Sending U.S. Employees Overseas: Tax and Immigration Update


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Tax and Immigration Issues when U.S. citizens and Green Card holders work as foreign expatriates

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Sending U.S. Employees Overseas: Tax and Immigration Update

  1. 1. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 Sending U.S. Employees Overseas: Tax and Immigration Update Dale Mason, CPA International Tax Director The Wolf Group, PC Eliot Norman Partner-Immigration Practice Group Williams Mullen Washington DC and Richmond, Va. 804.420.6482
  2. 2. Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. © 2013 The Wolf Group
  3. 3. Agenda U.S. Expatriate Taxation – The Basics U.S. Immigration for Expatriates -- The Basics  Impact of Recent Tax Legislation  Impact of Recent Immigration Developments: Foreign Financial Reporting  Foreign Account Tax Compliance Act and what it means for U.S. expatriates  Final Thoughts and Questions
  4. 4. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 U.S. Expatriate Taxation The Basics
  5. 5. Tax Equalization Assignee responsible for “stay-at-home” tax • Hypothetical tax withheld from salary and personal income Company responsible for home and host country income tax on worldwide income Policy intent is assignee “no better or worse off” from a tax standpoint
  6. 6. Income Subject to Tax Equalization  Company Income – Wages, allowances, etc.  Personal Income – Investment income etc.  Hypothetical tax can include: • Federal income tax • State income tax • Social Security tax
  7. 7. U.S. Citizens and Green Card Holders – U.S. Income Taxation Taxed on worldwide income Foreign financial information reporting  Elimination of double tax provisions: • Foreign earned income exclusion • Foreign tax credits (even for persons working in non-treaty countries) Congress frequently considers elimination of the foreign earned income exclusion
  8. 8. Income Tax Treaties  U.S. citizens • Always subject to worldwide taxation • Savings clause - preserves the right of the U.S. government to tax its citizens/residents as if no tax treaty existed  U.S. lawful permanent residents • May be treated as U.S. nonresidents • Treaty tie-breaker provisions • Taking a treaty tie-breaker position to treat GCH as nonresident may trigger U.S. exit tax • Immigration issues
  9. 9. Foreign Earned Income Exclusions (FEIE)  May exclude from income up to $97,600 in 2013 ($99,200 in 2014) plus the foreign housing exclusion Requirements  Tax home in a foreign country  Foreign earned income  Bona Fide Residence Test or Physical Presence Test
  10. 10. FEIE – Foreign Earned Income Wages Commissions Bonuses Vacation pay Sick leave Severance Allowances
  11. 11. FEIE - Foreign Tax Home Tax home must be in a foreign country Tax home located at regular/principal place of business Permanently or indefinitely engaged to work If expectation is the assignment to last more than 1 year then it is indefinite and qualifies Tax home in a foreign country is not restricted by: • Temporary presence in U.S. • Maintenance of home in U.S., even if used by spouse and dependents
  12. 12. FEIE- Bona Fide Residence Test U.S. Citizen & Green Card Holders (only under nondiscrimination article of treaty but be careful!) Resident in foreign country for entire calendar year Cannot claim to be a nonresident of the foreign country Subjective test based on facts and circumstances Individual’s foreign earned income must be subject to that tax – does not mean that foreign tax must be paid
  13. 13. FEIE - Bona Fide Residence Test Green Card Holders Green Card Holders – Nondiscrimination Article “Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.” • Rev. Rul. 91-58
  14. 14. Physical Presence Test US citizen or resident alien of the U.S. Tax home in foreign country Physically present for at least 330 full days during 12 consecutive months
  15. 15. Housing Exclusion Housing exclusion applies to amounts considered paid from employer-provided amounts in excess of government-set based housing amount Housing exclusion limited • Excess of housing costs over a base amount which is 16% of the FEIE. • 2013 base amount is $15,616 • Upper limit is 30% of foreign earned income exclusion. • 2013 upper limit is $29,280 • High cost locations upper limit is increased
  16. 16. FEIE Summary Bona fide residence test • Tax home in foreign country • Bona fide foreign residence • Entire taxable year Physical presence test • Tax home in a foreign country • 330 days out of 12 consecutive months Housing exclusion
  17. 17. Foreign Tax Credits (FTC) U.S. citizens and residents subject to US tax on worldwide income FTC eliminates double taxation by allowing a credit against U.S. tax for foreign tax paid or accrued FTC limited to lesser of foreign tax or U.S. tax on foreign income
  18. 18. Foreign Tax Credits Most states do not recognize foreign tax credits, e.g., California, Virginia, Maryland etc. does not recognize • Double taxation may occur
  19. 19. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 U.S. Immigration Basics: Your Company and its Expatriates
  20. 20. U.S. Immigration Basics: Green Card Holders Working Overseas  Who is an expatriate?  Green Card Holders: a Definition  Their Value to your Company  The Doctrine of Abandonment  Consequences of Abandonment  Tips to avoid Abandonment • Myths and Reality  Practical Solutions  One size does not fit all
  21. 21. U.S. Immigration Basics: Reentry or Travel Permits  Filing of I-131  Must be in the USA at the time of filing  Biometrics and your expatriate’s travel schedule  Effect: not a panacea or absolute guarantee  Subsequent Travel Permits: up to 6 years total in 2 year increments  Use as a planning tool and success rate
  22. 22. U.S. Immigration Basics: Nonimmigrants  Sending H-1B and other nonimmigrant foreign employees overseas  Some definitions  Basic Rules  Advantages/Disadvantages  Practical Problems  Practical Solutions • The L-1B or H-1B who wants a Green Card • The H-1B who is “running out of time”  Tax and Compensation Issues (Dale Mason)
  23. 23. U.S. Immigration Basics: Obtaining U.S. Citizenship  The Path to Citizenship: “Naturalization” • Prerequisite: Must be a Green Card Holder First • Basic Procedures to be Naturalized  Some Definitions and Concepts: • The waiting game: 3 and 5 years • physical presence test 50% of the 3 or 5 years • continuous residence tests  The Technicalities • definition of continiously reside • 90 day test: reside in state where application if filed: • Must “continuously reside” in USA from date of natz application until obtain citizenship  Dangers of “Disruption of Residency” when Green Card employees are sent to overseas assignments
  24. 24. U.S. Immigration Basics; “preserving continuous residence” for naturalization  Practical Solutions: Preserving Residency for Expatriates on the Path to U.S. Citizenship  The N-470: “Don’t leave home without fiiling it” • basic eligilibty: 1 year continuous uninterrupted physical presence after obtaining permanent residence and BEFORE being sent overseas • N-470 preserves “continous residency” while working overseas for “U.S. company”. How defined?  Practical Examples: How it works  Additional exemption for foreign Green Card spouse who accompanies U.S. citizen sent overseas to work for your company  Final Pointers:
  25. 25. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 Impact of Recent U.S. Tax Legislation
  26. 26.  0.9% Additional Medicare Tax Employee share of Medicare tax on compensation exceeding $250,000 (MFJ), $200,000 (single) Employer required to withhold the additional 0.9% on all wages exceeding $200,000, despite filing status Individuals liable for new Medicare Tax - Any shortfall or excess of additional Medicare tax can be paid/refunded through the tax return Additional Medicare Tax © 2013 The Wolf Group
  27. 27. Impact on Assignment Costs Additional tax plus gross-up costs will be incurred if assignees are subject to the 0.9% due to assignment allowances Host country may also tax the employer reimbursement Totalization Agreements – Additional Medicare Tax should be covered under the agreements Consider implication on hypothetical Medicare tax
  28. 28. Tax is 3.8% of the lesser of: • Net Investment Income OR • The excess of Modified Adjusted Gross Income over: o$250,000 (MFJ) o$125,000 (MFS) o$200,000 (Single & Other taxpayers) Modified by adding back the foreign earned income exclusion Net Investment Income Tax
  29. 29.  Unearned Investment Income: • Capital Gains • Dividends Income • Interest Income • Net Rental Income • Foreign non-qualified pensions  Unearned Income does not include: • Qualified retirement plan income • Sale of principal residence exclusion Net Investment Income Tax
  30. 30. Impact on Assignment Costs Additional tax plus gross-up costs will be incurred by employer if assignees are subject to the 3.8% tax because of assignment allowances For employees working outside the U.S., host country tax costs may increase
  31. 31. 2013 & 2014 Top Tax Rates Top 39.6% rate above the following thresholds: • $450,000 joint filers & surviving spouses • $425,000 HOH • $400,000 Single • $225,000 MFS
  32. 32. Capital Gains/ Dividends LT Capital gains/Qualified Dividends now 15% or 20% for taxpayers over the following ordinary income thresholds: • $450,000 joint filers & surviving spouses • $425,000 HOH • $400,000 Single • $225,000 MFS
  33. 33. Phase-Out of Personal Exemption Phase-out of personal exemptions (2013 = $3,900) Phase-out begins at the following AGI thresholds: • $300,000 MFJ • $275,000 HOH • $250,000 Single • $150,000 MFS Reduced by 2% by each $2,500 (or portion thereof) over the threshold amount.
  34. 34. Phase-Out of Itemized Deductions Itemized deductions are reduced by 3% of the amount AGI is over threshold amounts (not to exceed 80% of deductions). Phase-out begins at the following AGI thresholds: • $300,000 MFJ • $275,000 HOH • $250,000 Single • $150,000 MFS
  35. 35. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 Impact of Recent U.S. Immigration Developments
  36. 36. 2014: Immigration Realities  Homeland Security and U.S. Customs and Border Protection • Inspections and Secondary Inspections • Sequestration and Morale  Preparing your Foreign Expatriates for dealing with the new realities in 2014  Spouses and children: issues: “benign neglect” or part of the planning process, dangers s of 3 year and 10 year bars, dual career families, “one size does not fit all”  Final Thoughts
  37. 37. 37 Attention! Homeland Security remains in charge of immigration to the USA
  38. 38. WHAT’s NEW? 38
  39. 39. Customer Service
  40. 40. Conclusion: New Reality?
  41. 41. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 Foreign Financial Reporting
  42. 42. Foreign Bank Account Reporting “FBAR” – FinCen Form 114 U.S. persons oU.S. Citizens oGreen Card Holders oOther income tax residents Financial interest in or Signature authority over: • Foreign financial accounts if in the aggregate the accounts equal or exceed $10,000 at any point during the year
  43. 43. What Foreign Financial Accounts are Reportable? Bank & saving deposit accounts Securities accounts Life insurance policies with a cash value Mutual funds Assets not held in an account are not reportable
  44. 44. FBAR Filing Requirements Filing deadline is June 30 of the following year • Must be received by June 30 • No extensions • E-Filing now mandatory Not filed with tax return • Informational return – no additional income tax liability • Form 1040 Sch. B question
  45. 45. FBAR Penalties Non-willful failure penalty • $10,000 Willful failure penalty • Greater of $100,000 or 50% of account balance Criminal penalties 6 year statute of limitations
  46. 46. IRS Offshore Voluntary Disclosure Program FBAR and certain international tax reporting Pay all taxes and interest for the past 8 years Waiver of penalties for informational forms Penalty: 27.5% of the highest account balance Reduced or no penalty in certain situations Currently no deadline; subject to change © 2013 The Wolf Group
  47. 47. Specified Foreign Financial Assets Report Form 8938 Interest in “Specified Foreign Financial Assets” with an aggregate value exceeding $50,000 Information statement attached to the individual's U.S. income tax return; no additional tax liability © 2013 The Wolf Group
  48. 48. Foreign Financial Asset Report Cont.  “Specified foreign financial asset” • Foreign financial account • Stock or security issued by a foreign person • Financial instrument/contract with a foreign issuer • Any interest in a foreign entity • Includes foreign pension plans Information statement • Maximum value of assets, account numbers, names and addresses of foreign financial institutions, etc. © 2013 The Wolf Group
  49. 49. Form 8938 Filing Thresholds Year-End Aggregate Value of All Specified Foreign Financial Assets Exceeds: Highest Annual Balance Exceeds: Single, living in the U.S. $50,000 $75,000 Single, living outside the U.S. $200,000 $300,000 MFS, living in the U.S. $50,000 $75,000 MFS, living outside the U.S. $200,000 $300,000 MFJ, living in the U.S. $100,000 $150,000 MFJ, living outside the U.S. $400,000 $600,000 © 2013 The Wolf Group
  50. 50. Foreign Financial Asset Report Penalties • Minimum penalty $10,000 • Maximum penalty $50,000 • Presumption is that the value of the account is in excess of $50,000 • Extends Form 1040 statute of limitations
  51. 51. The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500 The Foreign Account Tax Compliance Act – “FATCA”
  52. 52. FATCA Overview Designed to force U.S. citizens and residents to report all foreign income FATCA provisions adds an entirely new Chapter 4 to the Internal Revenue Code 500 pages of Final Regulations
  53. 53. IRS Agreement or 30% IRS /Foreign Governmental Agreement : • Required of all worldwide foreign financial institutions (“FFI”) and certain non-financial institutions who receive any U.S. source payments  OTHERWISE: • 30% withholding tax applied to any “Withholdable Payment” © 2013 The Wolf Group
  54. 54. Practical Implications Many foreign financial institutions have and will decide to terminate U.S. clients’ accounts Self-reporting will be cross checked with institutional (foreign government) reporting. Discrepancies will be easy to identify  Opening foreign financial accounts may be difficult in some jurisdictions © 2013 The Wolf Group
  55. 55. FINAL THOUGHTS AND QUESTIONS  From Eliot Norman 804-420-6213  From Dale Mason (703) 502-9500  Your Questions?
  56. 56. Contact Us Dale Mason, CPA International Tax Director The Wolf Group PC Tel: (703) 502-9500 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 1875 I Street, NW (International Square), Suite 500, Washington, DC 20006 © 2013 The Wolf Group
  57. 57. Biographical information Eliot Norman Partner- International Williams Mullen Washington, D.C. T. 001.804.420.6213 Eliot Norman has worked for many years advising U.S. and Foreign Multinationals deal effectively with their global mobility issues. Mr. Norman is an International Practice Partner with Williams Mullen, a 250 lawyer national and international commercial law firm, with offices in Washington, D.C., Virginia and North Carolina. Eliot graduated from Yale College and Boston College Law School and served with the U.S. Department of Justice before entering private practice. He is listed in Best Lawyers in America for Immigration. He speaks French fluently and obtained a Certificate from the Institut d’etudes politiques, Paris, France. Mr. Norman regularly travels to Europe to meet with clients concerning investment projects and operations in the United States and to speak to industry trade groups and chambers of commerce.