Tax Issues for Immigration Attorneys

May 31, 2017

Satoko Valdes

Stephanie Hathaway

Brian Steuber

The material appearing in this presentation is for informationalpurposes only and should not be construed as advice of anykind, including, without limitation, legal, accounting orinvestment advice. This information is not intended to create,and receipt does not constitute, a legal relationship, including,but not limited to, an accountant-client relationship. Althoughthis information may have been prepared by professionals, itshould not be used as a substitute for professional services. Iflegal, accounting, investment or other professional advice isrequired, the services of a professional should be sought.

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Moss Adams LLP

• Moss Adams provides accounting, tax, and consulting services to public and private middle-market enterprises in many different industries.

• Moss Adams is also a founding member of Praxity, AISBL, a global alliance of independent accounting firms providing clients with local expertise in the major markets of North America, South America, Europe, and Asia.

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Today’s Agenda

Entry planning• U.S. estate and gift tax

• Foreign disclosure and anti-deferral rules

• Employee transfers

U.S. income tax• Taxation of U.S. and foreign persons

• Tax residency

• Entry year tax considerations

• Tax equalization and other employee issues

Departure planning• Departure year tax issues

• Expatriation regime for LTPRs

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Planning for a Change of Tax Residency

• U.S. Tax Residency Status ≠ U.S. Immigration Status

• Advantages of pre-move planning• Prepare for complexity of U.S. tax laws

• Mitigate U.S. transfer tax exposure

• Select advantageous U.S. tax residency start or end date

• Reduce impact of U.S. foreign disclosure and anti-deferral rules

• Asset tax basis adjustment transactions/elections

• Negotiate tax efficient U.S. compensation arrangements

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U.S. Estate and Gift Taxation

U.S. Persons

• Worldwide assets

Foreign Persons

• “U.S. situs” assets• U.S. Real property

• U.S. tangible personal property

• U.S. corporate stocks and receivables from U.S. debtors

• Intangibles not subject to gift tax

• Some U.S. assets held in flow-through entities

• Gift tax exclusion

• Estate tax exemption

• Impact of treaties6

U.S. Person (for Estate/Gift Tax purposes)U.S. Persons

• U.S. Citizens

• Non-Citizens with U.S. “Domicile”

Domicile

• Facts and circumstances

• Green card

• An individual has only one domicile at a time

• Must meet three tests to acquire a new domicile:• Physical presence

• Intent

• Legal capacity

• Continuity of domicile7

Pre-move Planning – estate/gift tax

Evaluate U.S. transfer tax exposure and consider strategies:

• Gifting of foreign property

• Gifting between spouses

• Re-titling of marital assets

• Gifts to non-grantor trusts

• Caution - Gain recognition rules of IRC §679 and §684

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Foreign Disclosure Requirements

In general:

• Comprehensive, detailed, complex

• Large late or non-filer penalties, regardless of tax

liability

• Incomplete return is considered “not filed”

• Required for:

• U.S. citizens

• U.S. residents under domestic law

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Foreign Disclosure Requirements (cont’d)

What is required to be disclosed?

• U.S. person’s transactions with and ownership in foreign entities

and foreign financial accounts and other arrangements

• Foreign gifts/bequests

• Contracts/financial agreements with foreign counterparty

Common Reporting Standards

• Apply in most countries other than U.S.

• Require more transparency and disclosure of financial arrangements than FATCA

• U.S. is becoming a popular jurisdiction for asset protection and privacy for HNW individuals

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Foreign Disclosure Requirements (cont’d)

Anti-Deferral Regimes

• Accelerates income recognition for U.S. persons who hold assets in foreign entities

• Foreign investment structures may produce unfavorable U.S. tax results

• Income is reportable even if no distributions have been received

• Examples:

• PFICs

• CFCs

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Foreign Disclosure Requirements (cont’d)

Foreign assets that may result in accelerated U.S. taxation• Pensions/Retirement and Deferred Compensation

Plans

• Trusts

• CFCs with passive activity or investments in U.S. assets

• Foreign mutual funds

• Indirectly owned assets

• Beneficial owner is other than legal owner

• Entities classified differently under U.S. rules

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Planning Before a Move to the U.S.

• Consolidation

• Reorganization

• Domestication

• Disposal

• Treaty basis adjustment opportunities

• Actual transactions to re-set basis

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Employee Transfers

• Temporary relocation from home country to U.S.

• Retains ties to home country employer

• Generally 5 years or less

• Often retains home country residence and investments

• Permanent transfer to U.S.

• Employee severs ties with home country company and becomes employee of U.S. company

• Employee Initiated

• Position could be filled by local hire

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Temporary Relocations (Considerations)

• Assignment Compensation Policy• Ad-hoc• Equitable, Employee Level, Cafeteria Style

• Tax Reimbursements Policy (i.e. Equalization, Protection, other)

• Compensation & Benefit Tax Structuring• Assignment Allowances• Equity Compensation• International Benefits/Healthcare

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Temporary Relocations (Considerations)

• Tax Treaty/Totalization Agreements/Double Taxation

• Cost of Assignment Projections/Accruals• Permanent Establishment (PE)

Analysis/Exposure• Assignment Consultations• Home/Host Payroll Reporting & Withholding

Requirements• Trailing Liabilities• Company provided tax services to ensure global

compliance

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Permanent Transfers (Considerations)

• Employee severs ties with home country company and becomes employee of local host country company

• Local compensation & benefits apply

• Could vary from home country significantly

• Loss of continuity/benefit in its entirety

• Potential double taxation• Trailing liabilities

• Equity Compensation

• Differing ‘taxation triggers’, sourcing rules

• Deemed Disposition/Exit Tax

• Ongoing home country payroll reporting/withholding requirements

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Income Taxation of U.S. Persons vs Foreign Persons

U.S. Persons

• Taxable on Worldwide Income

• Subject to Foreign Disclosure Rules

Foreign Persons

• Taxable on U.S. Source Income

• Not Subject to Foreign Disclosure Rules

• Exception – Individuals who claim non-residency under an income tax treaty

Who is a U.S. Person Under the IRC?

U.S. Person for federal income tax purposes

• U.S. citizens – Always

• U.S. green card holders

• Individuals who spend enough time in the U.S. to meet the “substantial presence test”

• Individuals who elect to be treated as full-year U.S. residents

• NRA spouse of U.S. citizen or resident - §6013(g)

• One or neither spouse is U.S. person at beginning of year and both spouses are U.S. persons at end of year - §6013(h)

Substantial Presence Test

• Count days of presence in U.S. for each of 3 years, ending with the tax year in question

• Mathematical Formula…

• (# of U.S. days in 2nd prior yr/6) + (# of U.S. days in 1st prior yr/3) + (# of U.S. days in tax yr) = Total• If Total <183 Non-resident

• If Total >182 and # of U.S. days in tax yr <183 U.S. Resident unless claiming Closer Connection to Another Country (file Form 8840 with Form 1040NR)

• If # of U.S. days in tax yr > 182 U.S. Resident unless claiming Non-Residency under a Tax Treaty (file Form 8833 with Form 1040NR)

Dual-Status Tax Years

• Year when individual’s U.S. status changes

• Foreign person becomes U.S. person (Form 1040 with Form 1040NR statement)

• U.S. person becomes foreign person (Form 1040NR with Form 1040 statement)

• Must file separately (no joint filings)

• Report worldwide income for period of U.S. residency

• Report only U.S. income for period of non-residency

• Must itemize (no standard deduction)

First Year Considerations

• First Year Choice (elect to be treated as part-year resident) – IRC §7701(b)

• Not a resident in the current year

• Will satisfy Substantial Presence Test in subsequent year

• Present in the U.S. for at least 31 days in current year

• Satisfies a 75% continuous presence test

• Present in the U.S. for 75% of the days during the period beginning with the first day of such 31 day period and ending with the last day of the election year

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First Year Considerations (cont’d)

• Closer Connection Exception• Present in the U.S. less than 183 days (by Substantial Presence Test)

• Maintained tax home in a foreign country

• Had closer connection to a foreign country than to the U.S.

• Effect of Tax Treaties – Residency Tie-Breaker Rules• For taxpayer who is a resident of two countries under domestic

laws of each country

• May allow more options for U.S. residency start date

• Dual Status Taxpayers\U.S. residents

• Resident of a foreign country under a tax treaty

• Nonresident in the U.S.

Preparing to Depart from the U.S. Tax System• U.S. regular compensation paid after ceasing to be a U.S.

tax resident

• U.S. deferred compensation and U.S. retirement benefits paid after departure• Form W-8BEN

• Departure Year return• Usually dual status

• Last day of U.S. tax residency

• Closer Connection statement to elect U.S. residency end date before 12/31

• Form 8854, if required

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Expatriation

Who is subject to reporting on Form 8854 (Initial and Annual Expatriation Statement)?

• Individuals who surrender U.S. citizenship

• Long-term permanent residents (“LPRs”) who terminate green card status

• An LPR is an individual who has had a green card for some portion of at least 8 calendar years during the past 15 calendar years

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Form 8854

• File timely with individual income tax return for departure year

• U.S. tax compliance certification for prior 5 years

• U.S. income tax liabilities for prior 5 years

• Net worth

• Asset valuation

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To avoid “Covered Expatriate” status:

An individual must meet all three of these tests:

1. Average income tax for the five years prior to expatriation was $161K or less (for 2016 expatriations)

2. Net worth < $2M

3. Form 8854 was timely filed with certification of prior 5 years’ U.S. tax compliance

Note: Dual-citizens and certain minors have different exemption criteria

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Covered Expatriates are…

Subject to the U.S. Expatriation Tax Regime:

• Determine FMV and tax bases of worldwide assets

• Calculate gain on deemed disposal

• Reduce net gain with applicable exclusion amount ($693K for 2016)

• Subject remaining net gain to income tax

• Applicable exclusion may not be used to offset gain on certain types of assets

• Tax deferral available with security

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Planning for the Expatriation Tax

• Start as early as possible

• Determine U.S. tax basis and FMV for worldwide balance sheet

• Categorize appreciated assets for eligibility for gain exclusion

• Evaluate retirement assets and non-grantor trusts and determine tax exposure and options for mitigation

• Consider:• Gifting of appreciated assets

• Minimize post-expatriation gifting by covered expatriates to U.S. persons

• Liquidation of appreciated assets

• Restructuring for new residence country

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Summary

• Clients need to prepare for the U.S. tax system

• Many strategies for reducing U.S. tax issues

• Mitigation of U.S. tax issues may require months or years

• Seek U.S. tax advice as early as possible before a move

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Thank you!

Satoko ValdesSENIOR MANAGER

206-302-6966

satoko.valdes@mossadams.com

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Stephanie Hathaway, CPA, MS, MPAPARTNER

360-685-2281

stephanie.hathaway@mossadams.com

Brian Steuber, CPAPARTNER

408-558-3233

brian.steuber@mossadams.com