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Some Nonresidents with U.S. Assets Must File Estate Tax Returns

September 23, 2015

Deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets.

U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A nonresident’s stock holdings in American companies are subject to estate taxation even though the nonresident held the certificates abroad or registered the certificates in the name of a nominee.

Exceptions: Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds.

Having worked for the Internal Revenue Service for 32 years as a senior attorney in international estate tax, and having subsequently prepared several hundred nonresident alien estate tax returns (form 706NA) for aliens who died owning property in the US with a value in excess of $60,000, I am aware that many attorneys/accountants who prepare tax returns in this somewhat limited area (perhaps 1,200 to 1,500 filings per year) are not familiar with a number of tax savings devices which are not intuitively obvious. 

The most obvious device for reducing tax, is a tax treaty or convention between the United States and the country from which the decedent originated or was domiciled. Estate tax treaties between the U.S. and other countries often provide more favorable tax treatment to nonresidents by limiting the type of asset considered situated in the U.S. and subject to U.S. estate taxation. Executors for nonresident estates should consult such treaties where applicable.

However, this will not cover most countries since there are approximately 193 countries in the world and the treaties encompass about 20 of these countries. The bulk of the countries covered by treaty are in Europe, England, and Canada. The treaties themselves are very poorly written and difficult to understand so I would recommend that when you do use such a treaty, you also look at the interpretation of the treaty created by the Treasury Department so that mere humans can understand the incomprehensible.

Beyond treaties, there were a number of devices which exist, the purpose of which is to reduce the federal estate tax. The most prevalent of these is offered in section 2106, IRC, where one is invited to, by verifying the value of the gross estate outside the United States, take apportioned deductions for debts and expenses incurred worldwide by the decedent or his estate. Very critical to remember is the fact that the IRS must believe your depiction of the non-US assets and their fair market value. Many people come to me and said that they want to use a zero figure for the gross estate outside the United States and that the IRS will have to live with it. Wrong! If the IRS has even a scintilla of suspicion about the purported foreign assets or their value, the IRS will simply disallow all the debts and expenses.   

At that point, if you wish to continue to pursue the deductibility of the debts and expenses, you are required to prove both the expenses themselves and the fair market value of the assets which means, words that you don't like to hear, an IRS audit!  It is much easier to try to verify the value of the foreign assets as part of your due diligence and avoid a confrontation with an estate tax attorney. 

Community property is an area with rich rewards for the tax preparer; it is also very poorly understood. If the decedent lived in a country in which the presumption of marriage is community property of assets, all assets (except gifts and inheritances) obtained by the wedded couple become community property. When one of them dies, irrespective of title, one half of the assets are excluded from the estate since they are legally the property of the other person. Generally the IRS is somewhat skeptical about this claim so if I have an estate from which I wish to exclude a portion based on community property, I generally get an opinion of law from counsel in the country where the marriage occurred. 

The marital deduction-since the 1990s, the IRS is not allowed a marital deduction for property passing to a nonresident alien spouse. The criteria for this was that in virtually every instance, the nonresident alien would receive the assets, tax free, and leave the US, paying no tax on assets which had been sitused in the United States. Ergo, no more marital deduction. To try to soften this blow, Congress, in section 2056A, created the qualified domestic trust. The qualified domestic trust basically allows assets passing through a special trust to a nonresident alien spouse to qualify for a marital deferral. Each time the spouse removes assets from the trust, he/she, is required to file a form 706QDT. 


Executors for nonresidents must file an estate tax return, Form 706NA, United States Estate (and Generation-Skipping) Tax Return, Estate of a nonresident not a citizen of the United States, if the fair market value at death of the decedent's U.S.-situated assets exceeds $60,000. 

However, if the decedent made substantial lifetime gifts of U.S. property, and used the applicable $13,000 “unified credit exemption” amount to eliminate or reduce any gift tax on the lifetime gifts, a U.S. estate tax return may still be required even if the value of the decedent’s U.S. situated assets is less than $60,000 at the date of death (due to the decrease in the “unified credit exemption” for the lifetime gifts). See Unified Credit (Applicable Credit Amount) Section in Publication 559, Survivors, Executors, and Administrators, and the Form 706NA Instructions for more information.

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Robert S. Blumenfeld  - 
 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.








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The OECD Challenges Aggressive Tax Planning

September 23, 2015

The OECD, in promulgating the discussion draft for action 12 of the base erosion and profit shifting project, sought to have tax authorities mandate disclosure initiatives that target the aggressive tax planning community. The drafters’ goal is to ‘‘rein-in’’ unwarranted activities by enabling tax administrations to challenge both domestic and international aggressive tax schemes. The draft itself, however, has significant limitations:

·       It focuses almost exclusively on mass market tax schemes, minimizing the taxing jurisdiction’s potential remedies against perpetrators of individualized, in-house, international schemes;

·        It seeks to curtail, rather than expand, tax administrations’ remedies against aggressive international tax planning schemes; and

·        While the OECD designed action 12 to address aggressive tax planning, the drafters failed to address many of the parameters that determine the nature of this tax aggressiveness. 

In addition, the draft fails to specify the scope of the aggressive tax shelter community itself. At various times, and depending on the specific context, the draft could apply such participant rules to promoters, advisers, material advisers, intermediaries, taxpayers, users, end-users, and others who provide ‘‘material assistance’’ to such schemes. The drafters acknowledge that those terms will need to be defined. It is unlikely that the action 12 drafters can weld these definitions into country-specific legislation.

For more on this see The OECD Challenges Aggressive Tax Planning: A Moving Target
by Robert Feinschreiber and Margaret Kent,  Tax Notes Int’l,September 21, 2015, p. 1037.

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Suspicious Activity Reports (SARs) Are One of the Best Methods to Battle Financial Crimes according to the OECD

September 22, 2015

 A recent Organization for Economic Cooperation and Development (OECD) report, one of the best methods to combat financial crimes such as tax evasion, money laundering, corruption and terrorist financing, is to have countries ensure that their tax administrators have access to reports of suspicious financial transactions

Financial crimes, including tax crimes, threaten the strategic, political and economic interests of both developed and developing countries and undermine confidence in the global financial system.

In a world of limited resources and increasing complexity, government authorities must work closely together in a “whole of government” approach to best address these challenges. This applies, as much as anywhere, to the authorities combating serious financial crimes such as tax crimes, bribery corruption, money laundering and terrorism financing. Through each authority pooling their knowledge and skills, the fight against financial crimes will be more effective.

This interaction between each authority’s objectives has therefore become increasingly recognized.

There are potentially significant financial and efficiency gains to be realized by both tax administrations and money laundering authorities, namely the Financial Intelligence Unit (FIU), from increasing their levels of co-operation, information sharing and, more specifically, in developing an agreed approach to the analysis of Suspicious Transaction Reports (STRs). 

This is recognized in the whole of government approach where tax authorities have a key role in not only identifying tax evasion but also in identifying and reporting other suspected serious crimes such as bribery, corruption, money laundering and terrorism financing. However, tax authorities are hindered in this role as it is still not universally the norm for tax authorities to have access to STRs, and even where some level of access is provided significant barriers, both of a legislative and non-legislative nature, remain.

The content of this report is based on survey data obtained from 28 countries on the access of tax administrations to STRs for both criminal and civil matters and provides a picture of the current state of play. As the report sets out, there are various models to provide for tax administration access to STRs – each with particular strengths and challenges – broadly categorized as: full unfettered

access to STRs by the tax administration (whether on a push or pull basis); joint decision - making on the use of STRs by the tax administration and the FIU; and models relying on the FIU to make the decision on what should be shared with the tax authority. Ways to overcome the associated challenges with each model are suggested in the report.

The report moves on to highlight the potential benefits of sharing STRs and documents some of the different uses of STRs in relation to tax compliance. While STRs are primarily used for criminal purposes, increasing numbers of jurisdictions are realizing significant benefits from also using STRs for civil purposes. However STRs are used, in order to ensure they are used as effectively as possible, it is critical to focus on policies and procedures as well as the legal framework for tax administrations and FIUs to work closely together on an ongoing basis and for clear communication strategies to be employed with reporting financial institutions and other reporting entities.

The report also explains the types of confidentiality requirements that will need to be considered and discusses how to remove barriers to closer co-operation, while respecting these confidentiality requirements. Finally, specific recommendations are made designed to enhance levels of co-operation and therefore increase the overall effectiveness of governments in the fight against tax evasion and financial crimes, including money laundering. 
The volume of STRs has generally increased significantly over recent years. While this is  encouraging, it is not necessarily a sign of increased compliance. It is clear, however, that STRs are an important means of identifying financial crimes. There is no ideal target number of STRs to be submitted: this depends on the level of risk facing an institution, sector or country, as well as the size and composition of an economy. Nevertheless it is useful to look at STR volumes for a general indication of such reporting for countries with similar characteristics.

Tax administrations that have access to reports of suspicious transactions see an increase in their ability to identify a range of serious crimes and have an additional source of information to enforce tax compliance, the report said.

For example, the South Korean tax administration in 2013 gained access to suspicious transaction reports for civil cases and reported an increase in tax assessed of KRW 367 billion ($337 million at the time), the report said.

“While STRs are primarily used for criminal matters, including tax crimes, increasing numbers of jurisdictions are experiencing significant benefits through their use for civil tax matters.”

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Exporters and Near Non-Exporters – Can Claim Tax Breaks Year After Year!

September 22, 2015

Submitted by Robert Feinschreiber and Margaret Kent, ExportDISC.com   [email protected]. 

The tax law provides six tax breaks for exporters – and for near exporters. Consider if your business can claim some - or perhaps all six - of these government-sponsored tax benefits:

  1. Your company can claim the tax-rate spread, paying 20 percent tax instead of the regular corporate tax – without limitation - if your company exports U.S. products.
  2. Your company can defer tax on a major share of its export profits – but only up to $10 million in gross receipts.
  3. Your company can obtain additional tax saving by – literally – venturing into foreign territory.  These rules provide for even more tax deferral.
  4. Your company can claim both domestic production deduction tax benefits and export benefits if the company produces or manufactures items in the U.S. 
  5. Your company can claim estate and gift tax benefits it the company follows all the rules.
  6. Your company can increase its tax benefits by grouping or segregating its export transactions.

These tax breaks apply to a plethora of industries. Here are some possible examples if the company meet all of the tax requirements then exports its property:

  1. Boat manufacturers can qualify for the export tax incentive. Boat wholesalers and sellers can qualify as well. The wholesaler or the seller must buy the boat – directly or indirectly - from a U.S. manufacturer and sell the boat to a customer offshore.
  2. Aircraft manufacturers can qualify for the export tax incentive. An aircraft repairfacility can qualify as well, but the repair facility must buy the aircraft and must make substantial repairs to the aircraft while in the U.S., and sell the aircraft offshore. 
  3. Phone companies can qualify for the export tax incentive. If the phones are imported, the company must add very substantial value to the phones in the U.S., and the company needs to sell the phones overseas.
  4. Companies that farm, raise, or gather agricultural products can qualify for the export tax inventive unless the U.S. government gives them separate tax breaks. Eligible agricultural products can include grains, fruits, and other agricultural products.
  5. Electronic manufacturers can qualify. They need to ascertain that 50% of fair market value was U.S., and demonstrate the electronics then go overseas.
  6. The equipment refurbishers can qualify if they purchase the equipment and substantiate their refurbishing efforts.
  7. Chemical manufacturers and wholesalers can qualify for the export tax incentive. By-product and joint product costing issues can arise, particularly when the company sells one product domestically and sells the other product overseas.
  8. Architectural services, engineering services, other related services can potentially qualify for export incentive benefits if the project is for an overseas customer.
Ascertaining when a business can claim these export benefits.
 

 Examine these potential tax benefits:

  • Inland manufacturers have products that go overseas: The company can benefit from the tax incentive if the company produces the products in the U.S.; the goods go overseas, and the manufacturer can track the sales to the foreign customer.
  • The company does not manufacture anything. The company buys items from an unrelated manufacturer and sends these products overseas. The company can qualify if it can track the purchases and sales.
  • Recyclers of used equipment potentially can qualify for export tax benefits if the  company can track the transactions that are overseas.
  • The company consolidates U.S.-made products before they ship the goods overseas. This company can qualify for export incentive tax benefits.  
  • An importer substantially modifies a product in the U.S. before the company sells the good to foreign customers. This company can qualify for export incentive tax benefits.
  • A distributor buys U.S. made products and sells these products to a cruise ship or to an international airline. This company can qualify for export incentive tax benefits.
  • Foreign located companies that distribute U.S. made goods can potentially qualify if the goods are made in the U.S. and the goods go overseas.
You must take action to claim these tax benefits. IC-DISC  procedures and requirements

  1. Initial – one time – IC-DISC Requirements
  2. Gross receipts test –the 95 percent requirement yearly
  3. Assets test-the 95 percent requirement yearly
  4. Importance of meeting timing requirements yearly
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