US Taxation: From Start to Finish. US Taxation from a non-US tax perspective.

1. US Taxation:
From Start to Finish
Matthew Ledvina, J.D., LL.M. (Taxation)
Anaford

2. US - New Developments
• Global Transparency
• Increased IRS Reporting (e.g., IRS Form 8938,
3520, “FBAR”)
• Increasing IRS Resources and Enforcement & Fear
of the US Department of Justice
• Foreign Account Tax Compliance Act (“FATCA”)
• Exchange of Information (IGAs)

3. US – Income Tax
• US Citizens and Residents
– Taxation on worldwide income for citizens and
residents.
• Non-US Citizens (NRAs)
– US source Fixed, Determinable, Annual or
Periodical Income (FDAP)
– Effectively Connected Income from a US trade or
business (ECI)

4. US – Tax Computation
US Citizens and Residents
• Gross Income: worldwide basis and broadly defined
• Taxable Income: gross income less the following:
– Above the line deductions (AGI)
– Standard or Itemized deductions
– Deduction for personal exemptions
• Graduated marginal rates applied to Taxable Income
– Highest marginal income tax rate is 39.6% (above USD
400,000)
– Lower permanent rate of 20% for net capital gains and
qualified dividend income, plus 3.8% Surtax (above USD
400,000)

5. US – Tax Computation (cont.)
US Citizens and Residents
• Tax reduced by:
– Foreign Tax Credit
– Foreign Tax Deduction
• Alternative Minimum Tax
• US Income Tax Treaties (savings clause)

6. US – Tax Computation
Non-U.S. Citizens (NRAs)
• FDAP Income
– 30% withholding rate
– Reduced by Treaty
• ECI (effectively connected income)
– Withholding exemption
– Deductions allowed
– Net income taxed at graduated rates or lesser rate
under Treaty

7. US – Anti-Deferral Regimes
• Controlled Foreign Corporation (CFC)
• Passive Foreign Investment Income (PFIC)
• Foreign Trusts (Foundations)
– Grantor v. Non-Grantor Trusts
– Accumulation Distributions Rules (DNI/UNI)

8. US – Transfer Taxes
• Estate Tax
– Applies to transfers made at time of death
• Gift (Donation) Tax
– Applies for transfers made during lifetime
• Generation Skipping Transfer Tax (GSTT)
– Applies to transfers that skip one or more
generations

9. US – Transfer Taxes (cont.)
• US Citizens and Residents
– Taxation on worldwide assets for US citizens and
residents, i.e., “domiciliary”(facts and
circumstances test)
• Non-US Domiciliary
– Applies to transfers of US “situs” assets (i.e., real
property and securities)

10. US – Transfer Taxes (cont.)
• US Citizens and Residents
– Unified exemption amount of USD 5,250,000
(2013, indexed and portable)
– Highest marginal rate is now permanently fixed at
40% (2013)
– Annual gift tax exclusion is USD 14,000 (2013)
• Non-US Domiciliary
– Exemption of USD 60,000 on US situs assets
– US Gift and Estate Tax Treaties

11. US – Voluntary Disclosure
• “Quiet” Voluntary Disclosure – A quiet voluntary
disclosure consists of the taxpayer filing an amended
return or a delinquent return of undeclared income
or false deductions.
• “Streamlined” Voluntary Disclosure – A newly
sanctioned IRS procedure since September 2012 for
“low risk” taxpayers who reside outside the US.
• “Noisy” Voluntary Disclosure – The taxpayer contacts
via a US tax lawyer the IRS Criminal Investigation
(“CI”). Taxpayer must agree to penalty framework.

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“Quiet”
• Taxpayer submits new or amended tax returns (typically for a
period of 6 years) together with payment of tax liability
(including interest and penalties) directly to the IRS.
• Tax returns have significant audit potential and should
correctly reflect the taxpayer’s income and expense items.
• During 2009 and 2010, the IRS made several statements that
quiet disclosures were no longer welcome, and the IRS would
be attempting to assess large penalties on those who used
this method of filing.
US – Voluntary Disclosure (cont.)

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“Streamlined”
• Streamlined is a brand new procedure announced in June 2012 and
is targeted at US citizens residing abroad who are in compliance
with their local tax regime (e.g., a US citizen residing in Switzerland
and not US tax compliant, but paying taxes in Switzerland)
• “Low Risk” Taxpayer submits new or amended tax returns (typically
for a period of 3 years) together with payment of tax liability
(including interest and penalties) directly to the IRS. Taxpayer also
submits a FBAR (Foreign Bank Account Report) for the past six
years.
• At this time, difficult to determine whether case is “low risk” and
therefore risky for taxpayer under current guidance.
US – Voluntary Disclosure (cont.)

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“Noisy”
• Generally, the preferred approach to making a
voluntary disclosure is for a taxpayer to file amended
returns and simultaneously begin open discussions with
the IRS Criminal Investigations and IRS Civil
Examinations.
• Under this approach, US taxpayer agrees to a fixed
penalty framework, which includes a 27.5% offshore
penalty on the highest aggregate balance during the
last eight years.
• US taxpayer may “opt-out” and receive different
treatment, but opt-out must be evaluated carefully.
US – Voluntary Disclosure (cont.)

15. US – Expatriation
Two Steps:
•US Taxation Considerations (US Internal Revenue Service)
– Ensure individual is compliant for last five years.
– Mitigate US Exit Tax: individual uses his lifetime gift tax
exemption (USD 5.25m), and spouse to spouse transfers.
– File terminal year US tax return, IRS Form 8854.
•Embassy Visit (US Department of State)
– Attending a US Embassy and completing the necessary
forms: a questionnaire, statement of understanding and
oath of renunciation, and surrender US passport.

16. US – Expatriation (cont.)
US “Exit Tax” (Established in June 2008)
• Applies to US citizens and to “long-term” Green Card holders (i.e., holding a
Green Card for eight or more years) who lose either their US citizenship or
green card and are considered “covered expatriates”
• Exit Tax does not apply to any other types of residents (e.g., Visa E, L, F, J, et
al).
• The US Exit Tax regime has two components: (i) a Exit Tax charge on
worldwide unrealized capital gains, and (ii) a Donee Tax on any gifts from a
covered expatriate to a US Person.
• Myth: the US will continue to charge taxes during a ten-year period after
departure -- Abolished since June 2008!
• Myth: the process is “difficult” and it takes a long time – total process can
take less than two months!
US-situs Assets post-departure issues (e.g., US real estate, US shares)
• Regardless of US tax status, US real estate and US shares remain fully subject
to US estate & gift taxation.

17. Anaford AG
Tödistrasse 53
CH-8002 Zürich – Switzerland
+41 44 567 8805 | Main
Matthew Ledvina matthew.ledvina@anaford.ch

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