Frequently I'll get asked at a conference or seminar about the issue of paying or not paying current income taxation on international earnings. Many people believe that if they generate money outside the US and do not repatriate that money, they owe no tax. But the issue is significantly more nuance and complicated and for most people investing offshore, this belief is just plain wrong.
1- April 15, 2012. Individual reporting requirements of offshore assets begin subject to new IRS form 8938 on foreign financial assets held as of December 31, 2011. (Even though this is in the past, this is where I would start).
2- January 1, 2013. Original implementation date for foreign banks to report to IRS on their US customers. This deadline has been extended.
3- June 30, 2013. Deadline for foreign financial institutions (FFIs) to enter into agreement with IRS that they intend to comply with FATCA and begin reporting effective January 1, 2014.
For people considering moving assets offshore, the new withholding tax under FATCA (Foreign Account Tax Compliance Act) which was scheduled to go into effect January 1, 2013 was a major planning milestone. That deadline, however has now been pushed back to January 1, 2014 to give foreign banks more time to comply with their new disclosure responsibilities.
Another, perhaps even more insidious deadline, however, is the pending expiration of the Bush tax cut "extensions". The Bush tax cuts were initially scheduled to expire December 31, 2010. In the last few days before the end of 2010, the tax cuts were extended for two years.
One of the most important reasons that people decide to protect assets abroad is to find strong jurisdictions that resist or eliminate many of the traditional threats against wealth. Yet compliance with US laws and regulations has never been more important than today. That begs the question: is it possible to do both? The simple answer is "yes".
Regulatory compliance for foreign based structures and assets held abroad has increased over the past years. Just some of the forms that need to be filed include:
A) The Report for holding a foreign bank account with more than $10,000 commonly referred to as the FBAR. This is an annual form required to be
filed with the US Treasury.
Frequently at seminars and in consultations with clients, people will ask me why they should consider international asset protection and estate planning. Won’t it cost a lot? Won’t I become the subject of IRS scrutiny? Can’t I accomplish all the same things with domestic planning? This is some of the common refrain.
To me, international planning is all about addressing jurisdictional systemic risk. What do I mean by that? Well, most people would agree that we live in a country where litigation has become the national pastime. If someone is not happy with someone else, whether a customer, business partner, patient or spouse, they turn to litigation as the answer.
A few weeks ago the United States Senate passed a piece of legislation called the “Moving Ahead for Progress in the 21st Century Act”, it is essentially a transportation bill focused on roads and bridges. Title III of the act is a revenue provision concerning gas guzzling, cars leaking underground storage tanks, import duties and a number of other fees, taxes and other revenue enhancements.
So often a client walks through my door to discuss trusts, corporations, family limited partnerships and/or other structures designed to protect their wealth. Structures are very important, but structures alone cannot do the job in a one-size-fits-all approach to asset protection. While an international trust may be just what the doctor ordered for protecting a surgeon's life savings, the same structure will do very little to help a commercial real estate developer operating in litigious North America.
The structure is only part of the equation, while the investment class is the other part. You need to put both parts of the puzzle together in a coherent fashion to truly protect and grow your wealth.
I spoke at a conference in Florida recently and during the Question & Answer session after my speech, one of the attendees asked me “what was the most erroneous assumption made by folks with regard to international business and investment”?
“The timing of taxation on global profits”, was my immediate response. You see, many people operate under a false assumption that if they make money abroad, they only pay taxes when they bring their money back into the United States. And while that may be the case in certain limited circumstances (which we will discuss below), the assumption as a starting point for global business and investment is false.
In the waning days of 2010 President Obama and the United States Congress agreed to a variety of compromise tax measures designed to “extend” the Bush Era tax cuts. Tax rates were largely maintained at the current levels through December 31, 2012 at which time they are once again set to revert to their old (higher) levels.
Editor's Note: Last month, international business attorney Joel Nagel listed the first 10 of 20 questions he is frequently asked about international investments by IRAs. This month, he completes that list.
