Behind the fairytale nuptials of British Prince Harry to American actress Meghan Markle is a dose of reality that the recently betrothed couple will need to pay their share of U.S. taxes during their marriage.
Under U.S. tax laws, U.S. citizens must report and pay taxes on their worldwide income, including assets held in overseas bank accounts, regardless of whether or not they reside in the U.S. By law, Markle must maintain her U.S. citizenship and pay U.S. taxes even if she applies for residency status in the U.K., which can be a three-year process. Any money that she earns in Britain or elsewhere will be subject to U.S. taxes.
Moreover, if Markle and the Prince have joint financial accounts with a balance of more than $10,000 at any point during the year, the bank or financial institution holding those accounts would be required to share the royal couple’s personal financial information with Uncle Sam, thanks to the U.S.’s Foreign Account Tax Compliance Act (FATCA). This includes all of the royal family’s trusts and offshore accounts in which Prince Harry holds ownership interest or for which he is a named beneficiary. Finally should the royal couple bear children while Markle is a U.S. citizen, those offspring will be considered U.S. citizens subject to U.S. tax laws.
If Markle becomes a dual citizen of the U.S. and the U.K, she may still have to meet her annual U.S. tax reporting requirements and disclose sensitive information about trusts and other financial accounts held by the royal family. However, as a U.S. citizen or dual citizen, she may qualify for either a foreign earned income exclusion or a foreign tax credit for taxes she paid in the U.K. on U.K.-source income. Should she take the deduction, she would be able to waive U.S. taxes on the first $104,000 of non-investment income she earns in the U.K. If she takes the credit, she may be able to use the taxes she paid in the U.K. to reduce her U.S. tax liabilities.
One option to keep the IRS’s prying eyes and hands away from the royal couple’s finances is for Markle to renounce her U.S. citizenship after the requisite three-to-five year waiting period.
While this may appear to be the simplest option, it would subject Markle to a significant exit tax and make it difficult for her to regain U.S. citizenship in the future.
U.S. citizens living abroad should meet with experienced tax advisors to understand their U.S. and foreign tax reporting responsibilities based upon such things as the type of income they receive.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at info@bpbcpa.com.
Due to the complexity of the U.S. tax system, it is not uncommon for foreign persons to accidentally become U.S. tax residents subject to taxation on their worldwide income based on such factors as the number of days they spend in the country.
Individuals who were born in the United States are automatically U.S. citizens subject to U.S. taxation on their global income. However, when an individual has a “tax home” outside the United States and meets other requirements, he or she may be able to exclude a certain amount of foreign earnings from U.S. taxes.
Under U.S. tax laws, a person’s “tax home” is generally where the person lives in order to maintain a place of business, employment or post of duty, regardless of where he or she maintains a family home. In fact, an individual’s tax home may be different from his or her country of residence.
The foreign earned income exclusion may apply when a U.S. citizen or resident alien is a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes one entire calendar year, or he or she must meet a physical presence test based on his or her unique facts and circumstances. Factors considered when applying the bona fide residence test include an individual’s intention to remain in a country, the purpose of his or her travels, and the nature and length of a stay abroad.
Just as the U.S. relies on a physical presence test to determine whether an individual qualifies as a U.S. tax resident alien, it also counts the aggregate number of days an individual is physically present in a foreign country to determine whether or not income earned in that country can be excluded from U.S. tax exposure. The exact calculation is based on an individual’s physical presence in a foreign country during an entire taxable year or a minimum of 330 full, 24-hour days over a 12 consecutive month period. The 330-day threshold need not occur consecutively; rather it is based on a cumulative amount of time over 12 consecutive months. Excluded from the calculation are days of travel into and out of the foreign country as well as days in which an individual leaves the foreign country for less than 24-hours.
For 2018, the maximum amount of foreign income a taxpayer may exclude from U.S. taxes is $104,100, which is indexed annually for inflation. It is important to note, however, that the exclusion applies only to “earned” income; passive income from sources such as interest and dividends do not qualify. Any foreign tax credits that might otherwise be available are reduced on a proportionate basis to the amount of foreign income excluded. Moreover, while individuals whose tax home is outside the United States will receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, interest on the tax that is owed will accrue during the extension period.
It is advisable that U.S. taxpayers seek the advice of experienced international tax and accounting professionals to assess their unique personal situation and develop appropriate strategies for minimizing tax liabilities, especially when taxpayers have homes and assets in multiple countries. While individuals whose tax home is outside the United States receive an automatic two-month extension of time to file their U.S. income tax return and pay any taxes due, however, interest will accrue during the extension period on any tax that is owed.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The IRS issued Notice 2018-29 providing guidance relating to the new withholding rules that apply when a foreign person disposes of a partnership interest. An IRS notice does not have the force and effect of actual regulations, but it does provide taxpayers with direction on how the IRS expects to enforce rules and eventually issue regulations in the future.
The recent tax reform law codified a long-held IRS position that gain or loss from the sale, exchange or other disposition of a partnership interest by a nonresident alien or a foreign corporation is taxable to the extent that the foreign person would have been subject to tax had the partnership sold all of its assets at fair market value. This rule applies to dispositions occurring on or after November 27, 2017. The notice does not provide any further guidance on determining the actual gain that is subject to tax.
The Tax Cuts and Jobs Act (TCJA) added an obligation for the acquirer (transferee) of a partnership interest to withhold a 10 percent tax on the amount realized on the transfer unless the transferor furnishes an affidavit or certificate to the transferee stating that the transferor is not subject to withholding. If the transferee fails to withhold the tax, the partnership is required to withhold from distributions to the transferee until the unpaid withholding tax (plus interest) has been satisfied. The recent Notice does not address the mechanics for this withholding. The IRS previously issued guidance suspending the withholding requirement on dispositions of certain publicly traded partnerships.
Notice 2018-29 generally adopts the forms and procedures for withholding on dispositions of U.S. real property interests under the Foreign Investment in Real Property Act (FIRPTA), which requires the purchaser of a U.S. real property interest from a foreign person to withhold and remit 15 percent of the sale proceeds as a withholding tax. The purchaser uses Forms 8288 and 8288-A to report the amount realized and the amount of tax withheld to the IRS, which then processes the withholding tax and returns a stamped copy of Form 8288-A to the transferor. In order to claim a credit for the withholding tax on their income tax return reporting the sale, the transferor must attach a copy of the IRS-stamped copy of Form 8288-A.
The Notice further provides that the transferee of a partnership interest should write “Section 1446(f)(1) withholding” at the top of Forms 8288 and 8288-A and remit payment within 20 days of the transfer of partnership interest. Transferees who fail to withhold properly are liable for the tax, and failure to submit the withholding tax may result in other civil and criminal penalties. The IRS will not assert penalties or interest when transferees file these forms and pay amounts to the IRS on or before May 31, 2018.
Under the Notice, transferees may eliminate their withholding obligation when they receive the following certifications:
- A certification of non-foreign status or IRS Form W-9 from the transferor;
- A certification from the transferor that no gain will be recognized on the transfer;
- A certification from the transferor that the partnership interest had been held for at least two years and his or her allocable share of partnership effectively connected income (ECTI) was less than 25 percent of his allocable share of all partnership income;
- A certification from the partnership that if it sold all of its assets, the amount of gain that would have been treated as ECTI (including gain from U.S. real property interests) would be less than 25 percent of the total gain; or
- A certification from the transferor that a non-recognition provision applies.
The exact information that transferees must receive differs for each certification. However, in general, the transferor or partnership must sign the certification under penalties of perjury. The transferee can rely on the certification unless he or she has knowledge that the information is false.
For purposes of determining the amount realized that is subject to withholding, the disposing partner must consider the amount of liability relief he or she obtained and include the amount realized on the transfer. A partner who owned a less than 50 percent interest in partnership capital, profits, deductions or losses may provide the transferee with a certification that provides the following:
- the amount of the partner’s share of partnership liabilities reported on his or her most recently received Schedule K-1, and
- confirmation that he or she does not have actual knowledge of events occurring after the issuance of the Schedule K-1 that would cause the amount of his or her share of partnership liabilities to be more than 25 percent above than the amount shown on the K-1.
The partnership may also issue a certification relating to the transferor partner’s share of liabilities. The notice does not specify a method for a partner who owns 50 percent or more of the partnership to certify his or her share of partnership liabilities. Therefore, in that situation, presumably the partnership certification would be required.
The total amount withheld cannot exceed the amount the transferor realized (without considering the transferor’s liabilities). If the transferee is unable to determine the amount realized because certification of the transferor’s share of liabilities is not provided, the transferee must withhold the entire amount he or she realized, determined without regard to the transferring partner’s liabilities.
The tax and withholding rules apply to partnership distributions in excess of the foreign partner’s basis in the partnership that would be treated as a capital gain (a partial disposition of the partnership interest).
These rules also apply in cases involving tiered partnerships. If a transferor transfers an interest in an upper-tier partnership that owns an interest in a lower-tier partnership, and the lower-tier partnership would have effectively connected taxable income (ECTI) on the deemed disposition of all of its assets, a portion of the gain recognized by the transferor is characterized as effectively connected gain. Therefore, the lower-tier partnership would be required to provide the upper-tier partnership with information in order for the upper-tier partners to be able to comply with these rules.
The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
The overhaul of the U.S. Tax Code that the president signed into law in December 2017 reverses a Tax Court decision from earlier in the same year, which, at that time, represented one of the most significant changes in international taxation in nearly 30 years.
In in July 2017 ruling in the matter of Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner of Internal Revenue, the tax court held that the gain a foreign partner yielded from the sale of its interest in a U.S. trade or business was not considered effectively connect income (ECI) and was therefore exempt from U.S. income tax treatment. Prior to this decision, the tax laws followed Revenue Ruling 91-32, which treated such gains as taxable U.S. income.
The passage of the Tax Cuts and Jobs Act, however, revives Revenue Ruling 92-32 and codifies under new section 1446(f) a foreign partner’s gain from the disposition of U.S. partnership assets as taxable U.S. trade or business income, effective for all sales or exchanges occurring on or after Nov. 27, 2017. Moreover, the new law introduces a 10 percent withholding tax to the amount a foreign person realizes from the sale of the partnership interest that occurs after Dec. 31, 2017.
A partner’s actual tax liability could actually be greater than the 10 percent withheld, especially when also considering the partner’s sale of partnership interest as well as a separate, 15 percent withholding tax on sales of U.S. property as required under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
It is critical that foreign partners stay abreast of developments on this matter, especially as the IRS issues technical guidance to help taxpayers apply the new Code Section 1446(f). For example, in January 2018, the IRS issued guidance temporarily suspending the withholding tax from foreign investors dispositions of interests in publicly traded partnerships. In addition, because the IRS has appealed the court’s decision in Grecian Magnesite, it is possible that foreign investors will be required to pay taxes retroactively on gains they may have reaped from sales of interests in a U.S. trade or business that occurred during the fourth month period between July and November 2017.
About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at jspencer@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
U.S. businesses owned by foreign persons or multinational corporations have an obligation every five years to complete the Bureau of Economic Analysis’s Benchmark Survey of Foreign Direct Investment in the United States (BE-12). Taxpayers are responsible for providing their financial and operational data on the BE-12 regardless of whether or not they actually receive a survey or are contacted by the Bureau.
BE-12 reports covering fiscal year 2017 are due May 31, 2018. Taxpayers who did not receive a notice via postal mail may access the survey online at www.bea.gov/efile.
Who must file a BE-12?
The B-12 is mandatory for each U.S affiliate of an entity for which a foreign person or entity owns or controls, directly or indirectly, 10 percent or more of the U.S. enterprise’s voting securities, or an equivalent interest if an unincorporated U.S. business enterprise, at the end of the enterprise’s fiscal year that ended in calendar-year 2017. Businesses that are unsure if they meet the filing requirements should contact their accountants as soon as possible.
What if I need more time to file?
Applicable businesses may request a filing deadline extension when they submit such requests before May 31, 2018.
How does the government use the information I provide?
The BEA uses information provided by BE-12 respondents to understand the state of foreign-owned business activities in the United States and make informed decisions regarding U.S. jobs, wages, productivity and taxes. Business leaders may use the census data to make hiring and investment decisions. All respondents are protected by federal privacy laws.
If you received a survey from the BEA or if believe you may be required to file a BE-12, please contact your tax professional. The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.
About the Author: Andrew Leonard, CPA, is an associate director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
