Yearly Archives: 2015

Some U.S. companies have significant earnings offshore in their Controlled Foreign Corporations (CFCs) that have not been distributed as dividends. To avoid taxable dividend distributions of the Earnings and Profits (E&P) back to the U.S. Parent (USP), some companies may attempt to use short term loans from the CFCs to related U.S. group companies to achieve economic repatriation of the foreign earnings.

The IRS has established a Practice Unit to examine the short term loan exclusion from the definition of U.S. Property, and whether such loans may trigger an income inclusion under IRC Section 951. It looks both at the issue of whether the relatively "mechanical" rules for the short term loan exception are met as well as at the more complex issue of whether a series of short term loans is being used in an attempt to circumvent IRC Section 951.

A loan to a related U.S. person held by a CFC at the end of a quarter may not trigger an inclusion under Subpart F if the loan is repaid within 30 days from the time it is incurred (“30-day exception”). This exception applies only if the CFC does not hold for 60 or more days during its taxable year any obligations of related U.S. persons that would be subject to IRC §956 (“60-day limitation”). Generally, if a CFC holds an obligation of a related U.S. person at the end of a quarter of the CFC’s tax year, the CFC will be considered to hold U.S. property. However, pursuant to certain Notices issued by the IRS, short term obligations of a related U.S. person may be excluded from the definition of US property. For the short term loan exception to apply to a CFC’s tax years ending before October 4, 2008 and beginning on or after January 1, 2011:

1. The obligation of the related U.S. person must be collected by the CFC within 30 days from the time the obligation is incurred (excluding the date of issuance, and including the date of repayment); and
2. The CFC must hold obligations of related U.S. persons for less than 60 days during the CFC’s tax year.

Whether the related US person executes and repays each obligation to its CFC as a separate, independent transaction. If not, multiple obligations may be collapsed into a single obligation for purposes of IRC Section 956.

 

A Swiss banker, Hansruedi Schumacher, who cooperated extensively in the United States' unsuccessful prosecution of former high-ranking UBS AG executive Raoul Weil received unsupervised probation in his Swiss homeland and a $150,000 fine on October 5, 2015 in a Florida federal court for his role in helping U.S. clients evade taxes.

The prosecutors' sentencing memorandum indicated that the sentencing guidelines called for a prison term of 57 to 71 months and a fine ranging from $10,000 to $100,000.

Schumacher, who also worked at Neue Zuercher Bank and once ran the cross-border business for UBS, was indicted in August 2009 on a charge of helping U.S. citizens evade taxes on UBS and NZB accounts; pled guilty in April, just before he was set to go on trial. His case was part of an extensive crackdown against Swiss banks in the mid-2000s, according to defense filings.

Despite his offenses, Schumacher's “willingness to come forward and subject himself to U.S. jurisdiction and cooperate, when he had no pressure to do so, cannot be overvalued,” prosecutors said in their motion for downward departure from those guidelines. “Although charged with a crime, he could have remained in his native country for the remainder of his life free from any danger that the Swiss government would extradite him.”

Schumacher returned to the U.S. in October 2014 to face a 2009 indictment and appeared later that month as a key prosecution witness in Ex UBS Executive Raymond Weil's trial in Fort Lauderdale, Florida, under an agreement that his testimony could not be used against him in his case as long as it was truthful.

 

Sources:

Bloomberg
Law360

The Internal Revenue Service announced the exchange of financial account information with certain foreign tax administrations, meeting a key Sept. 30 milestone related to FATCA, the Foreign Account Tax Compliance Act.

To achieve this, the IRS successfully and timely developed the information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data while facilitating reciprocal automatic exchange of tax information with certain foreign jurisdiction tax administrators as specified under the intergovernmental agreements (IGAs) implementing FATCA.

This information exchange is part of the IRS’s overall efforts to implement FATCA, enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts or foreign entities. FATCA generally requires withholding agents to withhold on certain payments made to foreign financial institutions (FFIs) unless such FFIs agree to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

In response to the enactment of FATCA and other jurisdictions’ interest in facilitating and participating in the exchange of financial account information, the U.S. government entered into a number of bilateral IGAs that set the groundwork for cooperation between the jurisdictions in this area. Certain IGAs not only enable the IRS to receive this information from FFIs, but enable more efficient exchange by allowing a foreign jurisdiction tax administration to gather the specified information and provide it to the IRS. 

And some IGAs also require the IRS to reciprocally exchange certain information about accounts maintained by residents of foreign jurisdictions in U.S. financial institutions with their jurisdictions’ tax authorities.

Under these reciprocal IGAs, the first exchange had to take place by September 30, giving the IRS a deadline to put in place a process to facilitate this data exchange.

The IRS will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet the IRS’s stringent safeguard, privacy, and technical standards.  Before exchanging with a particular jurisdiction, the United States conducted detailed reviews of that jurisdiction’s laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.

“This groundbreaking effort has fundamentally altered our relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field,” Koskinen said.

Meeting this deadline reflects a significant international collaboration and partnership with dozens of jurisdictions around the world. The capacity for reciprocal automatic exchange builds on numerous accomplishments including the following:

• Development of a consistent data reporting format, or schema, and the agreement to use this format by all jurisdictions;
• Establishment of the details and procedures required to assure data confidentiality;
• Creation of a data transmission system to meet high standards for encryption and security; and
• Cooperation with foreign jurisdiction tax administrations to achieve the timely implementation of this exchange.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP), which is open until otherwise announced.