IRS recently stated that the U.S. based holding companies claimed $18.3 billion in foreign tax credit in 2013 which is up from $8.17 billion in the previous year. The foreign tax credit was generally claimed for the tax paid in foreign countries on the dividend income repatriated to the U.S. by these holding companies. The data says that the holding companies reported $25.1 billion in such dividend income in 2013.
The data suggests that U.S. companies are bringing in more income from the foreign earnings to finance U.S. operations.
Since the tax incentives are not the motivation for repatriating the earnings, the economic factors seem to be the driving such a trend.
IRS announced that it intends to issue regulations under Code Sec. 304(b)(5)(B), Code Sec. 367 , Code Sec. 7701(l), and Code Sec. 7874 with respect to corporate inversion transactions.
Among others, the regulations will prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans (under section 956(e) of the code).
In general, the forthcoming regulations will prevent inverted companies from using certain techniques to access the overseas earnings of the U.S. company’s foreign subsidiaries without being subject to US tax. This would close a loophole to prevent inverted companies from transferring cash or property from a controlled foreign corporation to a new parent to completely avoid U.S. tax, and make it more difficult for U.S. entities to invert.
Notice 2014-52 further added that regulations will generally apply to transactions completed on or after Sept. 22, 2014.
In Osvaldo Rodriguez et ux V. Commissioner, the fifth circuit recently upheld the decision in a transaction involving inclusion of IRC 956 income with respect to the taxpayers’ Controlled Foreign Corporation (CFC) in Mexico.
Osvaldo and Ana Rodriguez, husband and wife, were citizens of Mexico and permanent residents of the U.S. They were the sole shareholders of Editora Paso del Norte, S.A. de C.V. (Editora). Editora had been incorporated in 1976 under Mexican law, and in 2001 it had established operations in the U.S. as a branch under the name Editora Paso del Norte, S.A. de C.V., Inc.—a controlled foreign corporation (CFC). On their amended 2003 and original 2004 U.S. federal income tax returns, the taxpayers included in gross income $1,585,527 and $1,478,202, respectively, for amounts of Editora’s earnings invested in U.S. property and taxable directly under IRC 951(a)(1)(B) and IRC 956.
Taxpayers treated the IRC 951 inclusions as qualified dividend income subject to preferential qualified dividend rates. IRS determined that the Code Sec. 951 inclusions were taxable at ordinary income rates.
The fifth circuit upheld the decision and ruled that the amounts included in the Rodriguez’s gross income under IRC 951(a)(1)(B) and IRC 956 with respect to their CFC’s investments in U.S. property were not qualified dividend income under IRC 1(h)(11).
IRS recently released the draft Form 8621 to reflect changes made by FATCA effective March 18, 2010.
The new Part I of the Form suggests that the IRS generally intends to require annual filing of Form 8621—
- Without regard to whether an election under the PFIC rules is being made in that year, or whether the PFIC rules would alter otherwise generally applicable U.S. income tax rules for the year under section 1291, and
- Without regard to whether an income inclusion would be required under section 1293 or section 1296 for that tax year.
The information in this new Part I would require the taxpayers to provide IRS with information also generally required on new Form 8938 (Statement of Specified Foreign Investment Assets), and would enable the IRS to waive reporting on Form 8938 of foreign assets reported on Form 8621 without sacrificing the ability of the IRS to obtain desired information.
The IRS did not release draft instructions. Guidance is still awaited on issues such as whether it will retain current exceptions from filing of Form 8621 by tax-exempt U.S. entities that would not be subject to U.S. taxation under subchapter F on actual dividends from a PFIC.
To remind our readers, generally any investment by a US person in a foreign mutual fund is considered a PFIC and subject to be reported on Form 8621.
IRS yesterday released a draft version of Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding, to accommodate the FATCA provisions of the Code’s Chapter 4. Instructions to the draft, which would expand the form from two to eight pages, haven’t been released yet.
Generally effective for payments made after Dec. 31, 2012, the HIRE Act established rules for withholdable payments to foreign financial institutions (FFIs) and for withholdable payments to other foreign entities by adding new Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474). The rules provide for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities.
Under Code Sec. 1471(a), a withholding agent must withhold 30% of any withholdable payment to an FFI that does not meet the requirements of Code Sec. 1471(b). A withholdable payment is, subject to certain exceptions:
- Any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (FDAP income), if such payment is from sources within the US; and
- Any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US (Code Sec. 1473(1))
An FFI satisfies Code Sec. 1471(b), if it either enters into an agreement (an FFI agreement) with IRS to perform certain obligations or meets requirements prescribed by IRS to be deemed to comply with Code Sec. 1471(b).
Switzerland and Japan are the latest additions to the list of countries that agreed to cooperate with US Treasury.
Treasury said on June 21, that the U.S. had signed separate joint statements with Japan and Switzerland to intensify cooperation in combatting international tax evasion by removing legal impediments to compliance with the Foreign Account Tax Compliance Act (FATCA). The approach taken under the joint statements with Japan and Switzerland permits foreign financial institutions (FFIs) to report information directly to the IRS, which is different from an earlier approach that called for FFIs to report information directly to their governments that would ultimately be shared with the U.S. on an automatic exchange of information basis.
The announcement expands the list of countries already cooperating with Treasury to implement FATCA. Treasury said in February it was negotiating with France, Germany, Italy, Spain and the U.K. (the so-called G5) to establish government-to-government information sharing arrangements. (See International Taxes Weekly, 02/14/2012). In April, Treasury also announced that Ireland had entered into discussions with Treasury regarding an intergovernmental approach to implementing FATCA.
Treasury’s joint statement with France, Germany, Italy, Spain and the U.K. envisages a two-step approach whereby FFIs report FATCA-required information to their own governments and then the governments exchange the information with the U.S. on an automatic basis.
Treasury’s separate joint statements with Japan and Switzerland contemplates the mutual intent to pursue a second model framework for intergovernmental cooperation, a senior Treasury official said. Under the second model for inter-governmental cooperation, FFIs would report information directly to the IRS to the extent permitted under the FFI’s domestic laws. Where consent is necessary and not granted by the account holder, the governments would then be able to obtain such information pursuant to a treaty request.
Last week IRS updated the FAQs on its website regarding reporting on Form 8938 and added few more questions. Few noteworthy clarifications are:
- Tangible assets held for investment (e.g., art, antiques, jewelry, and cars) do not have to be reported.
- Safe deposit box is not a financial account.
- The omission of Form 8938 with the original return requires an amended return to be filed with the form attached.
- Filing of Form 8938 does not remove the requirement to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), if otherwise required.
- Directly held precious metals, such as gold, are not specified foreign financial assets. Note, however, that gold certificates issued by a foreign person may be a specified foreign financial asset that you would have to report on Form 8938, if the total value of all your specified foreign financial assets is greater than the applicable reporting threshold.