impose whatever trade measures they wish on non- members, within reason. In addition, Biden announced that the G7 was seeking to ban Russia’s borrowing from the IMF and the World Bank. By revoking Russia’s MFN status, the United States and its allies send a strong signal that they no longer consider Russia an economic partner.

But the losses will go farther than Russia. The resulting tariffs will also raise costs for Americans and trading partners that may rely on affected Russian products. The United States is somewhat reliant on commodities exported from Russia, including fertilizers and base metals and the specific import restrictions will determine the impact of the sanctions.

What Are the Tax Implications of a Revoked U.S. – Russia Tax Treaty?

In tax treaties, the MFN clause promotes non-discrimination and parity for treaty partner countries. The main purpose of a tax treaty is to ensure proper tax treatment of monies earned by citizens, expats and residents of each other’s country. At present, the tax treaty between the United States and Russia is still in place, however, the US Senate Foreign Relations Committee has proposed a review of the US-Russia tax treaty.

Without the treaty, Russian investors with U.S.-sourced dividends would not only face a 30% withholding tax rate, they would also lose preferential treatment. The impact could be as great for American businesses in Russia as it is for Russian businesses. However, the ability to have offshore holdings in haven jurisdictions as well as the option of using cryptocurrencies for transactions, revocation of the tax treaty may not be as effective as it looks on paper..

Proposed tax changes aimed at penalizing the Russian government and Russians subject to sanctions who own U.S. assets is also in play. The plan, by Senate Finance Committee Chairman Ron Wyden (D., Ore.), would look to remove foreign-tax credits and certain deductions for U.S. companies earning income in Russia and Belarus.

We advise clients with business and investment ties to Russia to keep in touch as we continue to monitor the breaking developments in this unprecedented time of turmoil.

International Tax in 2022: The Year of Disclosure and Investment

by Jack Brister | Jan 19, 2022 | 2022, Covid-19, International, Taxes, U.S.

International Tax in 2022: The Year of Disclosure and Investment

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

International Tax in 2022:

The Year of Disclosure and Investment

For taxing authorities around the world, monitoring taxpayer disclosures and transparency will be a top line item in 2022, meaning taxpayers — especially high-net-worth individuals and corporate entities — should expect more scrutiny into their affairs. Governments are in a unique position as they navigate multiple demands and pressures. On one hand, the revenue demands of the COVID-19 economic recovery require creative strategizing, and lawmakers around the world are eyeing tax as a main driver. Increased public scrutiny on high-net-worth individuals due to data leaks like the Panama Papers and Pandora Papers is also placing more pressure on lawmakers to hold tax evaders to account. Throw in long simmering concerns about tax fraud, international money laundering and corruption, and it is apparent that taxing authorities will be focusing on how they can obtain more taxpayer information. At the same time, countries are also competing for foreign investment as part of their pandemic recovery strategy, and tax incentives for foreign investors will be a key area to watch in 2022.

New Rules: The U.S. Corporate Transparency Act

In the United States, Democratic and Republican lawmakers alike are concerned that the country’s millions of anonymous shell companies are enabling corruption, tax fraud, and money laundering. Those concerns drove Congress in January 2021 to enact a wide-sweeping beneficial ownership reporting law, the Corporate Transparency Act, which is one of the largest transparency-related laws in recent memory. The CTA was included in the National Defense Authorization Act for Fiscal Year 2021. In 2022, Treasury’s Financial Crimes Enforcement Network (FinCEN) will release three sets of implementing rules for the CTA that will impact millions of U.S. corporations, limited liability companies, and similar entities. Over the next few months, taxpayers will need to keep abreast of the rules as they are released by FinCEN and potentially participate in FinCEN’s regulatory notice and comment process as the office attempts to address several open issues within the law.

The CTA requires domestic and foreign “reporting companies” to send to FinCEN the names, addresses, dates of birth, and driver’s licenses or other identification numbers of their beneficial owners who have substantial control. But what is a reporting company? Or a beneficial owner? What does substantial control mean for purposes of the CTA? The first tranche of proposed FinCEN rules, which were published December 8, 2021, to provide some guidance.

The CTA applies to corporations, LLCs, and “other similar entities” and although the law doesn’t define “other similar entities” the December 8 proposed rules offer some insight.

A foreign reporting company is any entity formed under foreign law that is registered to do business within the United States. A domestic reporting company is any entity created by the filing of a document with a secretary of state or filed with a similar office within a U.S. jurisdiction, like a state.

In the proposed regulations, FinCEN wrote that the proposed definition of domestic reporting company “would likely include limited liability partnerships, limited liability companies, business trusts (aka statutory trusts or Massachusetts trusts) and most limited partnerships, in addition to corporations and limited liability companies,” because they typically are created by a filing with a secretary of state or similar office.

That definition will capture a lot of entities – there are about 30 million in the U.S. according to FinCEN’s estimation. Another 3 million are created annually. FinCEN said it does not plan to include any other legal forms other than corporations and LLCs within the definition, noting that U.S. state and tribal laws differ on whether other types of trusts and business forms like general partnerships are created by a filing.

There also are several exemptions, as the CTA exempts 23 different kinds of entities under 31 U.S.C. 5336(a)(11)(B)(i)-(xxiii). For example, FinCEN’s proposed regulations clarify that under the large company exemption, any domestic company or foreign entity that is registered to do business in the U.S. is exempt from the CTA’s reporting requirements if it meets the following hallmarks: (1) Over 20 full-time U.S.-based employees; (2) more than $5 million in gross receipts or sales from sources inside the U.S., as reflected on a U.S. federal income tax or information return; and (3) operates a physical office in the U.S.

The next question is, who is a beneficial owner with substantial control? The CTA defines a beneficial owner as “any individual who meets at least one of two criteria: (1) exercising substantial control over the reporting company; or (2) owning or controlling at least 25 percent of the ownership interest of the reporting company.” Under the CTA, substantial control is defined as: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

Beyond that, the proposed regulations say that determining an ownership interest is a facts and circumstances inquiry that evaluates criteria such as: (1) equity in the reporting company and other types of interests, like capital or profit interests (including partnership interests), or convertible instruments; (2) warrants or rights; or (3) other options or privileges to acquire equity, capital, or other interests in a reporting company.

The stakes – and potential penalties – are high. Taxpayers that willfully fail to share beneficial ownership information with FinCEN face civil penalties of up to $500 per day. Criminal penalties can hit $10,000 per violation. Based on this, and the broad sweeping nature of the CTA, taxpayers who meet the criteria for domestic or foreign reporting companies or want to know if they are exempt, will want to explore their options with an experienced international tax professional.

High Net Worth Individuals: Wealth Tax VS Enforcement

Globally, wealth taxation has commanded quite a bit of attention as governments strategize ways to raise revenue in light of the COVID-19 pandemic. Some countries have been more active than others. For example, Singaporean lawmakers are considering a graduated net wealth tax between 0.5 and 2 percent imposed on individual net worth exceeding SGD 10 million (about $7.4 million). Norway’s Parliament at the end of 2021 passed a bill to increase the country’s wealth tax base rate from 0.85 percent to 0.95 percent. Taxpayers whose assets exceed NOK 20 million will be assessed at a 1.1 percent rate.

Meanwhile, in the U.S. and much of Europe, wealth taxes have failed to gain much traction. What has proven popular is an increased focus on tax enforcement. President Joe Biden placed tax enforcement as a cornerstone of his Build Back Better economic strategy, and he wants to increase the IRS’ funding by $80 billion. For over a decade significant budget cuts have eroded IRS enforcement capabilities and cost the government billions of dollars in uncollected taxes. The IRS funding plan, which is part of Biden’s now- stalled Build Back Better social spending bill, would give the IRS $80 billion over 10 years to ramp up its enforcement and investigative work, particularly on audits of corporations and wealthy taxpayers. See our recent article on Build Back Better.

In the United Kingdom, HM Revenue & Customs has increased its investigations into criminal and tax offenders, and that work has recovered over £1 billion over the past five years. HMRC plans to continue that work in 2022, and specifically plans to rely more heavily on its powers to freeze and recover unexplained assets. Judging by the department’s prior activity, that could be quite a bit of activity: between 2020 and 2021, HMRC issued 151 account freezing orders, covering over £26 million in assets.

In 2021, Spain decided to investigate high net worth individuals who move their tax domicile abroad to determine whether or not they are doing so fraudulently, and that activity will continue in 2022. The same is true in China. In late 2021, China’s State Tax Administration announced that it would launch investigations into high net worth individuals suspected of engaging in tax evasion. Developments like these suggest that high net worth individuals should prepare for increased scrutiny into their tax affairs and engage the help of a professional to prepare for potential inquiries.

For how this ties-in to the new treatment of GILTI tax rules, see our related articles, The Biden Administration is Homing in on GILTI.

Global Tax Incentives for Investors

On the other hand, governments are keen to attract foreign investors with various tax credits and incentives, and individuals taking stock of these opportunities have a wide menu to peruse.

For example, Canada recently enacted an investment tax credit for capital invested in carbon capture, utilization, and storage projects, which can be claimed starting in 2022. Malaysia’s National Economic Recovery Plan contains a host of tax incentives for foreign businesses, including reduced corporate tax rates for companies that want to create a principal hub in Malaysia. China decided to offer an important tax exemption to foreign investors investing in China’s mainland bond market. Effective November 7, 2021 through December 31, 2025, foreign institutional investors are exempted from paying corporate income tax and value-added tax on bond interest gains generated by investments in the Chinese mainland bond market, according to the country’s Ministry of Finance and State Administration of Taxation. Poland’s Ministry of Finance is also assessing the country’s suite of tax incentives and whether they need an overhaul, in order to attract more investors to Poland. Accordingly, the Ministry has commissioned a study and results should be released in the next few months.

Prepare Now

In summary, foreign and domestic business entities, high net worth individuals and cross-border taxpayers will have to navigate an increasingly sophisticated terrain in the coming year and should be prepared to defend their current tax activity or take advantage of new taxing incentives as they appear. Legislative uncertainty only adds to the urgency. Given the breadth and depth of these new and anticipated changes, taxpayers are strongly advised to enlist the help of an experienced international tax practitioner to develop a game plan, mitigate loss, and stay ahead of global tax changes.

International Tax Guru Jack Brister, founder of International Wealth Tax Advisors, to Appear as Anchor Panelist in Upcoming Webinar on Foreign Trust Tax Reporting

by IWTA | Oct 5, 2021 | Taxes, 2021, International

International Tax Guru Jack Brister, founder of International Wealth Tax Advisors, to Appear as Anchor Panelist in Upcoming Webinar on Foreign Trust Tax Reporting

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Even the seasoned accounting professional can get stymied by foreign trust reporting and the correct filing of Form 3520. Foreign trust and cross-border tax expert Jack Brister joins legal experts in a live webinar detailing the quirks and specificities of foreign trust compliance.

New York, NY, October 5, 2021 Industry-renown international tax and foreign trust expert Jack Brister, EA, MBA, TEP, will lend his expertise at a live, CPE-eligible webinar for finance and legal industry educator Strafford entitled, “Form 3520: Reporting Foreign Trust Activities on U.S. Beneficiaries’ Income Tax Returns.” The immersive webinar will cover the identification of filing obligations, how to complete form 3520, DNI planning after mid disallowance, and avoiding throwback tax. Interested professionals can sign up for the webinar directly on the Strafford website.

Even the seasoned accounting professional can get stymied by foreign trust reporting and the correct filing of Form 3520. Says Jack Brister, “Any information not provided or incorrectly presented can mean significant tax penalties ranging from 25% of the value of the trust to 35% of a distribution received. “

Join Jack Brister and a leading panel of legal and financial experts as they take a deep dive into the quirks and specificities of foreign trust compliance and the infamous IRS Form 3520.

When: Monday, October 19, 2021, 1PM – 2:50 PM, EDT

Where: Livestreamed by Strafford. See https://b.link/strafford1021 for details.

What: Topics covered will include but not be limited to:

Determining owners and responsible parties
What “reportable events” trigger a Form 3520 filing requirement?
DNI calculations and distribution strategies
Completing Form 3520
What are the penalties and relief provisions for failure to file a Form 3520 or Form 3520-A?
What is the overlap between Form 3520 and other foreign information reporting requirements such as Forms 5471, 8865, 8621, and Schedule B?
Throwback tax
IRC Section 6677 penalties for failure to file and relief provisions

What are the filing requirements for the U.S. beneficiary of a foreign non-grantor trust?
What are the processes for establishing a reasonable cause exception for penalty abatement?

About International Wealth Tax Advisors

International Wealth Tax Advisors (IWTA) specializes in mitigating U.S. taxes and solving highly-sophisticated cross-border tax issues. Working with clients’ offshore and domestic wealth structures, we strategically pinpoint the intricacies and weaknesses of U.S. and foreign tax systems to minimize loss of wealth and profits.

Follow Jack Brister for Insights and Updates on International Tax Compliance

IWTA founder Jack Brister is a regular contributor to business intelligence publication J.D. Supra. His news updated can also be found on the IWTA blog, and daily on Twitter, handle @IWTAJack.

Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate

by IWTA | Oct 26, 2020 | Taxes, 2020, Business Investments, Compliance, International, Real Estate, U.S.

Are You FIRPTA Compliant? IRS Targets Foreign Holders of U.S. Real Estate

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The IRS is Targeting Foreigners Selling U.S. Real Estate Interests

Individuals, investors, families and businesses have all found it necessary to pivot to a greater or lesser extent in light of the 2020 pandemic and ensuing economic crises. The IRS is no different.

Given its current limitations in conducting larger-scale audits, the IRS has determined that its best play is to focus on “issue-based” non-compliance. In other words: catch bigger fish in the leaky loophole nets of the tax law. There is much anecdotal evidence within international tax circles to know that FIRTPA is an area teeming with reporting and compliance errors—not just by foreign investors, but also by U.S. withholding agents. Thus, the campaign is underway.

Who or What is Subject to FIRTPA?

The U.S. Congress designed the Foreign Investment in Real Property Tax Act (FIRPTA) to collect tax on the sale of a U.S. property by a foreign person or business entity in order to ensure that foreign persons and entities paid tax on their U.S. source (situated) income (i.e., extract a type of capital gains tax that would normally not apply).

The U.S. Congress determined that the sale of a defined interest in U.S. real property (USRPI) is the same as receiving income from a U.S. trade or business, and therefore becomes a taxable capital gain. A USRPI can apply to many investments besides a direct ownership interest in U.S. real estate, so foreign investors that think they are in the clear from FIRTPA compliance could be in for a big surprise.

To get a better and more thorough understanding of who and what is subject to FIRTPA and how it applies to property-related investments, please see the IWTA Services page on U.S. Real Estate and Foreign Investments.

Our section entitled “Navigating Real Estate Structures for Non-Resident Aliens” on our Tax Planning for Non-Resident Aliens services page also has some useful FIRPTA pointers.

What you Need to Know Now

On October 5^th 2020, the IRS Large Business & International Division (LB&I) issued a notice regarding their resumption of an enforcement campaign to target NRAs receiving rental income from USRPIs. Nonresident alien (NRA) and other non-US taxpayer rental property owners can be subject to a 30% withholding tax on the gross amount of collected rental income unless they elect to categorize the income as effectively connected with US trade or business activities.

The LB&I’s previous announcement on Sept 14, 2020 announced their campaign to aggressively enforce tax withholding and reporting obligations of foreign investors, including foreign trusts, of U.S. real property and property interests.

According to a report by Statista, foreign property investment by foreign nationals is a major source of investment in the United States. Property sales to foreign buyers totaled a whopping 78 billion dollars in 2019.

“In recent years, the largest share of foreign residential buyers originated from China and Canada, followed by Mexico. Foreign buyers of U.S. real estate prefer properties in suburban areas to properties in small towns and central areas of major cities,” says Statista.

Is it any wonder that the IRS is putting some firepower behind FIRPTA enforcement?

Forewarned is forearmed. The international cross-border tax experts at IWTA will gird you, your family, your trust, or business against the coming FIRTPA onslaught and help you emerge in good financial shape.

Contact us here to set up a consultation.

Additional IWTA Articles on FIRPTA:

https://iwtas.com/top-tips-for-international-tax-clients-during-the-covid-19-crisis/

Any questions or comments on this article? We’d love to hear them! Email us

IRS Cuts FDII and GILTI Some Slack

by Jack Brister | Aug 21, 2020 | Taxes, 2020, International, U.S.

IRS Cuts FDII and GILTI Some Slack

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

A new “flexible approach” addresses concerns about documentation and unnatural adjustments to accepted business practices.

Last month, on July 9, to be exact, the U.S. Treasury Department and the IRS officially rolled out final regulations under IRS tax code Section 250, providing updated guidance on the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI).

The final regulations (T.D. 9901, 85 Fed. Reg. 43042) were published in the Federal Register on July 15, 2020. Generally speaking, the revised regulations reduce certain documentation requirements and provide greater flexibility and further clarifications in areas such as the taxable income limitation.

Because the final regulations do not apply until 2021, clients and their tax preparation providers have additional time to implement new policies and procedures. That being said, the new regulations come with new rules — to advertising services and electronically supplied services, for example, these new rules will undoubtedly result in new issues and questions for those businesses and individuals impacted by GILTI and FDII.

The IRS’ new and more flexible stance is a result of concerns raised that documentation requirements of the previously proposed regulations could mandate major and unreasonable changes to already-established business processes, potentially damaging customer relationships, and thus, business in general.

Despite the relaxation of some rules, transactional categories such as: general property sales to resellers and manufacturers, sales of intangible property, and the performance of general services to business recipients are still subject to specific substantiation requirements which may require a business to make contractual changes and/or elicit additional information from customers in order to do busines

Further Information on GILTI, FDII and the Tax Code Section 250

“Elevator Explanation” of FDII

IRS Section 250(a)(1)(A) permits a domestic corporation to take a deduction equal to 37.5 percent of its FDII. In broad terms, a domestic corporation’s FDII is considered to be the amount of its intangible income from sales, lease, or licensing of property to persons located outside of the U.S., OR from services provided to persons located outside of the U.S. Export sales would be one example.

“Elevator Explanation” of GILTI

GILTI is a new category of income specifically designated for U.S. taxpayers that own a controlled foreign corporation (CFC). In general terms, all income of a CFC amounting to more than 10 percent return on a CFC’s basis in tangible depreciable property, with a few exceptions, is GILTI. The GILTI provisions commenced for CFC’s tax years after Dec. 31, 2017. The proposed regulations on computation of GILTI income were published on Oct. 10, 2018 in the Federal Register.

Need help navigating the new FIIDI and GILTI regulations and how they apply to your tax responsibilities? Contact us to set up a Zoom meeting or a phone call, or email us for more information.

Other Publications with Information and Summaries on IRS Tax Code 250

Further resources from the International Wealth Tax Advisors Web Site

https://iwtas.com/gilti-tax-and-foreign-trust-corps/

https://iwtas.com/services/real-estate-and-foreign-investment/

https://iwtas.com/services/nra-tax-planning/

Finally- All the Most Frequently Asked Questions About Foreign Trusts in One Place!

by IWTA | Jul 14, 2020 | FAQ, 2020, International, Taxes, U.S.

Finally- All the Most Frequently Asked Questions About Foreign Trusts in One Place!

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Finally- All the Most Frequently Asked Questions About Foreign Trusts in One Place!

BONUS: A Handy Yes/No Calculation Quiz to Determine:

If Your Trust is a Foreign Trust
Type of Trust

You asked, we answered. Click here to be a Foreign Trust know-it-all.

Foreign Trust tax reporting, tax management and filing of the infamous Form 3520 is all in a day’s work for a qualified international tax advisory and accountancy. For clients and financial professionals not-so-familiar with the international tax world, it is far from routine. Foreign Trusts are one of the most asked-about and misunderstood financial instruments. Questions abound in determining category, following legal compliance and fulfilling tax responsibilities.

We sympathize.

So, instead of paying for a lengthy and costly consultation by a legal or cross-border tax professional just to learn the basics, or scouring the Internet for bits and pieces of information, we thought we’d cut you some slack and give you the whole enchilada. Well, at least a healthy-sized serving.

We looked through our client history, researched search engine queries and combed online forums to come up with the top ten frequently asked questions on foreign trusts.

They are….(drumroll, please):

Who should file IRS Form 3520?
What is a foreign trust?
Are trust distributions taxable to the beneficiary?
Do trust beneficiaries of a foreign trust pay taxes?
What is a foreign grantor trust owner statement?
Is a gift from a foreign person taxable?
How to create an international trust?
Is a TFSA considered a foreign Trust?
What is the Schedule B compliance requirement for foreign accounts and trusts?
What is the U.S. taxation of foreign trusts?

And as an added courtesy, our office math whizzes came up with a simple-to-use tool in the form of a very short yes/no quiz to determine, in less than a minute, if the instrument you are dealing with is a Foreign Trust or U.S. Trust, and the specific type. The type of trust will determine the nature of your/your beneficiaries’ tax filing requirements. How’s that for one-stop Q & A shopping?

Click here to read the answers to the IWTA Foreign Trust Top Ten FAQs and try our 30-second determination tool.

If you or your clients need help with the next steps of Foreign Trust reporting, management and tax filing, contact us and we’ll be glad to be of service.

We’d love to hear your feedback and comments! Email us at info@iwtas.com or editor@iwtas.com

A Taxing Pandemic: Covid-19 and Cross-Border Tax Issues

by Jack Brister | Jun 11, 2020 | Taxes, 2020, International, U.S.

A Taxing Pandemic: Covid-19 and Cross-Border Tax Issues

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Tax Laws are Bending, Flexing and Breaking to Deal with an Ever-Evolving Situation

As they say in the news business, Covid-19 is a “developing story,” and the adjustments being made by the U.S. Treasury department to address the unique tax issues arising as a result of the pandemic are historic. At this halfway mark of the year, with summer on the near horizon, I have compiled what I consider to be this point in time, the most critical cross-border tax stories. I have summarized three issues, along with the IRS reference documents. If you or your clients have a compelling and unique tax circumstance that has arisen due to the Coronavirus pandemic, we would appreciate your sharing the story with us. And, please feel free to share your comments in an email, and we will publish them.

Issue #1: The Land of Lost Deductions: U.S. Citizens and Permanent Residents Living or Working Abroad in the Time of Covid

Summary:

Under normal circumstances, U.S. citizens or residents living abroad can qualify to exclude a maximum dollar amount from reported income made overseas. The amount is adjusted upward annually to account for inflation. In 2019 the maximum deduction was $105,900. In 2020 it is $107,600. This is called the foreign earned income exclusion. In addition, those who qualify can also claim an exclusion or deduction from gross income for foreign housing.

Question: What happens when the U.S. individual has to leave their foreign place of business and/or residence because of the Covid-19 pandemic? Qualified individuals must normally prove uninterrupted foreign residence for a minimum of 330 days.

Answer: The IRS has provided relief under these extenuating circumstances. If living/working in China, the individual would have to prove presence in the country on or before December 1, 2019. For qualifying individuals living in other locales, they must prove their foreign presence commenced on or before February 1, 2020. Therefore, individuals who under normal circumstance would have expected to meet the IRS’ 330-day continuous presence requirement while also meeting the other requirements for qualification, are permitted to use any 12-month period to satisfy the “qualified individual” requirement.

Reference:

https://www.irs.gov/pub/irs-drop/rp-20-27.pdf

Issue #2: Non-Resident Aliens and UTSBs Caught in the U.S. Government’s “Substantial Presence” Trap Due to the Covid-19 Outbreak

Summary:

Here we find a situation occurring on U.S. territory. To wit: a foreign visitor or business person has overstayed their allowance of tax-exempt visitor time, due to complications arising from the Coronavirus pandemic. The situations that ensued for those caught up in the quarantine were varied and often tragic. See my previous blog posts on the subject:

https://iwtas.com/the-perfect-storm-of-timing-tragedy-and-tax-law-nras-and-covid-19/

https://iwtas.com/breaking-news-update-u-s-department-of-treasury-offers-tax-relief-to-nras-remaining-in-usa-during-covid-19-pandemic/

A “Covid-19 Emergency Period” was established by the IRS. It begins on or after February 1, 2020 and ends on or before April 1, 2020.

The IRS has an FAQ page covering the myriad issues. (Link below.) Note that in some cases, filing preemptive individual or business taxes even if not required may actually result in gains, as treaty-based relief and statute of limitation issues could be claimed.

Reference:

https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions

Issue #3: Transfer Tax Extensions

Summary:

Many categories of Estate, Gift, and Trust tax returns were granted filing extensions of July 15. 2020 due to the Covid-19 pandemic. The extension affects many required forms. For a full list see the IRS publication below. For a summary, click here.

Reference:

https://www.irs.gov/pub/irs-drop/n-20-23.pdf

Also see our previous blog post: https://iwtas.com/top-tips-for-international-tax-clients-during-the-covid-19-crisis/

If you, a colleague or client need help with any of the above issues, do not hesitate to reach out.

Contact us here.

Top Tips for International Tax Clients During the Covid-19 Crisis

by Jack Brister | Apr 28, 2020 | FAQ, 2020, International, Taxes, U.S.

Top Tips for International Tax Clients During the Covid-19 Crisis

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

At International Wealth Tax Advisors, we’re suggesting cross-border tax clients, both U.S. citizens and foreign nationals, consider the following tips to help mitigate any unexpected tax and financial consequences as a result of the Covid-19 pandemic.

Foreign Trusts

Tax returns and international information returns including Forms 3520 for foreign trusts have been extended to July 15 from April 15. This includes any tax payments that may be due as of April 15.
Many foreign trusts have underlying companies which hold the assets of the trust and these underlying entities require additional filings such as Forms 5471 (Controlled Foreign Corporation), Form 5472 (US entity 25{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455} or more owned by Foreign Persons)
Consider the utilization of foreign trust losses due to the crisis as a tax benefits

Real Estate Holdings

Consider disposing U.S. real property investments by foreigners with minimal or no FIRPTA (Foreign Investment in Real Property Tax Act) implications (withholding taxes) and / or little U.S. tax.
Disposal could also reduce foreigners’ exposure to U.S. estate tax.

Other U.S. Investments

Consider reducing U.S. portfolio assets or restructuring to minimize U.S. estate and gift tax exposure.
Foreign national executives currently working inside the U.S. should consider a U.S. trust structure or other structure before being assigned to the U.S. on a more permanent basis.

Foreign Companies Doing Business in the U.S.

Consider restructure with little or no tax implications while value of business is low due to crisis.
Look to obtain stimulus money by way of PPP loan or payroll tax credits.

For help in navigating your multinational business and personal tax obligations as applied to the U.S tax system in this confusing time, don’t hesitate to contact us.

For a private consultation with me on Zoom, click here to book a timeslot.

About Rev. Proc. 2020-17 and How it May Favorably Affect Your Foreign Trust

by Jack Brister | Apr 1, 2020 | Taxes, 2020, International

About Rev. Proc. 2020-17 and How it May Favorably Affect Your Foreign Trust

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

Breaking Tax News on Foreign Trusts: IRS Announcement March 2, 2020

As of March 2, 2020, U.S. taxpayers, expats or permanent residents with ownership or interests in a “U.S. Favored” Foreign Trust are exempt from reporting these interests and may be eligible for refunds on past reporting.

The new guidelines issued by the Internal Revenue Service exempt current and former U.S. citizens and residents from obligations to report ownership and money transfers to their foreign retirement, medical, disability and educational plans that are foreign trusts.

As of tax year 2019, qualifying individuals are exempt from disclosing their interests under the foreign trust reporting rules. In addition, the IRS will give taxpayers the right to request a refund or abatement of penalties paid for omissions made in previous years.

An accountant with international tax expertise can determine with certainty if your particular trust will qualify under the new rules and make a determination as to an individual’s eligibility for redress of previous penalties.

The IRS makes clear that these new guidelines do not “affect any reporting obligations under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. section 5314 and the regulations thereunder.”

To download the entire IRS-issued white paper on the new U.S. Favored Foreign Trust provisions, click here.

This is potentially good news for those that hold certain retirement, education and medical foreign trust interests. A skilled global tax advisor will look at your entire investment portfolio, and can help you determine if you qualify for an exemption and refunds under the revised tax law.

Click here to book a consultation to discuss your tax situation as it relates to your foreign trust holdings.

What is a Withholding Agent and Why are They Important?

by Jack Brister | Feb 26, 2020 | Taxes, 2020, Compliance, International

What is a Withholding Agent and Why are They Important?

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The following will describe in detail how the United States (U.S.) tax law also known as the IRC (Internal Revenue Code) or Code defines a withholding agent. I’ll provide information on the definition of a withholding agent, and what role and responsibilities are assigned to them.

How the IRS Defines a Withholding Agent

IRC 1473(4) and 1.1473-1(d), define a withholding agent as any person in whatever capacity having control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. In the eyes of the U.S. federal tax authorities, a person is considered to have custody of, or control over a distribution of funds or income, if a person is the one who ultimately has the authority to release the funds or income. If such person does not properly withhold the correct amount of tax they will be subject to pay the tax not withheld.

How the IRS Defines a Non-Resident Alien

A non-resident alien (NRA) is a person who is not a U.S. citizen.

A NRA is not a person who has the legal right to permanently reside within the U.S. (a green card holder), and not a person who has resided or been in the U.S. for more than 183 days or an average of 121 days a year for the prior three years.

These persons are foreigners for U.S. income tax purposes and therefore they are not subject to U.S. income tax unless they derive income from sources within the U.S. such as dividends, rents, royalties, business income or income and gains from real property located within the U.S. If this is the case, then the person who is deemed to be the withholding agent must ensure that the appropriate tax is withheld and submitted to the U.S. tax authorities.

In other words, a foreign person who is considered a nonresident under the U.S. tax code is subject to thirty percent tax withholding on U.S source income unless a double tax treaty (e.g., income tax treaty) between the U.S. and the country of residence of the foreign person says otherwise.

Therefore, thee withholding agent is legally liable to withhold tax payments before the distribution. The IRS can demand payment from the agent if the tax was not withheld.

When a foreign person tries to open a bank or investment account, and the foreign financial institution (FFI) and U.S. financial institutions see that the foreign person might have a U.S. connection of almost any kind, (even a U.S. care-of address will be sufficient) they will request the foreign person complete and submit U.S. forms W-8BEN-E, W-8ECI, W-8IMY, W-8EXP. If the financial institution does request or attain the form submissions, the U.S. tax authorities (and sometimes the U.S. Department of Justice) can impose penalties or decline a FFI’s ability to use the U.S. financial markets. They can also choose to prosecute the institution for violation of U.S. law.

Depending on the relationship of the investor and investment, the financial institution itself may be considered the withholding agent and therefore subject to ensuring proper U.S. tax withholding. The aforementioned W8 forms will be an indication for the foreign financial institution what tax, if any should be withheld from the account holder and if the FATCA rules (Foreign Account Tax Compliance Act) may apply to the account holder. (See our FATCA blogpost here.)

Since the enactment of FATCA, most foreign and U.S. financial institutions follow procedural due diligence and ongoing monitoring when opening accounts for U.S. and foreign persons. The withholding agent monitors income from U.S.-sourced interest, dividends, rents, royalties, services, or wages. They calculate the tax is required to be withheld and ensure and that the appropriate amount is withheld to avoid penalties or more severe action.

In addition, to withholding the appropriate tax, withholding agents are required to file a Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Person) and submit the tax to the U.S. taxing authorities. Note: If there is a failure to provide correct statements to recipients and reasonable cause cannot be shown, a penalty of up to $260 may be imposed for each failure to furnish Form 1042-S when due. A penalty may also be imposed for failure to include all required information or for furnishing incorrect information on Form 1042-S. The maximum penalty is $3,218,500 for all failures to furnish correct recipient statements during a calendar year.

Special rules apply for withholding agents in determining whether a flow-through entity (trust estate, or partnership) must treat a payment of U.S. source FDAP income to the to the beneficiaries or partners as taxable. In the case of partnerships, simple trusts, complex trusts, and estates, rules similar to the rules that apply when determining withholding under IRS rules Chapter 3 (income tax withholding) apply.

There are many exceptions that apply in the calculation of withholding payments to the IRS. The requirements are very complex and should be discussed with your tax advisers. IWTA is more than happy to assist with your international tax consulting and computation needs. Click here to contact us.

OECD Leads Multinational Coalition to Address Digital Economy Tax Laws

by Jack Brister | Jan 29, 2020 | Taxes, 2020, International

OECD Leads Multinational Coalition to Address Digital Economy Tax Laws

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

International Tax experts view digital tax as one of the “hotbutton” issues of the new decade. The exponential international growth of the digital economy has erased retail and wholesale borders, had carved new roots and frameworks into the supply chain, and not surprisingly, has upended the way the traditional ways and means of tax collection. How do countries collect taxes from buyers across continents? Is there a uniform, unilateral method to comply with each country’s tax code, or is it possible to create international tax rules for the collection of sales and use taxes on digital platforms? To that end, the Organisation for Economic Co-operation and Development (OECD) has gathered over 134 countries and jurisdictions to tackle this important issue. The OECD is an international policy-building body whose goal is to establish international norms and find evidence-based solutions to a range of social, economic and environmental challenges. “We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD Secretary-General Angel Gurría. “This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal: ensuring all MNEs pay their fair share.” ”Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen,” says Gurría. IWTA will keep clients apprised of the progress and success of implementation of a unilateral agreement on a digital tax code. Clients with businesses that sell online to customers outside of their own countries will face new cross border tax issues. Even solopreneurs can be affected if they sell goods or services online to international clientele. Click here to read the full press release from OECD.

GILTI Tax and Controlled Foreign Corporations

by Jack Brister | Jan 27, 2020 | Business Investments, 2020, International, Taxes

GILTI Tax and Controlled Foreign Corporations

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

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When making a financial decision, it is important to consider tax consequences and any additional tax filing requirements.

Previously before the tax reform act of 2017, to maximize earnings, offshore operations could be used to accumulate earnings. The logic at that time was to create a blocker corporation with regard to foreign operating businesses doing business in foreign jurisdictions. The accumulated earnings would not be subject to U.S. tax until the corporation made distributions in the form of dividends.

Internal Revenue Code IRC Section 965 was enacted as part of the new Tax Reform Act (TCJA). This new law imposes a one-time transition tax (toll charge) on the undistributed, non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations. IRC Section 965 is seen as part of the transition to what some believe to be a move in the direction of a territorial tax regime.

In general, U.S. shareholders of foreign corporations may elect to pay the toll charge in installments over eight years. Also, in addition to that, U.S. persons may be subject to an additional category of Controlled Foreign Corporation Income, Global Intangible Low-Taxed Income (GILTI) for tax years 2018 and forward. GILTI tax was enacted under the TCJA (new IRC 951A). Taxpayers subject to GILTI tax should include the Form 8992 in their tax return.

GILTI Tax- Individuals

Persons will be subject to GILTI regulations if they are a U.S. shareholder of a Controlled Foreign Corporation. U.S. persons (citizens, residents, substantial presence or green card holders, domestic entities) are treated as a U.S. Shareholder of a Controlled Foreign Corporation (CFC) if such persons own at least 10 percent directly or indirectly of a foreign corporation’s voting stock or value. CFC is any foreign corporation of which more than 50 percent of the vote or value of the stock is owned by U.S. shareholders on any day during a given year.

Basically, U.S. shareholders of one or more CFCs must take into account its pro-rata share of the tested income or tested loss of the CFC(s) in determining the U.S. shareholder’s GILTI tax calculations. It is important to note that other tax forms reflect information for Form 8992 and Section 965 tax withholding.

Generally speaking, when taxpayers meet the requirements to file Form 5471, (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) as a category four and five, the filing should include Schedule I-1, Information for Global Intangible Low-Taxed Income. Information from Form 5471 Schedule I-1 and Schedule C will be reflected on Form 8992 to complete the GILTI tax calculation.

Considering the fact that the GILTI regulations are more favorable to the corporation, the taxpayer could make an IRC Section 962 election which allows an individual who is a U.S. Shareholder of a Controlled Foreign Corporation to elect to be treated as a domestic corporation (U.S. corporation) for the purpose of computing their income tax liability on their pro-rata share of the CFC’s subpart F income.

Significant tax savings opportunities for U.S. domestic corporations could be achieved by filling Form 8993, section 250 for Foreign- Derived Intangible Income (FDII) and GILTI tax. If the corporation has paid or accrued foreign tax in the country it operates, the taxpayer should include that amount on Form 1118, Foreign Tax Credit under section 951.

If the taxpayer does not have voting power and never wanted to participate in CFC management, one of the options to avoid the complexity of GILTI tax is to form a foreign trust and place the CFC stock(s) under the ownership of said foreign trust. Doing this eliminates GILTI tax calculation and reporting.

The downside is that the taxpayer will need to consider the potential gift tax implications and reporting at the time of the transfer of ownership. What’s more, they may be required to calculate Distributable Net Income (DNI) which gets reported on Form 3520 and potentially Form 3520-A. There will be additional tax filing fees, but this strategy will eliminate the complexity of GILTI tax calculations and reporting.

The IRS has issued some guidance related to this topic, and there are still uncertainties existing on how to treat certain items. The international tax provisions are highly complex and will likely continue to increase the tax compliance complexity for even the most straightforward corporations with foreign operations and their shareholders.

A tax professional with international tax expertise should be sought in these matters. If you need assistance, please contact IWTA.