Entries Tagged 'Outbound (from the U.S.)' ↓

A Federal judge has issued an order allowing the IRS to proceed against UBS AG, in their never-ending quest to find tax evaders.

U.S. people with undisclosed Swiss bank accounts?  The bell tolls for thee. *

*Kinda ironic that the quote comes from John Donne’s poem that starts “No man is an island” when people think they can hide money in palm-fronded island paradises.

For those of you who have U.S. passports (or have permanent residency status AKA “green cards”), leaving the country just became a little more expensive.

We now have an exit tax–new Section 877A of the Internal Revenue Code.

The new law was signed on June 17, 2008. I’ll get a “plain English” explanation shortly. In the meantime, feel free to print off and read the Joint Committee on Taxation’s explanation. (Warning: massive PDF). The discussion you want to read starts on page 36.

The exit tax will raise an estimated $411 million in tax over the next 11 years, they think. (Sorry, the source is in Tax Notes Today, locked inside Lexis-Nexis. 2008 TNT 118-2 is the cite, if you want it. I couldn’t find the source of the estimate, which apparently was a Baucus/Grassley press release).

Comment #1: good luck with that.

Comment #2: peanuts, really.

The exit tax rules (new Internal Revenue Code Section 877A) are buried in a special law aimed at giving tax relief to people serving in the Armed Services.

Comment: this is a classic example of “for the children” politics.

June 30 is the deadline to file your annual “show and tell” about all the offshore bank accounts over which you have signature authority.  The IRS used a quaint 20th Century device called a “press release” to remind you about filing your disclosure form.

Form TD F 90-22.1 is what you use.  (Warning:   PDF).

The IRS FAQ about reporting foreign bank accounts is useful.  Read it if you have questions.

A bit of advice:  if you MIGHT be someone who has to file this form, and you get a brainstorm with a staggeringly clever trick so you don’t “technically” have to file–check your clever idea by talking to someone whose brain is not infected with your thinking.  :-)

International tax planning can get fearsomely complex.

You have at least two (usually more) countries interested in extracting some tax revenue from you, and their laws are usually only barely consistent. It’s a bit like three dimensional chess, except that the rules change from time to time. (And no one in our law firm is anything like Spock in any way whatsoever. Just for the record.)

It’s also a bit of fun. For some people, anyway. There’s a little bit of the “Ooooh, shiny” when we talk about setting up holding companies in small palm-fronded island nations.

I am a tax lawyer. My job in life is to deflect the discussion away from tax. My job is to push companies to think about the business, THEN think about tax. Cart. Horse. Etc.

For privately held companies doing business worldwide (we help these people), talk to the shareholders–the people who started the company. Sooner or later they will dispose of their shares. There’s an exit strategy that every company owner has in his/her head.

• They get bought out by a third party.
• They give/sell the company to their kids.
• They get divorced and the ex gets a piece of the company.
• They die.

Yeah, the other exit strategy is to go public. But that’s a transformer strategy (transforming stock in a private company into stock in a public company). When it’s all done, the shareholder still has an exit strategy for the shares he/she owns. Going public isn’t a disposition strategy.

The disposition strategy that no one is willing to talk about is death. I talk to entrepeneurs who tell me they plan to run their companies foreverrrrrr. FAIL.

Here’s the simplistic way of approaching things for corporate income tax planning:

• First, think about the business and how it can maximize its profits from running the business. Where do you need people? Where do you need to control inventory, run quality control, provide customer service, build your widgets?
• Then, remember that profit is profit. Worldwide. Do your tax engineering for the lowest average income tax cost on company profits. Worldwide. Numerator = taxes paid everywhere, denominator = net profit before taxes. Your metric is to drive that number down slowly, year after year, if you can.

After that, work on the estate tax side of the equation. Why after? Because the company is worth some multiple of its profits. If you focus on the business planning, then the income tax planning, you should be increasing your worldwide pre-tax and after-tax corporate income, thereby increasing the value of the company. You build wealth by building wealth, not by shaving taxes.

One thing at a time. Business planning first because it creates higher pre-tax profit. Income tax planning second because it creates higher after-tax profit. Then and only then, estate and gift tax planning to make sure Mr. Congress doesn’t share too much of your wealth.

This post was triggered because I never really thought about why I do what I do until I saw a recent post, completely unrelated to tax law.

Dave McClure, in talking about web businesses, says in “not safe for virgin ears” language that the problem isn’t exotic “issue du jour” stuff.  The major problem people face is “I forgot my password.”

Same thing with tax planning.  That’s not the most important thing for a business.  The most important thing is “I need to make a profit.”  That’s boring and repetitive and in front of you every day.  It’s much more fun to talk about the Cayman Islands.

Nope.  Let’s deal with the “Duh!” stuff first.

We do international tax planning for US businesses. They do business outside the United States and need to make sure they don’t pay tax in two (or more) places at once on the same dollar of profit.

Among other things, we try to defer the day of reckoning. If you can pay your tax in 5 years from now, that’s good. That’s called deferral. Eliminating US tax may be a pipedream but deferral can (and does) work.

People who run businesses are at least as smart as J. Wellington Wimpy. It’s all about present value. Pay the tax later. Get the revenue now.

It turns out (shocking, I know) that the tax burden in the United States is high, especially when you combine State corporate income taxes with Federal corporate income taxes. So it isn’t surprising that you’d see businesses trying to alleviate the burden.

Here’s the Tax Foundation’s summary of their findings.

I know it’s popular to bag on the French, but take note that a corporation based in any one of the 50 states will face a higher income tax rate than a French corporation. (Yes, I know there are 10,000 other government-imposed reasons that a French corporation might be uncompetitive, but let’s stick with income tax for the moment).

Tax is only one reason why a US business might be a non-competitive with a business based in another country. I personally have seen non-U.S. real estate development capital flee from California for non-tax reasons. Too bad for the economic development of the Golden State, but then our State politicians wouldn’t have the brains to buy a vowel if Pat Sajak loaned them a quarter. “But we’re California,” bleats Sacramento. “Everyone wants to be in California. We’re the center of the universe.” Survey says? *BZZZZZT*

But I digress. One thing at a time. US business taxation is insane and puts US multinational businesses at a disadvantage. Now we have some statistics. Things won’t change. (Insert zen-like acceptance here).

Memo to politicians

Consider Ireland. That is all.  Write a 1-page book report and be back in a week.

Memo to US businesses.

If you feel like a racehorse carrying an overweight jockey, you’re right.  Move as much of your operations offshore as you can.  (That’s my job).

Memo to voters

Why should you care? “Meh, it’s all those Bloated Plutocrats lighting their cigars with $100 bills. Think of the children! Corporations should pay their fair share!”

Suggestion: take a basic Economics course at your local community college (as long as you can avoid the unreconstructed Marxists).  Or just look at reality with a nonjudgmental and unbiased eye.  Here’s the clue to cause and effect:  high taxes mean businesses will flee and your jobs will go with them. As businesses flee, tax revenues will drop. What will you do then?

The mills of the Gods, etc. Srsly. Kthxbai.

Hat tip: TaxProf Blog.

This is the next in a series aimed at helping a non-tax person — a business executive — who is called upon to make a complex tax decision — how to create a legal structure for holding foreign investments or operating a business outside the U. S.

The previous episodes: one, two, three, four, five.

Now we get to choosing between the “invisible” paradigm and the “deferral” paradigm. This is where someone–not you–will crank some numbers. You make a cost/benefit decision.

Tax deferral is bad — if you’re the government

We go back to the old triage methodology I am so fond of. The U. S. government wants money and designs the tax system to extract as much tax as possible as soon as possible. In other words, the casino has stacked the deck against the idea of “pay tax later”. The tax system is designed to tax profits in the year they are earned.

Deferral — real operating business, yes

So if you like the concept of deferral, first see if the IRS lets you use that strategy or whether your business is barred from using it. (Simple concept–income from overseas operations is passive income like interest, dividends, royalties, rent? You’re probably not going to be successful in getting deferral. But if you have a real operating business? You have a decent shot at getting the deferral treatment).

Who’s a good candidates?

Assuming the IRS will let you, the next question is whether you SHOULD–the old cost/benefit question.

We’re going to do a net present value analysis. Numbers. But it’s easy.

Calculate the amount of tax that you theoretically get to defer. Figure your foreign profits for the year. Figure the U. S. tax that would be payable on that. How big a number do you have?

You don’t have to pay tax on that until you bring the profits back to the U. S. How long can you wait until you need the money in the U. S.? Two year? Five years? Never?

Key concept: the deferral strategy works really well when you have lots of foreign profits, and when your foreign operations need lots of working capital to grow. Think of a company with a flat U. S. market and a fast-growing foreign market. That’s a good candidate for the deferral strategy.

Who’s not a good candidate?

The intensely practical question is whether your U. S. operations have such an insatiable appetite for cash that you will be forced to bring the foreign profits back to the U. S. to help fund U. S. operations. Rigorous self-honesty is important. Just ask yourself whether you need the money. If you do, you will not get as much deferral as you need to make this strategy worthwhile.

Doing the math

Totally made-up example.

Figure out what your tax savings will be on foreign operations because you don’t have to pay U. S. tax on the profits. Figure you will wait, say, 5 years before you repatriate the profits.

The amount of tax that you don’t give Uncle Sam now but give Uncle Sam in 5 years is really like an interest-free line of credit from the U. S. government. So in my example, you borrowed $3,000,000 interest free, due and payable in 5 years. How much money can you make on that $3,000,000 of free working capital? Well, if you generate 30% return on assets, it’s worth $900,000 per year.

I go through a much more sophisticated financial model than this, but that’s the idea. Uncle Sam made you a loan. How much money can you make by investing and reinvesting that money before you have to repay Uncle Sam?

The long view

And what if you operate your business so you repay Uncle Sam in 25 years?