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Monthly Archives: February 2012

Estate Responsible for Penalties For Decedent's Failure to Report Foreign Trust

The Internal Revenue Service Office of Chief Counsel, in a chief counsel advice memorandum released Feb. 24, said an estate is responsible for Section 6677 penalties for failure to file information returns regarding foreign trusts for tax years ending prior to the decedent's death.

The estate is responsible for “initial” penalties asserted against the decedent where Forms 3250, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3250-A, Annual Information Return of Foreign Trust With a U.S. Owner, were not timely filed with respect to a foreign grantor trust established by the decedent, the office said in CCA201208028

Read more at: Tax Times blog

FATCA Clears Way for Mexican Authorities to Investigate U.S. Accounts

The Mexican Tax Administration Service (SAT) can access information on thousands of U.S. bank accounts held by Mexican citizens “automatically” under a new collaboration with the IRS.

The agreement is part of a reciprocity mechanism between the U.S. and Mexican tax systems stemming from the Foreign Account Tax Compliance Act (FATCA), through which IRS can access information on U.S. citizens holding taxable bank accounts or financial assets in Mexico.

FATCA also applies to foreign financial assets or offshore accounts held by U.S. citizens around the world.

As SAT authorities have increased information-sharing with IRS, the IRS is doing the same for SAT, according to leading accountants in Mexico City.

“This comes as a reciprocity response from the U.S. to allow the SAT to look into large bank accounts held by Mexicans in the U.S. to ensure they are paying the correct tax, or the tax they claim to be paying,” said Carlos Martinez, PricewaterhouseCoopers LLP senior accountant in Mexico City.

Collaborating on banking information should help lower Mexico's tax evasion rate, which currently stands at 23.3% or 316 billion pesos ($24.5 billion) a year—equivalent to 2.62 per cent of its GDP.

In the past, Mexican tax officials interested in a particular individual's account had to ask IRS to provide it with information—a process that sometimes took significant time.

This is in line with what the SAT is already doing for IRS, observers said.

Martinez said SAT is interested in catching big Mexican tax evaders holding millions of U.S. dollars in accounts across the border.

Under Mexican law, citizens holding U.S. accounts must pay tax on interest and foreign exchange gains.

Depending on the amount to be taxed, the rate is gradual, capped at 30%.

While Mexicans can pay some tax under special double-tax agreements in the U.S. or in other countries, most must be paid in Mexico, Roja noted.

Also, under Mexican law, Mexican businessmen operating businesses abroad must report their earnings to SAT.

Roja said the newly strengthened collaboration between IRS and SAT will give the latter a lot more flexibility in policing Mexicans who flout their tax obligations.


Read more at: Tax Times blog

IRS determines sourcing of credit card interest and ATM fees received from outside the U.S.

In Chief Counsel Advice (CCA), IRS has determined the sourcing of credit card interest and fees received by a financial services firm from U.S. citizen and resident alien customers living outside the U.S. and from ATM fees earned by the firm in connection with customer transactions made on third-party ATMs located outside the U.S.

The CCA concluded that the interest and OID income that Taxpayer received from Customers generally should be treated as foreign source income. However, interest and OID income that Taxpayer received from the following groups of Customers should be treated as U.S source income:

·        alien individuals (other than lawful permanent residents) who are treated as U.S. residents under the substantial presence test or first-year election in Code Sec. 7701(b).

·        U.S. citizens and lawful permanent residents who would be treated as U.S. residents under the substantial presence test in Code Sec. 7701(b). While noting that there is a question as to how interest should be sourced if it is paid by a lawful permanent resident who lives outside of the U.S. at the time of payment, the CCA concludes (by analogy to the rules for U.S. citizens) that sourcing of interest payments by such individual should be based on the individual's place of physical residence, determined under the substantial presence test at the time of the interest payment.

·        dual resident taxpayers who make an election under Reg. § 301.7701(b)-7 to be treated as nonresident aliens but who meet the substantial presence test in Code Sec. 7701(b). That is, the CCA concludes that for purposes of Code Sec. 861(a)(1), a dual resident taxpayer's election to be treated as a nonresident alien should be disregarded.

·        Servicemembers who, under the Servicemembers Civil Relief Act (SCRA), are residents of a state or D.C. but are stationed in a U.S. territory pursuant to military orders. Under SCRA, a servicemember retains his jurisdiction of residence, which may be a State, D.C., or a U.S. territory, notwithstanding his presence in or absence from such pursuant to military orders.

·        Beginning in 2009, spouses of servicemembers who, under the Military Spouses Residency Relief Act (MSRRA), are residents of a state or D.C. but are accompanying their servicemember spouses, who are serving pursuant to military orders, to a U.S. territory. Under MSRRA, the same rules as in SCRA apply beginning in 2009 to the spouse of a servicemember if the spouse is present in or absent from any State, D.C., or any U.S. territory solely to be with the servicemember, who is serving in compliance with military orders, and both spouses retain the same residence.

The CCA concluded that it appeared that Taxpayer's income from ATM fees should be treated as U.S. source income. Taxpayer's activities with regard to processing the ATM transactions appeared to have been solely in the nature of personal services—i.e., processing Customer withdrawals of funds made on third-party ATMs. There didn't appear to be any credit risk associated with these transactions since Customers could only withdraw available funds and no overdrawals seemed to have been allowed. Accordingly, the fees were compensation for Taxpayer's processing of the transactions through use of its computers, software, and other equipment located in the U.S. Under Code Sec. 861(a)(3), compensation for labor or personal services performed in the U.S. is treated as income from sources within the U.S.

Chief Counsel Advice 201205007

Read more at: Tax Times blog

New Reporitng for Foreign Investors in U.S. Partnerships

Foreign investors are now required to file a special form, Schedule P. It applies to the ownership of any U.S. partnership including a limited liability company.

Now, the 2012 Schedule P (Form 1120-F) is required by a foreign corporation’s ownership of a U.S. partnership. Schedule P also reports the distributive shares of partnership effectively connected income and the foreign corporation’s effectively connected outside tax basis in interest.

Part I is used to identify all partnership interests the foreign corporation directly owns that give rise to distributive share of income or loss that effectively connected with a trade or within the United States of the corporation.

Part II is used to the foreign corporation’s distributive share of ECI and allocable expenses with the total income and expenses reported to it on Schedule K-1 1065), Partner’s Share of Income, Deductions, Credits, etc.

Part III is used to: report the corporation’s outside its directly-held partnership that include ECI in the corporation’s distributive share is apportioned between ECI and non-ECI Regulations section 1.884-1(d)(3) determine the average value treated as asset for interest expense allocation purposes under Regulations .

Read more at: Tax Times blog

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