As an alumni to the courses taught by Professor Alan Cerf at UC Berkeley, Brian Rowbotham and Cindy Hsieh returns to campus each semester to be a guest lecturer for the new classes.
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International Tax Planning
1. International Tax Planning
Brian Rowbotham, Managing Partner
br@rowbotham.com
Cindy Hsieh, Tax Director
chsieh@rowbotham.com
November 5, 2014
1
2. Rowbotham & Company
Founded in 1991
Offices in San Francisco and Silicon Valley
Areas of Service:
International tax planning (corporate & individual)
M&A, SEC Consulting
Executive tax planning
- Compensation & option planning
- Estate planning
Valuations
Assurance (Audits & due diligence)
Litigation consulting
Corporate & individual income tax compliance
New venture services
Member: Geneva Group International, 6th
largest worldwide network of accounting and law
firms worldwide
Website: www.rowbotham.com
Recruitment: Cindy Hsieh, chsieh@rowbotham.com
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3. Overview
Income tax:
-- Individual taxation focus
-- Examples of expat calculation
Estate tax & Gift tax:
-- Estate and Gift Tax Comparison Chart
-- Gifting – General rules and examples
-- Gifting – Foreign to U.S. Persons
International Tax Planning
International Tax Evasion
Tax Careers
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4. Key Questions To Ask
In International Tax
Where is the income generated
Where is the service performed
What type of income (capital, ordinary, license, royalty, rent, etc)
Understand flow of money
4
6. Expatriates vs. Expatriation
Expatriates (“Expats”)
• The expatriation tax provisions apply to US citizens who have renounced
their citizenship and to long term residents (as defined in IRC 877(e))
who have given up their green cards and ended their US resident status
for federal tax purposes.
• An exit tax applies to these persons that is equivalent to the tax on a
“deemed sale” of their assets
• Tax applies to persons with assets with fair market value in excess of $2
mm, or have an average income tax liability exceeding $155,000 (for
2013), over past 5 years.
• A person who is temporarily or permanently residing in a country and
culture other than that of the person’s upbringing.
• Expats, including US citizens and green card holders are still taxed on
their world wide income and are required to file income tax returns
annually. Statistics show that 65% of expats are not aware of their annual
filing obligations.
Expatriation
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8. Example – High Tax Jurisdiction
Facts
• U.S. Citizen
• Lives and works in Japan, 45% tax rate
Foreign tax credit disallowed [a] / [b] x [c]
= $99,200 / $200,000 = 49.6% x $90,000
= $44,640 disallowed portion
$90,000 paid
- $44,640 disallowed FTC
= $45,360 usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Japanese Tax Return 2014 USA Tax Return
Wage
Tax Rate (45%)
200,000
90,000 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
(99,200) [a]
100,800
33,264
(33,264)* [c]
$0
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9. Example – High Tax Jurisdiction
Facts
• U.S. Citizen
• Lives and works in Belgium, 50% tax rate
Foreign tax credit disallowed [a] / [b] x [c]
= $_______ / $200,000 = _____% x $90,000
= $_______ disallowed portion
$100,000 paid
- $_______ disallowed FTC
= $_______ usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Belgium Tax Return 2014 USA Tax Return
Wage
Tax Rate (50%)
200,000
100,000 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( ) [a]
________
________
( )* [c]
$_______
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10. Example – High Tax Jurisdiction
Facts
• U.S. Citizen
• Lives and works in Belgium, 50% tax rate
Foreign tax credit disallowed [a] / [b] x [c]
= $99,200/ $200,000 = 49.6% x $90,000
= $44,640 disallowed portion
$100,000 paid
- $44,640 disallowed FTC
= $55,360 usable FTC
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 Belgium Tax Return 2014 USA Tax Return
Wage
Tax Rate (50%)
200,000
100,000 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800
33,264
( 33,264 )* [c]
$0
10
11. Example – Zero Tax Jurisdiction
Facts
• U.S. Citizen
• Lives and works in Dubai, 0% tax rate
Foreign tax credit disallowed [a] / [b] x [c]
= $99,200/ $200,000 = 49.6% x $______
= _______
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 – No Dubai Tax Return 2014 USA Tax Return
Wage
Tax Paid
200,000
0 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800
33,264
( )*
$_________
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12. Example – Zero Tax Jurisdiction
Facts
• U.S. Citizen
• Lives and works in Dubai, 0% tax rate
Foreign tax credit disallowed [a] / [b] x [c]
= $99,200/ $200,000 = 49.6% x $0 tax paid
= $0
Limited by FTC limit = US Tax liabilityLimited by FTC limit = US Tax liability
2014 – No Dubai Tax Return 2014 USA Tax Return
Wage
Tax Paid
200,000
0 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
( 99,200) [a]
100,800
33,264
( 0 )*
$33,264
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13. Expat Example
Green Card Holder in Treaty Country
1. As a green card holder living outside of U.S., you can be taxed as a resident (Form
1040) or nonresident (Form 1040NR)
2. Income Tax Treaty overrides U.S. domestic tax rules
3. Income earned whiled in treaty country as a GC Holder may be exempt and taxed in
foreign country only.
4. Be aware of potential expatriation rule
Alternative 2:
Facts
• U.S. Green Card Holder
• Lives and works in Japan, 45% tax rate
2014 Japanese Tax Return 2014 USA Tax Return
Wage
Tax Rate (45%)
200,000
90,000 [c]
Wage
FEI Exclusion
Taxable Income
U.S. Tax Rate (33%)
Foreign Tax Credit
Tax Due with U.S. return
200,000 [b]
(99,200) [a]
100,800
33,264
(33,264)* [c]
$0
Alternative 1:
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14. Expatriation Rule
Covered Expatriate
• - U.S. Citizen
• - Long-term resident (held green card 8 years or more)
Thresholds
• - Assets: $2million plus
• - Average income tax
• Past 5 years - $155,000
Required filing: Form 8854
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16. Gift and Estate Taxes
• Residents are subject on worldwide assets
• Nonresidents for gift/estate purposes are
subject to tax on U.S. assets
– Gift tax – §2501, Reg. § 25.2501-1
– Estate tax – §2101, Reg. § 20.0-1
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17. Gift and Estate: Domicile
• For gift/estate tax purposes, residents are
defined by one’s domicile
– Permanent home
– Facts and circumstances
– Intent
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18. Gift and Estate: Domicile
Examples:
• U.S. citizen living abroad
– Domicile = U.S., subject on worldwide assets
• Green card holders living in U.S.
– Domicile = U.S.
• Green card holders living outside U.S.
– Domicile = Uncertain. Possibly non-domiciled in US
• Visa holders living in U.S.
– Domicile = Uncertain. Likely non-domiciled in US
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19. Domestic: Estate & Gift Tax Rates and
Exemption Amounts
For Decedents Dying During: Top Estate Tax Rate Exemption Equivalent **
2009 45% $3,500,000
2010 0% $5,000,000
2011 35% $5,000,000
2012 35% $5,120,000
2013 40% $5,250,000
2014 40% $5,340,000
Non-U.S persons only get $60,000 in lifetime exemption
Unlimited gift marital deduction available for U.S. spouse
Limited gift for non-U.S. spouse: $145,000
Annual exclusion - $ 14,000 – Resident and nonresident
Gifts using exemption reduce estate tax exemption dollar for dollar
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20. Gift / Estate Tax: Comparison
Gift tax
resident
(domicile)
Gift tax
nonresident
(non-
domicile)
Estate tax
resident
(domicile)
Estate tax
nonresident
(non-
domicile)
Annual
exemption
2013, 2014
$14,000 on
worldwide
assets
$14,000 on
U.S.
properties
Excess:
tax rate
40% 40% 40% 40%
Lifetime
exemption
$5.34mm
(2014)
None $5.34mm
(2014)
$60,000 on
U.S.
properties
21. Gift Tax - Nonresidents
* Law uncertain for treatment of US Partnership interest for the purpose of estate tax
Type of assets Gift Tax Estate Tax
Cash in U.S. banks Yes No
U.S. Bonds No Yes
Non-U.S. Govt bonds No No
U.S. Stocks No Yes
U.S. Partnership * No Yes
U.S. Corp stocks No Yes
Real Property in U.S. Yes Yes
Tangible Properties in
U.S.
Yes Yes
Non-U.S. Assets No No
22. Gifting: Gifting Car vs. Gifting Cash To
Buy A Car
Mom
China
You
Student
Mom pays for
a car in USA
No Form 3520 is required since amount is under $100,000 USD
Mom
China
Bank of Beijing
Your Account
at Bank of America
in California
Your Account
at the
Bank of Beijing
No U.S. gift exposure
You are transferring
money to yourself
$30,000 Car - Gift from parent
(14,000) 2013 Annual Gift Exclusion
16,000 Gift taxable income exposure
6,400 Gift tax liability exposure to donor
(Assumed 2014 max rate of 40%)
You
Student
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23. Gifting: Down Payment For Condo
Mom
China
You
Student
Bank of Beijing
$300,000
Bank of America
In California
Calculating the tax upon gifting:
$300,000 Cash Gift
( ) 2014 Annual exclusion
$______ Gift tax exposure
X 40% 2014 Max rate
$_______ Tax Exposure to Donor
• Are you required to file Form 3520?
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24. Gifting: Down Payment For Condo
Mom
China
You
Student
Bank of Beijing
$300,000
Bank of America
In California
Calculating the tax upon gifting:
$300,000 Cash Gift
($14,000) 2014 Annual exclusion
$286,000 Gift tax exposure
X 40% 2014 Max rate
$ 114,400 Tax Exposure to Donor
Mom
China
Your Account
at Bank of America
in California
Your Account
at the
Bank of Beijing
No U.S. gift exposure
You are transferring
money to yourself
Bank of Beijing
$300,000
You
Student
• Yes, you are required to file Form 3520 because amount
is equal to or more than $100,000 USD 24
25. Top Tax Rates
Income Tax - Operating Income
Capital Gains on Sale
Estate Tax Risk [40% Rate]
39.6% 39.6% 39.6% 39.6%
20% 20% 20% 20%
Yes Yes * Yes * No
NR
USRP
NR
USRP
NR
USRP
NR-1
USRP
NR-2
(4)(1) (2) (3)Direct and Indirect Ownership (a)
(1) Foreign Person
(2) U.S. or Foreign LLC
(3) U.S. or Foreign Partnership
(4) U.S. or Foreign Trust
Top Tax Rates
Income Tax - Operating Income
Second Level Dividend Tax
Capital Gains on Sale
Estate Tax Risk [40% Rate]
35% 35% 35% 39.6%
30% 30% 30% -0-
35% 35% 35% 20%
Yes No No No
NR
USRP
NR
USRP
NR
USRP
(8)(5) (6) (7)Corporate Ownership (b)
(5) U.S. Corporation
(6) Foreign Corporation
(7) Foreign / U.S. Corporation
(8) Hybrid Structure
USRP
NR
99%
1%
(for 99% owner)
(a) For nonresident individuals and high net worth families.
(b) For corporate and institution investors.
Limited Liability
Company
Partnership Trust
U.S. Inc. Foreign Corp.
U.S. Inc.
Foreign Corp. Foreign Mgmt.
Corp.
* Depends on whether situs of the entity is U.S. or foreign.
Foreign Hybrid
Foreign Investment in U.S. Real Property
27. Tax Havens
The U.S. National Bureau of Economic Research has suggested that roughly
15% of countries in the world are “tax havens”. Tax haven countries tend to
be small and affluent, with good governance and strong secrecy laws.
Countries/jurisdictions commonly referred to as tax havens:
• Bermuda
• British Virgin Islands
• Cayman Islands
• The Channel Islands of Jersey and Guernsey
• The Isle of Man
• Jebel Ali Free Zone in the United Arab Emirates
• Netherlands Antilles
• Turks and Caicos Islands
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28. Use of Tax Haven
Portfolio Assets (stocks,
bonds, cash)
Non-U.S. Resident
BVI Corporation
Nonresident
Citizens
U.S. Residents
Portfolio Assets (stocks,
bonds, cash)
okay
Not goodBVI Corporation
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29. Why Tax Haven Does Not Work For U.S.
Taxpayers
U.S. Resident
BVI Corporation
• In general, holding assets in a controlled non-U.S.
corporation creates unnecessary tax complexity,
increased taxes, and additional tax reporting
• Controlled Foreign Corporation rules will convert
capital gain (taxable at 20%) into ordinary income
(taxed at 39.6%)
• Investment income will be taxed currently to
U.S. resident – no deferral
Portfolio Assets (stocks,
bonds, cash)
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30. How Tax Haven May Work
• Foreign corporation owned less than 50% by U.S. persons will not result
in immediate taxation
• Since U.S. does not have income tax treaty with BVI, the profit
distributions (dividends) will be taxed at ordinary income tax rate
• However, be aware of passive foreign investment company (PFIC) rules!
U.S. Resident Non-U.S.
Resident
BVI Corporation
Portfolio Income
49% 51%
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31. Disclosure Forms
(*) Potential criminal prosecution can result for non-reporting.
Potential Penalties
IRS Forms for Non-compliance (*)
(1) Non-U.S. Corporation 5471 $10,000 / year per company
(2) Non-U.S. Partnership 8865 $10,000/ year per entity
(3) Non-U.S. Disregarded Entity 8858 $10,000/ year per entity
(3) Non-U.S. Trust & Gift 3520 35% of distribution
3520A 5% per month up to 25%
(4) Transfers of Assets to 926 25% of value,
a non-U.S. corporation maximum of $10,000
(5) Non-U.S. Bank FINCEN 114 50% of highest balance
Account Report (TDF 90-22.1) in prior years
(6) Non-U.S. Specified 8938 $10,000/year to $50,000
Asset – New for 2011
31
32. Tax Evasion: Offshore Accounts
Hiding money in offshore bank accounts:
•Form TDF90-22.1 Foreign Bank Account Report (“FBAR”)
•Civil penalty and criminal prosecution
Bank secrecy from the IRS is now history:
•Swiss Bank – UBS Scandal
•HSBC India, Credit Suisse, Deutsche Bank
Offshore Voluntary Disclosure Initiative #1 – Ended Oct. 15, 2009
• 30,000 taxpayers came forward
• Collected $3.4+ billion in taxes and penalties
• 20% penalty
Offshore Voluntary Disclosure Initiative #2 – Ended Sept 9, 2011
• 12,000 taxpayers came forward
• Collected $1+ billion in taxes and penalties as of Sept 2011
• 25% penalty
Offshore Voluntary Disclosure Initiative #3 – Announced in January 2012. Indefinite Ending Date
• 27.5% penalty
• Collected over $5B so far from the past initiatives
• New: Streamline process announced July 2014 for non-willful taxpayers
32
34. How To Get Into A Tax Career
Take accounting and tax classes, list on your resume
Get an internship with public accounting firms
Get an internship or part-time job in accounting departments of private
companies
Volunteer:
Volunteer Income Tax Assistance (VITA)
http://publicservice.berkeley.edu/vita
Tax-Aid
http://www.tax-aid.org/
UC Berkeley Winter Externship
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