A recent US government report acknowledges that U.S.-based global companies are increasingly shifting profits into offshore tax havens

By Geoffrey Weg and Mayer Nazarian

Mayer Nazarian

Geoffrey Weg

Among the findings: American multinational companies reported 43% of their overseas profits in the tax havens studied - Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland - in 2008, the most recent year data was available. 

 

At the same time, these same companies hired only 4% of their foreign workforce and made just 7% of their foreign investments in these same countries.

 

"By all indicators examined in this report, profit shifting has generally trended upward over time," the report said.  The analysis found this trend increasing since 1999. 

 

U.S.-based corporations are paying among the steepest corporate tax rates of all industrialized countries.  The report acknowledged that the high U.S. tax rate gives an incentive for companies to move profits abroad, a finding likely to fuel debate over the taxes corporations pay and their flexibility in locating profits.

 

The Congressional Research Service (“CRS”), a nonpartisan research arm of Congress used by lawmakers, analyzed profit data from multinational companies and compared reported profits and other business activity in lower-tax jurisdictions versus higher-tax countries like the United Kingdom and Canada.  The data were compiled by the Bureau of Economic Analysis, a unit of the Commerce Department that collects economic data from non-financial companies with foreign affiliates.

 

The Tax & Wealth Planning Group at Valensi Rose, PLC is experienced in advising and helping clients create tax efficient strategies for domestic and offshore business activities.

Contact; Geoffrey Weg   

Contact: Mayer Nazarian

2012 Year-End Tax Planning Tips

Year-end planning is a bigger challenge this year than in past years because, unless Congress acts, tax rates will go up next year, many more individuals will be snared by the alternative minimum tax (AMT), and various deductions and other tax breaks will be unavailable. To be more specific, as a result of expiring Bush-era tax cuts, unless Congress ascts, individuals will face higher tax rates next year on their income, including capital gains and dividends, and estate tax rates will be higher as well. The AMT problem arises because, for 2012, AMT exemptions have dropped and fewer personal credits can be used to offset the AMT. Additionally, a number of other tax provisions expired at the end of 2011 or will expire at the end of 2012. Rules that expired at the end of 2011 include, for example, the research credit for businesses, the election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes, and the above-the-line deduction for qualified tuition expenses. Rules that will expire at the end of this year include generous bonus depreciation allowances and expensing allowances for business, and expanded tax credits for higher education costs.

These adverse tax consequences are by no means a certainty. Congress could extend the Bush-era tax cuts for some or all taxpayers, retroactively "patch" the AMT for 2012 to increase exemptions and availability of credits, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year. Which actions Congress will take remains to seen and may well depend on the outcome of the elections. While these uncertainties make year-end tax planning more challenging than in prior years, they should not be an excuse for inaction. Indeed, the almost certain prospect of some higher taxes next year makes it even more important to engage in year-end planning this year. To that end, we have compiled a checklist of actions that may help you save tax dollars if you act before year-end. Many of these moves may benefit you regardless of what Congress does on the major tax questions of the day. Not all actions will apply in your particular situation.

We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make. We also should schedule a follow-up for later this year to see whether the November election results will require changes to year-end planning strategies.

 Year-End Tax Planning Moves for Individuals  

  (1)   Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It would be advisable for us to meet to discuss year-end trades you should consider making. 

(2)   If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, try to make the sale before year-end, with due regard for market conditions. This year, long-term capital gains are taxed at a maximum rate of 15%, but the rate could well be higher next year as noted above. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called "unearned income Medicare contribution tax").

(3)   Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.You can give $13,000 in 2012 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Savings for next year could be even greater if rates go up and/or the income from the transfer would have been subject to the 3.8% tax in the hands of the donor.

 Year-End Moves for Business Owners

(1)   If your business is incorporated, consider taking money out of the business by way of a stock redemption if you are in the position to do so. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you'll be taxed at a maximum rate of only 15% if you act this year. If you wait until next year to make your move, your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. And if your adjusted gross income (as specially modified) exceeds certain limits ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 for all others), gains taken next year (along with other types of unearned income, such as dividends and interest) will be exposed to an extra 3.8% tax (the so-called "unearned income Medicare contribution tax"). Keep in mind that you will need expert help to plan and execute an effective pre-2013 corporate distribution.

  

(2)   Set up a self-employed retirement plan if you are self-employed and haven't done so yet. 

(3)   Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner's share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro rata share of an S corporation's losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

 

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.  Please contact a member of the Tax & Wealth Planning Group for more information.

Geoffrey Weg Speaks on 2012 Income Tax Updates at Beverly Hills Bar Association

Tax attorney Geoffrey A. Weg, who was recently appointed for the third year as Vice Chair of the State Bar’s Taxation Section Executive Committee, will speak on recent income tax developments, including new laws and noted Tax Court opinions, at the Beverly Hills Bar Association luncheon on Thursday, August 23 at the Association's offices in Beverly Hills.

The presentation has been approved for Minimum Continuing Legal Education credit by the State Bar of California.

For more information and to register Logon

Contact Geoffrey Weg

Dramatic Rise is US Expatriations May Have its Roots in Foreign Asset Disclosure Laws

by Geoffrey Weg

Since 1998, under Internal Revenue Code Section 6039G, the U.S. Government publishes in the Federal Register the names of all US citizens who choose to expatriate (i.e., renounce their U.S. citizenship).  From 2004 through 2008, the number of expatriations per year averaged approximately 625 (from a high of 744 in 2009 to a low of 232 in 2008).  However, from 2009 to 2011, something interesting happened – the number almost tripled to approximately 1800 expatriations in 2011, with the number expected to be as high or higher in the first quarter of 2012. 
 

So what’s going on?  
 

The Federal Register does not reveal an individual citizen’s purpose for expatriation (nor is any citizen required to provide a reason to the government).  However, for tax professionals, one huge change in tax law stands out like a sore thumb – FATCA – the Foreign Account Tax Compliance Act.  According to the IRS, the purpose of FATCA is, “an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts”.  Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS.  In addition, FATCA requires foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  As a practical matter, both tax practitioners and US citizens living abroad now face a huge administrative burden in order to comply with FATCA.  And while direct evidence is lacking, anecdotal evidence from tax practitioner and taxpayer advocate groups indicates that it is this burden – FATCA – that is directly responsible for the dramatic increase in US expatriation.  
 

So why should we care?  
 

Indeed, 1800 expatriates constitutes something like 0.001% of all US taxpayers – a proverbial drop in the bucket.  On the other hand, in order to be listed in the Federal Register, a taxpayer must have a net worth above $2 million (and/or income above a specified and significant level).  In other words, these are individuals with significant income and assets, and they are deciding to leave our country, taking their skills, assets and tax-paying abilities with them.  Moreover, the number of people doing this is simply skyrocketing.  If it continues, at some point there will be a noticeable impact on the US economy.  Congress and the Department of Treasury should take this new trend seriously, and think long and hard about whether to continue to impose this burden on these taxpayers, and ultimately, on all Americans.

Contact Geoffrey Weg

TAX SEASON ALERT: Beware Of Fraudulent Refund Claims Using Your Social Security Number

 by Bruce Sires

We were made aware of this fraud when the IRS sent a letter inquiring about a 2011 Form 1040A allegedly filed by our client, who happened to have died in January of 2011.  The taxpayer's 2011 tax return had not been prepared or filed, and it was clear that someone had obtained the taxpayer's Social Security Number ("SSN") and filed a falsified return in the taxpayer's name, claiming a fraudulent refund.  The return requested a direct deposit into an account which was not in the taxpayer's name.  The IRS was alerted to the possible fraud, because they had received notice from the Social Security Administration of the taxpayer's death.  However, in many cases there are no obvious indicators of fraud, and we've heard that the Service has made direct deposit refunds into accounts shown on fraudulent returns, which do not belong to the taxpayer!

What should be done if the IRS notifies you that someone has claimed a fraudulent refund under your SSN?  Immediately call the IRS to confirm the fraud and ask them to flag your return.  The Service will flag your account regarding potential identity theft.  Also, notify your accountant, bank, financial advisor, and credit card companies that you may be the victim of identity theft.  All of your accounts should be closely monitored for any suspicious activity, and consider closing all existing accounts (and opening new ones) to prevent unauthorized purchases, cash transfers or withdrawals. 

If you haven't received such a letter, it is still a good idea to carefully review your bank and brokerage statements as well as credit card bills to be sure there is no unfamiliar activity, and where there is a suspect transaction follow up to be sure the issue isn't anything other than authorized use by your spouse, partner or children, or a memory lapse.  Finally, in this era of identity theft and fraudulent refund claims, you may want to regularly check your account with the IRS to be sure that only returns you have actually filed are reflected on their records.

You can order tax return transcripts online (www.irs.gov and go to the "Order a Return or Account Transcript" link), with a call to the IRS at 1-800-908-9946, or by filing the appropriate form with the IRS:  Form 4506,  Request for Copy of Tax Return; Form 4506-T, Request for Transcript of Tax Return; or, Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript.   The time spent carefully and regularly monitoring your finances could save you from a major disaster.

Contact Bruce Sires