Clients Letter

For many years the IRS has been demanding taxpayers with foreign financial accounts to be in compliance with the law. The FBAR is an informational return that was designed to fight the tax avoidance. The law requires a US person to file the FBAR if the US person has a financial interest or signature authority in a bank account located in a foreign country and the combined value of all foreign financial accounts is $10,000 or higher during any day of the calendar year. A US person is a US Citizen, US resident, US entity incorporated in the US and formed under the US law. Accordingly, the entities required to file the FBAR are corporations, partnerships, limited liability companies, estates, and trusts. The financial accounts that must be reported in the FBAR are securities, brokerage, savings, demand, checking, deposit, time deposit, and other accounts maintained with a financial institution.

"The US is one of the only countries to tax its citizens on income earned while living abroad" (Abrahamian, 2012). There are difficulties in filing taxes from overseas with heavy paperwork, lack of online filing options, and lots of local and foreign language resources for translation. The Report of Foreign Bank and Financial Accounts law requires all Americans, including those living abroad, with at least $10,000 in overseas bank accounts to file a supplementary form disclosing all of their foreign accounts. The Foreign Account Tax Compliance Act requires foreign financial institutions to provide IRS with information on US clients.

U.S citizens who has a financial interest in one or more foreign financial accounts must submit a report to the U.S treasury by electronically filing “Report of Foreign Bank and Financial Accounts (FBAR)”, when the aggregate value of those accounts exceeds $10,000 . Failure to comply with the FBAR reporting or even record keeping requirements can result in hefty penalties. However, you have the right to appeal against the proposed FBAR penalties if the IRS assessment does not reflect things correctly. But there are certain important factors on FBAR penalty appeals that you have to know.

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income they receive from sources within the United States (IRS, 2015). These reduced rates and exemptions vary among countries and specific items of income. The US has bilateral income tax treaties with many global trading partners. Under the terms of those treaties, a company that establishes a taxable presence in a foreign country is understood to have created a permanent establishment. With few exceptions, a treaty must exist between the US and the foreign country for the concept to apply. If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. If you are a resident of both the United States and another country under each country 's tax laws, you are a dual resident taxpayer. If you are a dual resident taxpayer, you can still claim the benefits under an income tax treaty. The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence.

The income earned by the U.S. individuals and corporations in the foreign countries or foreign source are taxed by the U.S. government, even though other countries also tax any income earned within their borders. To offset this double taxation of income by two different countries, the U.S. grants both individuals and corporations a foreign tax credit (FTC) that can be used to offset income taxes assessed by a foreign country on the income earned there (Foreign Tax Credit, FTC, n.d.). The FTC is allowable for foreign income taxes and other similar taxes, such as excess profit and war profit taxes. However, only income taxes qualify for the credit. The Value Added Taxes (VAT) and property, sales and severance taxes do not qualify, although they may be deductible.

That's because the IRS allows hefty income exclusions for US citizens living overseas that can result in significant tax savings. The agency has specific rules governing income exclusions, however, and these rules are not always easy to understand. Due to their length and complexity, it takes hours just to read the IRS regulations for expat taxes.

Corporate tax avoidance matters, however, are difficult to analyze without consistent geographical disclosures. Unfortunately, there is a significant lack of

The United States employs a worldwide taxation system accompanied by a complex system of foreign tax credits. So What the U.S Tax? The United States taxes the worldwide income of its citizens (both resident and non-resident). Accordingly, there is a system of foreign tax credits- a partial credit system- that aims to avoid double taxation (Desai, 2005). How the U.S Tax? The FTC system in the US allocates some expenses, such as interest payments and R&D expenses, based on measures of worldwide activity. Other parts of the tax code apply ratios depending on the circumstances, such as the allocations for export income 863(b) of the U.S Tax Code. When to Tax? Active income of incorporated affiliates overseas is taxed only when dividends are remitted. Active income excludes Subpart F income. And where the U.S. tax? For the most part, the U.S. permits worldwide averaging. Companies are required to segregate income into “basket” and perform tax credit calculations on each of the baskets.

On April 2016, the WSJ detailed on the article “The “Panama Papers” Scandal” the wrongdoing of a Panamanian Law Firm, Mossack Fonseca, which specialized on offshores holding companies. These companies were protecting “their clients by hiding wealth or suspicious transactions in tax havens.” Public figures, executives and celebrities were some of the clients of those companies, reported the WSJ. This article also reports that “more than 70 Swiss banks confessed to the U.S. that they encouraged tax evasion, many said … using Panamanian corporations.” In other words, the Panama Papers bring to light the possibility of tax evasion by many taxpayers who deposit funds illegally into those companies without a true business purpose. As a result, “the U.S Justice Department says it is reviewing the documents to see if they contain evidence of corruption that could be prosecuted,” stated the

If you are getting currency from overseas and it is classified as income, then your tax return will become more difficult to fill out, and you may have to pay extra taxes. In order to avoid this, some people will have foreign currency transferred into a third-party account, convert it, and then either withdraw or transfer it.

So since income earned in airspace over international waters is not considered a foreign source income, how should the taxpayer classify it?

The foreign tax credit limit is there to ensure that the foreign tax credit does not exceed U.S tax on foreign taxable income. Generally there will be foreign taxes that the corporation will have to pay for their exports abroad. The foreign tax credit is there to stop double taxation, which occurs when foreign countries tax the same income that the U.S. will tax. It is also key to look at tax treaties that the U.S has with various countries in Europe. There might be tax treaties that are very favorable to companies that export from the U.S to certain European countries. Once the income is determined either foreign or domestically sourced, the corporation can then source their deductions. Deductions are allocated based to the particular class of income it generates and then they’re apportioned based on whether the income is foreign or domestically sourced. In this case Hall Oakes Inc. could have some deductions related to their income from export operations.

The Foreign Tax Credit is designed to be very simple in nature, as it only requires basic math skills to compute the tax liability with the credit. As mentioned above, income that is earned in a foreign location may be taxed by the respective government of that location. Therefore, because the United States utilizes a global tax system, the individual or entity may be taxed by the foreign government and definitely taxed by the United States government. Therefore in order to reduce the double taxation liability, the government allows U.S. taxpaying entities to reduce U.S. income tax “dollar for dollar (credited) by the amount that has been paid in income tax by a U.S. person to a foreign government” (Adams). Furthermore, there are two limitations on this credit that a U.S. taxpaying entity must be aware of. The first limitation states that only income tax is only susceptible to the credit. To further explain, this means “taxes like Value Added Tax, property taxes, taxes on capital or assets, and any other tax which the U.S. does not consider a tax on income are excluded from the foreign tax credit” (Adams). (However, a valuable tax planning strategy will note that these taxes may be deductible on an individual’s Schedule A for Itemized Deductions. In addition, if an individual owns a business or rents out a building abroad, he/she can deduct these expenses on his/her Schedule C or Schedule E). The second limitation states that an

A tax haven is a country that offers foreign corporations and individuals relatively low corporate and income tax rates, with a politically and economically stable environment. Some tax havens are Switzerland, Hong Kong, Bermuda, Ireland, and the Cayman Islands. Although the businesses have moved across seas, the United States forces them to pay the corporate tax. Fortunately for the businesses, it they keep their income and money across seas they do not have to the pay the American corporate tax, Unfortunately this is ghastly for the United States Government businesses keep their products and profits over seas.

Due to the various forms of generating income and the availability to generate it in various incorporated organizations within these different governments, legislation has tried to enact tax treaties with them. A tax treaty is an agreement made between two governing bodies, allowing individuals to determine what income producing items are considered taxable, in which country, and whether or not the primary country will allow a credit for foreign taxes paid or if they will be subjected to double taxation ("tax treaty"). Tax treaties, were developed with the purpose of avoiding double taxation on worldwide income as well as tax evasion by resident individuals earning income from abroad.