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CREDITABILITY OF SWISS FORFAIT TAX FOR US FOREIGN TAX CREDIT PURPOSES

CREDITABILITY OF SWISS FORFAIT TAX FOR US FOREIGN TAX CREDIT PURPOSES

The Swiss Forfait Tax Under the US Foreign Tax Credit Rules

As a US tax accounting firm in Switzerland, we are often asked whether tax paid to Switzerland under a “forfait” or “pauschal” ruling (“forfait tax”) is creditable against the US income tax under the US foreign tax credit provisions. The US foreign tax credit is a dollar-for-dollar credit with respect to foreign taxes paid and is intended to alleviate the burden of simultaneous taxation by two countries on the same income.

This is not a frequent occurence in any event as there are relatively few US persons residing in Switzerland, and even less US persons who are on this special tax regime. However, we have been asked this question frequently so we thought it would be helpful to those rare birds to which this approach applies.

I. SWISS FORFAIT TAXATION

Switzerland imposes personal income tax on persons who are tax resident in Switzerland. But by application, an individual may be permitted to be taxed on a more favorable basis rather than by an assessment of his or her actual income. The general basis on which the tax is imposed is a multiple of the annual rental income value of the individual’s residence in Switzerland, the multiple usually being five. This amount is then subjected to normal Swiss personal income tax rates, as if it were the individual’s income. This is the “forfait” tax. Foreign entertainers, sportsmen, and other wealthy individuals have long enjoyed the possibility of migration to Switzerland without unduly burdensome taxation by means of the forfait regime.

An individual’s right to forfait taxation is only granted by a ruling. Some Swiss cantons, such as Zurich, do not grant the forfait tax arrangement. For the ruling to remain valid, the individual cannot work or pursue gainful economic activity (e.g., a profession) within Switzerland, although he or she may do so elsewhere.

In addition, the amount of the tax due under the forfait ruling must not be less than the individual’s normal Swiss income tax would be with respect to income from Swiss sources (e.g., dividends, interest paid by Swiss companies or banks, income from Swiss real estate) and income from non-Swiss sources on which foreign tax is reduced or eliminated by a tax treaty. In this latter situation, the forfait holder does not lose his forfait ruling, but must pay the higher of the two taxes.

II. ANALYSIS

Under the 901 Credit rules, an individual is allowed to offset, or credit, against his or her US federal income tax liability the amount of “any income, war profits, and excess profits taxes” he or she pays to another country, subject to limitations not relevant to this analysis. Under the 903 Credit rules, the term “income, war profits, and excess profits taxes” includes a tax paid “in lieu of” a tax on income, war profits, or excess profits otherwise generally imposed by a foreign country. So, if a foreign income tax qualifies as a 903 Credit an individual is also allowed to offset the 903 Credit against his or her US federal income tax liability.

The question we often receive is whether the forfait tax qualifies as either an “income tax” under the 901 Credit rules or an “in lieu of” tax under the 903 Credit rules.

A. The Forfait Tax Is Not a 901 Credit

Whether a foreign tax qualifies as an “income tax” within the meaning of the 901 Credit rules depends primarily on whether the tax constitutes an income tax in the US federal income tax sense. The key requirement for so qualifying is that the foreign tax must fall on net income/gain. Generally, a foreign tax will satisfy this requirement if it is levied on an amount computed in such a manner that it is very unlikely that the taxpayer will have to pay the tax in the absence of net income/gain.

Without going into detail, we have previously concluded that the forfait tax does not qualify under the 901 Credit rules, and thus is not a tax creditable under these rules. A recent liberalization trend regarding foreign tax credits has developed under court cases and IRS guidance in the past few years, which may undercut the strength of that conclusion, yet most practitioners still hold the forfait not to qualify as a 901 Credit. Regardless of that conclusion, the forfait does qualify as a creditable tax under the 903 Credit rules.

B. The Forfait Tax Should Satisfy 903 Credit Rules as an “In Lieu Of” Tax

The 903 Credit rules were designed to permit a tax that would not otherwise satisfy the 901 Credit rules as a creditable “income tax” to be treated as an “income tax,” and thus to be creditable. Like the 901 Credit rules, the 903 Credit rules set certain standards for a foreign tax to qualify as an “in lieu of” tax.

First, the foreign tax must be a “tax”, which means that the tax must be a compulsory levy by a foreign government, but cannot be a fine, penalty, customs duty or the like, and cannot be in exchange for a specific economic benefit (e.g., a license fee). There seems little doubt that the Swiss forfait tax satisfies this criterion.

Second, the tax must be a substitute for, and not an addition to, an otherwise generally imposed income tax. The Swiss forfait tax would appear to satisfy this criterion. The fact that the individual might be subject to additional tax as a result of Swiss-source income exceeding the forfait tax base amount would not appear to disqualify the forfait tax from US foreign tax creditability.

The forfait tax should thus be treated as an “in lieu of” tax under the 903 Credit rules. Most importantly, the 903 Credit rules make it clear that the net income/gain requirement of the 901 Credit rules do not apply to foreign taxes that are “in lieu of” taxes.

Our conclusion in this regard is also supported by an IRS advice (called a Field Service Advice). In this particular IRS advice, a Swiss corporation obtained a ruling from the Swiss tax authorities which provided that instead of paying normal Swiss corporate taxes, the corporation paid a tax computed as a percentage of its expenses. The IRS advice concluded that the tax qualified as 903 Credit. It made reference to the fact that the net/gain requirement of the 901 Credit rules do not apply. The Swiss tax in the IRS advice bears a strong resemblance to the Swiss forfait tax for individuals.

Consequently, the IRS should view the Swiss forfait tax as a tax that can be credited against US tax liability under the US foreign tax credit rules (viz., the 903 Credit).

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HELM TAX SERVICES

Taxes are what we do. Our accountants know the ins and outs of taxes for U.S. taxpayers residing in and outside the United States. The Helm team can assess your tax liabilities and help you choose the best options for you. For all of your tax-related services, contact us directly.

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US TAXPAYERS: OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) CLOSES ON SEPTEMBER 28, 2018

US TAXPAYERS: OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP) CLOSES ON SEPTEMBER 28, 2018

The IRS has announced the Offshore Voluntary Disclosure Program (OVDP) will be closing on September 28, 2018.

OVDP – WHAT IS IT AND WHY IS IT ENDING?

The Offshore Voluntary Disclosure Program (OVDP) is for taxpayers who come forward voluntarily and report their previously undisclosed foreign accounts and assets. It provides taxpayers with a way to avoid criminal liability and resolve their tax and penalties.

The IRS launched the open-ended disclosure program after strong interest in previous OVDPs. Since 2009, there have been more than 56,000 disclosures and more than $11 billion collected in tax by the IRS using this program.

While use of the program peaked in 2011 with 18,000 taxpayers participating, in recent years, there has been a significant decline (600 disclosures in 2017). Read the full IRS guidance and FAQs on the closing of OVDP.

If you think this program might apply to your situation, there is still time to avail of the program, which closes on September 28, 2018.

If you have been unaware of your requirements to file US tax returns and of your reporting obligations (i.e. reporting foreign bank and financial accounts using FBAR / Fincen Form 114), it is more likely the Streamlined Filing Compliance Procedures are more relevant to your situation.

THE STREAMLINED FILING COMPLIANCE PROCEDURES REMAIN OPEN

The Streamlined Filing Compliance Procedures will remain available after the OVDP closes. These procedures are aimed at individuals who may not have known about their tax obligations. To use this program, taxpayers must certify that conduct was not willful (i.e. that failing to report all income, pay all tax and submit all required information was due to a misunderstanding of the requirements).

The Streamlined Filing Compliance Procedures have been used by around 65,000 people to meet their tax and reporting obligations to become compliant.

Read more about Streamlined Filing Compliance Procedures on the IRS website.

Find out more about our services for individuals and compliance for U.S. taxpayers residing outside the U.S.

CONTACTS

If you would like additional information on the OVDP program, Helm is in a unique position to assist you with both legal and tax advice. We strongly recommend you first consult with one of our attorneys for legal advice to ensure the confidentiality of your information under the attorney-client privilege, which does not apply to non-attorneys.

Taxes are what we do. Our accountants know the ins and outs of taxes for US taxpayers residing in and outside the United States. The Helm team can assess your tax liabilities and help you choose the best options for you. For all of your tax-related services, you may contact Helm directly at info@helm.tax or call us.

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TRAPPED IN THE US?

TRAPPED IN THE US?

We have seen many articles on this COVID-19 question about US tax residency and what happens if you stay more than 121 days in the US during 2020, the IRS finally came out with an answer today: the days a ‘trapped’ individual stays in the US will not count toward the substantial presence test –so normally someone can stay 121 days per year & with the IRS’ latest guidance they can stay an extra 60 days.

https://www.irs.gov/pub/irs-drop/rp-20-20.pdf

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ALERT: PHISHING SCAM USING FAKE IRS FORMS AIMED AT NON-US RESIDENT TAXPAYERS

ALERT: PHISHING SCAM USING FAKE IRS FORMS AIMED AT NON-US RESIDENT TAXPAYERS

The US Internal Revenue Service (IRS) has issued a warning on phishing scams aimed at getting your banking and personal details in order to steal your money and identity. It has seen a rise in taxpayers receiving bogus letters, emails and calls that appear to come from the IRS, your tax professional or tax software companies.

In particular, criminals are sending fake W-8BEN forms to international taxpayers and non-U.S residents.
WHAT IS FORM W8-BEN AND HOW DOES THE SCAM WORK?
Form W8-BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting is a legitimate US withholding certificate often used by non-US individuals to claim exemption from withholding.

You only file a Form W8-BEN with your withholding agent (for example, your bank), not with the IRS.

Criminals pretending to be from the IRS mail or fax a letter asking you to fill out (a fake version) of Form W-8BEN.

These bogus letters and forms ask for information such as your:

  • mother’s maiden name
  • passport number and details
  • bank account information (pin numbers and passwords)

Read more about the Form W8-BEN and other scams on the IRS website.

HOW TO SPOT A FORM W8-BEN OR OTHER TAX SCAM

To determine if someone is trying to scam you, keep in mind that:

  • The legitimate Form W-8BEN does not ask for your mother’s maiden name, passport details or bank account information.
  • The IRS will not reach out directly to you to request a Form W-8BEN (your withholding agent or financial institution will generally do this and you should verify your institution has made the request).
  • The fake letter or fax also may refer to a Form W9095, which does not exist.
  • The letter may mention anti-money laundering regulations require a review of your client information and ask you to complete the form.
  • The letter may ask you to complete the form in order to protect your exemption from tax reporting and withholdings on income, including interest paid to you.

In addition, the IRS will not:

  • Demand that you use a specific payment method or ask for debit or credit card numbers over the phone. If you owe taxes, you can make payments to the U.S. Treasury or review irs.gov/payments for online payment options.
  • Demand you pay tax immediately. You would receive a letter in the mail and can appeal or question what you owe.
  • Threaten to bring in local police, immigration officers or other law enforcement to arrest you for not paying. The IRS can’t take away your license or change your immigration status.

IF YOU RECEIVE A SCAM LETTER OR CALL

  1. Do not reply.
  2. Do not open any attachments. (Attachments may contain malicious code that will infect your computer.)
  3. Do not click on any links. (If you clicked on links in a suspicious email or phishing website and entered confidential information, visit the IRS identity protection page to find out what to do.
  4. Forward the email to the IRS at phishing@irs.gov.
  5. After you forward the email, delete the original email message you received.
  6. Report it to the Treasury Inspector General for Tax Administration at its IRS Impersonation Scam Reporting site.

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HELM TAX SERVICES

Taxes are what we do. Our accountants know the ins and outs of taxes for US taxpayers residing in and outside the United States. The Helm team can assess your tax liabilities and help you choose the best options for you. For all of your tax-related services, you may contact Helm directly at info@helm.tax or call us at any of our offices.