NEW TAX LAW HAS SURPRISE FOR THOSE WHO OWN MEXICO CORPORATIONS - YOU MAY NOW HAVE TO PAY TAX

By Kyle Lodder, CPA

President Trump has signed significant U.S. tax legislation into law today, namely the “Tax Cuts and Jobs Act”.

There are many favorable tax provisions that will benefit many taxpayers, for individuals and businesses. But there are also some quite unfavorable international tax provisions which may adversely impact business owners of non-U.S. corporations.

One specific new provision relates to U.S. persons who own an interest in a non-U.S. corporation.

Under prior law, U.S. shareholders generally are taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign (non-U.S.) corporation generally is not subject to U.S. tax until the income is distributed as a dividend to the U.S. shareholder.

Under this new law, certain U.S. shareholders owning at least 10% of the foreign corporation generally must include in income starting in 2017 the shareholder’s pro-rata share of the net post-’86 historical earnings and profits “E&P” (i.e. accumulated unrepatriated earnings) to the extent it hasn’t been previously taxed in the U.S.  This is a one-time tax as the U.S. attempts to transition from a worldwide tax system to a territorial type of tax system.

The portion of the historical earnings comprising of cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8% (it works out to a bit higher rate in some cases). The lower tax rate is intended to recognize that non-cash assets are illiquid and/or in productive use in the business. Nonetheless, this could be a significant tax hit for this upcoming tax season, although there is an option to elect to defer the payment over eight years.

Another problem with this tax is that it’s on deemed income. There isn’t an actual dividend. Rather, it’s deemed income for U.S. purposes. In most foreign countries, this deemed income isn’t considered taxable income. The challenge then is that it’s taxed in the current year for U.S. purposes but not in the foreign country. And when the money is distributed in the future, it typically is treated as a dividend in the foreign country, but not in the U.S. It causes a mismatch and often the lack of use of foreign tax credits, resulting in true double taxation.

 
What to do by year-end?

If you have significant retained earnings, it’d be worth contacting us to see if there are some planning moves to be made prior to year-end. Perhaps it makes sense to withdraw money from the company before year-end to trigger an actual dividend in the U.S. and the foreign country. This will trigger income in both countries to allow for utilization of foreign tax credits. Furthermore, simply withdrawing the money by year-end will allow for us to then determine after year-end how to classify the withdrawal (as a dividend, wage or loan for example).

If there remains tax exposure after considering foreign tax credits, it could make sense to gift shares to a non-resident alien spouse before year-end to a smaller ownership percentage level to avoid this tax.

This is a very new tax concept and not a lot of time has been granted to us to plan around this matter.  Yet, it makes sense to look at this before year-end to see if any moves can be made prior to year-end to put you in a better tax position.

If you require additional information on any aspect of these complex rules, please contact Kyle Lodder CPA at 360.599.4340 or kyle@loddercpa.com.  You can also contact Don D. Nelson International Tax Attorney at ddnelson@gmail.com or 949.480.1235. Kyle works with our firm.

The material appearing in this communication is for informational purposes only and should not be construed as legal, accounting, or tax advice or opinion provided by Lodder CPA PLLC. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by a professional, the user should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information

IRS INTERNATIONAL TAX EVASION STATUS

WASHINGTON — The Internal Revenue Service continues to make strong progress in combating international tax evasion, with new details announced today showing the recently completed offshore program pushed the total number of voluntary disclosures up to 30,000 since 2009. In all, 12,000 new applications came in from the 2011 offshore program that closed last week.

The IRS also announced today it has collected $2.2 billion so far from people who participated in the 2009 program, reflecting closures of about 80 percent of the cases from the initial offshore program. On top of that, the IRS has collected an additional $500 million in taxes and interest as down payments for the 2011 program — a figure that will increase because it doesn’t yet include penalties.
“By any measure, we are in the middle of an unprecedented period for our global international tax enforcement efforts,” said IRS Commissioner Doug Shulman. “We have pierced international bank secrecy laws, and we are making a serious dent in offshore tax evasion.”
Global tax enforcement is a top priority at the IRS, and Shulman noted progress on multiple fronts, including ground-breaking international tax agreements and increased cooperation with other governments. In addition, the IRS and Justice Department have increased efforts involving criminal investigation of international tax evasion.
The combination of efforts helped support the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which ended on Sept. 9. The 2011 effort followed the strong response to the 2009 Offshore Voluntary Disclosure Program (OVDP) that ended on Oct. 15, 2009. The programs gave U.S.taxpayers with undisclosed assets or income offshore a second chance to get compliant with the U.S. tax system, pay their fair share and avoid potential criminal charges.
The 2009 program led to about 15,000 voluntary disclosures and another 3,000 applicants who came in after the deadline, but were allowed to participate in the 2011 initiative. Beyond that, the 2011 program has generated an additional 12,000 voluntary disclosures, with some additional applications still being counted. All together from these efforts, taxpayers came forward and made 30,000 voluntary disclosures.
“My goal all along was to get people back into the U.S. tax system,” Shulman said. “Not only are we bringing people back into the U.S. tax system, we are bringing revenue into the U.S. Treasury and turning the tide against offshore tax evasion.”
In new figures announced today from the 2009 offshore program, the IRS has $2.2 billion in hand from taxes, interest and penalties representing about 80 percent of the 2009 cases that have closed. These cases come from every corner of the world, with bank accounts covering 140 countries.
The IRS is starting to work through the 2011 applications. The $500 million in payments so far from the 2011 program brings the total collected through the offshore programs to $2.7 billion.
“This dollar figure will grow in the months ahead,” Shulman said. “But just as importantly, we have changed the risk calculus. Americans now understand that if they try to hide assets overseas, the chances of being caught continue to increase.”
The financial impact can be seen in a variety of other areas beyond the 2009 and 2011 programs.

• Criminal prosecutions. People hiding assets offshore have received jail sentences running for months or years, and they have been ordered to pay hundreds of thousands and even millions of dollars.
• UBS. UBS AG, Switzerland's largest bank, agreed in 2009 to pay $780 million in fines, penalties, interest and restitution as part of a deferred prosecution agreement with the U.S. government.

The two disclosure programs provided the IRS with a wealth of information on various banks and advisors assisting people with offshore tax evasion, and the IRS will use this information to continue its international enforcement efforts.

IRS Voluntary Offshore Disclosure Program Ends 8/31/11- After That Date Things will get really Bad!

The IRS 2011 Voluntary Offshore Disclosure Program ends on 8/31/11. Any entry into the program must be made by that date.  If you have not been filing your tax return, reporting your Mexican Bank Accounts and Financial Accounts, reporting your Mexican Corporation, Partnership or Fideicomiso this may be the last chance to eliminate or reduce potentially huge penalties, and avoid criminal prosecution.

The IRS has stated any taxpayer who does not come forward by the date, and who is later discovered or attempts to make up for past forms which have not been filed will be subject to the maximum possible penalties and possible criminal prosecution.

The IRS knows that in 2008 only about 100,000 US tax returns were filed by Gringos living in Mexico, but there are over One Million US Citizens living in Mexico.  With these statistics in mind,  there is little doubt that Mexico will become a big target for the IRS in the very near future.  The statue of limitations never runs out on future IRS action if you have not filed a return for any particular year or if you fail to file certain foreign information returns such as those for Mexican Corporations, Fideicomisos, Mexican Financial accounts, etc.

In serious situations such as this, Attorney-client privilege which we can offer our clients is often indispensable.

Read more at our website at www.TaxMeLess.com

Election to Treat Mexican Corporation as a Flow Through For US Taxation if Usually a Good Idea

If you own a business or real property in Mexico in a Mexican Corporation, you should consider making an election for your US tax return to treat that entity as a flow through entity.  Best to do this when it is originally formed, but that can be done at a later date also, though the benefits will not be as great.

Your election has no effect on the taxation in Mexico, but does create benefits in many instances with your US tax return.  The Mexican corporations that end in S.R.L, are the only eligible entity to make this election. If your Mexican corporation ends in S.A. de CV, the election cannot be made unless you work with your Mexican accountant and attorney to revise its type of entity classification under Mexican law.

The benefits of electing the flow through treatment is as follows:

• You can deduct any yearly losses on your US tax return.
• Though your share of the Corporations yearly earnings flow through to be be taxed on your personal tax return, you can claim foreign tax credits for all income taxes paid in Mexico on that income which will offset your US tax on the same income dollar for dollar.
• If your corporation has a capital gain, that capital gain will flow through and be taxed to you on your personal return as a capital gain at the lower US tax rates (this is particularly good for corporations that investment in Mexican real estate and ultimately sell it).
• You avoid the onerous US Foreign Corporation Subpart F income rules which cause many types of income in a regular Foreign Corporation to be taxed to you whether you receive that income or not and to be taxed at ordinary income rates on your personal tax return.  These rules usually prevent individuals from claiming foreign tax credits against that income for taxes paid in by the Mexican corporation on that income.
• Assures in most situations capital gains treatment on your US tax return should you sell your stock in the corporation rather than that gain being taxed as ordinary income under the Subpart F rules which is often the situation.

Please contact us if you have Mexican corporation  and wish to make this election which again if often very advantageous to US shareholders on with respect to their personal taxes in the USA.