international

W-8BEN: Keep more of the pie for yourself

 
 

When it comes to getting their piece of the pie, the U.S. Government has done everything within its power to make the world so small that there’s nowhere for a non-compliant taxpayer to hide. Because U.S. taxation is based on worldwide income, all amounts earned globally are subject to U.S. tax and reporting. Even if you’re not a U.S. citizen or a resident, you’re still subject to U.S. tax on any amount earned from U.S. sources. However, the U.S. identified two major issues within its worldwide system:

  • Foreigners weren’t reporting and paying taxes on U.S. source income
  • U.S. taxpayers weren’t reporting their worldwide income and income-producing assets

The IRS responded by adding two new chapters to the Internal Revenue Code for new special reporting related to foreign assets and income.

CHAPTER 3: WITHHOLDING OF TAX ON NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS

Let’s put that title into layman’s terms: a U.S. person (“person” in the tax code sense) must withhold tax on income earned by foreigners. The types of income covered by Chapter 3 are commonly referred to as “FDAP” income (fixed, determinable, annual, and periodical). “FDAP” income usually consists of dividends, interest, rents, royalties, etc. Any U.S. person who’s paying out FDAP income to a non-U.S. person generally has the responsibility to withhold 30% of the income and remit it to the government.

This chapter was created to compel non-U.S. taxpayers to report income earned from U.S. sources. The tax due is withheld by an agent (the payer) and remitted to the government in lieu of the foreign person filing a tax return (sometimes). The withholding agent uses Forms 1042 and 1042-S to report the withholding.

CHAPTER 4: TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS

To folks “in the know", parts of this chapter are referred to as “FATCA” reporting (Foreign Account Tax Compliance Act) or sometimes erroneously as “FACTA”. This chapter is directly responsible for both the foreign financial asset reporting on Form 8938 and all of the associated headaches. However, there’s another key component to the chapter: the manner in which foreign institutions exchange information with the U.S. government about U.S. persons. More often institutions are entering agreements with the U.S. to disclose information about the financial holdings of their customers… bad news for the willfully non-compliant.

This chapter is designed to compel U.S. taxpayers to report their worldwide income through a system of compliance for non-U.S. institutions holding U.S. taxpayer assets. The chapter separates non-U.S. institutions into two distinct classes: “Foreign Financial Institutions (FFI)” and “Nonfinancial Foreign Entities (NFFE).” Each includes different types of subclasses, but the general idea is that the withholding responsibilities are determined on whether the institution is a bank or something else.

So what? What about my piece of the pie?

The new reporting requirements mandate that participating withholding agents do the following:

  • Disclose pertinent information to the IRS about assets held within their institutions
  • Withhold money and remit it to the U.S., if applicable

As a result, more taxpayers are entering into offshore voluntary disclosure programs, and the IRS is collecting more U.S. tax. Which brings us to the BEN forms.

W-8BEN form.JPG

What are BEN/BEN-E forms? Do they involve pie?

No. The pie was a metaphor. Sorry to get your hopes up.

The W-8BEN series (Certificate of Foreign Status of Beneficial Owner for United States Withholding and Reporting) is a group of forms created to document the status of a person that would potentially be subject to U.S. withholding tax by a withholding agent and remember: 30% by default. When a foreign person is the ultimate beneficiary of U.S.-source income, they are generally subject to withholding. The BEN series is a way of tracking that withholding requirement for withholding agents. W-8BEN forms are filed for individuals, and W-8BEN-E forms are filed for entities. There are a number of other forms in the series, but we’ll focus on these two. Although complex, the BEN forms serve three distinct functions:

  • Establish that you are not a U.S. person (for Chapter 4 purposes)
  • Claim that you are the beneficial owner of the income subject to the withholding
  • Claim a reduced rate of withholding or exemption from withholding based on treaty benefits

The third function is key, because it can allow a non-U.S. person to reduce or even eliminate the amount of withholding required by the withholding agent. This keeps your client’s money in their pockets and out of the hands of the government; more pie on their plate.

I just received one of these forms. Now what do I do?

The forms (especially the W-8BEN-E) can be daunting, even to an experienced professional. But they’re worth the time and effort it takes to fill them out accurately. They’re a valuable means to reduce potential withholding on income. Ignoring these forms can cause the institution to withhold at the max 30% rate. Not good. When faced with one of these forms, take a deep breath and contact your trusted accounting professional for help. You’ll be glad you did.

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.

IC-DISCS 101

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.