Going global? Be aware of the many changes taking place in the international tax area. After successfully obtaining names of US account holders from UBS in Switzerland, IRS is gearing up for enforcing further compliance in this area. There may be new tax traps for the unwary after the enactment of FATCA in the Hire Act of last March. Controlled foreign corporations are likely to meet the definition of the newly defined “Non Financial Foreign Entities” which can have stringent reporting requirements and increased penalties for non compliance.
Recently there were two interesting news from Russia and Italy.
Russian finance minister Alexei Kudrin said that by smoking a pack, “you are giving more help solve social problems such as boosting demographics, developing other social services and upholding birth rates. People should understand: Those who drink, those who smoke are doing more to help state.” he told a news agency after raising taxes on alcohol and cigarettes.
Italian tax authorities announced that fresh bread and pasta along with small fish and shellfish would be eligible for preferred tax rates.
After introducing the Rupee symbol for the first time, government of India is seeking to overhaul tax code which will replace the Income tax Act enacted in 1961. This was felt necessary to reflect economic and political changes in recent times. Economy is growing at faster rate than ever and new vistas are opening up in globalization. Along with many other changes and codification of certain Supreme Court decisions, the Direct Tax Code brings in few changes that can affect certain sections of persons of Indian origins – better known as NRI or Non Resident Indians. Traditionally India has given many investment incentives in terms preferential tax treatments to NRIs who have settled overseas and acquired permanent residence or citizenships of other countries. Prior to the proposals, NRIs visiting India were not taxed on their overseas income if their combined stay during the year did not exceed 182 days. The new proposals intend to shorten this period to 59 days. Consequently, if any NRI meeting certain other conditions, stays in India for more than 59 days, his or her overseas income can also be subject to tax in India. Various interested groups have raised concerns to these changes and it will be interesting to see what the final outcome would be.
Recently released report by the Treasury Inspector General for Tax Administration (TIGTA) found after examining 231,277 tax returns from tax year 2008 that 23,334 taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion.
U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. However, if they meet certain conditions they are eligible to claim foreign earned income exclusion and can exclude up to $91,500 of foreign earned income. IRS observed that in 2008 taxpayers excluded $19.2 billion in foreign earned income on their tax returns. Out of this, the erroneous claims totaled $675 million and the estimated tax that was avoided totaled $90 million.
According to TIGTA Inspector General J. Russell George, “Over five years, the estimated revenue loss to the IRS could total more than $450 million. Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions.” It is likely IRS will focus on this area in near future due to substantial revenue loss.