What a CEO Needs to Know About Tougher Off-Shore IRS Tax Regulations
By Scott Hendon and Donna Chamberlain
For the many Texas multinationals, maintaining programs for globally mobile employees, tax and payroll compliance should be a priority, especially since it is quickly becoming a priority for the IRS.
Texas is a big state, but the Federal Government is trying to make this a smaller world for purposes of income tax collection. The President’s 2010 and 2011 budgets contain provisions for preventing offshore tax evasion by Americans and foreign nationals. Further, the United States is working with the Organization for Economic Cooperation and Development (OECD) to encourage an “exchange of information” provision in currently existing foreign tax treaties. In a Journal of Accountancy article, IRS Commissioner Doug Shulman emphasized the fact that the IRS is focusing on third party reporting, and the IRS has also publicly vowed to increase their focus on international transactions. Foreign banks are now required to issue 1099 forms for interest and dividends paid, with penalties associated with noncompliance. With the increase in 2010 budget funding, the IRS expects to increase staff handling international transactions for corporations and individuals by 800, with a proposed 800 more in 2011.
Here are some IRS regulations that Texas CEOs should be aware of:
Foreign Bank Account Reporting (FBAR). The IRS requires that all US residents report foreign accounts with a balance of U.S. $10,000 at any time during the year on Form TDF 90-22.1 for each year applicable. This form is due by June 30 of the following year and although there is no tax associated with it, there is a $10,000 penalty for failure to file with the possibility of criminal charges for willful noncompliance. The IRS offered a voluntary disclosure program in 2009 that brought over 14,700 non-compliers out of the woodwork. Penalties under this program were 20 percent of the value of the accounts not reported (for the year with the highest balance). The FBAR rules include a reporting requirement for employees who have signature authority over company accounts. In this case, the company can file this form on the employee’s behalf. The IRS is also trying to extend this reporting to non-residents in certain circumstances, but that has been put on hold for the time being.
IRS Form 4564. The IRS uses this form to request detailed information about a company’s U.S. citizens abroad and foreign nationals in the U.S. They ask to see payroll forms such as Form 673 and W-4 documenting withholding exemption. They delve into assignment reimbursement policies and expect documentation of compensation by requesting wage breakdowns detailing all benefits and allowances provided worldwide for each assignee. This can be quite an endeavor if you don’t have a solid program in place and an advisor assisting you with expatriate compliance and planning.
IRC Section 877A. On June 18, 2009, the IRS used this section to impose an exit tax for U.S. citizens and green card holders who expatriate from the U.S. permanently. It is important for companies, and their foreign national employees, to be aware of this relatively new code section before sponsoring a green card application. The company may want to address it in their assignment policies to make the assignee aware of what they will and will not support in order to avoid being obligated to pay a tax on behalf of their employee that is tied to personal asset appreciation. The section doesn’t apply until one has held a green card for any part of eight years and either chooses to relinquish it or abandons it, knowingly or unknowingly. The exit tax is a tax imposed on the deemed sale of all worldwide assets on the day of expatriation. There are certain exemptions and deferrals available that should be taken into consideration as well.
There is much more than just the tax implications of international business on the company. Traditionally, issues such as permanent establishment, transfer pricing and even foreign tax credits have been the center of focus when discussing expatriate employees, but some of the other finer tax implications can easily be overlooked. Now, the IRS is making these issues a priority.
Scott Hendon is a Partner in the BDO Dallas office (email@example.com), and
Donna Chamberlain is Senior Tax Director – Expatriate Services at BDO, Charlotte (firstname.lastname@example.org )
Mar 13, 2017 Comments Off on Business Tax Issues for 2017
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