H. Jacob Lager

Archive for the ‘U.S. Tax policies’ Category

Close Offshore Loopholes to Ease Fiscal Cliff?

In Business tax rate, Business tax rates, U.S. Tax policies on December 14, 2012 at 9:08 am

Fiscal cliff

The best part of writing about taxes is that there is no shortage of current events to chew on.

So I completely missed writing about Romney’s offshore carried interests.  That election is so Fall, 2012.  Mitt who?  What people really want to know about is the Fiscal Cliff!  (Cue ominous musical score).

The “Fiscal Cliff” is a phrase that summarizes the sum total of tax increases and spending cuts that are scheduled to take place on January 1, 2013 if Congress and the President don’t act to change the existing laws by the end of 2012.  At the time of the “Debt Ceiling Crisis” of 2011, the Cliff seemed at once (a) a good way to reassure foreign lenders and (b) something we could surely avoid by acting within the next two years. 

Well, now that we are less than three weeks away from falling off the Cliff, what does any of this have to do with international taxes?

Nothing right now, actually.

But there are sure a lot of people who think that all our Cliff stress could be eased by closing all those foreign loopholes big nasty corporations use to avoid paying US taxes.  The latest to join this chorus is non-profit organization US Public Interest Group (USPIRG), which claims that offshore manipulation “costs the federal government an estimated $150 billion in tax revenue each year.”  According to USPIRG, all we need to do close all those loopholes and we’ll actually have more than enough to “cover the $109 billion in automatic spending cuts” that will happen if (when?) we fall off the Cliff.

Sounds great.  But what are the actual “loopholes” that USPIRG thinks we need to close?  Well, that’s where it the article is a little . . . er, scant?  USPIRG cites three maneuvers by three well-known multinationals that should be undone:

  • Google’s use of the so-called “double Irish” and the “Dutch sandwich” structures which reportedly reduced its tax bill by $3.1 billion between 2008 and 2010.
  • Wells Fargo’s payment of no federal income taxes between 2008-2011 “due to its use of 58 offshore tax haven subsidiaries.”
  • Microsoft’s avoiding $4.5 billion in taxes by “artificially shift[ing] its income to tax-friendly Puerto Rico.”

So is all this true?  Over the next three weeks, I’m going to explore each of the above maneuvers and we’ll see just how these work and (maybe) how they can work for your business.

In the meantime, I’ll keep on eye out for that Fiscal Cliff.

My one bold prediction?  Not a good time to rely on Congress to reinstate the “active financing” exception.


Photo by Jim Moran.


An unpleasant surprise for expat family members: A look at Section 2801

In Expat taxes, IRS regulations, U.S. Tax policies on September 21, 2012 at 1:18 pm

Are you a family member or friend of an expat?  Get ready to be surprised!

I always hated surprises.

Actually, that’s not quite right.  I love being truly surprised.  Its terrific when someone actually keeps something totally secret and then drops it on me.  Especially when its good news.  In fact, that’s pretty much exactly what happened when my wife told me we were going to have a baby.

But when you keep something from me AND  let me know you are doing so?  That stinks.  This is pretty much how my wife tortured me for 15 awful seconds when she discovered before me that our baby was going to be a girl.

So you might imagine how I react when the IRS says, “Yeah, your clients might owe that tax, or they might not.  We’re not really sure when we’re going to start enforcing that tax, but when we do it’s going to be retroactive to … sometime in the past.”

Don’t believe that the IRS says that?  Then you’ve never read Section 2801.  That section imposes a gift tax liability on U.S. taxpayers who receive gifts or bequests from tax expatriates.  So if you’re anticipating any looming generosity from Ed Saverin or Denise Rich, you may want to pay attention.

Regardless of whether one finds this tax a travesty to liberty or a justified clawback, the real sinister element here is that Treasury has not issued forms on which to report a subject gift and has publicly stated that it’s not going to enforce the tax until . . . it does.  In Notice 2009-85, the IRS stated that expatriate gifts received on or after June 17, 2008, are subject to tax, but that “[s]atisfaction of the reporting and tax obligations for covered gifts or bequests received will be deferred, pending the issuance of guidance.”

That was three years ago.  So far – no guidance.

Even the government doesn’t really know what to do about this one.  Last week, Catherine Hughes, attorney-adviser, Treasury Office of Tax Legislative Counsel, attempted to address the issue at the American Bar Association Section of Taxation meeting in Boston.  According to Hughes, issuing 2801 guidance is a “top priority” for Treasury, but she also acknowledged that “figuring out when to say these returns are due is a huge issue.” The statute itself provides no due date and savvy taxpayers who reported the gift may be able to avail themselves of statute of limitation protection if the gift is old enough.  Others may not know whether the tax is owed until after the due date for those returns.


Mr. Tax Lawyer goes to Washington

In FATCA, IRS regulations, U.S. Tax policies on August 31, 2012 at 9:24 am

I’ll admit it. I’m a mark for Capra films. I cheer for every ulcer Grandpa gives the IRS agent. I cry every Christmas Eve when Clarence gets his wings. And like Mr. Smith, I’ve always wanted to go to Washington and tell ’em what’s what. Sadly, the opportunity rarely arises.

However, a few brave California tax attorneys courageously face the DC humidity every summer to do that which I only dream: tell the IRS and Congress how to better administer taxes. It’s as sexy as it sounds.

This past May, the taxation section of California State Bar sent its annual Washington, DC delegation to our nation’s capital to discuss current tax issues with Treasury officials, congressmen, and other policy-makers. Their reports were just published, which included the following recommendations relating to international tax issues:

Jenna Shih, Esq. and CPA Po Han Chen recommended that regulations be issued clarifying the rules to determine whether a US-owned foreign company may be treated as engaged in the active business of developing its own intellectual property (and therefore escape US taxation on its profits). The authors noted that current case law allows such treatment where the company’s direct employees manage the business, even if independent contractors develop the IP.

Pracitioners Pedro Corona and Enrique Hernandez issued a report suggesting that Mexican pension participants should be exempted from PFIC reporting requirements.

In particular, the authors noted that participation in Mexican retirement funds represents a low-risk of tax evasion because such pensions are not created to allow foreign investment, but are actually part of a mandatory condition of Mexican employment.

Finally, Patrick W. Martin and Liliana Menzie proposed expanding the FATCA definition of “local foreign financial institutions” to ease compliance burdens for foreign banks whose clients are considered “accidental Americans” (i.e. individuals who live in other countries but retain U.S. citizenship).

If you have any interest in preparing a report or a recommendation for next year’s delegation, click here for more information, or contact me and I can put you in touch with one of the organizers.

Forget the Olympics; Boycott This!

In IRS regulations, U.S. Tax policies on August 24, 2012 at 7:32 am

Pop Quiz:  what do Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the UAE, and Yemen have in common?

Exemplary human rights record?  Demonstrated historic dedication to religious tolerance? Main streets named after George W. Bush?

Nope.  But if you answered “routinely named by the US Government as countries which require participation in, or cooperation with, an international boycott,” you win.  So, what exactly does this mean?

Well, in 1976, Congress sought to deter participation in non-U.S.-sanctioned boycotts by the imposition of the tax penalties codified at Code Section 999.

Generally speaking, the section features two parts:  the risk of losing certain income tax benefits from boycott participation and (surprise!) a reporting requirement.

Taxpayers who actually participate in a boycott risk losing certain foreign tax credit and DISC benefits, increasing their Subpart F income, and may be fined.

But what about that reporting requirement?  That rule is surprisingly broad.  If a taxpayer has operations in or related to a boycotting country and that country is on the above-mentioned list, those operations must be reported.  And by “operations,” Treasury really means “any meaningful commercial contact.”  Also, a taxpayer must report any operations in a non-listed country when the taxpayer “has reason to know” that participation in or cooperation with an international boycott is a condition of such activities.  Needless to say, this “has reason to know” qualifier greatly expands the world of potentially reportable transactions well beyond the Middle Eastern countries listed above.  Failure to report could subject a taxpayer to a fine of $25,000 plus a year in jail.

Iraq’s re-emergence on the list is notable, given that it had been removed as recently as August, 2010.  Other notable “alumni” include Bahrain and Oman.

While not as onerous as an FBAR report, or as frightening as the looming FATCA requirements, the Section 999 reporting requirement should not be ignored.  The generality with which it may be applied makes it a dangerous IRS weapon, even if rarely wielded.

Image provided by 8jin_design.

International tax law updates: Kansas and FATCA and whistleblowers, oh my!

In FATCA, U.S. Tax policies, Yes you must pay taxes on August 17, 2012 at 7:36 am

Although a “fly-over,” Kansas is indeed an actual state.  On August 15, the Tenth Circuit affirmed the Tax Court’s holdings denying an individual’s arguments that he was a “a citizen of Kansas that earned a living through activities occurring solely under the jurisdiction of Kansas” and therefore not a federal taxpayer; and that he did not receive taxable income.

Hmmmmm . . . This sounds familiar.  This kind of argument, with its hints of facial logic (“Citizen of California?  Makes sense to me!”) are very popular with the tax protest movement and very likely to get a proponent sanctioned.  In dismissing the taxpayer’s claim, the panel also mentioned the following similarly facetious anti-tax arguments:

  • “the authority of the United States is confined to the District of Columbia,”
  • “wages are not income,”
  • “the income tax is voluntary,”
  • “no statutory authority exists for imposing an income tax on individuals,” and
  • “individuals are not required to file tax returns fully reporting their income”

Quick rule of thumb for heavily-promoted tax dodges: if Mitt Romney isn’t doing it, it’s likely not legal. The full opinion can be found here.

More FATCA Forms Released  Yesterday, the IRS released a draft of the anticipated Form W-8IMY meant to accommodate impending FATCA regime. (For a brief recap of what FATCA check out this post.)

Chief among its new additions is a new enhanced “line 4” that features no less than 21 options for an entity to choose from when indicating its FATCA status designation and five extra pages relating to that choice.  Accompanying instructions and regulations have not yet been issued.

This is what we call “tax simplification.”

IRS Hails Whistleblowers  As part of an American Bar Association Section of Taxation webcast, IRS special trial attorney and division counsel John McDougal noted the utility of the Service’s whistleblower program.  According to McDougal, whistleblower data constitutes one of the most important sources of taxpayer information for enforcement efforts.  McDougal noted the IRS has just recently begun to distribute award payments to individuals who have supplied that information.  Because whistleblowers often present information on a particular financial institution or practice, the IRS is able to gain access to information outside the U.S. that is not otherwise easily available.  “It’s an incredibly valuable opportunity for us,” McDougal said.

Rat on your bank, a new “Occupy” strategy?

Same-Sex Marriage Tax Ramifications: A Look at Mass v. Dept. of Health and Human Services

In U.S. Tax policies on June 4, 2012 at 11:08 am

In a case where civil rights, election-year politics, and (yes!) tax policy meet, the First Circuit last week affirmed a district court’s holding that section 3 of the Defense of Marriage Act violates the equal protection clause by denying federal tax and other benefits to same-sex couples and surviving same-sex spouses who were lawfully married in Massachusetts.

At issue are basically all federal benefits available to spouses, including federal employee health insurance, Social Security benefits, and (wait for it) the right to file “joint federal tax returns, which can lessen tax burdens.” Although not mentioned in this decision, federal recognition of same-sex marriages will also touch on the following issues:

  • Eligibility for the unlimited estate tax exclusion for assets passing to a surviving spouse;
  • Ability to pass on assets to a foreign spouse via  Qualified Domestic Trust (QDOT);
  • A host of other immigration and naturalization issues for those multinational same-sex spouses.

Read more about the decision.


Remember our entry a few weeks ago about the administrative Microsoft decision that absolutely savaged the District of Columbia’s reliance on a specious third-party transfer pricing analysis?

The District is appealing.   Not sure how you appeal from a finding that the subject analysis was “useless in determining whether Microsoft’s controlled transactions were conducted in accordance with the arm’s-length standard” and its findings were “arbitrary, capricious, and unreasonable.” DC Office of Tax and Revenue Chief Counsel Alan Levine is quoted as noting that the “transfer pricing program, at issue in this case, and others, is important to the District of Columbia.” OTR has not yet revealed the substantive grounds for this appeal.

In other news, the Indian retroactivity saga continues.  While Indian Finance Minister, Mr Pranab Mukherjee has sought to reassure investors that “in cases where assessment proceedings have become final before the first day of April 2012, such cases shall not be reopened,” Vodafone remains a target.  According to the  Finance Ministry, the retroactive Vodafone assessment remains active because it involves an alleged default in fulfilling the withholding tax obligation.  More here.

Photo by Cynthia.Ess.