The Internal Revenue Service Will End the Offshore Voluntary Disclosure Program before October 2018

On March 13, 2013 the Internal Revenue Service announced that it will end the 2014 Offshore Voluntary Disclosure Program (OVDP) on Sept. 28, 2018.  This means that taxpayers have approximately 6 months left if they wish to participate in the program.

The OVDP is a voluntary disclosure program that offers taxpayers an opportunity to report foreign financial assets for prior undisclosed tax years.  The disclosure period is defined as the most recent eight tax years for which the return due date has already passed.  Nondisclosure by taxpayers means that they may be exposed to potential criminal liability.  They are also exposed to substantial civil penalties if the IRS determines that the taxpayer was engaging in willful failure to report foreign financial assets and to pay all taxes due with respect to such assets.  

The benefits of participating in the OVDP include minimize the risk of criminal liability.  If a taxpayer is accepted in the OVDP and ultimately resolves outstanding issues by way of a closing agreement, the IRS Criminal Investigation division will not recommend criminal prosecution to the Department of Justice for the relevant tax periods up to the date of the disclosure.  Another benefit to the OVDP is by entering into agreed-upon terms, the taxpayer can resolve outstanding issues in connection with the additional taxes that are owed and the civil tax penalties that will be due.

Taxpayers should consult with a tax attorney to determine whether the OVDP is the right program for them.  If it is determined that this option is not appropriate, taxpayers should consider other alternatives, including Streamlined Filing Compliance Procedures, Delinquent FBAR submission procedures, or Delinquent international information return submission procedures.

For more information on each of these options, visit the IRS website at: https://www.irs.gov/individuals/international-taxpayers/options-available-for-u-s-taxpayers-with-undisclosed-foreign-financial-assets

Will the New Tax Act Affect You? Part Four

In my last post, I discussed how the Tax Cuts and Jobs Act may impact an individual’s decisions regarding estate planning.  In this post, I will briefly survey several significant changes affecting the U.S. international tax realm.

Part Four: International Tax Reform

New Dividends Received Deduction

The Act enacted a new Code Section 245A which provides for a 100 percent deduction for dividends received by a U.S. shareholder of foreign corporate stock, provided that the foreign corporation is a 10 percent-owned foreign corporation, is not a passive foreign investment company, and meets all other relevant requirements under the Code Section. 

The key takeaway of this code section is that for those multinational corporations that qualify for the new deduction, they will no longer be subject to the tax on dividends they receive from their foreign subsidiaries. 

New tax on Global Intangible Low Tax Income

A new Code Section 951A creates a sub-category of income (GILTI income) that is formula-driven and creates a minimum threshold for income that will be subject to U.S. taxation.  For tax years 2018 through 2025, U.S. corporations can deduct 50 percent of GILTI income, resulting in a 10.5 percent effective tax rate. 

While this new tax aims to reduce the incentive for U.S. companies to shift assets offshore, it is less clear why the Act imposed 10 percent as the minimum threshold figure.  Furthermore, due to the formula-driven nature of this new rule, U.S. corporations will have planning opportunities aimed at minimizing their exposure to the GILTI income that will be subject to tax.

New Deduction for Foreign-Derived Intangible Income

This is essentially a relief provision to the newly-enacted GILTI rules.  The Act allows a deduction under new Code Section 250 for a U.S. corporation’s foreign-derived intangible income (FDII) of 37.5 percent for tax years 2018 through 2025, and 21.875 percent for tax years after 2025.  Corporate taxpayers can also use up to 80 percent of foreign tax credits against their GILTI income. 

The net effect of all of the deductions, foreign tax credits, and gross-ups is that the effective tax rate on FDII is 13.125 percent for tax years 2018 through 2025 and 16.406% after 2025.

New Base Erosion Minimum Tax

The new “base erosion and anti-abuse tax” (BEAT) operates as a limited-scope alternative minimum tax, which is applied by adding back to taxable income certain deductible payments made to related foreign persons.  Note that this new tax, imposed under Code Section 59A, applies to taxpayers with an average annual gross receipts for the last 3 taxable years of at least $500,000,000.

The new minimum tax rate is 5 percent for tax year 2018, 10 percent for tax years 2019 through 2025, and 12.5 percent for tax years after 2025.  Taxpayers now must calculate their tax liability under the new rules to determine whether they are subject to the BEAT. 

One-Time Transition Tax

Finally, a transition tax imposed under Code Section 965 applies to U.S. shareholders on deferred foreign earnings as part of the transition to the new participation exemption system of taxation under the Act.  Deferred foreign earnings refers to the accumulated post-1986 deferred foreign earnings.  Such foreign earnings that are held as cash or cash equivalents are taxed at a rate of 15.5 percent and all other earnings are taxed at 8 percent.  U.S. shareholder may elect to pay the transition tax in eight installments.

Did You File Your FBAR Completely and Accurately? District Court Clarifies the Ambiguous IRS Willfulness Standard

While a non-willful violation may result in a penalty of up to $10,000, a willful violation may lead to a much larger penalty and potential criminal prosecution.  As more taxpayers travel the world and transact in different countries, their compliance with the IRS international tax rules and regulations become critical for a taxpayer’s peace of mind as well as for the pocketbook.

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