Tax Presentation By Richard Medalla

United States Tax Planning & Compliance AN OVERVIEW OF UNITED STATES CROSS-BORDER TAX AND IMPLICATIONS IN THE PHILIPPINES SETTING

About Us •

Manrkē is a global professional services firm specializing in US cross-border tax. We work closely with businesses and individuals providing valuable tax compliance and consulting expertise, business advisory on industry leading practices, tax accounting/preparation and global employer services.

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In the Philippines, we anchor our relationship in providing US tax compliance with the intricacies of cross-border US tax requirements. Our target market include the 220,000 US citizens and US permanent residents domiciled in the country and Philippine businesses transacting with US entities that trigger US tax compliance requirements.

Countries outside the U.S. where more than 100,000 Americans reside • • • • • •

Australia Canada Dominican Republic France Germany Greece

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Israel & The West Bank Italy Mexico Philippines Spain United Kingdom

United States Tax •

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The USA is one of a handful of countries that requires their citizens to file and report on their worldwide income. This requires careful planning and strict compliance with the US Tax code.

Discussion Topics A. The Filipino-American: Requirements for U.S. taxes, “U.S. Person,” “Accidental American” B.

An American employee in a Filipino company

C. U.S. Person in the Philippines: Forms and Due Dates D. Foreign Financial Holdings: FATCA, FBAR, FinCEN E.

Avoiding Penalties, Interests and IRS Investigations

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Manrkē Professional Services

G. Open Forum & Networking

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The Filipino-American: Requirements for U.S. taxes, “U.S. Person,” “Accidental American”

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If you are a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax, regardless of where you are living. Also, you are subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.

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Who is considered a “U.S. Person?” United States Persons

Foreign Persons

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A citizen or resident of the United States Substantial presence test A domestic partnership A domestic corporation Any estate other than a foreign estate Any trust if: • A court within the United States is able to exercise primary supervision over the administration of the trust, and • One or more United States persons have the authority to control all substantial decisions of the trust • Any other person that is not a foreign person.

Nonresident alien individual Foreign corporation Foreign partnership Foreign trust A foreign estate Any other person that is not a U.S. person

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The Accidental American

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• Citizen of a foreign country who may also be considered a US citizen • Birth in a foreign country to one US citizen parent • Born to both US citizen parents residing in a foreign country • What are the implications? • US Passport requirement • FATCA

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An American “employee” in a Filipino company • Are there implications and potential reporting requirements of Philippine companies for “employing” Americans? • Wages paid to a U.S. citizen or resident alien for services performed outside the United States for a foreign employer are subject to U.S. federal income tax. However, such wages are not subject to the U.S. federal income tax withholding to the extent that such wages are already subject to the income tax withholding of a foreign country. • Form 5471 & 5472 – Information return of U.S. Persons with respect to certain foreign corporations: Requires the disclosure by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations.

What precautions and actions should Philippine companies do?

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U.S. Person in the Philippines: What are the Filing Requirements?

B C D E

Forms

Due Dates

• 1040

• April 15

• FinCEN 114

• June 15 (automatic 2-month extension)

• 5471

• October 15 (application for extension)

• 3520

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“Record Number of Americans dump U.S. Passports" – CNN Money February 8th, 2016

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Foreign Financial Holdings: FATCA, FBAR, FinCEN • FATCA = Foreign Account Tax Compliance Act • The Foreign Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets. • Form 8938, Statement of Specified Foreign Financial Assets • Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets

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Foreign Financial Holdings: FATCA, FBAR, FinCEN • FBAR = Foreign Bank Account Reporting • FinCEN = Financial Crimes Enforcement Network • FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts, that must be filed with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department. The form must be filed electronically and is only available online through the BSA E-FilingSystem website .

Foreign Financial Holdings: FATCA, FBAR, FinCEN • How does FATCA affect Americans in the Philippines? • What was the motivation behind implementing FATCA? • Banks, Insurance Companies, Brokerage Firms and other financial institutions will require that the accountholder confirm under penalties of perjury: • W-9 – Request for Taxpayer Identification Number and Certification for US persons • W-8BEN – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) for non-US persons • W-8BEN-E - Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) for non-US entities

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Avoiding Penalties, Interests and IRS Investigations • What are some key things to do while living abroad in order to help avoid penalties, interests and IRS investigations?

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• Can the IRS really assert power to assert penalties? • They will apply these penalties, even if you’re abroad [Edward S. Flume v. Com’r TCM 2017-21]. • House Resolution 22 – FAST Act: Revocation or denial of passport in case of certain unpaid taxes • What are some typical penalties? • FinCen 114 Foreign Bank Account Report up to $10,000 per account • 8938 Specified Foreign Financial Assets $10,000 • 3520 Foreign Trust 35% of property transferred or received • 5471 Foreign corporation $10,000 • 8865 Foreign partnership $10,000 • 8858 Foreign disregarded entity $10,000

Avoiding Penalties, Interests and IRS Investigations • U.S. Department of State • New Section 7345 completely modifies how U.S. citizens living and traveling around the world have to now consider very seriously actions taken by the Internal Revenue Service. It is the IRS which now holds the power under this new law that requires the U.S. Department of State to revoke or deny to issue a U.S. passport in the first place. • New Section 7345(e) provides in relevant part as follows: “upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section. . . ” [emphasis added]. • This new law mandates (not at the discretion of the DOS) that various U.S. passports be denied at the direction of the IRS. Once the IRS issues the certification of “seriously delinquent tax debt.”

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Avoiding Penalties, Interests and IRS Investigations • Edward S. Flume • Franchise Food Services de Mexico S.A. de C.V. (FFM) • FFM was incorporated in Mexico in 1995 to operate two fast food franchises that petitioner owned. • Petitioner timely filed his Forms 1040, U.S. Individual Income Tax Return, for the years in issue but did not attach Forms 5471 to any of his originally filed returns. • Petitioner was assessed a penalty of $20,000 for 2001, two penalties of $10,000 each for 2002, and penalties of $10,000 for each year from taxable year 2003 through 2009.

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Avoiding Penalties, Interests and IRS Investigations • Manny Pacquiao • Pacquiao claims he paid his income taxes for 2008 and 2009 in the United States, and that a twocountry treaty protects his money from being taxed twice. • The dispute is all about his boxing earnings in the U.S. Proving how much Pacquiao paid the IRS would help reduce his Philippine bill, but the IRS slapped on a Federal Tax Lien for $18.3 million in allegedly unpaid taxes for 2006 through 2010. • Foreign athletes must file U.S. income tax returns and face special withholding rules so they don’t just pocket the money and run. They generally must pay U.S. income tax on their U.S.-source income.

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Unreported Accounts, Options to Remedy Delinquent Returns or Incorrect Filings •

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IRS Offshore Voluntary Disclosure Program (ended Sept 28, 2018) • 8 years back tax returns • 8 years FBAR • Volumes of supporting documents Streamlined Procedures (still available) • 3 years of back tax returns • 6 years FBAR • When accepted into the procedure, no late penalties or 5% penalty IRS FAQ • Does the closing of the 2014 OVDP signal a change in IRS priorities towards offshore tax noncompliance? • No. Stopping offshore tax noncompliance and evasion remain top priorities of the IRS. The IRS enforces offshore compliance with tax and FBAR requirements using information received under the Foreign Account Tax Compliance Act (FATCA), the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting, and other data-rich sources such as the Department of Justice’s Swiss Bank Program and various John Doe Summonses. The IRS leverages information resources using enhanced data analytics to continue to make it more difficult to evade tax by hiding offshore.

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Open Forum • Questions