ABOUT THE AUTHOR: Lawrence H McNamara Jr TEP is an
Oregon accountant who has an international tax practice
This is a second article I have written for the STEP Journal
which describes developments and offers suggestions in a frenzied
impetus by global tax administrations to coordinate actions in tax
enforcement to achieve stronger tax compliance (thus seeking the
rewards of greater tax revenues). The first article, ‘International
Scrutiny’ (STEP Journal Vol19 Iss1), described the progress of US
tax legislation and the Treasury’s operative plans to solicit
cooperation, develop coordinated tax procedures and tax information
sharing with other countries. It is important for STEP members to
understand the scope of these momentous developments in order to
advise their clients with cross-border transactions.
The US Treasury, with effective legislation passed by Congress,
has led the trend by achieving better tax administration results,
such as the US ‘QI’ (qualified intermediate)
agreement. Although
‘information-exchange agreements’ have developed into
the generally-accepted norm, the US continues to use its capital
markets to obtain information (as well as collect tax withholdings)
that is more effective than its information-exchange agreement
partnership. The Hiring Incentives to Restore Employment (HIRE)
Act, passed on 18 March 2010, added the Foreign Account Tax
Compliance Act (FATCA), which requires non-US financial
institutions to disclose data entity investment accounts outside
the US to the Internal Revenue Service (IRS) and information about
US account owners to tax withholding agents.
Concerns from abroad have reverberated back to US officials from
foreign financial institutions faced with implementing such
procedures after 2012. The EU sent a letter to the US Treasury
complaining of the severe financial burden that FATCA reporting
will impose on European institutions. The US Treasury
issued two notices as guidance for compliance with the new statute
sections. The key grandfathering
statute provision of FATCA is that it is not applicable to certain
financial obligations outstanding on 18 March 2012, or from gross
proceeds from the disposition of such obligations.
Similar apprehension of compliance with FATCA procedures exists
with foreign fiduciaries. The trust provisions stipulated in the
HIRE Act appear to apply to all foreign trustees, which would
classify them as FFIs (foreign financial institutions). Such
definition includes any entity engaged in a business activity of
holding financial assets for the account or custody of others (i.e.
the prime responsibility of a trustee). The trust is a legal
institution which can only be found in the legal systems existing
in common-law countries. This distinction causes difficulties in
countries whose legal systems are ignorant of trusts.
‘Tax treaty countries are developing coordinated
procedures to enforce laws’
Similar in some respects to the FATCA provisions, the EU Savings
Directive (the Directive) attempts to ensure that savings income
from interest income payments made in one member state to the
beneficial owner of that income who is a resident (for tax
purposes) of another member state is subject to the tax rules of
the member state where the taxpayer has residence. The
Directive’s objectives include requiring all signatory countries to
disclose to one another’s tax authority the income earned by a
resident of an EU country, thus declaring the taxpayer’s country of
residence. Such procedures require the paying agents to identify
the beneficial owner.
As we look at these trends in tax compliance administration
procedures being implemented on a global scale, it is noteworthy
that an institutional progression in this development is a ‘one
coordinated tax return’ to report all of the taxpayer’s
cross-border transactions. Such a product could be jointly
developed to become workable and efficiently designed for tax
authorities and taxpayers, which clearly reports all of an
individual’s or entity’s source income by country.
One coordinated tax return
As demonstrated above, tax treaty countries are developing
coordinated procedures to enforce their tax laws. Tax
administrators from over 40 countries reaffirmed their commitment
to offshore tax compliance. They endorsed the use of
‘joint audits’ and agreed to target HNWIs. Judging from this
concerted effort by affirmative tax administrations, it is
conceivable that ‘one coordinated tax return’ could be jointly
developed to effectively report the taxpayer’s tax liability due to
each applicable country’s tax jurisdiction. Foreign currency and
language translations could be incorporated in the tax forms and
instructions to accommodate all affected parties, for example. The
IRS currently offers basic tax filing information in some
languages, which could be expanded to accommodate taxpayers and
their preparers, as well as foreign tax authorities.
Such a development could be a realistic goal, considering the
recent public comments by IRS Commissioner Douglas Shulman on 9
December 2010. His comments included,
‘Ideally, all countries with developed tax systems would come
together to design a united system for information reporting on
their residents investing abroad’, and ‘we will press on with our
efforts… while keeping in mind that we are perhaps paving the way
for broader-based efforts…’. He further stated: ‘I am a believer in
moving beyond cooperative government relationships to true
coordinated action.’ In another example of the US government’s
focus on international tax cooperation efforts, the Government
Accountability Office (GAO) recently told the Senate Finance
Committee: ‘IRS and foreign tax administrators encounter similar
issues even though their tax law provisions may
differ.’ GAO cited examples such as
assisting taxpayers with the preparation and filing of returns,
describing the way that foreign tax administrators deal with issues
similar to those encountered in the US, and suggested the
possibility of adopting tax administration practices used in other
countries. It further commented: ‘Although differences in laws,
culture, or other factors likely would affect the transferability
of foreign tax practices to the US, these practices may provide
useful insights for policyholders and the IRS.’ Any serious
consideration by tax administration officials for such a ‘joint tax
return project’ should first explore suggestions and comments by
respected professional tax organisations such as the Society of
Trust and Estate Practitioners and the American Institute of
Certified Public Accountants.
As indicated in my previous article, the AICPA has developed a
‘one coordinated tax return’ for an estate or trust (Form 1041NR
with related forms and instructions). It is designed and
suitable for an estate or trust with non-resident beneficiaries
(including some in the US), administered in a foreign country or
under a foreign court’s jurisdiction. Such beneficiaries in many
cases lack the filing information (accounting data and/or
applicable tax forms to file in their country), to properly report
their current year distributions from the estate or trust on their
corresponding individual income tax returns. I have held informal
discussions with a tax return software vendor regarding the
development of a ‘commercial product’ for such a tax
return. Their response was
positive, with serious consideration to the development project
commencing with the US Treasury’s approval of the form’s format and
joint project.
Form 1041NR and its related forms incorporates schedules to
accommodate tax treaty provisions, as well as the reporting of
income that might be taxable in a foreign jurisdiction, but not in
the US, for example, regarding a foreign estate or non-grantor
trust, for US tax purposes, capital gains income from US sources
that are not effectively connected with a US trade or business or
from the sale of a US real property interest are not taxable in the
US. It is, however, income
included in ‘distributable net income’ and would be taxable in a
distribution by the entity to most foreign beneficiaries. Form
1041NR and its related attachments, including inter-related foreign
jurisdiction form(s), would enable all beneficiaries to report
their respective taxable income from the entity, as well as the
fiduciary, in their reporting responsibilities. Foreign
jurisdictional tax authorities would have the corresponding tax
information to substantiate the proper reporting by its
residents.
A positive step forward
I demonstrated the benefits of the Form 1041NR Project after IRS
officials asked the AICPA to assist in development of the fiduciary
tax return in 2007. The evidence above,
including supportive comments, corroborates collective approval by
global tax authorities for the project, especially as it is so
close to fruition. It supports tax compliance and consistency for
taxpayers and tax authorities. The implementation of this
tax-return project could gravitate the development of other
coordinated tax-return projects, such as for corporations and
partnerships.