The US Treasury Department and the IRS to propose changes to offshore business taxes and a practice known as “Inversion.” A hearing yesterday brought stiff resistance from representatives in the business community and others seeking to preserve offshore tax advantages. “Inversion” is one of the specific strategies addressed in the proposed legislation. Inversion is the a transaction where a US company merges with an offshore company, and then reorganizes as a foreign corporation in a country that provides an advantageous tax structure. This allows companies to shift taxable income from the US to their offshore entities.
The IRS and the Treasury Department did not provide much comment during the hearing. The proposed changes would also change the nature of some corporate “inter-company debt” in an effort to reclassify this “debt” as “equity.” The present strategy targeted by the federal agencies is known as “earnings stripping”, which is a tax avoidance strategy employed by companies that have successfully completed inversion.
The IRS, the Treasury Department and the Department of Justice have worked in concert to tighten international financial cooperation and controls that bring offshore accounts, assets, transactions and income to light. The past several years have brought significant changes to offshore business taxes as well as changes to the international business and financial markets, primarily as a result of FATCA. More than 100 nations have signed on to FATCA, and thousands of banks, financial institutions, investment houses and sovereign tax authorities are providing information directly to the IRS regarding US taxpayers and their offshore activities.
The Wall Street Journal recently confirmed that the IRS has already begun the process of data-mining to extract information and associate it to specific US social security numbers and taxpayer identification numbers. Once this is completed, the IRS will compare reported figures to the actual returns and FBARs submitted by the US taxpayer. If there is a discrepancy, the US taxpayer should expect an intense audit, where they will face harsh financial penalties. The failure to report accounts, assets and income offshore will result in a penalty of 50% of the highest aggregated balance at any point for each year in question, or $100,000 per incident, whichever is highest.
Offshore penalties have already cost US taxpayers millions, and more than 200 citizens have been jailed in the past two years based upon FBAR violations and tax evasion. The Offshore Voluntary Disclosure Program or OVDP and a streamlined program provide alternatives to steep penalties and the risk of criminal prosecution.
The international tax and business attorneys at Allen Barron are uniquely positioned to advise businesses and individuals regarding changes to offshore business taxes as well as international business and financial transactions. We invite you to contact us for a free consultation at 866-631-3470.
