Read more at: Tax Times blog
According to Moodys Gartner, the transition tax on businesses, introduced by the US Tax Cuts and Jobs Act 2017, may cause some Canadian-resident US individuals with a substantial unexpected US tax liability. They will have to pay the tax without being able to claim it as a tax credit against their Canadian income, unless the Ottawa government decides to allow them relief from this double taxation.
- The Transition Tax applies to the shareholder even if the Canadian corporation has not actually declared a dividend meaning that there is no “source” of income against which to credit the Transition Tax.
- Under Canadian law, dividends received by a shareholder from a Canadian corporation are classified as Canadian source income and therefore the resulting Canadian tax liability is not eligible to be credited for the US tax paid. The general Canadian principle is that US taxes will be creditable only if the income received is US sourced.
At the 2018 Society of Trust and Estate Practitioners (STEP) conference held in Toronto, the Canada Revenue Agency (CRA) confirmed that a Canadian resident shareholder’s Canadian tax liability would not be eligible for a credit to offset the Transition Tax paid (see question #12 of the CRA Roundtable Questions & Answers here). Accordingly, this can lead to double taxation for these unfortunate Canadian residents.
The allowance of a domestic tax credit for foreign tax paid on domestic income is specifically found in the Article XXIV of the Canadian/US Tax Treaty which provides relief by deeming the source of some types of income to be foreign, thereby enabling the use of FTCs to offset the Canadian or US. tax otherwise payable.
Another possible solution would have been for CanadaCo to pay out an immediate dividend of the same amount in 2017, as the income would be included on the personal returns in both countries in 2017.
This problem may also be faced by US citizens living in other countries besides Canada, since most other industrialized countries will not consider this transition tax nor other types of accrued Subpart F income, as taxable in their country:
The 965 deemed distribution is taxable in the U.S. in 2017, but there is no taxable event in the country of residence and therefore no tax paid in the country of “tax residence”.
There is no credit allowed for the U.S. tax paid on the individual’s 2017 foreign tax return where he/she actually lives.
When the amount of the 2017 IRC §965 inclusion is later distributed to the US shareholder, that distribution is taxed in the foreign jurisdiction a second time.
Therefore, unless the US/Country of Residents tax treaty provides a solution, the §965 inclusion amount will be taxed twice, first by the United States in 2017 and then by the country of residence upon distribution in years after 2017.
Read more at: Tax Times blog
According to Law360, the Eighth Circuit vacated a favorable U.S. Tax Court decision for Medtronic Inc., in its $1.36 billion tax dispute with the IRS, after finding that the judge in the case had not justified the pricing.
The case will return to the Tax Court, which found in January 2017 that the medical equipment company owed only $14 million in an adjustment over its 2005-2006 tax years, stemming from royalty payments to the company's U.S. headquarters from its Puerto Rican subsidiary.
The Eighth Circuit did not reject the Tax Court's decision outright but ordered U.S. Tax Court Judge Kathleen Kerrigan to justify more extensively her determination that Medtronic's overall transfer pricing method was correct.
Using that methodology, Kerrigan found that the royalty rate for medical device pulse generators should be 44 percent, while the rate for pacemaker leads should be 22 percent. Based on those figures, Medtronic and the IRS reached an agreement to reduce Medtronic's tax bill to $14 million while the case remained under appeal.
The IRS argued that because the Puerto Rican subsidiary was merely an assembly arm, the comparable uncontrolled transactions method was inappropriate. The agency used the comparable profits method, which takes into account profits from similar firms, to argue that Medtronic's U.S. entities should have received 90 percent of the income from the transaction, which it used to make an overall adjustment of $1.36 billion for the two years.
Writing the lead opinion for the Eighth Circuit, Judge Roger Wollman said the Tax Court didn't explain how it determined that Medtronic's choice of comparable prices, which used pricing from a 1992 settlement with another supplier, was appropriate. Judge Wollman also said the Tax Court didn't account for significant differences in the transactions, including the types of intellectual properties sold and the nature of the contracts.
In addition, the judge found that the Tax Court did not sufficiently analyze how the Puerto Rican subsidiary assumed risk in the transaction, which Medtronic used to justify its royalty agreement.
"In the absence of such a finding, we lack sufficient information to determine whether the Tax Court’s profit allocation was appropriate," Wollman wrote.
Fellow Eighth Circuit Judge Bobby Shepherd noted in a concurring opinion that the Tax Court did not account for effects that could potentially distort prices in a legal settlement, including that the parties settled to avoid future litigation costs.
Read more at: Tax Times blog
On November 22, 2017 we posted 146 Offshore Banks & Now Financial Advisors Are Turning Over Your Names To The IRS - What Are Your Waiting For? and since then the Government has add NPB Neue Privat Bank AG (effective 7/18/18 ) and Mirelis Holding S.A., formerly known as Mirelis InvestTrust S.A. (effective 7/27/18) to this list bringing the number to 148 Offshore Banks and Foreign Financial Advisors.
The IRS keeps updating its list of foreign banks which are turning over the names of their US Account Holders, who are now subject to a 50% (rather than 27.5%) penalty in the IRS’s Offshore Voluntary Disclosure Program (OVDP). This penalty is based on the highest account balance measured over up to eight years.
Under the program, banks are required to:
- Make a complete disclosure of their cross-border activities;
- Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
- Cooperate in treaty requests for account information;
- Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
- Agree to close accounts of account holders who fail to come into compliance with U.S. reporting obligations; and
- Pay appropriate penalties.
These Banks, Financial Instructions and Foreign Financial Advisors have made substantial efforts to cooperate with the IRS investigation, including by:
- facilitating interviews that their Office with employees, including top level executives;
- voluntarily producing documents in response to the Office’s requests;
- providing, in response to a treaty request, unredacted client files for the U.S. taxpayer-clients who maintained accounts at their Banks or Financial Instruction; and
- committing to assist in responding to a treaty request that is expected to result in the production of un-redacted client files for U.S. taxpayer-clients who maintained accounts at these Banks and Financial Instructions and with these Foreign Financial Advisors.
The complete list of Offshore Banks and Foreign Financial Advisors who are turning over the names of their US Account Holders, who are now subject to a 50% (rather than 27.5%) penalty in the IRS’s Offshore Voluntary Disclosure Program (OVDP) is as of January 31, 2017:
- UBS AG
- Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
- Wegelin & Co.
- Liechtensteinische Landesbank AG
- Zurcher Kantonalbank
- swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
- CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
- Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
- The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
- The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
- Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
- Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
- BSI SA (effective 3/30/15)
- Vadian Bank AG (effective 5/8/15)
- Finter Bank Zurich AG (effective 5/15/15)
- Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
- MediBank AG (effective 5/28/15)
- LBBW (Schweiz) AG (effective 5/28/15)
- Scobag Privatbank AG (effective 5/28/15)
- Rothschild Bank AG (effective 6/3/15)
- Banca Credinvest SA (effective 6/3/15)
- Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
- Berner Kantonalbank AG (effective 6/9/15)
- Bank Linth LLB AG (effective 6/19/15)
- Bank Sparhafen Zurich AG (effective 6/19/15)
- Ersparniskasse Schaffhausen AG (effective 6/26/15)
- Privatbank Von Graffenried AG (effective 7/2/15)
- Banque Pasche SA (effective 7/9/15)
- ARVEST Privatbank AG (effective 7/9/15)
- Mercantil Bank (Schweiz) AG (effective 7/16/15)
- Banque Cantonale Neuchateloise (effective 7/16/15)
- Nidwaldner Kantonalbank (effective 7/16/15)
- SB Saanen Bank AG (effective 7/23/15)
- Privatbank Bellerive AG (effective 7/23/15)
- PKB Privatbank AG (effective 7/30/15)
- Falcon Private Bank AG (effective 7/30/15)
- Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
- Bank EKI Genossenschaft (effective 8/3/15)
- Privatbank Reichmuth & Co. (effective 8/6/15)
- Banque Cantonale du Jura SA (effective 8/6/15)
- Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15)
- bank zweiplus ag (effective 8/20/15)
- Banca dello Stato del Cantone Ticino (effective 8/20/15)
- Hypothekarbank Lenzburg AG (effective 8/27/15)
- Schroder & Co. Bank AG (effective 9/3/15)
- Valiant Bank AG (effective 9/10/15)
- Bank La Roche & Co AG (effective 9/15/15)
- Belize Bank International Limited, Belize Bank Limited, Belize Corporate Services Limited, their predecessors, subsidiaries, and affiliates (effective 9/16/15)
- St. Galler Kantonalbank AG (effective 9/17/15)
- E. Gutzwiller & Cie, Banquiers (effective 9/17/15)
- Migros Bank AG (effective 9/25/15)
- Graubundner Katonalbank (effective 9/25/15)
- BHF-Bank (Schweiz) AG (effective 10/1/15)
- Finacor SA (effective 10/6/15)
- Schaffhauser Kantonalbank (effective 10/8/15)
- BBVA Suiza S.A. (effective 10/16/15)
- Piguet Galland & Cie SA (effective 10/23/15)
- Luzerner Kantonalbank AG (effective 10/29/15)
- Habib Bank AG Zurich (effective 10/29/15)
- Banque Heritage SA (effective 10/29/15)
- Hyposwiss Private Bank Genève S.A. (effective 10/29/15)
- Banque Bonhôte & Cie SA (effective 11/3/15)
- Banque Internationale a Luxembourg (Suisse) SA (effective 11/12/15)
- Zuger Kantonalbank (effective 11/12/15)
- Standard Chartered Bank (Switzerland) SA, en liquidation (effective 11/13/15)
- Maerki Baumann & Co. AG (effective 11/17/15)
- BNP Paribas (Suisse) SA (effective 11/19/15)
- KBL (Switzerland) Ltd. (effective 11/19/15)
- Bank CIC (Switzerland) Ltd. (effective 11/19/15)
- Privatbank IHAG Zürich AG (effective 11/24/15)
- Deutsche Bank (Suisse) SA (effective 11/24/15)
- EFG Bank AG (effective 12/3/15)
- EFG Bank European Financial Group SA, Geneva (effective 12/3/15)
- Aargauische Kantonalbank (effective 12/8/15)
- Cornèr Banca SA (effective 12/10/15)
- Bank Coop AG (effective 12/10/15)
- Crédit Agricole (Suisse) SA (effective 12/15/15)
- Dreyfus Sons & Co Ltd, Banquiers (effective 12/15/15)
- Baumann & Cie, Banquiers (effective 12/15/15)
- Bordier & Cie Switzerland (effective 12/17/15)
- PBZ Verwaltungs AG (effective 12/17/15)
- PostFinance AG (effective 12/17/15)
- Edmond de Rothschild (Suisse) SA (effective 12/18/15)
- Edmond de Rothschild (Lugano) SA (effective 12/18/15)
- Bank J. Safra Sarasin AG (effective 12/23/15)
- Coutts & Co Ltd (effective 12/23/15)
- Gonet & Cie (effective 12/23/15)
- Banque Cantonal du Valais (effective 12/23/15)
- Banque Cantonale Vaudoise (effective 12/23/15)
- Bank Lombard Odier & Co Ltd (effective 12/31/15)
- DZ Privatbank (Schweiz) AG (effective 12/31/15)
- Union Bancaire Privée , USP SA (effective 1/6/16)
- PHZ Privat - und Handelsbank Zürich AG reorganized as Leodan Privatbank AG (effective 1/25/16)
- Hyposwiss Privatbank AG reorganized as HSZH Verwaltungs AG (effective 1/27/16)
- Bank Julius Baer & Co., Ltd (effective 2/4/16)
- Cayman National Securities Ltd. (effective 3/9/16)
- Cayman National Trust Co. Ltd. (effective 3/9/16)
- Bradley Birkenfeld (effective 11/15/16)
- Renzo Gadola (effective 11/15/16)
- Martin Lack (effective 11/15/16)
- Christos Bagios (effective 11/15/16)
- Joshua Vandyk (effective 11/15/16)
- Eric St-Cyr (effective 11/15/16)
- Patrick Poulin (effective 11/15/16)
- Andreas Bachmann (effective 11/15/16)
- Josef Dörig (effective 11/15/16)
- David Kalai and Nadav Kalai (effective 11/15/16)
- David Almog (effective 11/15/16)
- Hansruedi Schumacher (effective 11/15/16)
- Matthias Rickenbach (effective 11/15/16)
- Cem Can (effective 11/15/16)
- IPC Management Services, LLC (effective 11/15/16)
- IPC Corporate Services Inc. (effective 11/15/16)
- IPC Corporate Services LLC (effective 11/15/16)
- Titan International Securities, Inc. (effective 11/15/16)
- Legacy Global Markets S.A. (effective 11/15/16)
- Unicorn International Securities LLC (effective 11/15/16)
- Andrew Godfrey (effective 11/15/16)
- Michael Little (effective 11/15/16)
- Edgar Paltzer (effective 11/15/16)
- Peter Amrein (effective 11/15/16)
- Daniela Casadei (effective 11/15/16)
- Fabio Frazzetto (effective 11/15/16)
- Michele Bergantino (effective 11/15/16)
- Mario Staggl (effective 11/15/16)
- Beda Singenberger (effective 11/15/16)
- Gian Gisler (effective 11/15/16)
- Felix M. Mathis (effective 11/15/16)
- Michael Berlinka (effective 11/15/16)
- Urs Frei (effective 11/15/16)
- Roger Keller (effective 11/15/16)
- Josef Beck (effective 11/15/16)
- Hans Thomann (effective 11/15/16)
- Stephan Fellmann (effective 11/15/16)
- Otto Huppi (effective 11/15/16)
- Christof Reist (effective 11/15/16)
- Stefan Buck (effective 11/15/16)
- Marco Parenti Adami (effective 11/15/16)
- Emanuel Agustino (effective 11/15/16)
- Roger Schaerer (effective 11/15/16)
- Markus Walder (effective 11/15/16)
- Susanne D. Rüegg Meier (effective 11/15/16)
- Martin Dunki (effective 11/15/16)
- Robert Bandfield (effective 11/15/16)
- Michael A. Behr (effective 1/25/17)
- Prime Partners SA (effective 8/15/17)
- NPB Neue Privat Bank AG (effective 7/18/18 )
- Mirelis Holding S.A., formerly known as Mirelis InvestTrust S.A. (effective 7/27/18)
- With roughly 145 Foreign Banks and Financial Advisors cooperating with the DOJ & IRS and
- FATCA requiring the entire world to report to the IRS
Read more at: Tax Times blog