Mahesh Kumar
[email protected] Brian Rowbotham
[email protected] Peter Trieu
STEP Silicon Valley
Palo Alto, CA
January 22, 2014
Indian – U.S. Tax Planning
Rowbotham & Company 101 2nd Street, Suite 1200
San Francisco, California 94105 USA +1 (415) 433-1177
www.rowbotham.com
Nishith Desai Associates www.nishithdesai.com
Table of Contents
Reporting Non-US Investments 3
Foreign Trust Disclosures 4
Case Study: US Techie Moving Back to India 5
Case Study: Foreign Trust with US Beneficiaries (1) 6
Case Study: Foreign Trust with US Beneficiaries (2) 7
Case Study: FBAR Penalty 8
Expatriation Rules 11
Case Study: Expatriation (1)- US Citizen 12
Case Study: Expatriation (2)- Visa Holder 13
Case Study: Expatriation (3)- Green Card Holder 14
Reporting Non-U.S. Investments
Filing “Activities” include ownership in:
Potential Penalties
IRS Forms
for Non-compliance
(1) (2)(1) Non-U.S. Corporation 5471 $10,000 / per year (2) Non-U.S. Partnership entity 8865 $10,000 / per year
(3) Non-U.S. Trust 3520 25% of distribution
3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value (max $100,000)
a non-U.S. corporation
(5) Specified Foreign 8938 $10,000 / per year
Financial Assets
(6) Foreign Bank & FinCEN 114 50% of highest balance each
Financial Account (formerly TDF 90-22.1) year
(1) Potential criminal prosecution can result for non-reporting.
1. FBARs must be reported by beneficiaries of foreign trust if beneficiary is a
majority current beneficiary. To be a majority current beneficiary, beneficiary
must be entitled to more than 50% of current trust income.
2. Form 8938 must be filed by all beneficiaries of a foreign trust if actual
distributions plus mandatory distributions during the year exceed the
prescribed thresholds (
e.g.
$50k).
3. Form 3520 must be filed only if actual distributions are received. No
reporting is required for simply being in a class of eligible beneficiaries.
4.
4.
A foreign trust is any trust that is not a domestic trust. IRC
A foreign trust is any trust that is not a domestic trust. IRC
7701(a)(31)(B).
7701(a)(31)(B).
•
•
A trust is a domestic trust if
A trust is a domestic trust if
both
both
“
“
court test
court test
”
”
and
and
“
“
control test
control test
”
”
are met.
are met.
IRC 7701(a)(30)(E).
IRC 7701(a)(30)(E).
•
•
Court Test
Court Test
-
-
a court within the U.S. is able to exercise primary
a court within the U.S. is able to exercise primary
supervision
supervision
•
•
Control Test
Control Test
-
-
only U.S. persons have authority to control all
only U.S. persons have authority to control all
substantial trust decisions
substantial trust decisions
Disclosures by US Beneficiaries of Foreign Trusts
Facts:
1. US Citizen 2. Founder stock
3. Company to have IPO Plan:
1. Gift pre-IPO Indian parents
• Gift tax exemption $5,340,000 (2014) 2. Parents acquire foreign company
3. Foreign company establishes foreign grantor trust • Trust benefits parents during life, benefits
client after parents’ death
• California revocable living trust; US trustee • Still foreign trust since revocable by
parents
• Indian foreign exchange rules 4. Trust sales post-IPO stock
• No US tax to parents • No US tax to client
5. Parents file “check-the-box” election
• Distributions by trust treated as gifts
Case Study: US Techie Moving back to India
Indian Parents US Trust Foreign Company -US Stock US Citizen gift US LLC
- Indian trust is revocable during father’s life
- Non US income of trust is not taxable in U.S. during father’s life
- Indian trust becomes irrevocable upon death of father
- Non U.S. trust is treated as a nonresident alien
- Income distribution to U.S. children taxable
- Accumulated income in foreign trust can result in higher U.S. tax
Indian Father
Indian Trust
U.S. Children Indian
Company Shares
ALT (1)- Foreign Trust
ALT (2)- U.S. Trust
Foreign Father Foreign Father US Home Foreign Trust U.S. Trust
- Foreign trust reporting (Form 3520) by U.S. beneficiaries required every year
- Foreign trust is taxpayer treated as a nonresident individual
- Accumulated income in trust taxed at ordinary rates, and charged interest
- Foreign trust reporting (Form 3520) by U.S. beneficiaries required in initial year only - U.S. Trust is taxpayer
- Accumulated income rules do not apply
US Home
Case Study: Foreign Trusts with U.S. Beneficiaries (2)
ALT (3)- Foreign Property
Foreign Father
Foreign Trust
Foreign Home
- Foreign trust reporting (Form 3520) by U.S.
beneficiaries required every year
- Foreign trust is taxpayer treated as a nonresident individual
- Accumulated income in trust taxed at
ordinary rates, and charged interest
Decision to make:
(a) File back years FBARs; or
(b) Submit to OVDI program
- 8 years returns audited
- large penalties for non-reporting of foreign accounts
- eliminates risk of potential penalties, but substitutes
certain penalty (25% of highest account balance)
Case Study: FBAR Penalty!
Action:
1. Withdraw from OVDI
2. Submit to audit in normal course
•
Matter submitted to centralized office for withdrawals
Result:
1. FBAR penalties reduced to $40k ($10k for 2 years per
taxpayer)
2. Penalized years attributed to reliance upon CPA without
providing full information
3. Remaining years abated based on reasonable cause
•
Foreign accounts inherited, not established by taxpayer
•
Accounts designated as “Not Ordinarily Resident” (NRO)
•
Professional advice obtained in India
•
Professional advice obtained in US
•
Minor had insufficient mental capacity
Covered Expatriate
- U.S. Citizen
- Long-term Resident
Thresholds
- Assets: $2 million plus
- Average income tax
Past 5 years - $155,000
Required filing: Form 8854 (certification of past 5 years)
Expatriation Rule
Father: Indian citizen and resident Daughter: U.S. citizen
Problems
- Indian gifting – No gift or estate tax
- Prior gifts to daughter in U.S.: $20mm in Indian listed shares - Age 24, U.S. University
- Giving up U.S. citizenship (by appointment) - Getting Indian citizenship (2 years)
- Expatriation in 2013:
- Filing Form 8938 – Foreign Financial Assets – High value in 2012 return
- Exit tax = $4.6 mm ($20mm - $650,000 exclusion) x 23.8% (20% + 3.8%) - Valuation strategies with family limited partnership
Choosing Between U.S. Citizenship and $20 Million!
Facts:
1. E2 Visa holder
2. Physically present in the US year round 3. Founder stock in US tech company 4. Company going IPO
5. Plan to return to India Plan:
1. Avoid substantial presence in US
2. Establish closer connection to Singapore (no treaty with US) • Spend less than 183 days in current year
• Treated as nonresident for full year
• Still treated as resident for CA purposes until departure; consider using trust
• Returning within 3 years results in tax as US resident on US sourced income • Spend more than 183 days in current year
• Treated as resident until last day of physical presence if • New tax home established; and
• Not US resident in following year
• Returning within 3 years results in taxation as US resident on US sourced income
Facts:
1. Green card holder for 10 plus years 2. Assets in excess of $2 million
3. Plan to relinquish green card Plan:
1. Reside India for past 8 years
2. File nonresident treaty based returns and foreign disclosure filings 3. Relinquish green card in year 9
• No longer long-term green card holder • No Form 8854 filing until year 9
• Notice 2009-85
BRIAN ROWBOTHAM, CPA: ([email protected])
Mr. Brian Rowbotham, Managing Partner at Rowbotham & Company in San Francisco, advises executives and high net worth families on global tax planning. With over 35 years experience, he provides consulting services to real estate and investment funds, U.S. and foreign technology companies. Mr. Rowbotham is a frequent speaker to international tax associations and is a guest lecturer at the Haas Business School at the University of California, Berkeley. He was recently featured on the cover of the California CPA magazine for tax and business planning for U.S. companies expanding into Asia.
Mr. Rowbotham has a Bachelor’s degree and MBA (with Honors) from the University of California, Berkeley, and is a Certified Public Accountant in California.
Biography
Rowbotham & Company is a full service Certified Public Accounting firm with extensive real estate experience. We provides audit, accounting, and domestic and international tax services to individuals and businesses, both public and private. The firm serves its global clientele from its offices in San Francisco and Silicon Valley. The firm is a member of Geneva Group International, a worldwide association of independent professional firms. Our practice includes extensive domestic and international income, gift, and estate planning services for business executives, entrepreneurs and investors from Asia including China, Hong Kong and Singapore. The firm provides consulting to EB-5 investors including: pre-arrival income and estate planning, compliance services for US returns, and representation in tax audits.
Peter Trieu, Esq., LL.M: ([email protected])
Peter Trieuis a Partner at Rowbotham & Company. His practice focuses on advising clients regarding domestic and international tax planning and compliance. He also assists clients with their estate plans. His clients include
entrepreneurs, multi-national families, high net-worth individuals and businesses. Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney.
Mr. Trieu is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in
Business-Economics with a minor in Accounting from University of California, Los Angeles. He graduated cum laudefrom
University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University.
Mahesh Kumar: ([email protected])
Mahesh Kumar is a partner at Nishith Desai Associates. Mr. Kumar leads the international tax and estate planning practice in the Singapore office of Nishith Desai Associates. He is an attorney and advises high net-worth client in complex estate planning matters and structuring of cross-border wealth. He advises entrepreneurs on globalization structures and strategies. He also represents clients in complex international tax litigation in India.
Biography
Nishith Desai Associates is a research-based Indian law firm with offices in Mumbai, Silicon Valley, Bangalore, Singapore, Mumbai BKC, Delhi and Munich that aims at providing strategic, legal and tax services across various sectors; some of which are IP, pharma and life-sciences, corporate, technology and media. The firm has had many accomplishments and won several accolades internationally as well as domestically for being an industry leader; and continues to be ranked consistently as one of the top 5 in India. Their client list includes many of the Fortune 500 and other successful Indian businesses.
