Category Archives: Tax

25-28 February 2016: GGI ITPG winter meeting High level tax meeting in Barcelona

Barcelona

By Oliver Biernat and Carlos Frühbeck

All tax experts at GGI member firms are cordially invited by the GGI International Taxation Practice Group to its famed winter meeting. Back in spring 2015, senior members at ITPG voted in a poll to decide the venue for 2016: Barcelona was the winner and Carlos Frühbeck from Ficesa Treuhand, S.A.P will be your host.

Barcelona is one of Europe’s most popular tourist destinations, offering an outstanding mix of culture, gastronomy and shopping. No matter which district or neighbourhood of Barcelona you may find yourself in, there is always something of interest to see and experience. For example, a vast array of architectural jewels: Gaudi features prominently and the modernist movement is stamped across the city. Food markets and relics dating back to Roman and medieval times are also popular with tourists. Barcelona is located on the Mediterranean coast and enjoys a mild winter climate. The average temperature in February is between a low of 6 ºC and a high of 14 ºC. Barcelona has an international airport with direct connections to most European capitals in addition to many destinations in North America and the Middle East.

Delegates and their guests can also enjoy the gastronomical and cultural delights Barcelona has to offer should they wish to extend their stay. For example, there are several walking tours dedicated to subjects including Roman and medieval history, the artistic movement of Modernism as well as specific Gaudi or Picasso routes. There are also places of interest in the vicinity of Barcelona, such as the Benedictine Abbey located atop the mountain of Montserrat, the historic city of Girona and the Dalí Theatre and Museum in Figueres.

The Gallery Hotel has been chosen to host the conference. It is a boutique hotel located in the heart of Barcelona, a three minute walk away from La Pedrera and the most exclusive shops of Passeig de Gràcia. The hotel offers comfortable and recently renovated meeting rooms perfectly suited to our conference needs. The hotel is located only 20 minutes from the airport by taxi.

On Thursday evening all delegates and their guests are invited to a welcome reception in the lobby of the hotel, followed by a walk to “Miguelitos” restaurant where we will enjoy traditional Spanish tapas and good wine.

The technical agenda starts on Friday morning at 9 a.m. with an overview of current ITPG projects in the various regions and a discussion on potential future projects. As requested by the majority of senior members, the rest of the morning session will again be spent discussing an international tax case, this time presented and moderated by Ashish Bairagra from India. Ashish will run a problem solving session focusing on a mix of transfer pricing and cross-border income and inheritance tax issues. Several groups will work on various problems and be tasked with finding different solutions. When the groups present their work, the aim is ultimately for all participants to have learned something new about tax issues in many different countries.

After the lunch break, further tax related PG meetings such as “Immigration & Expatriate Services”, chaired by Huub Kapel and “Indirect Taxes”, chaired by Steve McCrindle and Toon Hasselman, should be of interest to delegates. The PG meetings will take place consecutively in the conference room with each scheduled to last one hour.

In the evening, delegates will have a little time to relax before a 25 minute stroll to “Els Quatre Gats” (The Four Cats), a restaurant which was at the heart of the modernist movement of Barcelona and a favourite haunt of Picasso. The restaurant serves traditional Mediterranean fare with live music in the background. After dinner, delegates are free to walk back to the hotel or enjoy the nightlife in one of the many bars in Barri Gòtic (the Gothic Quarter). A taxi back to the hotel will cost around EUR 10.

On Saturday morning, various speakers will deal with recent national tax issues which involve cross-border effects in the framework of a general discussion on international tax topics. And of course, Oliver will show funny YouTube films as per usual for a little light relief between presentations.

Later in the morning we will focus on marketing aspects for tax experts. Marketing professional Paul Atkinson from Lawrence Grant, Chartered Accountants, has been invited to talk about online marketing. His talk will cover several areas including: increasing website traffic, SEO vs SEA, company logos and social media. Paul is also happy to offer one-to-one sessions after the presentation if you would like to receive general feedback on your website or help setting up a social media page. If this is of interest, you may of course bring along your own marketing experts to learn some tips and tricks first hand or exchange ideas with other experts.

After lunch, a two hour guided sightseeing walking tour of Barcelona is available to all delegates. We would recommend bringing appropriate, comfortable footwear for the tour. After enjoying a little free time, we will meet for dinner at the restaurant “El Tragaluz”, where the conference will be brought to a close in good company and with delicious food and drink. For those wishing to make a night of it, Carlos can recommend a few places to extend the evening’s festivities after dinner.

Barcelona 2

On Sunday, there is the option of going on an excursion by bus to the Bodega Alella winery, which will include food and wine tasting for those delegates who wish to make the most of the final day in Spain and catch an evening flight home. The winery is located just 20 km from Barcelona.

The last few ITPG winter meetings have combined high quality tax work with opportunities for fun, and there is no reason to think that Barcelona won‘t live up to previous years’ standards, with its Mediterranean climate, not to mention excellent flight connections and convenient journey time from the airport.

 

Benefitax GmbH, Steuerberatungsgesellschaft, Wirtschaftsprüfungsgesellschaft

Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning

Frankfurt/Main, Germany

Oliver Biernat

E: o.biernat@benefitax.de

W: http://www.benefitax.de

 

Ficesa Treuhand, S.A.P. Auditores y Asesores Fiscales

Auditing & Accounting, Tax, Advisory, Fiduciary & Estate Planning

Barcelona, Las Palmas de Gran Canaria, Madrid, Marbella, Palma de Mallorca, Spain

Carlos Frühbeck Olmedo

E: fruhbeck@ficesa.es

W: http://www.ficesa.es

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Recent Changes to Canada’s Immigration Policy and Related Tax Rules

Canada Immigration Policy Tax Rules

By Robert Worthington and Prof Robert Anthony

Canada is a capital-importing nation and is generally open to immigration. However, high net-worth individuals moving to Canada should be advised of changes made by the Canadian government to its immigration incentive programs. Recent changes include the repeal of both the tax holiday for immigration trusts and the investor class immigrant program, but new opportunities as well.

The Canadian Income Tax Act has non-resident trust rules (often referred to as the “NRT rules”) that may deem a trust to be resident in Canada where it would be factually resident elsewhere. Under the NRT rules, a deemed-resident trust is subject to Canadian tax on the trust’s worldwide income. The “immigration trust” was one of the exceptions to the NRT rules. The NRT rules apply where there is a Canadian “resident beneficiary” of the trust, or alternatively a “resident contributor” to the trust. The legislative concept of “contribution” to a trust is quite broad, and captures most transfers of property and loans to a trust, other than certain arm’s length transfers. Since a trust may be deemed resident in Canada but factually resident in another country, a dual residency issue may arise.

If a trust is resident in one country under a tax treaty between that country and Canada, can the NRT rules validly deem the trust to be resident in Canada notwithstanding the treaty? Domestic Canadian legislation states that NRT rules can override treaties. This domestic override is inconsistent with Canada’s approach to treaty negotiation in other contexts. For example, the anti-deferral regime in the controlled foreign corporation rules is explicitly carved out of Canada’s treaties. However, the interesting legal issues as to the effect or validity of the unilateral treaty override with respect to the NRT rules have not yet been considered by the courts.

If the NRT rules deem a trust to be resident in Canada, the trust will be subject to tax at a current federal rate of 42.92%, assuming the trust has no income earned in a province, and may in some cases be subject to provincial tax. Generally, distributions by a trust to beneficiaries are deductible to a trust and taxable in the hands of a beneficiary, but there are restrictions to such deductions in the case of a deemed resident trust. The calculation of the available deduction depends on various factors including whether the beneficiary is resident in a country with which Canada has a tax treaty. Distributions made by the trust to a non-resident beneficiary may be subject to withholding tax at a rate of up to 25%.

As mentioned, one important exception to the NRT rules that was available until recently was the “immigration trust”. Where the person who created a trust had not been a Canadian resident for 60 months, the trust would not be deemed resident in Canada until after the 60-month period expired. In short, the trust enjoyed a 5 year tax holiday from the time of the immigrant’s arrival in Canada. Unfortunately, the immigration trust exception was repealed in the 2014 budget, and so this structure is no longer available. Despite the tax community’s efforts to persuade the Canadian government to grandfather existing immigration trusts, no such relief was provided. Apparently the government believed this tax holiday was no longer useful.

In the same budget that the immigration trust exception was repealed, Canada cancelled its investor immigrant program. Under that program, an investor class immigrant could obtain favoured application conditions by providing an $800,000 interest-free loan to the government (most of which could be financed by a Canadian bank). The relatively low cash requirement made this program very attractive compared to similar programs in other countries. The cancellation of the program was controversial. A large number of Chinese applicants filed a class action lawsuit against the government in response to their pending immigration applications being cancelled.

Although the Canadian government has cancelled the investor class immigration program, new opportunities are available under programs for high net worth individuals and entrepreneurs. The “Start-up Visa Program” requires an investment commitment from an angel investor group or venture capital fund of at least CAD $75,000 or CAD $200,000, respectively. Another program, not yet in effect, is the Immigrant Investor Venture Capital Program, which requires a personal net worth of CAD $10,000,000 or more and a CAD $2,000,000 investment.

Similarly, the repeal of the immigration trust rule does not eliminate all tax planning opportunities for immigrants using trusts. For example, it may be possible for a non-resident contributor to establish a so-called “granny trust” so long as all contributions are made at a non-resident time. Additionally, other civil law entities such as private foundations may fall outside the scope of the NRT rules and create tax deferrals. It goes without saying that it is always worthwhile to seek tax advice for pre-immigration planning.

PEIWM Authors

GGI member firm

Shea Nerland Calnan LLP

Tax, Law Firm

Calgary, Canada

Robert Worthington

E: rworthington@snclaw.com

W: www.snclaw.com

 

 

GGI member firm

Anthony & Cie

Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning

Valbonne, Sophia Antipolis, France

Prof. Robert Anthony

E: robert@antco.com

W: http://www.antco.com

 

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The UK – Major Changes for Foreigners

Uk Major Changes for Foreigners

By Graham Busch

The past 12 months or so has seen some of the most significant developments in many years affecting people coming to live in the UK or investing in the UK. These include:

  • An end to the long-term non-domiciled status
  • Tax on the gains on all sales of residential properties
  • See through for Inheritance Tax on UK residential properties held in offshore companies
  • Main residence election
  • Some good news

The new Non-Dom regime

People who come to the UK to live and/or work are usually classified as non-domiciled. This allows them to elect to be taxed on the “remittance basis”. In this way they can avoid UK taxes on unremitted income and gains. For the first 7 years of UK residence this privilege comes at only a minimal loss of certain allowances. Thereafter, an annual “remittance basis charge” of between £30,000 – £90,000 is payable.

Most importantly, their non-dom status can be claimed indefinitely, so long as they can demonstrate close ties to their claimed country of domicile, usually their country of birth.

A special rule exists in respect of Inheritance Tax (death and gift duties). Individuals resident in the UK for less than 17 out of the last 20 years can claim to be “deemed domiciled” for this tax. The effect of this is that they can avoid Inheritance Tax on death on non-UK assets, and on gifting any such assets.

The UK government has now announced a non-dom time limit. From April 2017, anyone resident in the UK for more than 15 out of the past 20 years will automatically be considered to be domiciled. As a result, they will thereafter be taxed on the “arising basis”, i.e. on worldwide income and gains, remitted to the UK or not. The 15 year rule will also apply to Inheritance Tax and replaces the 17 year rule.

So the world famous UK non-dom status will from April 2017 have a finite lifespan. Individuals coming to the UK will now have a shorter time during which they can benefit from the generous advantages that the remittance basis currently offers. Non-doms currently resident in the UK will need to keep a close check on the number of years they have been UK resident and may wish to consider structuring changes to their worldwide assets sooner than before.

Tax on Residential Property Gains

Legislation was introduced in 2013 to tax gains on the sale of high value UK residential property by companies or corporate-type entities. Individuals and trusts remained outside of this new regime. Now the net has widened such that gains on all residential properties by all entities/individuals will be subject to Capital Gains Tax. There are certain fairly specialised/narrow exceptions. The gain will be calculated with reference to the April 2015 value as the base cost (or earlier at the seller’s election), so unrealised gains prior to April 2015 will not be taxed. The applicable tax rates will be:

Companies      20% (*)

Individuals       18%/28% depending on their total taxable income/gains in the tax year.

Trusts              28%

(*) – companies under the “ATED” (Annual Tax on Enveloped Dwellings) regime will continue to pay Capital Gains Tax on such gains at 28%.

Inheritance Tax on UK Residential Property

UK resident non-doms can currently shelter their UK residential property from Inheritance Tax by holding the property in an offshore company. From April 2017, the UK tax authorities will “look through” such offshore companies and treat the underlying residential property as if owned by the non-dom. Consequently such properties will be subject to Inheritance Tax on death. Non-doms will need to review their structures and Inheritance Tax exposure, with a view to possible mitigation of such exposure.

Owning More Than One Property – Main Residence Election

UK residential property owners are exempt from Capital Gains Tax on the sale of their main home. Owners of more than one residential property can elect which is their main residence (subject of course to the reality test) which may then be sold free of Capital Gains Tax. Non-residents can now elect for their UK property to be their main residence for the purposes of this exemption if they spend at least 90 days in the relevant tax year in the property.   Conversely, UK residents receive the reciprocal exemption if they spend at least 90 days in a tax year in one or more residences in an overseas territory.

The Good News

The UK government is committed to encouraging business to come to the UK. Our corporation tax rate of 20% gives us the joint lowest rate of corporation tax in the G20. The government has announced that this rate will fall to 19% in 2017 and 18% in 2020. Together with other corporate tax advantages such as tax-free receipt and payments of dividends, tax-free sales of underlying companies, transfer of tax losses, generous first year tax write offs of fixed assets and the 230% research and development tax credit, the UK remains an attractive tax jurisdiction in which to locate an international business.

Graham Busch

GGI member firm

Lawrence Grant

Auditing & Accounting, Tax, Advisory, Fiduciary & Estate Planning

London, United Kingdom

Graham Busch

E: graham@lawrencegrant.co.uk

W: http://www.lawrencegrant.co.uk

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The New Italian Patent Box Regime

Italian Patent Box

(art.1 paragraph 36 to 45 of Law no.190 of 2014)

By Dr Massimiliano Russo

After a recent debate as to the possible introduction of new tax tools and incentives to attract foreign investments in Italy as well as a long period in which we have seen measures increasing the tax burden for both companies and individuals, this newly introduced legislation on the Patent Box Regime as a tax incentive is most welcome (in the following also referred to as the “incentive”).

Unfortunately, as with most the newly introduced legislation in Italy, some aspects have not yet been committed and will be further regulated in future ministerial decrees. The interpretation of the newly introduced rule by tax authorities is also still awaited.

However, it is already possible to evaluate the regime as it is now drafted under the Law in force and raise a few questions that domestic or foreign investors would possibly ask based on the current information available. Before analysing the Patent Box Regime and its key elements, it is useful to briefly look at the current tax environment for company business in Italy.

Under current Italian tax legislation, resident corporations are taxed on their worldwide income. A company is considered to be resident in Italy when its registered office, its place of effective management or its main business operations are located in Italy for the greater part of the year. Resident companies are currently subject to Corporate Income Tax (IRES) at a flat rate of 27.5% and to Local Income Tax (IRAP) at a 3.9% rate (a 1% increase to IRAP is allowed on a regional basis).

From a general tax standpoint, all income earned by a resident company or commercial entity qualifies as business income. Revenues, expenses and other positive and negative items of income shall be included in the taxable base of the tax period to which they relate. The taxable business income is determined under the accrual principle, with certain exceptions, such as dividends and social security contributions. Interest and royalty income earned by resident companies are taxed as ordinary business income.

The subjective scope of the law

The incentive generally applies to business income earned by individuals or companies resident in Italy according to principles summarised above. The Patent Box Regime recently introduced in Italy aims to create a competitive tax regime similar to those for Italian resident companies developing intangibles and deciding to opt for such incentive that are already applicable in Luxembourg, the Netherlands, Portugal and the UK. Non-resident companies with a permanent establishment in Italy will benefit from the same incentive, provided they are resident in countries that have double tax conventions (DTC) with an exchange of information clause with Italy and opt for the incentive.

The objective scope of the law

Those who conform to the subjective scope of the legislation may select a five-year period for the incentive, provided that the business income is derived from the use of intangibles, such as payments received as a consideration for the use of or the right to use any patent, trademark, design or models or information concerning industrial, commercial or scientific equipment.

International ruling procedure with tax authorities may apply in a domestic context in order to determine the cost attributable to the intangible’s development. This is the first time Italian tax legislation has adopted and created a procedure for cross-border transactions such as intra-group policy pricing (for example, transfer pricing purposes), applying to a purely domestic scenario where a higher degree of discretion may be exercised by the tax authorities.

The measure of the tax incentive

Since 1 January 2015, taxpayers may opt for the Patent Box Regime with the purpose of excluding from the taxable income for both IRES and IRAP purposes, 50% of the revenues derived from the use or right to use directly or indirectly the intangibles, patents, trademarks, secret formulas process and information concerning industrial, commercial or scientific experience.

The incentive is also extended to capital gains arising from the sale of the intangibles. Capital gains would be 100% exempt provided that 90% of the gains are again invested in development and or maintenance of intangibles in the two years following the sale. However, the amount of the gain realised that can benefit from the exemption is to be determined with a shared procedure with Italian tax authorities.

Limitation of the incentive

The legislation on the Patent Box Regime introduces a significant taxable income cut for companies that develop intangibles.

However, to determine the reduced taxable income, net of the “revenues exclusion allowed” each taxpayer will have to go through a more detailed calculation each year for the duration of the option that takes into account a ratio between the cost of research and development and the overall costs, and multiply this ratio for the taxable income. The outcome will be the figure to which the 50% reduction can apply.

Example: R&D expenses: EUR 350,000; overall cost: EUR 1,000,000; royalties from licensing agreements: EUR 5,000,000.

350,000 : 1,000,000 x 5,000,000 = taxable income that benefits from the incentive, so only 35% of EUR 5 million royalties could be reduced by 50% and excluded from the ordinary income tax levy (i.e. EUR 1.75 million in this example).

Furthermore, the 50% exclusion applies progressively as only 30% and 40% of the taxable income reduction apply in the first and second year of the option. Consequently, if a taxpayer opts for the incentive starting from 2015, they will only benefit from the 50% reduction for financial year 2017.

Preliminary comments

The Patent Box Regime in Italy is a welcome measure, especially in the European arena where similar measures have already been introduced.

The rule already applies, but some aspects will be further defined in the anticipated ministerial decrees as delegated by the current legislator.

At this stage, it is still unclear whether, once a taxpayer opts for application of the incentive, it can be used for all intangibles or whether a single election applies for each intangible of a single entity. Furthermore, it should be clarified if the benefit of the regime is just for the beneficial owner of the intangible or if it would also be available for a group company that acts as licensing company receiving the royalty payments. A last question might be raised with respect to the procedure, where tax authorities should provide greater clarity on which cost are included and excluded from the previously mentioned ration as well as the steps of the international ruling procedure, especially for small and medium-sized start-up companies that might find it cumbrous and more expensive to run the overall Italian procedure to benefit from a more favourable tax regime for their ideas compared with other countries.

 

Dr Massimiliano Russo

Studio Signori – Professionisti Associati

Auditing & Accounting, Tax, Corporate Finance, Fiduciary & Estate Planning

Rome, Italy

Dr Massimiliano Russo

E: massimiliano.russo@studiosignori.com

W: http://www.studiosignori.com

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19-22 February 2015: GGI International Taxation Weekend. We love Marbella in Winter

Travelling to sunny places is delightful at any time, but a chance to briefly escape the cold winter weather is particularly special. Those who were lucky enough to attend the GGI Practice Groups Weekend in Marbella for the Winter Meeting 2012 will remember having a great experience, and everyone was in agreement that it should definitely be repeated. The wait has not been too long. Just two years later, the decision has been made to meet at the seaside for a second time from 19 to 22 February 2015.

Marbella

We at JC&A Abogados, GGI correspondence firm in Marbella, welcome the decision and are pleased to host the Winter Meeting again.

Those who did not have the chance to come last time or who have never visited this part of Spain are cordially invited to beautiful Marbella. Situated along the Costa del Sol, this chic holiday resort is a favoured get-away for the rich and famous and it is not hard to see why.

There is no such thing as a foreigner in Marbella. With all the appeal of a large city and the charm of a convenient town, Marbella is without doubt one of the best places in the world to live.

Marbella is famous for its internationally renowned and exceptional climate due to its unique geographical location surrounded by mountains. The annual average temperature is around 18.5ºC, with 320 days of sunshine a year.

Marbella has the largest number of golf courses in continental Europe. It is home to 15 of the best courses, which have hosted many international events and where golf can be played 365 days a year without the need of a sweater. It is a veritable golfing paradise.

Sunbathing, swimming in the tranquil Mediterranean waters, having lunch in a beachside restaurant, enjoying a drink in an exclusive beach club – these are just some of the options open to those visiting the 27.9km of beaches stretching along Marbella’s coastline, which is the finest on the Costa del Sol.

Thursday 19 February is the day of arrival with no official agenda, although some participants have arranged private leisure programmes spending a few days more prior to the Conference. We could also organise a programme of activities for Thursday, if there is enough quorum or interest.

Marbella

The programme will start on Friday 20 February with the customary conferences in the morning, followed by an outdoor team-building activity if the weather allows during the afternoon (still to be confirmed). The ITPG will meet again for technical presentations throughout all of Saturday 21 February, ending with a nice dinner at local restaurant. The weekend will continue on Sunday with optional outdoor activities, which could perhaps include some golf lessons again as in 2012, if wished for by attendees.

The technical agenda includes a big case study on international holding and trade companies (U.S. corporations with two shareholders as natural persons, wishing to build up a group of trading companies in Europe). Chaired by Prof. Robert Anthony from France this will involve splitting those attending into smaller groups to discuss various issues that have been covered by separate PG meetings in previous meetings (e.g. tax structuring, VAT, legal, expatriates). Another key focus will be a case study chaired by Klaus Küspert from Germany on base erosion and profit shifting of a German manufacturer distributing all over Europe.

Shorter presentations will be held on various tax topics such as “Cross-border Financing Using Hybrid Instruments” (Robert Worthington from Canada), “Transfer Pricing Litigation – Case History with Italian Tax Authority” (Matteo Bedogna from Italy) and the “golden visa” and notes about the tax reform or the possibility to claim for refund on inheritance tax further to the ECJ sentence (Santiago Lapausa, our host from Spain).

Ashish Bairagra from India and Huub Kapel from the Netherlands have also agreed to give presentations and will be choosing their subject matter in due course. Arlene Rochlin and Patrizia Giannini from Italy, who talked about why attorneys and accountants should interact at the last ITPG winter meeting, have also announced their attendance and will be surprising visitors with a motivating non-tax topic.

Of course there will be plenty of time to discuss internal topics, as well as for networking and cooperation between GGI’s tax experts. If you would be interested in presenting a tax topic, please contact Oliver.

As usual we have decided to put special emphasis on working and networking together. We have chosen the same 4-star hotel as in 2012, located directly on the beach. This allows us to offer the meeting at a very favourable price, comparable to the costs of an EasyMeet, so that it should be possible to attend with two or even three people from your firm. Given that part of our meeting will be over the weekend, the time taken off from the office can be reduced to only one or one-and-a-half days. We will keep our fingers crossed that the weather will be as sunny as it was last time, allowing us to have lunch at the beach, which should act as an extra incentive to come and relax from hard work in February.

Official invitations and registration forms will follow and be sent to all ITPG members. We are looking forward to seeing you in Marbella and are confident a great time will be had by all.

Benefitax GmbH, Steuerberatungsgesellschaft, Wirtschaftsprüfungsgesellschaft
Auditing & Accounting, Tax, Advisory, Corporate Finance, Fiduciary & Estate Planning

Frankfurt/Main, Germany
Oliver Biernat
E: o.biernat@benefitax.de
W: http://www.benefitax.de

JC&A, Javier Carretero y Asociados – Abogados
Tax, Law Firm
Marbella, Spain

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The Quest for U.S. Tax Reform: Fact or Fiction

The Quest for U.S. Tax Reform

The perpetual drumbeat for tax reform continues to echo around Capitol Hill. On August 5th, Senators Richard Durbin, D-Ill., Elizabeth Warren, D-Mass., and Jack Reed, D-R.I. urged President Obama to take independent action to stop the tax-avoidance practice commonly known as corporate inversions. Their plea was made to the deserted corridors of the Capitol, as Congress has left Washington, D.C. for its August recess. The Administration has suggested that executive authority might be exercised to prevent inversions, albeit only as an alternative to Congress not moving forward with tax reform.

To stem the latest strategy of U.S. corporations employing mergers with foreign businesses to escape the high U.S. tax rates, the most effective counter-measures would require a comprehensive reform of the U.S. tax system, an overwhelming and unrealistic prospect before or after the mid-term elections, and possible only slightly after the 2016 Presidential election. More attainable stop-gap solutions, such as cutting U.S. corporate tax rates to 28 percent will not stop companies from moving to lower tax “havens” such as Ireland, where the tax rate is 12.5 percent.

During a press briefing on August 5, White House spokesman Josh Earnest told reporters that the administration is not prepared to make an announcement about any unilateral actions from the president on inversions. In the absence of tax reform, the onus is on Congress to pass specific legislation that would retroactively close current inversion (merger) strategies.

Rep. Sander M. Levin, D-Mich., ranking member on the House Ways and Means Committee, noted that, “Corporate inversions, as well as other tax-avoidance strategies, threaten to cause long-term damage to the U.S. tax base and increase the tax burden on ordinary Americans — and swift collective action is required.” Shakespeare’s Macbeth offered his précis on life and death, which, unfortunately, applies equally well to Congress’ many attempts to refashion U.S. tax law: “[A] tale told by an idiot, full of sound and fury, signifying nothing.” Since the original 1916 tax code, reformists have fought behind the familiar banners of fairness and simplification, as well as the prevention, recovery and salvation of the American and global economy, while maintaining a measured focus on collecting tax revenues sufficient to fund the massive federal budget. However, the Internal Revenue Code has become burdened with countless layers of provisions included to satisfy politically correct, “of-the-moment” social objectives and entitlements or to provide some urgently required stimulus. Rather than separating out these distinctly-purposed laws, the path of least resistance has pointed to targets that have no (or lower) apparent impact on the general public. In an economic and financial environment of increasing globalization, the U.S. has sought to brand all things “international” as presumptively evil (read: “tax avoidance”) and even unpatriotic. The current “sound and fury” of Congressional and Administration calls for action are but the latest example of playing to the public’s fears without actually stepping forward with actual, substantive tax proposals.

The Quest for U.S. Tax Reform

From the Kennedy-era Subpart F rules seeking to retain U.S. tax coverage over U.S taxpayers investing wealth offshore, to the myriad efforts to limit the movement of manufacturing, services and the companies to lower-taxed foreign countries, the clear message proclaimed by the current Administration in its two campaigns is that your life and well-being is diminished by U.S. companies looking outside, and not within, the U.S. The Senate’s hearings on “profit-shifting” attacked structures used by multinational giants Microsoft, Apple and others, illustrating how those companies managed their very significant U.S. tax costs with planning available under the current tax code, resulting in large cash reserves held offshore. The sheer size of the tax dollars actually paid, and the comparative numbers of what these companies could have paid under less sophisticated structures, created a media event, and generated calls for tax reform. Again, the message was that the tax savings of these U.S. companies hurt the so-called average taxpayer. No data was presented on how the companies’ higher tax costs might have impacted the consumer prices those average taxpayers paid.

With significant statutory change approaching, IRS has sought data to support whatever changes might be implemented, as well as to enforce any laws currently available to them. Enforcement of filing requirements for information returns detailing U.S. owned foreign financial accounts and foreign entities, as well as increased scrutiny of required tax withholding from payments to foreign recipients has increased the risks of inadequate or missing reporting. Moreover, the accumulated data will effectively roadmap future enforcement of new anti-deferral provisions.

This discussion is not intended to suggest that the U.S. is alone in its international crusade for tax revenues. Rather, the Organization for Economic Co-operation and Development (“OECD”) has commissioned multiple studies under an action plan to combat the erosion of separate country taxable income and the shifting of profits between related parties (under the acronym: “BEPS” for Base Erosion and Profit Shifting). BEPS study areas include many of the exposures focused on by Congress and the Administration. The conclusion is inescapable that U.S. tax reform, or at least tax change, will occur at some point. Changes will impact existing transfer pricing and profit shifting provisions, as well as permanent establishment standards extending countries’ tax bases beyond their borders. Consequently, multinational businesses will be well- advised to prepare to react to these changes.

Doug Nakajima, Managing Director, Tax Services, has over 30 years of experience in federal and international tax and strategic business planning, serving a U.S. and foreign client base of multinational manufacturing, service and technology businesses. He has advised clients on the tax treatment of domestic and cross-border transactions, inbound and outbound business expansion strategies, domestic and cross-border acquisitions, dispositions and reorganizations, intercompany transfer pricing analysis, documentation and audit defense, treaty interpretation, and repatriation planning. Doug has worked extensively with tax advisors in foreign countries to develop global structures that minimize U.S. and foreign tax exposures, and in this role, has forged effective working relationships with key professionals throughout North America, Europe, Asia and the Pacific Rim.

GGI member firm

Smart Devine

Auditing & Accounting, Tax, Advisory
King of Prussia (PA), Philadelphia (PA), USA Doug Nakajima
E : dnakajima@smartdevine.com
W : http://www.smartdevine.com

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Cross-border inheritance tax problems within the European Union

Cross-border inheritance

The European Commission is consulting in order to collect information on the progress made in European Union (EU) countries in tackling cross- border inheritance tax (IHT) problems.

What is the problem?

In the EU some people can effectively pay IHT twice or more in different countries.

Why is that?

EU countries have to respect EU treaties and in particular are not allowed to discriminate against EU citi- zens when imposing IHT. However, they are not obliged to harmonise or coordinate their policies on IHT and two or more countries can impose their taxes in parallel.

As a result there are a number of mismatches including:

      • Some countries apply a tax on the heirs, whilst others levy IHT on the basis of the estate.
        There can be a variety of relevant factors including the residence, do- micile or nationality of the deceased or heir, despite the EU requirement not to discriminate; and/or the loca- tion of the property.
      • Different valuation methods.
      • The different characterisation of as- sets depending on different ways of holding property e.g. there is no clear English authority on whether a partner’s interest in partnership land is an interest in moveable or immovable property.
      • Different exemptions and reliefs.
      • Different tax rates for certain groups of beneficiaries.
      • Lack of double taxation agreements covering IHT.
      • Unilateral relief not available or in- complete

What has been done?

In 2010 the Commission consulted the public on possible approaches to tackling cross border IHT obstacles for citizens and SMEs within the EU. It received contributions which it summarised in a report. Around half of the opinions concerned solutions at EU level ranging from an EU model double taxation relief provision, to the establishment of common rules to determine the basis of taxation. One third suggested the extension of the treaty network within the EU while a quarter expressed a preference for the application of unilateral relief mechanisms.

In 2011 the Commission asked EU countries to consider modifying their existing domestic rules for relieving double IHT such as by introducing a credit for tax paid in another EU country or exempting certain items of foreign property from the domestic tax base. The commission also recommended an order of taxing rights (i.e. which state has the primary right to tax the inheritance) based on the standards commonly accepted in international tax practice. Separately, the EU Court of Justice has heard an increasing number of cases in relation to inheritance and gift taxes.

What is happening now?

The Commission has launched a public consultation to receive contributions regarding the way its 2011 recommendations have been implemented in the legislative and administrative practice of EU countries together with any information on current problems, views on the principles proposed and feasible solutions.

It reiterates its 2011 recommendations which include the following proposals :“… that EU countries in which immovable property and business property of a permanent establishment is situated should, as the country with the closest link, have the primary right to apply inheritance tax to such property. In respect of movable property the Commission has proposed to favour the personal links that the deceased or the heir may have with its EU country over the link that the movable property has with the EU country where it is located. The EU country where such movable property is situated should,therefore, exempt the property from its inheritance taxation if such taxation is applied by the EU country with which the deceased and/or the heir has a personal link. In respect of the personal link the Commission has proposed to favour that which the deceased person had with its state rather than the link of the heir.

… proposed to solve potential con- flicts of many personal links to several EU countries on the basis of a mutual agreement procedure involving tiebreaker rules to determine the closest personal link. The tie breaker rule is to some extent based on Article 4.2 of the OECD Model Tax Convention on Income and Capital. The tie breaker rule assumes that the person has closer links with one of two or more states, if that person has a permanent home available in one of those states. If that person has such homes available in more than one states, then the priority is given to a country with which his/her personal and economic relations are closer. If the above cannot help then the decisive factors would be the habitual abode (where the person usually lives) and, finally, the nationality.

… proposed a period of 10 years to use the tax relief since the timing for the application of inheritance tax may differ in the EU countries involved and cases with cross-border elements may take significantly longer to be resolved compared to domestic inheritance tax cases. The Commission has considered that in cross-border inheritance tax cases citizens deal with more than one legal and/or tax system and therefore EU countries should allow claims for tax relief for a reasonable period of time.”

Looking forward

This article has gone to press just after the period of consultation ended. In a future edition of the Insider I will report on the Commission’s findings. Increasing globalisation and in particular the free movement of people within the EU means that cross-border IHT is an increasingly important issue to consider. The fact that the EU is making recommendations to avoid double taxation serves to highlight the problem and is an area where GGI practitioners can liaise to help our clients.

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U.S. Tax Issues Hidden in Foreign Trust Inventories

Purchasers of foreign trust inventories should be warned that many complicated tax issues may be lurking in the history of trust structures with U.S. beneficiaries, some not too far below the surface.

Such issues include identification of the real “grantor”, accurate classification of the grantor trust status of each trust and status as a foreign or domestic trust for U.S. tax purposes, as well as proper U.S. tax planning for foreign trusts with U.S. beneficiaries in the trust documents.

Definitions under U.S. tax law

To fully grasp these issues and the complexity of the analysis required, it is helpful to review some simple definitions under U.S. tax law.

Foreign grantor trust

If a foreign trust company is the trustee of a trust, it will most likely be classified as a “foreign trust” for U.S. tax purposes. However, confirmation of this fact must be made on a trust-by-trust basis.

A foreign trust is a grantor trust (which means income is taxable to the grantor) only if (1) the grantor retains the right, exercisable either alone or with the consent of another person who is a related or subordinate party who is subservient to the grantor, to revoke the trust; or (2) the only amounts which may be distributed from the trust during the grantor’s life are amounts distributable to the grantor or their spouse. Another way of thinking about foreign grantor trust status is that the foreign grantor is deemed to “own” the assets of the trust for U.S. income tax purposes.

The rules for a trust with a foreign grantor to qualify as a “grantor” trust are much narrower than the rules for a trust with a U.S. grantor to qualify as a “grantor” trust for U.S. tax policy reasons.

A foreign grantor will not be within the U.S. tax system with respect to the trust’s income unless the trust is, for example, engaged in a U.S. trade or business or has U.S. source income. If the grantor is treated as the owner of the assets of a foreign trust for U.S. income tax purposes, no distribution from such trust made to the U.S. beneficiary would be taxable income to the U.S. beneficiary. The U.S. beneficiaries of a foreign trust which qualifies for foreign grantor trust status benefit from the ability to receive distributions from the trust which are not subject to U.S. income tax during the life of the foreign grantor, and the foreign grantor may be outside of the U.S. tax system as well.

In addition, U.S. beneficiaries of a foreign grantor trust are not subject to the throwback rules upon receiving a distribution during the life of the foreign grantor.

Foreign non-grantor trust and throwback rules

A foreign non-grantor trust is a foreign trust which is not a foreign grantor trust. The throwback rules are essentially an anti-deferral regime for U.S. beneficiaries of foreign trusts which are NOT foreign grantor trusts so that U.S. beneficiaries may not benefit from the deferral of tax that has occurred in the trust offshore when the beneficiary receives a distribution.

If a U.S. beneficiary receives a distribution from a foreign non-grantor trust that is comprised of income or gain earned and accumulated by the trust in a prior year, the U.S. beneficiary may be subject to both an interest charge and the back tax of the throwback rules.

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Tax issues

These concepts are important to understand a number of “tax traps” that can create problems for trustees and U.S. beneficiaries of a foreign trust unless a qualified U.S. tax attorney has provided thorough and accurate advice concerning the foreign trust. Two of these tax traps are highlighted below.

Tax trap 1: identifying the “real” grantor

A person is the “grantor” of a trust to the extent that they either created the trust or made a gratuitous transfer to the trust. In order to achieve favourable grantor trust status, only the person who actually contributed the assets to the trust may be treated as the “owner” of the assets for U.S. income tax purposes.

Members of foreign families commonly hold assets for each other, so it is important to understand the true source of funds and whether there were any nominee agreements in place. If the person who has the power to revoke the trust or is (or whose spouse is) the beneficiary of the trust is not the “real” contributor of the assets, the trust will not qualify for foreign grantor trust status. Similarly, if a married person who contributed assets to the trust was from a jurisdiction with a community property regime, then his spouse may be a partial grantor. Without proper drafting of the trust instrument, full grantor trust status could be lost.

If a foreign corporation was the grantor and the trust was funded for a business reason of the corporation, the corporation will be respected as the grantor. If the trust was funded for personal reasons of one or more shareholders, the shareholder who had a personal reason for the funding of the trust will be treated as the real grantor.

If a foreign trust is not categorised correctly as a foreign grantor or non-grantor trust, a U.S. beneficiary cannot report distributions properly for U.S. tax purposes and the foreign trustee cannot meet its obligation to provide the correct information to the U.S. beneficiary.

Tax trap 2: failure to plan for the death of the foreign grantor

Ideally, a foreign grantor trust will be drafted to provide for a step-up in basis for the assets of the trust to fair market value upon the death of the foreign grantor. There are specific provisions in the United States Internal Revenue Code that permit a step-up in basis of foreign situs assets held in a foreign trust. The foreign grantor must have the power to direct trust income. This power should be coupled with either a power to revoke the trust or the power to alter, amend or terminate the trust. Matching the power to revoke the trust with foreign grantor trust status is relatively simple since a power to revoke is one of the tests for foreign grantor trust status. Matching a power to alter, amend or terminate with a trust where only the grantor or the grantor’s spouse may be a beneficiary is much more difficult. These provisions are often overlooked in foreign grantor trusts. A foreign trust also should be drafted to provide for foreign grantor trust status to continue upon the incapacity of the grantor.

Other issues beyond the scope of this article are timely and accurate identification of U.S. beneficiaries, the U.S. anti-deferral regimes for foreign corporations in which U.S. beneficiaries may have an indirect interest through a foreign trust and exit strategies from ownership of these foreign corporations.

It is critical for a foreign trust company to address all of these issues when acquiring a new inventory of trusts by having an experienced U.S. tax attorney review each trust in the inventory. In this review, the attorney should determine on a case-by-case basis the status for U.S. tax purposes of each trust, as well as highlighting any potential problems, pitfalls or ambiguities for U.S. tax purposes that should be addressed and resolved.

To access a more comprehensive version of this article as well as other publications by Cantor & Webb legal professionals, please visit www.cantorwebb.com.

Kathryn von Matthiessen is a partner at the law firm of Cantor & Webb, a GGI member, which focuses on the representation of international private clients in the areas of taxation, estate planning and tax compliance. Kathryn von Matthiessen focuses primarily on sophisticated personal and estate planning for high-net-worth individuals and the administration of complex estate and trusts, including advising international trust companies on reporting obligations concerning U.S. matters.

The Miami-based law firm of Cantor & Webb services high-net-worth private clients, predominantly from Canada, the Caribbean, Europe and Latin America.

GGI member firm

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Law Firm, Tax, Fiduciary & Estate Planning
Miami (FL), USA
Kathryn von Matthiessen
E: kathryn@cantorwebb.com
W: http://www.cantorwebb.com

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The International Standard Ruling Procedure

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The Italian tax agency’s report of 19 March 2013 dealt at length with the international standard ruling procedure aimed at international companies which proposed to reach a preliminary agreement with the Italian tax authorities on

  •       Determining fair market value in view of the transfer price rules (Article 110 para. 7 of Presidial decree 917/86)
  •       The application proposed of rules also agreed for contracts in specific individual cases concerning paying or drawing dividends, interest, royalties and other elements of profits to or from non-resident rights holders;
  •    The application proposed for specific individual cases of rules on attributing profits or losses to the stable organisational structure of a company domiciled in the territory of another state.

 The transfer price issue is particularly suited to the ruling, as the single test on income tax (Presidial decree 917/86) lays down that international inter-group transactions based on fair market value (free market price) of purchases or sales concluded with the foreign partner contribute towards earnings from business. This applies, in particular, when transferring tangible assets, semi-finished products, finished products, intangible assets in connection with research and development (trademarks, intellectual creations, inventions, knowhow etc.) or when performing services with particular reference to services of an administrative, commercial or HR nature.

Determining whether the transfer prices as used are reasonable may give rise to disputes between companies and the tax authorities. Seen in this context, the ruling procedure may help pre-empt the risk of potential disputes by concluding an agreement, in this case, the A.P.A. (Advance Pricing Agreement) with the Italian tax authorities to settle the method to be used in calculating transfer prices to determine the fair market value in advance for a limited period of time for the business transactions to which the agreement relates.

The report indicates that a majority (75%) of the APAs concluded to date involve transfer prices.

An APA is a unilaterally binding agreement which is binding only on the Italian tax authorities and not on those of the other states involved.

To offer multinational groups more certainty, however, the Italian tax authorities have allowed taxpayers who have an interest in concluding bi- or multilateral agreements to include the tax authorities of the other states involved in the agreement and hence eliminate the risk of disputes.

Applications may also be made for guidance (prior to submission), which advisers may submit anonymously, without disclosing the taxpayer’s name and which may extend to instigating or waiving proceedings. To instigate proceedings formally, application must be made to the tax collection agency’s ruling office on stamp-duty-free paper.

GGI member firm
Comma 10- Chartered Accountants & Lawyers
Auditing & Accounting, Tax, Advisory, Corporate Finance
Milan, Italy

Dr. Sergio Finulli
E: sergio.finulli@comma10.it
W: http://www.comma10.it

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GGI adds ROBERT YAM & CO in Singapore

ROBERT YAM & CO was established in Singapore in 1977 as a firm of Chartered Accountants and Certified Public Accountants. Its core business is Auditing & Assurance and Accounting & Tax services, but additionally the firm offers general business Consultancy and Advisory, and further services including Regulatory Compliance, Internal Audit & Risks Assessment, Tax Planning, Company Liquidation and Investigation and Corporate Secretarial Services.

During over 35 years of operation, ROBERT YAM & CO has developed a vast network of clients from various industries, many of which are family controlled businesses, small to medium sized companies (SMEs) that have grown with the firm over the years.

ROBERT YAM & CO strives to provide the highest standards of services and best solutions to problems to the full satisfaction of all clients through working hand in hand with them to achieve their objectives.

ROBERT YAM & CO currently employs over 50 professionals who are being managed and supervised by 2 Partners. The team is fluent in English and Mandarin

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Robert Yam FCA
Managing Partner
E: ryam@robertyamco.com.sg

Singapore
T: +65 63381133
F: +65 63388989
W: http://www.robertyamco.com.sg

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