International Taxation

Regarding that disregarded entity...

Posted by Lisa S. Goldman, CPA, TEP

The Treasury Department has clamped down on a key reporting exemption that was previously enjoyed by foreign-owned, single-member limited liability companies (SMLLCs).  This change has significant impacts on any foreign person or entity with holdings in U.S. SMLLCs that are disregarded for federal income tax purposes.  Previously, these entities were exempt from the comprehensive record maintenance and associated compliance requirements that applied to 25% foreign-owned domestic corporations.  Now, substantially any transaction between U.S. domestic disregarded entities and their foreign owners, including any of the owner’s related entities, may be reportable.

These regulations are part of a larger effort by the Treasury Department to increase financial transparency.  Entities subject to these regulations will continue to be treated as disregarded for other federal tax purposes.  The Treasury Department explained that there is a class of foreign-owned U.S. entity (typically SMLLCs) that has no obligation to report information to the IRS or even obtain a tax identification number.  According to the government, these “disregarded entities” could be used to shield the foreign owners of non-U.S. assets or bank accounts.  By treating domestic disregarded entities that are wholly owned by a foreign person as a domestic corporation separate from its owner (for these limited reporting and compliance requirements), the regulations enable the IRS to determine the existence and magnitude of any tax liability and share information with tax authorities in other countries.


Previously, certain disregarded entities and their foreign owners may not have had an obligation to file a tax return or obtain an Employer Identification Number (EIN).  The final regulations require foreign owned domestic disregarded entities to:

  • Obtain EINs from the IRS
  • Annually file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
  • Identify “reportable transactions” between the LLC and any related parties, including the LLC’s foreign owner
  • Maintain supporting books and records


These rules treat U.S. disregarded entities as stand-alone foreign-owned domestic corporations.  Therefore, they are now required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties. Transactions are reportable as if the entity were a corporation for U.S. tax purposes. These entities also are required to maintain records sufficient to establish the accuracy of the information return and the proper U.S. tax treatment of such transactions.

Please see the regulations for examples of reportable transactions that require reporting, elimination of certain reporting exemptions, and overlap rules affecting controlled foreign corporations and foreign sales corporations.

Tax Year

The final regulations require the domestic reporting corporations to have the same tax year as their foreign owner if that foreign owner has an existing U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation must report on a calendar year basis.

Effective Date

The final regulations are effective December 13, 2016, and apply to tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017.

Worried About Undisclosed Foreign Assets? The Offshore Voluntary Disclosure Program May Offer a Solution

Posted by Evan Piccirillo, CPA

As I've said before: Being a good tax citizen is important.  Sometimes it is difficult to navigate the stormy seas of compliance to achieve that end.  One such hazard is the difficulty of adhering to complex international reporting requirements.

I must pause here to note that if you do have significant international compliance issues, you should consult legal counsel in addition to a tax professional due to the many civil and criminal consequences imposed by the Department of Justice and Department of the Treasury.

Imagine a normal day in the life of a hard-working taxpayer.  She always files her tax return on time and doesn’t take any undue deductions.  One day she learns a wealthy relative left her interest in a profitable commercial property in Croatia.  How fortunate!  But wait, this wealthy relative left it to her a couple of years ago and it has been generating income this whole time.  Oh no!  There are full pages in the IRS instructions detailing penalties for the forms she didn’t file over that period that could amount in many thousands of dollars and even jail time.  What is our hard-working taxpayer to do?

The IRS, in an effort to provide a bridge to compliance, has enacted the 2012 Offshore Voluntary Disclosure Program (“OVDP”), modified effective July 1, 2014.  This program is designed to incentivize taxpayers (entities and individuals) to come to the IRS with undisclosed assets and accounts rather than the IRS having to hunt them down; it offers a reduction in penalties and potential elimination of the risk of criminal prosecution.  The penalties described in the Internal Revenue Code for failing to comply with foreign reporting are incredibly brutal; in some cases 100% of the highest value of an asset during a given year, plus other penalties, plus interest, plus criminal prosecution.  That, coupled with the increasing risk of being detected by the US Government by their new, more aggressive approach to treaties and policy, creates a very compelling argument for taxpayers to come forward.

This relief a taxpayer receives from this program is not completely painless.  Paying the offshore penalty of 27.5% plus the accuracy-related penalty of 20% is a hard pill to swallow, but when weighed against the alternative (potentially 100% and criminal prosecution), it should go down a little easier.

Eligibility for the OVDP is contingent upon coming forward before the IRS is aware of the unreported foreign assets; if they find you, OVDP is off the table.  In some cases, a taxpayer may have already amended and submitted reports, referred to as a “quiet disclosure.”  These taxpayers still run the risk of full penalties and criminal prosecution if they don’t apply to the OVDP.

In our example, the hard-working taxpayer has the ability to compile all information on the property and the unreported income and then submit an application via Forms 14454 and 14457 to the IRS OVDP.  If accepted, original and amended tax returns accounting for the foreign income and forms reporting the foreign transactions and activity must be prepared and submitted. In addition, the taxes, penalties, and interest due must be paid or arrangement to pay must be made.  All this just to be a good tax citizen!

The Offshore Voluntary Disclosure Program offers a bumpy path to compliance that is not without its difficulties.  It is important for someone considering this path to enlist the counsel of professionals in law and accounting.

Voluntary Disclosure Programs: A Saving Grace

Image courtesy of iStock.

Image courtesy of iStock.

Being a good tax citizen is important for businesses. However, businesses do not always adhere to that notion in practice. When a taxpayer does business in a jurisdiction, the decision to comply with applicable tax law is many times governed by the risk of exposure. This is especially true when businesses operate in multiple jurisdictions; compliance is assessed on a case-by-case basis. The cost burden of compliance resulting from registering to do business and filing tax returns in every required state can outweigh the benefits of the activities performed in those jurisdictions. Perhaps at that point, the decision not to register or not to file is made by the taxpayer and business goes on. However, over time the risk of exposure for not filing due to tax liability and mounting interest and penalties may grow to an unacceptable level. In addition, not registering to do business may have certain legal repercussions that can interfere with operations.

The questions then become:

  • Should I start filing now?
  • Should I have started filing already?
  • If I don’t file, will the tax man come after me?
  • What if the taxing authority requires me to have registered previously?
  • What if information requested from prior years reveals additional liability?

Luckily, many states have a viable answer: Voluntary Disclosure Programs. These programs allow a taxpayer to come to the taxing authority, with hat in hand, and diminish some of the exposure. Specifics vary by state, but generally the taxpayer is forgiven of penalties in exchange for payment of tax and interest due over the applicable look-back period. Look-back periods can also vary, but most fall into a 3- to 4-year range. Other conditions include, but are not limited to:

  • Registering to do business with the appropriate department
  • Continued future compliance
  • Not having been contacted in the past by that jurisdiction
  • Not currently being under audit

A taxpayer can anonymously apply to most programs through a representative (usually their accountant or lawyer). Once accepted, the taxing authority will set forth a timeline and list of what the applicant must do in order to complete the agreement. Generally, a signed document disclosing the identity of the taxpayer and outlining required compliance must be sent. The tax returns, tax due plus interest that apply to the look-back period must also be submitted.

Voluntary disclosure programs offer a path to compliance that can limit a significant amount of exposure. If you believe that you are noncompliant and your exposure risk is too high for comfort, you should consider entering into a voluntary disclosure program via a trusted representative.

The Dreaded "PFIC" Rules: How to Limit the Damage

Image courtesy iStock.

Image courtesy iStock.

In a world that is becoming smaller, money-making opportunities present themselves all over the globe.  However, with said opportunity comes the obligation to pay taxes.  Otherwise prudent investors can find themselves in a precarious tax situation when they discover that they have been investing in what the U.S. tax rules refer to as “PFICs,” or Passive Foreign Investment Companies.  PFIC investments come with a unique set of compliance rules, and failure to meet these requirements can come with a hefty tax bill and/or penalties.


There are two tests to determine if a foreign corporation falls into the PFIC category:

  • The Income Test: 75% or more of the corporation’s gross income for the taxable year is passive income. Passive income includes, but is not limited to, dividends, interest, royalties, rents, and annuities
  • The Assets Test: 50% or more of the corporation’s total assets are passive assets (based on average market value, or adjusted basis if qualified and elected)


So you determine that the foreign corporation is subject to PFIC rules.  There are three main ways the U.S. Government can tax a PFIC investment:

  • “Excess Distributions” Regime
  • Qualifying Elected Fund “QEF” Election
  • “Mark-to-Market” Election

By default, a PFIC will fall under the excess distribution method.  Tax recognition under this regime is not triggered by income earned but rather by distributions received. An excess distribution is a distribution that is greater than the base amount, defined as 125% of the average actual distributions received from the three prior years (or less, if owned for less time).  Once the base amount is determined, any part of the current year distribution that is above the base amount is considered excess.  The base amount is taxed as ordinary dividends, but the excess distribution is allocated to the entire holding period and taxed at the highest tax bracket for each year, thereby eliminating the deferral of yearly tax amounts.  There is also an interest charge associated with the excess distribution, calculated at the underpayment rate, which is the AFR short term rate plus 3%.  This would be considered a penalty regime, since you have been deferring foreign income from the U.S. Government, and as such they charge you interest to make up for it.  This default method is complex and cumbersome, to say the least.


Generally, the reporting for a PFIC is the responsibility of the first U.S. taxpayer owning the investment.  If this is the first year owning the PFIC, you can (and should – depending on your tax situation) make the QEF election to report all income currently.  A QEF election will treat the investment in the manner similar to that of a domestic mutual fund.  Your pro rata share of interest and dividends will be taxed at ordinary income tax rates and capital gains at the capital gains rate, even if you did not receive any distributions for the year.  Any distributions that you receive subsequently from the previously taxed income would be received tax free to you.  Important: a QEF election can generally only be made in the first year owning the investment.  There are retroactive elections and ways to “purge the PFIC taint,” thereby regaining the ability to make a QEF election, but those concepts are outside of the scope of this blog.  You should, however, be aware that they are available as a potential tax strategy.

If the QEF election cannot be made, another possibility to limit the damage would be the “Mark-to-Market” election.  This election was created to extend the current year income treatment that the QEF election offers for those investors that were unable to elect QEF.  If the PFIC stock is marketable (that’s an important qualification), you can elect to pick up the excess in fair market value over adjusted basis of the stock as ordinary income in the taxable year.  Your basis in the stock adjusts  accordingly in the year the income is recognized.  If there is a decrease in fair market value, losses can be taken to the extent of prior “unreversed inclusions”.  Prior unreversed inclusions are prior year mark-to-market gains that were previously picked up as income.  Any losses above and beyond the unreversed inclusions are lost.

The PFIC rules are extremely complicated, and we’ve only scratched the surface of navigating potential compliance issues.  If you think that you may have investments subject to the PFIC rules, you should reach out to a trusted professional to discuss your options.

Escape From New York (Taxes): Excluding Worldwide Income from New York Taxation

Image courtesy of iStock.

Image courtesy of iStock.

Do you live and/or work outside of the US but maintain a home in New York? New York residency rules may be costing you over 10% of your income unnecessarily. In today’s REMcycle, I’ll explore a tax break referred to as the “548-Day Rule,” useful for New York domiciliaries who spend most of their time outside of the country.

New York is, and has been, one of the most desired states to live in for centuries. Rich and poor, American or immigrant, New York’s myriad opportunities draw taxpayers like a moth to the neon ATM sign outside of your favorite bodega. Unfortunately, that appeal translates directly into some of the highest living costs in the world, including high tax rates. Not only can New York income tax rates cap out at 8.82% with an additional 3.876% for New York City residents, but New York will tax your worldwide income if you are deemed a resident of the state. That means that income from foreign wages, real estate, investments, etc., will all be subject to these steep rates.

So what makes someone a “resident” of New York?


New York employs two different tests to determine if a taxpayer is a resident of New York and thus subject to taxation on their worldwide income: the Statutory Residence Test and the Domicile Test.

The Statutory Residence test, the quantitative view of residency, will sound familiar to taxpayers avoiding US residency status at the federal level due to the 183-Day Rule. Similar to the federal definition of a US resident, if a taxpayer spends more than 183 days in New York during the tax year, they have met one of the two tests to be classified as a statutory resident – the second and concurrent requirement being that the taxpayer maintains a permanent place of abode in New York. If you spend this much time in New York, the 548-Day Rule will not be able to save you.

Taxpayers defined as residents under the Domicile Test, however, have options. If you lived in New York previously and are attempting to break residency, the Domicile Test is a qualitative barrier to exit. New York auditors will review where you spend your time, where you do business, where you define your “home,” and a number of other items that can paint a subjective picture of money leaving your wallet. It can be very difficult to change your domicile away from New York if you maintain a home there.

Now that I’ve provided (over)simplified summaries of New York’s residency traps, let’s explore how the 548-Day Rule provides tax relief for those taxpayers deemed domiciliaries of New York.


First things first, why is it called the 548-Day Rule? Simple. The test allows a taxpayer to review 548 days (a year and a half) to determine if they are a resident of New York based on their physical presence during the chosen period. The period can be any 548 days the taxpayer chooses, as long as 365 of those days fall within the tax year in question. These 548 days chosen create the context for jumping through the three hoops necessary to avoid New York residency:

  1. The taxpayer must spend fewer than 90 out of 548 days inside New York;
  2. They must spend more than 450 out of 548 days outside of the country; and
  3. During the short period, or the section of the chosen 548 days that fall outside of the tax year under question, the ratio of days spent in New York divided by 90 cannot exceed the ratio of days in that short period divided by 548.

An important caveat to taxpayers’ reviewing these thresholds is that your spouse or minor children count in your stead. So if you head back to France to run Société Générale but leave your spouse behind to manage the home, your worldwide income will be taxed by New York.


Minor algebra aside, the most important and complex facet of the 548-Day Rule is the ability to shift the 548-day period at will. As an example, if a 2015 tax year is under review, and the taxpayer spent 91 days in New York at the end of 2014 (failing the first test) but zero days in New York during 2015, the taxpayer can shift the 548-day period forward to include the first half of 2016 instead. This shift is a blessing in its ability to alleviate taxation, but a curse in its complexity, as it can trip up even seasoned practitioners.

I’ve only grazed the edges of New York’s complicated residency rules here. New York is one of the most aggressive residency auditors among the 50 states, and a prudent taxpayer will trust this issue to an experienced professional.


Posted by David Roer, CPA

The subject of Interest-Charge Domestic International Sales Corporations (commonly known as an IC-DISC) is complex, but often worth exploring. The IC-DISC is a corporate tax remedy – one that provides U.S. exporters and manufacturers large tax incentives in order to mitigate potentially significant tax burdens. With international economic growth on the rise, it’s crucial for exporters and manufacturers to be privy to the IC-DISC concepts.

Congress created the Domestic International Sales Corporation (DISC) in 1971 to encourage U.S. exporters to help economic growth by engaging in activities. In simple terms, a U.S. exporter was allowed to allocate a portion of its export profits to a domestic subsidiary – a DISC, which per IRC Section 991 is not subject to US Corporate tax – to reduce its U.S. taxes.

How does this tax advantage work and do you qualify? First, the exporting company pays a commission to the IC-DISC based on foreign sales of products manufactured or produced within the United States (please consult your tax advisor regarding determination of the commission amount). This commission is then deducted from ordinary business income by the exporting company and acts as commission receipts received by the IC-DISC. From a kneejerk perspective, the IC-DISC receives and reports the commission income tax-free, while the exporting corporation receives a deduction at ordinary rates, at a maximum rate of 39.6%.

According to IRC section 995(b), a shareholder of an IC-DISC will treat any distributions as taxable dividend income at the favorable qualified dividend tax rate (maximum rate of 23.8% comprising qualified dividend rates and the net investment income tax). Effectively, the export company receives a deduction at the ordinary tax rate and the identical amount is paid out as a dividend, flowing through to the owners at qualified dividend rates.  It is important to remember that if the IC-DISC chooses to not pay dividends to its shareholders, an interest charge – these are interest-charged DISCS – will apply to the deferred tax, usually based on Treasury Bill Rates.

To attain IC-DISC status, four criteria must be met by the Corporation – it is important that you consult your tax advisor regarding whether or not your Corporation’s facts and circumstances are applicable.

Bottom line: The IC-DISC concept is a way to secure a 15.8% direct tax benefit by merely setting up a separate corporation and adhering to the necessary rules and restrictions. While this introduction hits the highlights, the remaining IRC rules and regulations are more complex. Proactive measures such as these can result in significant tax savings.