The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Sending U.S. Employees

Overseas: Tax and Immigration

Update Dale Mason, CPA

International Tax Director

The Wolf Group, PC

Eliot Norman Partner-Immigration Practice GroupWilliams MullenWashington DC and Richmond, Va. enorman@williamsmullen.com804.420.6482

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

© 2013 The Wolf Group

Agenda

U.S. Expatriate Taxation – The Basics

U.S. Immigration for Expatriates -- The Basics

Impact of Recent Tax Legislation

Impact of Recent Immigration Developments:

Foreign Financial Reporting

Foreign Account Tax Compliance Act and what it means for U.S. expatriates

Final Thoughts and Questions

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

U.S. Expatriate Taxation

The Basics

Tax Equalization

Assignee responsible for “stay-at-home” tax• Hypothetical tax withheld from salary and personal

income

Company responsible for home and host country income tax on worldwide income

Policy intent is assignee “no better or worse off” from a tax standpoint

Income Subject to Tax

Equalization

Company Income – Wages, allowances, etc.

Personal Income – Investment income etc.

Hypothetical tax can include:

• Federal income tax

• State income tax

• Social Security tax

U.S. Citizens and Green Card

Holders – U.S. Income Taxation

Taxed on worldwide income

Foreign financial information reporting

Elimination of double tax provisions:

• Foreign earned income exclusion

• Foreign tax credits (even for persons working in non-treaty countries)

Congress frequently considers elimination of the foreign earned income exclusion

Income Tax Treaties

U.S. citizens

• Always subject to worldwide taxation

• Savings clause - preserves the right of the U.S. government to tax its citizens/residents as if no tax treaty existed

U.S. lawful permanent residents

• May be treated as U.S. nonresidents

• Treaty tie-breaker provisions

• Taking a treaty tie-breaker position to treat GCH as nonresident may trigger U.S. exit tax

• Immigration issues

Foreign Earned Income

Exclusions (FEIE)

May exclude from income up to $97,600 in 2013 ($99,200 in 2014) plus the foreign housing exclusion

Requirements

Tax home in a foreign country

Foreign earned income

Bona Fide Residence Test or Physical Presence Test

FEIE – Foreign Earned Income

Wages

Commissions

Bonuses

Vacation pay

Sick leave

Severance

Allowances

FEIE - Foreign Tax Home

Tax home must be in a foreign country

Tax home located at regular/principal place of business

Permanently or indefinitely engaged to work

If expectation is the assignment to last more than 1 year then it is indefinite and qualifies

Tax home in a foreign country is not restricted by:

• Temporary presence in U.S.

• Maintenance of home in U.S., even if used by spouse and dependents

FEIE- Bona Fide Residence Test

U.S. Citizen & Green Card Holders (only under nondiscrimination article of treaty but be careful!)

Resident in foreign country for entire calendar year

Cannot claim to be a nonresident of the foreign country

Subjective test based on facts and circumstances

Individual’s foreign earned income must be subject to that tax – does not mean that foreign tax must be paid

FEIE - Bona Fide Residence Test

Green Card Holders

Green Card Holders – Nondiscrimination Article

“Nationals of a Contracting State shall not besubjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.”

• Rev. Rul. 91-58

Physical Presence Test

US citizen or resident alien of the U.S.

Tax home in foreign country

Physically present for at least 330 full days during 12 consecutive months

Housing Exclusion

Housing exclusion applies to amounts considered paid from employer-provided amounts in excess of government-set based housing amount

Housing exclusion limited• Excess of housing costs over a base amount which is

16% of the FEIE.• 2013 base amount is $15,616 • Upper limit is 30% of foreign earned income

exclusion. • 2013 upper limit is $29,280• High cost locations upper limit is increased

FEIE Summary

Bona fide residence test

• Tax home in foreign country

• Bona fide foreign residence

• Entire taxable year

Physical presence test

• Tax home in a foreign country

• 330 days out of 12 consecutive months

Housing exclusion

Foreign Tax Credits (FTC)

U.S. citizens and residents subject to US tax on worldwide income

FTC eliminates double taxation by allowing a credit against U.S. tax for foreign tax paid or accrued

FTC limited to lesser of foreign tax or U.S. tax on foreign income

Foreign Tax Credits

Most states do not recognize foreign tax credits, e.g., California, Virginia, Maryland etc. does not recognize

• Double taxation may occur

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

U.S. Immigration Basics: Your

Company and its Expatriates

U.S. Immigration Basics: Green

Card Holders Working Overseas

Who is an expatriate?

Green Card Holders: a Definition

Their Value to your Company

The Doctrine of Abandonment

Consequences of Abandonment

Tips to avoid Abandonment• Myths and Reality

Practical Solutions

One size does not fit all

U.S. Immigration Basics: Reentry

or Travel Permits

Filing of I-131

Must be in the USA at the time of filing

Biometrics and your expatriate’s travel schedule

Effect: not a panacea or absolute guarantee

Subsequent Travel Permits: up to 6 years total in 2 year increments

Use as a planning tool and success

rate

U.S. Immigration Basics:

Nonimmigrants

Sending H-1B and other nonimmigrant foreign

employees overseas

Some definitions

Basic Rules

Advantages/Disadvantages

Practical Problems

Practical Solutions • The L-1B or H-1B who wants a Green Card

• The H-1B who is “running out of time”

Tax and Compensation Issues (Dale Mason)

U.S. Immigration Basics: Obtaining U.S.

Citizenship

The Path to Citizenship: “Naturalization”• Prerequisite: Must be a Green Card Holder First • Basic Procedures to be Naturalized

Some Definitions and Concepts:• The waiting game: 3 and 5 years • physical presence test 50% of the 3 or 5 years • continuous residence tests

The Technicalities • definition of continiously reside• 90 day test: reside in state where application if filed:• Must “continuously reside” in USA from date of natz application until

obtain citizenship

Dangers of “Disruption of Residency” when Green Card

employees are sent to overseas assignments

U.S. Immigration Basics; “preserving

continuous residence” for naturalization

Practical Solutions: Preserving Residency forExpatriates on the Path to U.S. Citizenship

The N-470: “Don’t leave home without fiiling it” • basic eligilibty: 1 year continuous uninterrupted physical presence

after obtaining permanent residence and BEFORE being sent overseas

• N-470 preserves “continous residency” while working overseas for “U.S. company”. How defined?

Practical Examples: How it works Additional exemption for foreign Green Card

spouse who accompanies U.S. citizen sent overseas to work for your company

Final Pointers:

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Impact of Recent U.S. Tax

Legislation

0.9% Additional Medicare Tax

Employee share of Medicare tax on compensation exceeding $250,000 (MFJ), $200,000 (single)

Employer required to withhold the additional 0.9% on all wages exceeding $200,000, despite filing status

Individuals liable for new Medicare Tax - Any shortfall or excess of additional Medicare tax can be paid/refunded through the tax return

Additional Medicare Tax

© 2013 The Wolf Group

Impact on Assignment Costs

Additional tax plus gross-up costs will be incurred if assignees are subject to the 0.9% due to assignment allowances

Host country may also tax the employer reimbursement

Totalization Agreements – Additional Medicare Tax should be covered under the agreements

Consider implication on hypothetical Medicare tax

Tax is 3.8% of the lesser of:

• Net Investment Income OR

• The excess of Modified Adjusted Gross Income over:

o$250,000 (MFJ)

o$125,000 (MFS)

o$200,000 (Single & Other taxpayers)

Modified by adding back the foreign earned income exclusion

Net Investment Income Tax

Unearned Investment Income:

• Capital Gains

• Dividends Income

• Interest Income

• Net Rental Income

• Foreign non-qualified pensions

Unearned Income does not include:

• Qualified retirement plan income

• Sale of principal residence exclusion

Net Investment Income Tax

Impact on Assignment Costs

Additional tax plus gross-up costs will be incurred by employer if assignees are subject to the 3.8% tax because of assignment allowances

For employees working outside the U.S., host country tax costs may increase

2013 & 2014 Top Tax Rates

Top 39.6% rate above the following thresholds:

• $450,000 joint filers & surviving spouses

• $425,000 HOH

• $400,000 Single

• $225,000 MFS

Capital Gains/ Dividends

LT Capital gains/Qualified Dividends now 15% or 20% for taxpayers over the following ordinary income thresholds:

• $450,000 joint filers & surviving spouses

• $425,000 HOH

• $400,000 Single

• $225,000 MFS

Phase-Out of Personal

Exemption

Phase-out of personal exemptions (2013 = $3,900)

Phase-out begins at the following AGI thresholds:

• $300,000 MFJ

• $275,000 HOH

• $250,000 Single

• $150,000 MFS

Reduced by 2% by each $2,500 (or portion thereof) over the threshold amount.

Phase-Out of Itemized

Deductions

Itemized deductions are reduced by 3% of the amount AGI is over threshold amounts (not to exceed 80% of deductions).

Phase-out begins at the following AGI thresholds:

• $300,000 MFJ

• $275,000 HOH

• $250,000 Single

• $150,000 MFS

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Impact of Recent U.S.

Immigration Developments

2014: Immigration Realities

Homeland Security and U.S. Customs and Border Protection

• Inspections and Secondary Inspections

• Sequestration and Morale

Preparing your Foreign Expatriates for dealing with the

new realities in 2014

Spouses and children: issues: “benign neglect” or part of

the planning process, dangers s of 3 year and 10 year bars,

dual career families, “one size does not fit all”

Final Thoughts

37

Attention!

Homeland Security remains in charge of

immigration to the USA

WHAT’s NEW?

38

Customer Service

Conclusion: New Reality?

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Foreign Financial Reporting

Foreign Bank Account Reporting

“FBAR” – FinCen Form 114

U.S. persons oU.S. Citizens

oGreen Card Holders

oOther income tax residents

Financial interest in or Signature authority over:

• Foreign financial accounts if in the aggregate the accounts equal or exceed $10,000 at any point during the year

What Foreign Financial

Accounts are Reportable?

Bank & saving deposit accounts

Securities accounts

Life insurance policies with a cash value

Mutual funds

Assets not held in an account are not reportable

FBAR Filing Requirements

Filing deadline is June 30 of the following year

• Must be received by June 30

• No extensions

• E-Filing now mandatory

Not filed with tax return

• Informational return – no additional income tax liability

• Form 1040 Sch. B question

FBAR Penalties

Non-willful failure penalty

• $10,000

Willful failure penalty

• Greater of $100,000 or 50% of account balance

Criminal penalties

6 year statute of limitations

IRS Offshore Voluntary

Disclosure Program

FBAR and certain international tax reporting

Pay all taxes and interest for the past 8 years

Waiver of penalties for informational forms

Penalty: 27.5% of the highest account balance

Reduced or no penalty in certain situations

Currently no deadline; subject to change

© 2013 The Wolf Group

Specified Foreign Financial

Assets Report

Form 8938

Interest in “Specified Foreign Financial Assets” with an aggregate value exceeding $50,000

Information statement attached to the individual's U.S. income tax return; no additional tax liability

© 2013 The Wolf Group

Foreign Financial Asset

Report Cont. “Specified foreign financial asset”

• Foreign financial account • Stock or security issued by a foreign person• Financial instrument/contract with a foreign issuer • Any interest in a foreign entity• Includes foreign pension plans

Information statement• Maximum value of assets, account numbers, names and

addresses of foreign financial institutions, etc.

© 2013 The Wolf Group

Form 8938 Filing Thresholds

Year-End Aggregate Value of All Specified Foreign Financial Assets Exceeds:

Highest Annual Balance Exceeds:

Single, living in the U.S. $50,000 $75,000

Single, living outside the U.S.

$200,000 $300,000

MFS, living in the U.S. $50,000 $75,000

MFS, living outside the U.S. $200,000 $300,000

MFJ, living in the U.S. $100,000 $150,000

MFJ, living outside the U.S. $400,000 $600,000

© 2013 The Wolf Group

Foreign Financial Asset Report

Penalties

• Minimum penalty $10,000

• Maximum penalty $50,000

• Presumption is that the value of the account is in excess of $50,000

• Extends Form 1040 statute of limitations

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

The Foreign Account Tax

Compliance Act – “FATCA”

FATCA Overview

Designed to force U.S. citizens and residents to report all foreign income

FATCA provisions adds an entirely new Chapter 4 to the Internal Revenue Code

500 pages of Final Regulations

IRS Agreement or 30%

IRS /Foreign Governmental Agreement :

• Required of all worldwide foreign financial institutions (“FFI”) and certain non-financial institutions who receive any U.S. source payments

OTHERWISE:

• 30% withholding tax applied to any “WithholdablePayment”

© 2013 The Wolf Group

Practical Implications

Many foreign financial institutions have and will decide to terminate U.S. clients’ accounts

Self-reporting will be cross checked with institutional (foreign government) reporting. Discrepancies will be easy to identify

Opening foreign financial accounts may be difficult in some jurisdictions

© 2013 The Wolf Group

FINAL THOUGHTS AND QUESTIONS

From Eliot Norman

enorman@williamsmullen.com

www.williamsmullen.com

804-420-6213

From Dale Mason

dmason@thewolfgroup.com

(703) 502-9500

Your Questions?

Contact Us

Dale Mason, CPA

International Tax Director

The Wolf Group PC

dmason@thewolfgroup.com

Tel: (703) 502-95004401 Fair Lakes Court, Suite 310, Fairfax, VA 22033

1875 I Street, NW (International Square), Suite 500, Washington, DC 20006

www.thewolfgroup.com

© 2013 The Wolf Group

Biographical information

Eliot Norman

Partner- International

Williams Mullen

Washington, D.C.

T. 001.804.420.6213

enorman@williamsmullen.com

www.williamsmullen.com

Eliot Norman has worked for many years advising U.S. and Foreign Multinationals deal effectively with their global mobility issues.

Mr. Norman is an International Practice Partner with Williams Mullen, a 250 lawyer national and international commercial law firm, with offices in Washington, D.C., Virginia and North Carolina. Eliot graduated from Yale College and Boston College Law School and served with the U.S. Department of Justice before entering private practice. He is listed in Best Lawyers in America for Immigration. He speaks French fluently and obtained a Certificate from the Institut d’etudes politiques, Paris, France. Mr. Norman regularly travels to Europe to meet with clients concerning investment projects and operations in the United States and to speak to industry trade groups and chambers of commerce.