The Tax Cuts and Jobs Act signed into law by President Trump has been at the forefront of the national news since its passage in December. There are sweeping changes to the individual, business, and international taxpayers.
The Act will have an immediate and significant impact on taxpayers involved in business out of the country. For taxpayers with an ownership position in a Specified Foreign Corporations (“SFC”), the new Act requires them to pay an 8% to 15.5% “toll tax” (for individuals it could be up to 17.5%) on all deferred foreign income of these entities as of November 2 or December 31, 2017, whether a distribution has been made or not. Different tax rates are applied based on the SFC liquidity.
So how does this all work?
More About Specified Foreign Corporations
An SFC is any controlled foreign corporation (generally meaning greater than 50% US ownership) or any foreign corporation to which one or more domestic corporation(s) is a US Shareholder (generally meaning greater than 10% ownership).
This means that any US Shareholder whether a domestic corporation, partnership, individual, trust, or estate, that meets these requirements as a shareholder will be subject to this toll tax if they have deferred foreign income.
US Shareholders with interests in S Corporations that have an interest in an SFC can defer the mandatory repatriation tax as long as they make the election at the shareholder level. This election can be revoked if certain events occur.
The Basis for the New International Toll Tax: From a Worldwide to a Territorial Perspective
The Toll Tax was created by an overall change in the way international tax requirements are imposed, from a worldwide system to a modified territorial based system.
Prior to the new Act, a US person was required to pay tax on all of its income, regardless of whether it was earned in the US or in a foreign jurisdiction. However, US income tax was paid on the earnings of a foreign corporation when they were repatriated back to the US in the form of a dividend or capital gain.
This created a deferral on US income taxes for earnings of a foreign corporation between when it was earned and when it was distributed. Under this worldwide system, the US person was generally allowed a foreign tax credit to alleviate some or all of this burden.
Under the Act’s new territorial system, a US person will only pay tax on income that is earned within the United States. In most circumstance, dividends from foreign corporations will now be exempt from tax if received by a US corporation and in most other circumstances a foreign tax credit will still be available for other amounts earned in a foreign jurisdiction. In order to bridge the gap between the two international tax systems, this mandatory repatriation or “toll tax” has been put into place.
How to Calculate the Toll Tax
To calculate the “toll tax”, the US shareholders will increase their Subpart F income by the accumulated net earnings and profits of all their specified foreign entities since becoming an SFC as of December 31, 2017 or November 2, 2017, whichever is greater.
Accumulated deficits are included in this calculation to offset any accumulated earnings but not below zero. In order to arrive at the lower tax rates, 15.5% on your aggregate foreign cash position and 8% on the remainder, a deduction will be calculated at the highest corporate rate to reduce the Subpart F income included on the taxpayers’ tax return. The taxpayer is also allowed to utilize a portion of their Foreign Tax Credits to offset the mandatory repatriation tax but must also include a gross-up in its income for the amount of these taxes.
The increase in the subpart F income and correlating deduction is reported during the specified foreign entities last tax year beginning before January 1, 2018. Therefore a US Shareholder that owns a calendar year SFC will report the increase in subpart F income and relating deduction on its 2017 tax return. For fiscal year SFCs, the subpart F income and correlating deduction will be reported in its US Shareholder’s tax return in 2018.
The US Shareholder can elect to pay the “toll tax” over 8 years. The taxpayer will have to pay 8% of the “toll tax” in years one through five, 15% in year 6, 20% in year 7, and 25% in year 8. There are acceleration provision to the payment of the “toll tax” if the taxpayer fails to pay timely, in the case of a liquidation, or the sale of all of its assets.
International Tax Planning: Consequences for Your 2017 Tax Return and Obligations
Since calendar year SFCs will be reported on the US Shareholder’s 2017 tax return, taxpayers must keep this in mind if they plan on extending the due date of their 2017 tax returns. Extending the due date of filing a tax return does not extend the time to pay the tax due with the tax return.
Since one of the accelerated provisions is failure to pay timely, the taxpayer must ensure that they have timely paid 8% of their “toll tax” by the original date of the tax return, not the extended date. If they do not have their tax fully paid in it could cause the taxpayer to have to pay the entirety of the “toll tax” immediately instead of over 8 years.
Connect with a Freed Maxick International Tax Accountant
If you have any questions or concerns about how this mandatory repatriation tax may impact you please reach out to the International Tax Services Team at Freed Maxick for a complementary InternationalTax Situation Review.
If you have any questions or concerns, call the Freed Maxick international tax accountants at 716-847-2651 to discuss your tax situation or start the process of setting an appointment by clicking here and submitting your contact information.
For more insight, observations and guidance on the new Tax Cuts and Jobs Act, visit our Tax Reform webpage.View full article
“The exodus continues. It’s like the party’s over and the last one to leave gets stuck with the check!”
- Agent Zed, “Men in Black” (a film about aliens)
Immigration laws and tax laws frequently go hand in hand – unsurprising given how complex both can be.
For resident and nonresident aliens who wish to leave the United States, the concept of the “sailing permit” can be one of the most important items of business that must be resolved before departing. But what exactly is a “sailing permit?” (Spoiler: It has nothing to do with maritime law, marina fees, or the United States Coast Guard.)
Internal Revenue Code Section 6851(d)(1) specifies that “[n]o alien shall depart from the United States unless he first procures from the Secretary a certificate that he has complied with all the obligations imposed on him by the income tax laws,” subject to certain exceptions by regulatory authorities. This certificate, simply put, is result of the IRS’s review and concurrence that an alien is up to date with all income tax obligations and is therefore cleared to leave.
The IRS refers to this certificate in informational materials as a “tax clearance document,” but it’s also known as a “departure permit” or, more commonly, as a “sailing permit.”
As mentioned earlier, all departing resident and nonresident aliens must obtain this document, with the following exceptions: foreign diplomats, employees of international organizations, exchange students and industrial trainees, aliens who earn no U.S. income, and commuting employees who reside in Canada or Mexico whose wages have U.S. taxes withheld.
Applying for a Sailing Permit from the IRS
If you don’t meet an exception, the application for a sailing permit is done using one of two forms: Form 2063 or Form 1040-C.
Form 2063 is the simpler and easier of the two forms to prepare, but has certain conditions that must be met. Resident aliens who have taxable income but are not, in the IRS’s evaluation, leaving to avoid paying income taxes, may file this form. Additionally, resident and nonresident aliens who have no taxable income for the current and preceding year may file this form. Form 2063 is short, but more importantly doesn’t require you to calculate and pay tax. If you don’t qualify for Form 2063, your only avenue is to file Form 1040-C, which is more onerous and requires a calculation of tax before you can receive a sailing permit.
Regardless of the form you need to file, the window of time you have is limited and you’ll need quite a bit of information to make the process go as smoothly as possible. If you are a resident or nonresident alien and you think you may need to apply for the sailing permit, we stand ready to assist you in the process.
Tax Planning and Advice for Resident and Nonresident Aliens
We at Freed Maxick pride ourselves on our experience and expertise with sailing permits and other international tax matters. If you are a resident or nonresident alien, and would like to discuss your tax and compliance responsibilities, please connect with us here , or call us at 716.847.2651 to schedule a brief conversation.View full article
More and more Canadian companies are expanding their business activities into the United States. The states are becoming increasingly aggressive in enforcement and assessment of various state taxes and have changed their laws in order to capture more revenues. For these reasons, state tax considerations and planning have become a hot topic for Canadian companies in recent years.
Canadian companies expanding their operations into the United States need to be aware of the state tax implications. State tax laws differ greatly from federal laws and vary widely among the states themselves. Although the treaty between Canada and the United States provides for an exemption from federal income taxes in the United States in certain circumstances (i.e. lack of a permanent establishment or fixed place of business), in most cases the states do not recognize this exemption.
Some state tax implications a Canadian company should be aware of when they start doing business in the United States are as follows:
- In most states, there is no state income tax exemption under the treaty.
- In most states, a Canadian company will be taxed on worldwide income (subject to state apportionment).
- It may be easier to have “nexus” and be subject to tax in a state than you would think. Nexus is generally defined as a “certain level of business activity conducted within a taxing jurisdiction allowing that jurisdiction the legal right to impose tax.”
- The definition of state nexus differs considerably from the federal definition of permanent establishment, varies from state to state, varies by tax type, and has changed in recent years with the adoption of the concept of economic nexus.
- In most states, soliciting sales through independent representatives or an employee is enough to give a company some type of state tax nexus.
- In some states, having sales into a state greater than a certain threshold will trigger a state income tax filing requirement.
- In most states, delivering product in company owned vehicles is enough to give a company some type of state tax nexus.
- In most states, having inventory on consignment is enough to give a company some type of state tax nexus.
- States impose various state taxes, including but not limited to sales tax, income tax, personal property tax, franchise tax, payroll tax, and real estate tax.
- When a business fails to pay sales tax or other trust fund taxes, state law allows a state to hold a “responsible person” personally liable for these taxes.
State nexus is complex and should be considered fully before expanding into the United States. Even a minimum amount of activity in a state could trigger a registration or state tax filing requirement.If you would like help with U.S. tax compliance for a Canadian business and reviewing your activities in the states or state tax exposure, contact a member of Freed Maxick’s experienced International Tax or SALT Group for assistance. View full article
Report of Foreign Bank and Financial Accounts (FBAR) Deadline June 30th
Did you know the deadline to file foreign bank and financial accounts (FBARs) is coming up soon? June 30th is right around the corner!
Many companies and individuals agree that the IRS rules and regulations in regard to foreign bank accounts and international tax issues are confusing and intimidating. That’s why it is important to connect with a trusted international tax professional… someone who can navigate through the complexities of these regulations and make things easy and more understandable to those who need to file.
A Little Background
From the IRS website, “If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.”
Important Reporting and Filing Information- Deadline June 30th
From the IRS website, “The FBAR is an annual report and must be received by the Department of the Treasury in Detroit, MI, on or before June 30th of the year following the calendar year being reported. While FinCEN strongly encourages individuals to electronically file FBARs, the form can be mailed to one of the two addresses below, provided that the mailing is received by June 30, 2013.”
What Should You Do Next?
There is limited time left to comply with IRS regulations regarding foreign bank accounts. Please feel free to contact us to connect with a member of our International Tax team. We at Freed Maxick CPAs are poised to assist you in assessing your FBAR filing requirements, assimilating the necessary information and preparing your current and past due FBARs. We also have considerable experience in helping taxpayer’s that have not been historically compliant to navigate the IRS guidelines and minimize their potential penalties through the various IRS Voluntary Disclosure Programs that have been available.
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Failure to File FBAR | Penalties
FBAR Penalty Relief Under Certain Circumstances
Recent FBAR Developments
Foreign Account Tax Compliance Act (FATCA)
U.S. Tax Services for Canadians
In April of 2010, the Department of the Treasury and the IRS asked for public comment regarding guidance projects and issues concerning interpretation and implementation of the new Foreign Account Tax Compliance Act (FATCA) provisions that stemmed from the HIRE Act of 2010. Unlike its FBAR compliance efforts that rely on delegated authority from the FinCEN and that are restricted due to concerns in the use of tax return or tax return information under Internal Revenue Code ( I.R.C.) 6103, the new provision eliminates these concerns and allows the IRS to use its own tax administration authority.
While there are benefits to the IRS using its own tax administrative authority, there are still some issues. Many of the issues encountered with the FBAR will continue to plague the new provision as well. For example:
The IRS will face the same problem with the new FATCA provisions as it does with the FBAR provisions, as there is no easy method to determine what constitutes the potential population filing base.
The new provision will be self-reported, similar to the FBAR.
Other roadblocks include the burden of what taxpayers will face, and increases filing requirements that have become considerably more complicated as a result of the addition of the FATCA filing. For example:
In addition to the required FBAR filing, taxpayers are now required to file the new FATCA information.
Taxpayers may also find that certain terms are defined differently in the BSA regulations and the Internal Revenue Code. For example, the term United States is defined in the BSA regulations as …the States of the United States, the District of Columbia, the Indian lands, and the Territories and Insular Possessions of the United States.20 While in the I.R.C. it is defined as “United States” when used in a geographical sense includes only the States and the District of Columbia
(Source from IRS.gov/pub/IRS-wd I.R.C 7701(a)(9) (2010).
Are you hitting roadblocks in filing your FBAR and FATCA? Do you have questions on how to navigate the complex IRS tax rules? If so, we can help. Freed Maxick is committed to helping you! Contact us today to get started.
By: Howard B. Epstein, CPA
The Bank Records and Foreign Transactions Act- commonly referred to as the Bank Secrecy Act, became law in 1970 out of a growing complexity of the national and international economy, and technological revolution. Activities increased not just at home but abroad. This allowed the IRS to require citizens or residents of the U.S., or a person in, or doing business in the U.S. to file reports on any financial accounts with aggregate totals valuing $10,000 or more. But did you know……
As a result of new legislation on foreign tax reporting and disclosure of financial assets, some taxpayers may be required to file the new foreign financial assets disclosure statement (Form 8938) with the income tax return, and the Report of Foreign Bank and Financial Accounts (FBAR) seperately. Filings and returns are due April 15th or June 15th, if living in the U.S. For those living outside the U.S., extensions for October 15th filings can go through December 15th. These reporting requirements will potentially add to both taxpayer roadblocks and the complexity of tax law changes.
On March 18, 2010, the President signed the HIRE Act, containing the Foreign Account Tax Compliance Act, into law. Addressing taxpayer concerns, the law requires individual taxpayers with foreign financial assets with an aggregate balance exceeding stipulated dollar amounts during a taxable year to file a disclosure statement with his or her income tax return for that taxable year. The stipulated dollar amounts can be found in IRS Form 8938. Beginning with 2011 individual tax return filings; the new law requires compliance with filing the disclosure statement (Form 8938) describing the maximum value of the assets during the taxable year. The disclosure statement should also provide the following information in the case of a:
Financial account – the name and address of the foreign financial institution in which such accounts are maintained and the number of such account.
Stock or security – the name and address of the foreign issuer and such information as is necessary to identify the class or issue of which such stock or security is part of.
Contract, interest, or other instrument – such information as is necessary to identify such contract, interest, or other instrument and the name(s) and addresses of all foreign issuers and counterparties with respect to such contact, interest, or other instrument.
What should you do next?
It is important to note that while there are similarities between the FBAR and FATCA filings, there are also a number of differences when filing each of the Forms. Freed Maxick International tax practice professionals are here to assist you with your FBAR filings. We can assess FBAR filing requirements and prepare current and past due FBARs. We can navigate the IRS guidelines and minimize potential penalties through the various IRS Voluntary Disclosure Programs available. Contact us to connect with our experts.