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Cross Border Tax Planning

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The document summarizes international tax planning opportunities for individuals moving to or from the United States. It discusses pre-arrival planning strategies like realizing income, undertaking asset transactions, and establishing foreign trusts before becoming a US tax resident. It also covers US taxation of residents and nonresidents, US reporting requirements for foreign accounts/entities, and estate planning techniques.

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International Tax   Cross Border Tax Planning Swiss American Chamber of Commerce Borel Private Bank & Trust San Mateo, California February 17, 2011 Brian Rowbotham Rowbotham & Company Accountants & International Tax Consultants (415) 433-1177 [email_address]
Interacting Tax Rules U.S. Domestic Tax Rules Bilateral Tax Treaty U.S. International Tax Rules Foreign Country Domestic Tax Rules Foreign Country International Tax Rules Rowbotham & c o m p a n y l l p
Frequent Planning Opportunities Situations frequently requiring international tax planning: Timing of income recognition: Managing U.S. tax residency Pre-arrival planning Pre-departure planning Rowbotham & c o m p a n y l l p
U.S. Taxation of Nonresident Foreign Nationals Taxed Not Taxed (3) Treaty Override of U.S. Rules U.S. Source Income - 30% tax rate (1) Interest and Dividends – 30% tax rates U.S. Trade or Business - 10% to 35% tax rates (same as U.S. residents) effectively connected with a U.S. trade or business (2) Rowbotham & c o m p a n y l l p Capital gains (unless in U.S. over 183 days) (3) Interest if defined as “Portfolio Income” (4) Exempt individuals (government, trainees, students, athletes) (5) Switzerland – U.S. Income Tax Treaty reduces the 30% royalty tax rate to zero (Article 12) U.K. – U.S. Income Tax Treaty reduces the 30% royalty tax rate to zero (Article 12)
U.S. Taxation of Residents Residents taxed on worldwide income There are three principal ways to become a U.S. tax resident: Substantial presence test (formula) (6) Lawful permanent resident (Green Card) Citizenship Rowbotham & c o m p a n y l l p Elections A foreign person: Present in the U.S. for 31 days and 75% of subsequent days in election Year (7) Married to a resident or citizen and elects to file a joint return (8)
The substantial presence test met if taxpayer is: Present in the U.S. at least 31 days in the current year; and Present in the U.S. for 183 days according to a formula: Year days multiplier 2011 120 1 120 2010 120 1/3 40 2009 120 1/6 20 180 Exceptions: (1) Taxpayer has a closer connection to a foreign country (9) (2) If current year’s days exceed 182: only Treaty tie breaker test will override residence Visas: H1-B, L-1, and other business or investment visas are generally not a factor for determining tax residence Substantial Presence Test Rowbotham & c o m p a n y l l p
Income Tax Treaty Treaty tie-breaker test may override “green card” status Article 4: Tie Breaker Test – Swiss – U.S. Income Tax Treaty If you are defined to be a resident of both countries, the Treaty will determine whether you are a resident of India or the United States In general to qualify, the foreign national must be subject to tax in other country Permanent home Center of vital interests Habitual abode Nationality Competent authorities Rowbotham & c o m p a n y l l p
Pre-Arrival Planning Pre-arrival planning can include: Realize income prior to becoming a U.S. tax resident Undertake transactions to step up basis in assets Pre-arrival sale of assets Pre-arrival foreign trust planning Pre-arrival gifting to U.S. or non U.S. persons Rowbotham & c o m p a n y l l p
1 Exercising Stock Options: Timing is Everything 2009 2010 2011 Arrival in U. S. Exercise Options August November Early exercise avoids taxation of “in the money options” Rowbotham & c o m p a n y l l p May Options awarded in 2008 Alternative 1 Exercise Options June Alternative 2 Worldwide Taxation 2 An incoming foreign national will generally be a resident from May – December 2010 An incoming foreign national will likely be a nonresident for all of 2010
Pre-Arrival Planning Stepping up Tax Basis Rowbotham & c o m p a n y l l p LLC Indian Citizen will move to U.S. in 2011 - Transfer: Low Basis Assets into a non-U.S. LLC - Indian tax can be avoided Pre-Arrival U.S. Tax Election Pre-Arrival or Post Arrival Elect to treat LLC as Corporation (10) File IRS Form 8832 Distribute assets or Liquidate company - No U.S. Impact due to nonresident status No Indian impact due to U.S. residence - U.S. assets stepped up to FMV - Sale of assets: Pre-arrival gain is tax-free Foreign Transactions Recognized Biddle v. Commr, 302 U.S. 573, Supreme Court held that U.S. tax concepts control for foreign persons. Year 2011 2011 2012 1 1 Exchange control to consider 2 2 2
Pre-Arrival Formation of Trusts Trust settled prior to arrival U.S. beneficiaries Foreign beneficiaries (1) Income taxed to settlor if trust established within 5 years of establishing U.S. residence (10) (2) Income not taxed to any U.S. beneficiary Rowbotham & c o m p a n y l l p Foreign Trust 1 2
Pre-Arrival Planning Liquidating Controlled Foreign Corporation Consider liquidating foreign corporation prior to becoming a U.S. resident Rowbotham & c o m p a n y l l p In general, holding assets in a controlled foreign corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting Controlled Foreign Corporation rules will convert capital gain into ordinary income (11) Investment income will be taxed currently to U.S. resident Portfolio Assets Nonresident U.S. Resident Foreign Corporation
Expatriation When do these rules apply? (13) Applies when: (1) Annual income tax over prior 5 years averages > $124k (2) Fair market value of assets > $2 million (3) Person is giving up: U.S. citizenship, long term residency (4) Residence will resume for any year that presence in the U.S. exceeds 30 days Rowbotham & c o m p a n y l l p U.S. Citizenship Resident green card if person was resident for 8 of prior 15 years Filing as a nonresident can be a deemed disposition after 7 years
Expatriation Outcome of Expatriation Income Tax: IRS: Rowbotham & c o m p a n y l l p There is a deemed disposition of assets Gain is taxable at normal U.S. tax rates Notification is required in order to expatriate: Tax can de deferred until assets are sold Tax applies to appreciation on worldwide assets Appreciation occurring prior to U.S. residence is excluded IRS Form 8854 must be filed Prior five years tax returns must be filed
U.S. Estate Planning Rowbotham & c o m p a n y l l p $5mm U.S. Citizen or U.S. Resident Remainder of Assets Taxed at 35% (1) Exemption goes to $1 million in 2013 (2) Unlimited marital deduction available for U.S. spouse. Deferral is permitted until non-U.S. spouse dies if a qualified domestic trust is formed. Worldwide Assets To U.S. or Foreign Relatives exemption 1 2
Reporting Foreign Reporting U.S. Residents Filing “Activities” include ownership in: Rowbotham & c o m p a n y l l p (1) Foreign Corporation 5471 $10,000 / year per company (2) Foreign Partnership 8865 $10,000/ year per entity (3) Foreign Trust 3520 25% of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value, a foreign corporation maximum of $10,000 (*) Potential criminal prosecution can result for non-reporting. Potential Penalties IRS Form for Non-compliance (*)
FBAR Foreign Bank Account Reporting Rowbotham & c o m p a n y l l p Current Requirements TDF 90-22.1 Voluntary disclosure [March – October 2009] program 2011 voluntary [February 14, 2011 - disclosure program August 31, 2011] How to handle the problem today if (a) Your foreign accounts are in a Swiss Bank (b) Your foreign accounts are not in Swiss Banks FATCA Rules for 2011 (*) Potential criminal prosecution can result for non-reporting. Maximum Monetary Penalties IRS Form for Non-compliance (*) 50% of account balance 5% in limited circumstances 20% of account balance 5% in limited circumstances 12% for accounts up to $75,000 25% for accounts over $75,000
U.S. Estate & Trust Planning Rowbotham & c o m p a n y l l p Foreign Citizen and Resident (1) Future generations subject to estate tax (2) Assets avoid U.S. estate tax (3) Assets avoid U.S. generation skipping tax (4) Exemption amount limited to $60,000 for nonresidents Distribution 1 2 U.S. Assets Foreign Assets U.S. Person Foreign Trust U.S. Person 1 U.S. Person U.S. Dynasty Trust Distributions to U.S. Person 2 Foreign Trust Foreign Corporation U.S. Assets 3 4
Estate Tax Rates and Exemption Amounts Rowbotham & c o m p a n y l l p * Executor may elect estate tax with increased exemption and step up basis of assets, or elect no estate tax with modified carry-over basis in assets. ** Exemption equivalent amount for nonresidents is limited to $60,000 for all years. $3,500,000 45% 2009 $5,000,000 35% (optional)* 2010 $5,000,000 35% 2011 $1,000,000 55% 2013 $5,000,000 35% 2012 Exemption Equivalent ** Top Estate Tax Rate For Decedents Dying During
Gift Tax Exclusions and Unified Exemption Rowbotham & c o m p a n y l l p Annual exclusion – $13,000 Gifts using exemption reduce estate tax exemption dollar for dollar No exemption allowed for nonresidents $1,000,000 2010 $5,000,000 2011 $1,000,000 2013 $5,000,000 2012 Exemption Equivalent For Gifts During
References Rowbotham & c o m p a n y l l p (1) Code § 871 (a) (2) Code § 871 (b) (3) Code § 871 (a)(2) (4) Code § 871 (h) (5) Code § 871 (c) (6) Code § 7701 (b)(3) (7) Code § 7701 (b)(4) (8) Code § 6013 Regs. § 301.7701 (b)(2)(a) Code § 679 (b) and (c)(3) Code § 951 Code § 951 (a)(1) Code § 877A
Rowbotham & Company LLP Rowbotham & c o m p a n y l l p Brian Rowbotham is a CPA with 33 years of experience advising businesses and individuals on complex domestic and international income and estate tax planning. He is the founding partner of Rowbotham & Company LLP which is almost exclusively dedicated to businesses and investors needing both domestic and international tax and accounting services. His clients include private and public companies around the globe which consist of: U.S. and foreign institutional investors, multinational families and executives and non-U.S. investors doing business in the U.S. Mr. Rowbotham has advised clients in major domestic and international litigation and has also served on the boards of both privately held and publicly traded companies. From 1992 to 2006, he directly supervised his firm’s engagement by trustees in Europe to assist with the recoveries of funds from one of the largest frauds in U.K. history. Over the past 20 years, he has represented large European and Middle Eastern institutional investors and numerous Asian families investing in U.S. Real Estate transactions. Mr. Rowbotham has been a frequent guest lecturer at the Haas School of Business, University of California Berkeley, and at the University of San Francisco. He taught graduate courses on corporate and partnership taxation at the University of California Extension. He has been a speaker for several U.S. and international tax planning organizations, including the ITPA and STEP, in Europe, Asia and the U.S. He presented in-house training lectures on investment structures for acquisitions of U.S. property at major European trust companies and banking institutions. Mr. Rowbotham is a frequent commentator on international tax topics of interest. He submitted proposed legislation to the U.S. Treasury in the FIRPTA arena which resulted in changes to final regulations on withholding tax on foreign partnerships with investments in U.S. Real Property. This past year he issued several commentaries that were critical of IRS procedures and policies in the FBAR amnesty program. He is member of the Tax Division of the AICPA and a past president of the San Francisco Tax Club. Mr. Rowbotham is a former featured columnist for Outlook, the official journal for the California Society of CPAs. He has been a contributor to the Journal of Accountancy and several international tax and investment journals. In 2005, he was profiled in the San Francisco Business Times as an entrepreneur of the accounting profession. In April 2009, his article “Doing Business in China” was featured on the cover of the California CPA Journal. Mr. Rowbotham began his career in national accounting firms in San Francisco and London, specializing in international tax, before founding Rowbotham & Company in 1991. He was born in Buenos Aires with British citizenship, and became a naturalized U.S. citizen in 1969. He earned his bachelors degree and MBA, with honors, from the University of California, Berkeley.

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Cross Border Tax Planning

  • 1. International Tax   Cross Border Tax Planning Swiss American Chamber of Commerce Borel Private Bank & Trust San Mateo, California February 17, 2011 Brian Rowbotham Rowbotham & Company Accountants & International Tax Consultants (415) 433-1177 [email_address]
  • 2. Interacting Tax Rules U.S. Domestic Tax Rules Bilateral Tax Treaty U.S. International Tax Rules Foreign Country Domestic Tax Rules Foreign Country International Tax Rules Rowbotham & c o m p a n y l l p
  • 3. Frequent Planning Opportunities Situations frequently requiring international tax planning: Timing of income recognition: Managing U.S. tax residency Pre-arrival planning Pre-departure planning Rowbotham & c o m p a n y l l p
  • 4. U.S. Taxation of Nonresident Foreign Nationals Taxed Not Taxed (3) Treaty Override of U.S. Rules U.S. Source Income - 30% tax rate (1) Interest and Dividends – 30% tax rates U.S. Trade or Business - 10% to 35% tax rates (same as U.S. residents) effectively connected with a U.S. trade or business (2) Rowbotham & c o m p a n y l l p Capital gains (unless in U.S. over 183 days) (3) Interest if defined as “Portfolio Income” (4) Exempt individuals (government, trainees, students, athletes) (5) Switzerland – U.S. Income Tax Treaty reduces the 30% royalty tax rate to zero (Article 12) U.K. – U.S. Income Tax Treaty reduces the 30% royalty tax rate to zero (Article 12)
  • 5. U.S. Taxation of Residents Residents taxed on worldwide income There are three principal ways to become a U.S. tax resident: Substantial presence test (formula) (6) Lawful permanent resident (Green Card) Citizenship Rowbotham & c o m p a n y l l p Elections A foreign person: Present in the U.S. for 31 days and 75% of subsequent days in election Year (7) Married to a resident or citizen and elects to file a joint return (8)
  • 6. The substantial presence test met if taxpayer is: Present in the U.S. at least 31 days in the current year; and Present in the U.S. for 183 days according to a formula: Year days multiplier 2011 120 1 120 2010 120 1/3 40 2009 120 1/6 20 180 Exceptions: (1) Taxpayer has a closer connection to a foreign country (9) (2) If current year’s days exceed 182: only Treaty tie breaker test will override residence Visas: H1-B, L-1, and other business or investment visas are generally not a factor for determining tax residence Substantial Presence Test Rowbotham & c o m p a n y l l p
  • 7. Income Tax Treaty Treaty tie-breaker test may override “green card” status Article 4: Tie Breaker Test – Swiss – U.S. Income Tax Treaty If you are defined to be a resident of both countries, the Treaty will determine whether you are a resident of India or the United States In general to qualify, the foreign national must be subject to tax in other country Permanent home Center of vital interests Habitual abode Nationality Competent authorities Rowbotham & c o m p a n y l l p
  • 8. Pre-Arrival Planning Pre-arrival planning can include: Realize income prior to becoming a U.S. tax resident Undertake transactions to step up basis in assets Pre-arrival sale of assets Pre-arrival foreign trust planning Pre-arrival gifting to U.S. or non U.S. persons Rowbotham & c o m p a n y l l p
  • 9. 1 Exercising Stock Options: Timing is Everything 2009 2010 2011 Arrival in U. S. Exercise Options August November Early exercise avoids taxation of “in the money options” Rowbotham & c o m p a n y l l p May Options awarded in 2008 Alternative 1 Exercise Options June Alternative 2 Worldwide Taxation 2 An incoming foreign national will generally be a resident from May – December 2010 An incoming foreign national will likely be a nonresident for all of 2010
  • 10. Pre-Arrival Planning Stepping up Tax Basis Rowbotham & c o m p a n y l l p LLC Indian Citizen will move to U.S. in 2011 - Transfer: Low Basis Assets into a non-U.S. LLC - Indian tax can be avoided Pre-Arrival U.S. Tax Election Pre-Arrival or Post Arrival Elect to treat LLC as Corporation (10) File IRS Form 8832 Distribute assets or Liquidate company - No U.S. Impact due to nonresident status No Indian impact due to U.S. residence - U.S. assets stepped up to FMV - Sale of assets: Pre-arrival gain is tax-free Foreign Transactions Recognized Biddle v. Commr, 302 U.S. 573, Supreme Court held that U.S. tax concepts control for foreign persons. Year 2011 2011 2012 1 1 Exchange control to consider 2 2 2
  • 11. Pre-Arrival Formation of Trusts Trust settled prior to arrival U.S. beneficiaries Foreign beneficiaries (1) Income taxed to settlor if trust established within 5 years of establishing U.S. residence (10) (2) Income not taxed to any U.S. beneficiary Rowbotham & c o m p a n y l l p Foreign Trust 1 2
  • 12. Pre-Arrival Planning Liquidating Controlled Foreign Corporation Consider liquidating foreign corporation prior to becoming a U.S. resident Rowbotham & c o m p a n y l l p In general, holding assets in a controlled foreign corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting Controlled Foreign Corporation rules will convert capital gain into ordinary income (11) Investment income will be taxed currently to U.S. resident Portfolio Assets Nonresident U.S. Resident Foreign Corporation
  • 13. Expatriation When do these rules apply? (13) Applies when: (1) Annual income tax over prior 5 years averages > $124k (2) Fair market value of assets > $2 million (3) Person is giving up: U.S. citizenship, long term residency (4) Residence will resume for any year that presence in the U.S. exceeds 30 days Rowbotham & c o m p a n y l l p U.S. Citizenship Resident green card if person was resident for 8 of prior 15 years Filing as a nonresident can be a deemed disposition after 7 years
  • 14. Expatriation Outcome of Expatriation Income Tax: IRS: Rowbotham & c o m p a n y l l p There is a deemed disposition of assets Gain is taxable at normal U.S. tax rates Notification is required in order to expatriate: Tax can de deferred until assets are sold Tax applies to appreciation on worldwide assets Appreciation occurring prior to U.S. residence is excluded IRS Form 8854 must be filed Prior five years tax returns must be filed
  • 15. U.S. Estate Planning Rowbotham & c o m p a n y l l p $5mm U.S. Citizen or U.S. Resident Remainder of Assets Taxed at 35% (1) Exemption goes to $1 million in 2013 (2) Unlimited marital deduction available for U.S. spouse. Deferral is permitted until non-U.S. spouse dies if a qualified domestic trust is formed. Worldwide Assets To U.S. or Foreign Relatives exemption 1 2
  • 16. Reporting Foreign Reporting U.S. Residents Filing “Activities” include ownership in: Rowbotham & c o m p a n y l l p (1) Foreign Corporation 5471 $10,000 / year per company (2) Foreign Partnership 8865 $10,000/ year per entity (3) Foreign Trust 3520 25% of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value, a foreign corporation maximum of $10,000 (*) Potential criminal prosecution can result for non-reporting. Potential Penalties IRS Form for Non-compliance (*)
  • 17. FBAR Foreign Bank Account Reporting Rowbotham & c o m p a n y l l p Current Requirements TDF 90-22.1 Voluntary disclosure [March – October 2009] program 2011 voluntary [February 14, 2011 - disclosure program August 31, 2011] How to handle the problem today if (a) Your foreign accounts are in a Swiss Bank (b) Your foreign accounts are not in Swiss Banks FATCA Rules for 2011 (*) Potential criminal prosecution can result for non-reporting. Maximum Monetary Penalties IRS Form for Non-compliance (*) 50% of account balance 5% in limited circumstances 20% of account balance 5% in limited circumstances 12% for accounts up to $75,000 25% for accounts over $75,000
  • 18. U.S. Estate & Trust Planning Rowbotham & c o m p a n y l l p Foreign Citizen and Resident (1) Future generations subject to estate tax (2) Assets avoid U.S. estate tax (3) Assets avoid U.S. generation skipping tax (4) Exemption amount limited to $60,000 for nonresidents Distribution 1 2 U.S. Assets Foreign Assets U.S. Person Foreign Trust U.S. Person 1 U.S. Person U.S. Dynasty Trust Distributions to U.S. Person 2 Foreign Trust Foreign Corporation U.S. Assets 3 4
  • 19. Estate Tax Rates and Exemption Amounts Rowbotham & c o m p a n y l l p * Executor may elect estate tax with increased exemption and step up basis of assets, or elect no estate tax with modified carry-over basis in assets. ** Exemption equivalent amount for nonresidents is limited to $60,000 for all years. $3,500,000 45% 2009 $5,000,000 35% (optional)* 2010 $5,000,000 35% 2011 $1,000,000 55% 2013 $5,000,000 35% 2012 Exemption Equivalent ** Top Estate Tax Rate For Decedents Dying During
  • 20. Gift Tax Exclusions and Unified Exemption Rowbotham & c o m p a n y l l p Annual exclusion – $13,000 Gifts using exemption reduce estate tax exemption dollar for dollar No exemption allowed for nonresidents $1,000,000 2010 $5,000,000 2011 $1,000,000 2013 $5,000,000 2012 Exemption Equivalent For Gifts During
  • 21. References Rowbotham & c o m p a n y l l p (1) Code § 871 (a) (2) Code § 871 (b) (3) Code § 871 (a)(2) (4) Code § 871 (h) (5) Code § 871 (c) (6) Code § 7701 (b)(3) (7) Code § 7701 (b)(4) (8) Code § 6013 Regs. § 301.7701 (b)(2)(a) Code § 679 (b) and (c)(3) Code § 951 Code § 951 (a)(1) Code § 877A
  • 22. Rowbotham & Company LLP Rowbotham & c o m p a n y l l p Brian Rowbotham is a CPA with 33 years of experience advising businesses and individuals on complex domestic and international income and estate tax planning. He is the founding partner of Rowbotham & Company LLP which is almost exclusively dedicated to businesses and investors needing both domestic and international tax and accounting services. His clients include private and public companies around the globe which consist of: U.S. and foreign institutional investors, multinational families and executives and non-U.S. investors doing business in the U.S. Mr. Rowbotham has advised clients in major domestic and international litigation and has also served on the boards of both privately held and publicly traded companies. From 1992 to 2006, he directly supervised his firm’s engagement by trustees in Europe to assist with the recoveries of funds from one of the largest frauds in U.K. history. Over the past 20 years, he has represented large European and Middle Eastern institutional investors and numerous Asian families investing in U.S. Real Estate transactions. Mr. Rowbotham has been a frequent guest lecturer at the Haas School of Business, University of California Berkeley, and at the University of San Francisco. He taught graduate courses on corporate and partnership taxation at the University of California Extension. He has been a speaker for several U.S. and international tax planning organizations, including the ITPA and STEP, in Europe, Asia and the U.S. He presented in-house training lectures on investment structures for acquisitions of U.S. property at major European trust companies and banking institutions. Mr. Rowbotham is a frequent commentator on international tax topics of interest. He submitted proposed legislation to the U.S. Treasury in the FIRPTA arena which resulted in changes to final regulations on withholding tax on foreign partnerships with investments in U.S. Real Property. This past year he issued several commentaries that were critical of IRS procedures and policies in the FBAR amnesty program. He is member of the Tax Division of the AICPA and a past president of the San Francisco Tax Club. Mr. Rowbotham is a former featured columnist for Outlook, the official journal for the California Society of CPAs. He has been a contributor to the Journal of Accountancy and several international tax and investment journals. In 2005, he was profiled in the San Francisco Business Times as an entrepreneur of the accounting profession. In April 2009, his article “Doing Business in China” was featured on the cover of the California CPA Journal. Mr. Rowbotham began his career in national accounting firms in San Francisco and London, specializing in international tax, before founding Rowbotham & Company in 1991. He was born in Buenos Aires with British citizenship, and became a naturalized U.S. citizen in 1969. He earned his bachelors degree and MBA, with honors, from the University of California, Berkeley.