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Many Fortune 500 Companies Use Foreign Subsidiaries to Avoid Paying U.S. Tax- Here is One Way Your Foreign Corporation Can Avoid Paying U.S. Income Tax

Many Fortune 500 Companies Use Foreign Subsidiaries to Avoid Paying U.S. Tax- Here is One Way Your Foreign Corporation Can Avoid Paying U.S. Income Tax

Sales Tax
By Anthony Diosdi The Internal Revenue Code provides that a U.S. shareholder of a controlled foreign corporation (“CFC”) is subject to tax on the CFC’s subpart F or global intangible low-taxed income, called “GILTI.” For many years, U.S. multinational corporations and other CFCs were able to utilize a high-tax election to defer the recognition of Subpart F income. However, when the GILTI taxing regime was announced in late 2017, a corresponding high-tax election was not available. Shortly after the enactment of the GILTI taxing regime, U.S. multinational corporations and their advisors began lobbying the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) to issue regulations to permit the use of a high-tax election for GILTI income. On July 20, 2020, the Department of Treasury (“Treasury”) promulgated final regulations…
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Facing a 965 Transition Tax Audit? Maybe a 962 Election Can Save the Day

Facing a 965 Transition Tax Audit? Maybe a 962 Election Can Save the Day

Tax Law
By Anthony Diosdi In August of 2020, the Internal Revenue Service (“IRS”) launched a compliance campaign that targets the individual compliance with the Section 965 transition tax through examinations and correspondences. In October of 2020, the IRS announced it will be expanding Section 965 examinations. Our experience with Section 965 audits indicates that the IRS is focusing on the earnings and profits (“E&P”) calculations, the calculation of foreign tax credits, foreign tax pools, and transactions used to reduce E&P. It has also been our experience that a significant number of CFC shareholders facing a transition tax audit could greatly benefit by making a late 962 election. This article discusses the 965 transition tax and the possibility of making a 962 election. A Section 962 election could be a very useful…
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Fighting IRS Form 3520 Penalties- Your Best Defense is Your Offense

Fighting IRS Form 3520 Penalties- Your Best Defense is Your Offense

Tax Law
By Anthony Diosdi IntroductionUnder Internal Revenue Code Section 6677(a), if any United States Person beneficiary receives (directly or indirectly) a distribution from a foreign trust, that person is required to make a return with respect to such a trust using Internal Revenue Service (“IRS”) Form 3520, and show thereon the name of the trust, the amount of the aggregate distribution received, and any other data the IRS may require. A foreign gift, bequest, or inheritance that exceeds $100,000 must also be disclosed on a Form 3520. The IRS may assess an annual penalty equal to 35 percent of the gross value of the trust or 35 percent of the gross value of the property transferred from the trust if a Form 3520 is not timely filed. The IRS may also…
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A Closer Look as to How FDII Can Reduce the Effective Corporate Tax Rate to 13.125%

A Closer Look as to How FDII Can Reduce the Effective Corporate Tax Rate to 13.125%

Tax Law
By Anthony Diosdi Foreign Derived Intangible Income (“FDII”) deduction was enacted as part of the 2017 Tax Cuts and Jobs Act. Under this tax regime, a U.S. C corporation may claim deduction of up to 37.5 percent on a portion of the corporation’s FDII income. Because the current U.S. federal corporate income tax rate is 21 percent, a FDII deduction can result in an effective tax rate of only 13.125 percent (21% - 37.5% = 13.125%).A FDII deduction can be extremely beneficial to U.S. exporters of goods, services, and intellectual property such as the sale of software or apps, and the streaming of audio or video. A FDII deduction is not available for income received from financial services, any domestic oil and gas extraction, activities performed through a branch, and…
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Attention All Home Buyers Part II: FIRPTA and the Statute of Limitations

Attention All Home Buyers Part II: FIRPTA and the Statute of Limitations

Tax Law
By Kerrin N.T. Liu This article is a followup to our previous article entitled “Attention All Home Buyers.” In our previous article, we introduced Foreign Investment in Real Property Tax Act of 1980 (hereinafter “FIRPTA”); what it is, who it applies to, exemptions, and the consequences of noncompliance. In this article we discuss the possible application of the statute of limitations in cases where unwitting U.S. buyers of a noncompliant FIRPTA transaction are subjected to a lien on their purchased property. Options Moving Forward and the Statute of Limitations. The most straightforward way of taking a tax lien off of a title is to pay the tax lien in full. However, this is not an equitable result for many buyers since the tax should have been paid by the foreign…
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A Line-by-Line Review of the IRS Form 5471 Schedule M

A Line-by-Line Review of the IRS Form 5471 Schedule M

Tax Law
By Anthony Diosdi Schedule M is designed to measure Controlled Foreign Corporation (“CFC”) intercompany payments. Schedule M requires the majority U.S. owner to provide information on transactions between the CFC and its shareholders or other related persons. This article is designed to provide a basic overview of the Internal Revenue Service (“IRS”) Form 5471, Schedule M. Who Must Complete Schedule MForm 5471 and its accompanying schedules must be completed and filed by the following categories of persons:Category 1 FilerU.S. persons who are officers, directors or ten percent or greater shareholders in a CFC. Category 1 includes U.S. shareholders of a Section 965 “specified foreign corporation” at any tax year of the foreign corporation, and who owned that stock on the last day in that year. A SFC includes 1) a…
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What is a Fungible Token (NFT) and How is a NFT Taxed?

What is a Fungible Token (NFT) and How is a NFT Taxed?

Tax Law
By Anthony Diosdi The popularity of Non Fungible Tokens (“NFTs) has spiked in the past couple of months. NFTs were just featured on an episode of Saturday Night Live. Recently, the New York Times published an article entitled “Why Did Someone Pay $560,000 for a Picture of My Column?” The article discusses how a reporter wrote a column about NFTs, turned the column itself into a NFT, and put it up for auction. The winning bid for the column was about $560,000. So what is an NFT? To understand what an NFT is, you must understand the basics about digital currencies. Digital current is money. There are a number of different digital currencies. They include bitcoin, ethereum, and dogecoin. Digital currencies are also called cryptocurrency. This is because cryptocurrency can…
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Can a “Leveraged Lease or License” Avoid the New Anti-Conduit Regulations Revisited with a Touch of Hungarian Spice

Can a “Leveraged Lease or License” Avoid the New Anti-Conduit Regulations Revisited with a Touch of Hungarian Spice

Tax Law
By Anthony Diosdi Recently, the Internal Revenue Service (“IRS”) and the Department of Treasury (“Treasury”) issued a number of regulations and proposed regulations (the Proposed Regulations) that will restrict foreign persons’ ability to minimize U.S. tax through “conduit” financing arrangements. See REG-106013-19; 85 F.R. 19858-19873. The new final regulations and Proposed Regulations potentially impact a number of types of structures used by foreign persons for financing into the United States, and therefore these structures should be reevaluated. The discussion below first presents a brief overview of the 30 percent withholding tax as well as the “anti-conduit” rules, then describes if a properly structured “leveraged lease” is entitled to an exemption U.S. withholding tax. The 30 Percent Withholding TaxNon-U.S. taxpayers are subject to U.S. federal income taxation on a limited basis.…
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Major Estate and Gift Tax Increase Proposed in the Senate

Major Estate and Gift Tax Increase Proposed in the Senate

Gift Tax
By Anthony Diosdi On March 25, 2021, Senator Bernie Sanders of Vermont and Senator Sheldon Whitehouse of Rhode Island introduced a bill entitled “For the 99.5% Act.” If the bill is enacted, it dramatically changes the current estate and gift tax system. Below, are the most significant provisions of the 99.5% Act:1. There would be a reduction of the estate tax exemption amount to $3.5 million per person and $7 million for a married couple. The exemption would be indexed for inflation. Currently, the estate tax exemption per person is $11.7 million and $23.4 million per married couple. 2. There would be a reduction of the gift tax exemption to $1 million per person. Under current law, an individual is permitted a gift tax exemption of $11.7 million. 3. Currently,…
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The Conduit Regulations and Multinational Financing Transactions Between Cross-Border Subsidiaries

The Conduit Regulations and Multinational Financing Transactions Between Cross-Border Subsidiaries

Tax Law
By Anthony Diosdi It has been more than 25 years since Congress enacted Section 7701(1) of the Internal Revenue Code and the Department of Treasury (“Treasury”). These provisions authorize the Internal Revenue Service (“IRS”) to recharacterize any multiple-party financing transaction as a transaction directly between two or more parties if it is determined that reclassification is necessary to prevent the avoidance of U.S. tax. Last year, on April 8, 2020, Treasury issued new proposed regulations which would make changes to the current conduit regulations. Anyone involved in the planning of multinational corporate finance transactions, must understand the conduit regulations. This article is designed to provide an introduction to the conduit finance rules which govern the transfer of funds among subsidiaries in different countries. The 30 Percent Withholding TaxHistorically, foreign taxpayers…
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