U.S. & Cross-Border Tax Breakfast May 26, 2011 1
Introduction • Larry Vicic • Welcome • Eddie Goldsberry • Current U.S. Tax Developments • Elaine Reynolds • U.S. Vacation Property • Rafael Carsalade & Bill Macaulay • Canadian Business Expansion into the U.S. • John Forrest • Doing Business in Washington State 2
Tax Update: Things You Need to Know About Doing Business in the U.S. Edward N. Goldsberry 3
It’s the Debt/Deficit, Stupid! • Debt just hit $14.294 trillion – the “debt ceiling”. No more borrowing until it is raised. • Federal government runs out of money on August 2. • U.S. current and expected budget deficits: • 2010: $1.3 trillion • 2011: $1.4 trillion (projected) • 2012: $1.1 trillion • 2013: $700 million to $950 million, depending • Entitlements expected to increase as population ages. • Latest CBO estimates show likely $7.2 trillion deficit over next 10 years without major changes. 4
Changed Political Landscape • Republicans now have the majority in the House, and Democrats no longer have 60 vote majority in the Senate. • Obama still has veto power, and Republicans cannot override his veto. • Republicans are split between Tea Party conservatives and moderates. • Two immediate results - the last-minute, Lame Duck compromise that extended the Bush tax cuts, and repaired several other broken tax provisions, and repeal of expanded Form 1099 reporting. • Republicans also captured majorities in most state legislatures. Huge implications for Congressional “redistricting”. • Example – Texas will get 4 new House seats allocated to it in 2012, and the Republications largely control who will get them. 5
Busy Summer Ahead • Democrats want more taxes to cut deficit. • Moderate Republicans want to cut spending moderately and to make a deal. • Tea Party Republicans want to really cut spending, including entitlements and are adamantly against tax increases. • Deal has to be made by August 2nd or risk either shutting down the government or possibly more loss of investor confidence in U.S. debt – or both. • Stalemate possible, but not likely. Almost certain that the U.S. will not run risk of debt default. • The good side of stalemate – less uncertainty. 6
Tax Legislation Crystal Ball • Lots of talk about major reform. Not likely to happen soon. • Pace of legislation will be much slower than in first two years of Obama administration. • Raising tax rates on the “rich” off the table until 2012. • Near-term raising of taxes on the Big 5 oil companies is a real possibility. Much more politically palatable than earlier proposals that would have devastated smaller companies and domestic drilling. • Possible repeal of the estate tax. • Probably not much of a precedent on the state level, but Michigan just repealed much of their draconian and anti-business tax system. 7
International Tax Policy Climate • Very active and not particularly pro-business Administration (and Congress through end of 2010). • Offshore tax abuses estimated to cost U.S. government as much as $100 billion per year. May not be too far off. • IRS clear position of increased scrutiny of international tax compliance for recent past and expected future. UBS investigation & scrutiny of U.S. taxpayers with foreign accounts – IRS now after HSBC in India. • Enforcement of legislation already passed likely to be stringent. Compliance costs for international business will continue to rise, but not by as much as we feared. • Continued interest in international corporate tax changes. • Increased emphasis by IRS on transfer pricing. 8
Good News • U.S. needs foreign direct investment. • U.S. federal tax policy will likely continue to favor SME’s where they know most jobs are created. • States and localities will continue to fight for jobs with tax breaks. • States and localities, even in the budget crunch, are continuing to devote resources to providing services to assist in-bound investment. 9
Costs of Doing Business FOREIGN BANK ACCOUNT REPORTS FATCA 1099 REPORTING (REPEALED) 10
FBAR – U.S. Person • U.S. Person is • 1. A citizen of resident of the U.S. • 2. A domestic partnership • 3. A domestic corporation • 4. A domestic estate or trust • But, only (so far) for years 2010 and prior • May ultimately include non-residents engaged in U.S. trade or business. To date, this has been suspended via IRS notices for foreigners considered to be “in or doing business in the U.S. Exemption does not apply to anyone considered a U.S. tax resident. 11
FATCA(T) – Withholding Imposed • Targets U.S. persons failing to report/hiding income and assets outside the U.S. • Effective for payments after 1/1/2013. • Imposes 30% withholding tax on any withholdable payment of U.S. sourced income to any foreign financial institution • Subject payments include any fixed or determinable annual or periodic income (FDAP), and • Gross proceeds from sale of property that could produce U.S. source interest or dividends • Withholding agent includes any person, an any capacity, having control, receipt, custody, disposal or payment of any withholdable payment 12
FATCA(T) Withholding Expansion In addition, now also subject to withholding: • proceeds from sale of property that produces interest/dividend income (i.e. capital gain transaction) • interest on deposit with foreign branch of U.S. bank • Any payment of such income to an “unqualified” foreign financial institution will be automatically subject to the 30% withholding rate. Exception for “qualified” institutions. • Any payment of such income to a foreign nonfinancial entity also subject to the 30% withholding. Exception for cases where certification exists, recipient is publicly traded or subsidiary of a publicly traded corporation, governmental entities, international organizations, and others. 13
Foreign Financial Institutions Qualified foreign financial institutions will need to: • Obtain enough information on all account holders to determine which ones are U.S. accounts. • Follow IRS procedures to determine which are U.S. accounts. • Report annually all U.S. accounts and its holders, account balances, gross receipts, and withdrawals from the account. • Withhold 30% on applicable payments • Comply with information request by IRS on U.S. accounts • Attempt to obtain waiver from foreign law where it would prevent such disclosure on its account holders, and close the account if waiver is not obtained. • Agree to withhold on “recalcitrant” account holders. 14
FATCA(T) – Non-Financial Foreign Entity • Also applies to payments to non-financial foreign entities – any entity that is not a foreign financial institution • That has one or more “substantial U.S. owners” • Substantial is ownership, directly or indirectly, of 10% or more of a corporation, partnership or of a trust treated as a grantor trust, or holder of 10% of more beneficial interest in a non-grantor trust • 10% is reduced to zero if the foreign corporation or partnership is engaged primarily in the business of investing • To be exempt, must: • Provide certification that there is no substantial U.S. ownership, • or provide name, TIN and address of each substantial U.S. owner 15
OTHER KEY POINTS – NOT NECESSARILY NEW 16
Treaty Based Return Disclosures • A treaty based return position is any case where there is a difference in tax liability due to a provision of a tax treaty – common example is a position that business profits are not taxable because there is no permanent establishment (PE) in the U.S. • Disclosed by attaching IRS Form 8833 to the tax return • Penalties for failure to disclose • Disclosure waived under most circumstances where U.S. payer properly reports on From 1042-S • Where payer and payee are unrelated and FDAP paid exceeds $500,000, disclosure is required. 17
U.S. Inbound Individuals • Most common error is failure to realize that foreign nationals become taxed just as if they were U.S. citizens when they become a U.S. tax resident. “Closer connection” tests in U.S.-Canada tax treaty can provide limited relief. • Biggest risk today is failure to comply with U.S. reporting requirements for non-U.S. income and assets, including trusts, companies and real property. • Planning – everyone in the world is a U.S. taxpayer – they just do not know it yet. Non-residents who become U.S. tax residents are treated as if they have always been U.S. taxpayers with some strange and, at times, counter-intuitive results. 18
Circular 230 Legend • Pursuant to U.S. Treasury Department Circular 230, unless we expressly state otherwise, any tax advice contained in this presentation is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. 19
Contacts Eddie Goldsberry, Director, International Tax Services Phone: (713) 860-1450 Email: egoldsberry@pkftexas.com 20
Canadian Business Expansion into the U.S. Rafael Carsalade Bill Macaulay 21
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