Tag Archives: PFIC

The worldwide trend of attacking the use of corporations as a way to reduce or defer taxation for individuals

Introduction – The war against corporations and the shareholders of those corporations

Corporations as entities that are separate from their shareholder/owners

As every law students knows, a corporation is a legal entity that is separate from its owner. As a legal entity that is separate from its owner, a corporation is capable of holding assets, carrying on a business and investing in a way that results in separation of the shareholder(s) from the business itself. It is a mistake to infer that the corporation’s status as a separate legal entity means that the corporation’s income will not be taxed to its shareholders.

Corporations as legal instruments of tax deferral

When corporate tax rates are lower than individual tax rates, there is incentive for individuals to earn and invest through corporations rather than to earn and invest as individuals. In other words, in certain circumstances, corporations can be used to pay less taxes.

Corporations as instruments of tax evasion

In many jurisdictions is it possible to create a Corporation and NOT disclose the identities of the beneficial owners. Because of this circumstance:

1. Corporations (as was made clear in the “Panama Papers Story”) can be used to hide income and assets for either legitimate or illegitimate reasons; and

2. Corporations can be used to avoid the attribution of income earned by the corporation to the shareholders.

Corporations and the rise of @TaxHavenUSA
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The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

The reality of being a “DUAL” Canada U.S. tax filer is that you are a “DUEL” tax filer

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

I was recently asked “what exactly are the issues facing “Canada U.S. dual tax filers?” This is my attempt to condense this topic into a short answer. There are a number of “obvious issues facing U.S. citizens living in Canada.” There are a number of issues that are less obvious. Here goes …

There are (at least) five obvious issues facing “dual Canada U.S. tax filers in Canada”.

At the very least the issues include:
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Wisdom of “Three Monkeys” explains why: Although there is little support for “citizenship-based taxation” repeal is difficult

The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).

The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.

The “imposition of direct taxation” on the “citizen/residents of other nations” evolved from “citizenship-based taxation”. “Citizenship-based taxation” was originally conceived as a “punishment” for those who attempted to leave the United States and avoid the Civil War. I repeat, it’s origins are rooted in PUNISHMENT and PENALTY and not as sound tax policy.

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Are “non-U.S. mutual funds” foreign corporations AKA #PFIC? Does your tax preparer know for sure?

I have written many posts that include a discussion of PFICs. This post has been motivated by a post by Karen Alpert at “Fix The Tax Treaty” (well it can’t really be fixed). The post focuses on the use of “non-U.S. mutual funds” in retirement planning. The post is written from the perspective that “non-U.S. mutual funds” ARE PFICs.

If you don’t know what a PFIC is be happy, be happy! A bit of knowledge (especially if you know things that aren’t true) can be a dangerous thing. Although most “tax professionals” treat non-U.S. mutual funds as PFICs, there is little explanation or analysis of WHY or HOW a “non-U.S. mutual fund” is a PFIC. In other words, most “tax professionals” know that “non-U.S. mutual funds” are PFICs. But, they don’t do a good job of explaining why. This post is based on a series of comments on Karen’s post that are consolidated as tweets in this Storify post.

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Form 8621 and Form 5471 are required even if the tax return is NOT!

The Internal Revenue Code of the United States requires two things:

1. The calculation of taxes; and

2. The reporting of information.

The Internal Revenue Code of the United States is based on three basic principles:

1. A dislike of all things “foreign”. (If you see the word “foreign” a penalty is sure to follow.)

2. A hatred of all forms of non-U.S. “tax deferral”

3. An attempt to stop the “leakage” of “U.S. taxable assets” from the U.S. tax base. (Examples include the U.S. tax treatment of the “alien spouse” and the U.S. S. 877A “Exit Tax” that may be payable when one makes the decision to renounce U.S. citizenship).

“Forms” AKA “information returns” are for the purpose of forcing disclosure of information relevant to  “foreignness”, “deferral” and “leakage”.

The above tweet references an earlier post describing many of the “forms” required of Americans abroad. The post also describes the significant penalties which can be potentially imposed for the failure to file those forms.

For Americans abroad the information reporting requirements are extensive, burdensome and penalty laden. Normally (but not in all cases) the “forms” are filed as part of the tax return (1040 or 1040NR).

NEVER FORGET MR. FBAR – THE NEW SYMBOL OF U.S. CITIZENSHIP – AND THE POTENTIAL FBAR PENALTIES FOR FAILURE TO FILE THE FBAR! THOSE WHO HAVE FAILED TO FILE MR. FBAR SHOULD BE CAUTIOUS ABOUT HOW THEY “FIX THE FBAR PROBLEM“.

(Interestingly, Mr. FBAR has been used as a model for Russia which now has (for lack of a better term) the Russian FBAR.)

Many people do NOT understand that they may be required to file “information returns”, even though they may NOT meet the income thresholds to file a tax return!
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Tweet #Citizide: The new response of US citizens to #FATCA #FBAR #PFIC


Is it Congress or Treasury that is responsible for “taxation-based citizenship”? Perhaps change is through regulation and not law!

This post is a continuation to my recent post: “The Internal Revenue Code does not explicitly define “citizen”, “citizenship” or require “citizenship-based taxation“. That post was reposted at the Isaac Brock Society, and received a comment which included:

Your statement that the IRC does not explicitly define citizenship is technically correct. It is also misleading. When the IRC was codified in 1939, the Secretary of Treasury was given an order to issue all needful regulations. That mandate is now found at 26 USC 7805. The needful regulation of the Secretary, Treasury Regulation, 26 CFR 1.1-1(c) explicitly defines citizenship in terms of the 14th Amendment and it included the term subject. 26 CFR 1.1-1(a) explicitly states that the tax imposed by section 1 of the IRC imposes the tax on citizens and residents. It does not list any other type, class or category of person upon the tax may be imposed by force.

In the original post I had demonstrated why taxation based on “citizenship” was a reasonable inference from Sections 1 and 2 of the Internal Revenue Code. The basic reasoning from Sections 1 and 2 of the Internal Revenue (without consideration of outside sources) is reflected in the following syllogism:

1. All individuals with the exception of non-resident aliens are subject to U.S. taxation.

2. Citizens are individuals who are NOT “nonresident aliens”

Therefore, citizens are subject to taxation.

Nevertheless, the comment raises a very interesting question. To put it simply the question is:

Could U.S. Treasury/IRS by regulation exempt Americans abroad from U.S. taxation?

The purpose of this post is to explore this very interesting question.

Let’s work with the information in the comment.

1. S. 7805 of the Internal Revenue Code gives U.S. Treasury the authority to make regulations to implement the provisions of the Internal Revenue Code.

(a) Authorization

Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

2. The regulation made to interpret S. 7805 of the Internal Revenue Code is:

§ 1.1-1 Income tax on individuals.

(a) General rule.

(1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual. …

(JR Note: This does NOT say ONLY “citizen or resident”, but okay.)

(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. …

(c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see chapters 1 and 2 of title III of the Immigration and Nationality Act (8 U.S.C. 1401-1459). For rules governing loss of citizenship, see sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk, (1964) 377 U.S. 163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to persons who are nationals but not citizens at birth, e.g., a person born in American Samoa, see section 308 of such Act (8 U.S.C. 1408). For special rules applicable to certain expatriates who have lost citizenship with a principal purpose of avoiding certain taxes, see section 877. A foreigner who has filed his declaration of intention of becoming a citizen but who has not yet been admitted to citizenship by a final order of a naturalization court is an alien.

All well and good, what might this mean? Why might this be helpful?

A possible conclusion:

In the above regulation Treasury appears to have restricted the meaning and scope of the word “individual” to “citizen or resident”. For example a U.S. national is a broader term than citizen. (Confirmed by S. C of the above regulation “For rules pertaining to persons who are nationals but not citizens at birth“). Yet, in this regulation Treasury appears to have excluded “nationals”, who clearly are “individuals”, from payment of the income taxes imposed in Subtitle A of Title 26. Yet, U.S. “nationals” are clearly “individuals”.

Put it another way: In this Treasury regulation, Treasury is excluding at least one class of “individuals” (“nationals”) from the Income Tax. If Treasury can exclude one class of persons from the meaning of “individuals” for the purposes of S. 1 of the Internal Revenue Code, then why can’t it exclude another class of individuals?

I nominate Americans abroad as a class of “individuals” that Treasury could ALSO exempt from taxation under Subtitle A of Title 26 (the income tax).

To put it another way:

Could “taxation-based citizenship” be abolished by Treasury/IRS regulation? This seems like a simple argument. Why has this argument not been made before?

Afterthought …

In the last two Obama budgets, the White House has recognized the injustice of imposing “U.S. taxation” on certain “accidental Americans“. If Treasury believes it can define “individuals” in a way that excludes certain “individuals” from U.S. Income tax, then why not let the Obama government solve this problem through regulation (which he loves doing anyway) rather than waiting for Congress to change the law (at best as part of major tax reform) or through the Alliance For The Defeat of Citizenship Taxation lawsuit.

A question for President Obama and Democrats who have caused all the problems:

Cook v. Tait just means that the U.S. had (at least in 1924) the constitutional right to impose citizenship-based taxation. This does not mean that the U.S. is required to have citizenship-based taxation.

How about abolishing citizenship-based taxation through regulation?

With the stroke of a pen you could solve this problem – that is if you want to!

In fact, here is recent precedent of your attempting to amend the Internal Revenue Code by regulation:

Yes we can!!!

John Richardson

Tax Haven or Tax Heaven 3: Why the USA is an attractive place to lure “foreign capital” and keep that “foreign capital” secret

The United States as a “poacher” (AKA Tax Haven) of the capital of other nations

The above tweet references the following article which includes:

Leaving income-producing assets in the US may be advantageous for foreigners. If you are a foreigner who owns financial assets in the United States, you are not subject to the capital gains tax and interest on bank accounts is also tax free. You will, however, be charged at a rate of up to 30% for dividends. If there is a treaty between your home country and the US, then this tax rate could be reduced to 10% to 15%. You may also recover this tax as a credit in your country of residence.

This is found in Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code.

IRC871

The following section of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. Interestingly this part of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Interestingly both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809. It is reasonable to infer that that the enactment of both S. 871 and S. 877 as part of the 1966 Foreign Investors Tax Act, eventually evolved into the S. 877A Exit Tax of today.

For a pdf of the 1966 Foreign Investors Tax Act …

Foreign Investors Tax Act 1966 809

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The definition of “Non-resident alien” is found in S. 7701(b) of the Internal Revenue Code.

What does this mean from the perspective of a “non-resident alien”?

Very interesting. Rather than invest his capital at home (where he is certain to be taxed), he might consider investing in the United States where:

A. His interest and capital gains are NOT subject to U.S. taxation (this is how the U.S. attracts the capital of other nations to the United States); and

B. The U.S. will not (in the absence of a specific treaty) report your investment account information to the tax authority of your country (making it easier to escape any taxation on the investments).

Not bad at all!! It would appear that (1) this is a mechanism to “poach” capital from other nations and (2) make tax evasion (assuming the non-resident alien fails to report the income to his country of residence) much easier!

The United States certainly complained that Switzerland was doing the same thing.

It’s easy to understand why:

But, “Not all Tax Havens are the same!”

Some countries are more “TaxHavenly” (or is that more “Tax Heavenly” than others!

Hmmm …

Voluntary “poaching” of capital – The Tax Haven

Because the United States encourages and facilitates the “poaching” of capital, the United States is most certainly a major “Tax Haven”. Note that “Tax Havens” lure capital to the Tax Haven in question. The “transfer of capital” to the “Tax Haven” is voluntary.

The United States of America:

1. Is a “Public Tax Haven” because, by NOT taxing certain forms of investment income it “lures” capital to the United States.

2. Is a “Private Tax Haven” because it will NOT (with the exception of certain treaties) disclose the identity of depositors to the tax authorities of other nations. This is one of the many problems of FATCA. Although other countries are required to disclose “U.S. Accounts”, the United States is NOT obligated to disclose the accounts of tax residents of other nations.

Involuntary “poaching” of capital – “citizenship-based taxation”

U.S. citizenship-based taxation ALSO results in the direct “poaching of capital” from other nations! A thoughtful post describing the cost of U.S. “poaching” to Canada is here. This topic of – how “U.S. citizenship-based taxation” steals the capital of other nations – is deserving of a separate post!

#YouCantMakeThisUp

John Richardson

“Coming Into Tax Compliance Book” – How Americans can come into U.S. tax compliance in a FATCA world

Are you “Coming To America” by entering the U.S. tax system as an American Abroad?

The “How To Come Into U.S. Tax Compliance” book for Americans abroad

John Richardson, LL.B, J.D.

I have contributed to establishing the new “Citizenship Taxation” site. As part of launching that site, I have written a series of posts providing relevant information (in a broad sense) about how Americans abroad, who did not know about their U.S. tax obligations, can come into U.S. tax compliance.

Sooner or later, it’s likely that many people will receive a FATCA letter. In your panic, you should be careful. There are a number of things Americans abroad should consider before consulting a lawyer or tax professional.

This series of posts developed from my “Educational Outreach” program for Americans abroad. It is an effort to respond in a practical way to the questions that people have.

The chapters of “Coming Into Compliance Book” are:

Chapter 1 – “Accepting Cleanliness – Understanding U.S. Citizenship Taxation – To remain a U.S. citizen or to renounce U.S. citizenship

Chapter 2 – “But wait, I can’t renounce U.S. citizenship if I’m not a U.S. citizen. How do I know if I am a U.S. citizen?”

Chapter 3 – “No matter what, I must come into U.S. tax compliance – Coming into U.S. tax compliance for those who have NOT been filing U.S. taxes

Chapter4 – “Oh no, I have attempted U.S. tax compliance by filing tax returns. I have just learned that I have made mistakes. How do I fix those mistakes?”

Chapter 5 – “I don’t want to renounce U.S. citizenship. How to live outside the United States as a U.S. tax compliant person

Chapter 6 – “I do want to renounce U.S. citizenship. This is too much for me. How the U.S. “Exit Tax” rules might apply to me if I renounce

Chapter 7 – “I really wish I could do retirement planning like a “normal” person. But, I’m an American abroad. I hear I can’t invest in mutual funds in my country of residence. The problem of Americans Abroad and non-U.S. mutual funds explained.

Chapter 8 – “We all have to live somewhere. Five issues – “The problem of Americans Abroad and non-U.S. real estate explained

Chapter 9 – “Receiving U.S. Social Security – #Americansabroad and entitlement to Social Security

Chapter 10 – “Paying into Social Security – #Americansabroad, double taxation and the payment of “Self-employment” taxes

Chapter 11 – “Saving the children – INA S. 301 – “Residence” vs. “Physical Presence” and transmission of US citizenship abroad

Chapter 12 – “Relinquishing citizenship and your IRA – bringing your IRA home

Chapter 13 – “Married filing separately” and the “Alien Spouse” – the “hidden tax” on #Americansabroad

Chapter 14 – “The Obamacare “Net Investment Income Tax” – Pure double taxation of #Americansabroad

Chapter 15 – “To be “FORMWarned is to be “FORMArmed” – It’s “FORM Crime” stupid!!

Chapter 16 – “Most “Form Crime” penalties can be abated if there is “reasonable cause”

Chapter 17 – “How to get “credit” for taxes (foreign) paid to your country of residence

Chapter 18 – “I don’t pay taxes in the country where I live. Can I “exclude” my foreign income from the U.S. tax return?

Chapter 19 – “Is it better to take the “Foreign Tax Credit” or the “Foreign Earned Income Exclusion” – a discussion

Chapter 20
– “The child tax credit: take it, leave it or how to take it

Chapter 21 – “How #Americansabroad can continue to use the #IRA as a retirement planning vehicle

Chapter 22 – “To share or not to share” – Should a U.S. citizen share a bank account with a “non-citizen AKA alien spouse?

The “Coming Into Compliance Book” is designed to provide an overview of how to bring some sanity to your life.

 Coming to America

You may remember the old Eddie Murphy movie about “Coming To America”.

Welcome to the confusing and high stakes rules for U.S. taxation and Americans abroad.

The United States has the most complex, confusing, most penalty ridden and most difficult anti-deferral regime in the world. McGill Professor Allison Christians has noted that Americans abroad are both:

“deemed to be permanently resident in the United States for tax compliance and financial reporting purposes” …

and are

“subject to the most complex aspects of the U.S. tax code regardless of any activity in the United States, and facing extraordinary compliance costs and disclosure risks even for nil returns”

Although Americans abroad are deemed to be resident in the United States, their assets are treated as “offshore”. In addition Americans abroad are subject to taxation in their country of residence.

All of this means that:

1. Americans abroad are subject to the worst and most punitive aspects of the U.S. tax system (there is no Homelander who is treated as badly as an American abroad); and

2. Denied most benefits of the tax systems of their country of residence.

To put it simply, Americans abroad get the worst of all possible tax systems.

The most horrific aspects of the U.S. tax system are saved for Americans abroad. Prepare to be shocked. As one commenter at the Isaac Brock Society site recently said:

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