America was voted the third best tax haven in the World.
International tax planners have used the U.S.A. as one of the premier tax havens starting in the 1960’s.
Amazingly the White House and Congress never knew the America is one of the best places to launder money and evade taxes. But, when the European tax authorities reading the Panama Papers, they protested to the U.S.
President Obama was on TV the other week saying that he has told the Treasury Department to make some changes.
So, the Treasury Department (which owns the IRS) issued tax regulations requiring foreign corporations hiding behind a U.S. LLC, to file a special report.
I have the Treasury Department explanation of the regulations below.. .for those of you that like to see the detail.
Panama Papers – here is what happened. When folks want to hide money in the U.S., they formed a limited liability company. Wyoming allows no records of manager or owner. It is an inexpensive state with low fees. The LLC then would open either a U.S. bank account or a foreign bank account.
The LLC owned by one person files no U.S. tax return. This rule was written by the Treasury Department when Bill Clinton was President. As a result, the American LLC has been used as tax haven company for twenty years.
Under the new rules, a single owner LLC will have to file a tax return if it is owned by a foreign business. I have the Treasury Department of the new rules below in blue print.
Please note that nothing in these new rules maintains the U.S. position as a tax haven. The new rules merely require another IRS information return.
Sections 301.7701-1 through 301.7701-3 (“the entity classification regulations”) classify a business entity with two or more members as either a corporation or a partnership, and a business entity with a single owner as either a corporation or an entity disregarded as separate from its owner (“disregarded entity”).
Certain domestic business entities, such as limited liability companies (“LLCs”), are classified by default as partnerships (if they have more than one member- see the author comment below) or as disregarded entities (if they have only one owner) but are eligible to elect for federal tax purposes to be classified as corporations. Under special rules, an entity that is otherwise disregarded is not disregarded for certain excise and employment tax purposes. Section 301.7701-2(c)(2)(iv) and (v).
Some disregarded entities are not obligated to file a return or obtain an employer identification number (“EIN”). Author Note: This is still the rule when a domestic person owns the LLC. Sometimes you want an EIN or return. In this case, you merely add an owner. The owner can be related and own just 1%. This is discussed above.
In the absence of a return filing obligation (and associated record maintenance requirements) or the identification of a responsible party as required in applying for an EIN, it is difficult for the United States to carry out the obligations it has undertaken in its tax treaties, tax information exchange agreements and similar international agreements to provide other jurisdictions with relevant information on U.S. entities with owners that are tax resident in the partner jurisdiction or otherwise have a tax nexus with respect to the partner jurisdiction.
Section 6001 of the Internal Revenue Code (“Code”) provides that every person liable for any tax imposed by the Code, or for the collection thereof, shall keep such records, render such statements, make such returns and comply with such rules and regulations as the Secretary may from time to time prescribe, and that whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax.
Thus, the Treasury Department and the IRS have broad authority under section 6001 of the Code to promulgate regulations to require the keeping of records and the reporting of information by persons who may be liable for any tax. The Code also requires many categories of persons to file returns, even if no tax is owed in a particular year. For example, all corporations organized in the United States must file annual income tax returns, which may include schedules requiring the identification of owners exceeding specified ownership thresholds. Moreover, foreign corporations engaged in a trade or business in the United States (“U.S. trade or business”) must file annual income tax returns. Section 6012(a)(2); section 1.6012-2.
Domestic partnerships must file information returns with schedules identifying each partner. Section 6031; Section 1.6031(a)-1. Also, domestic corporations that are at least 25% foreign-owned are subject to specific information reporting and record maintenance requirements. Section 6038A.
All entities, including disregarded entities, must have an EIN to file a required return. Section 6109(a)(1); see section 301.6109-1(a)(1)(ii)(C) and (b). An entity must also have an EIN to elect to change its classification. An entity that accepts its default classification and is not required to file a return need not obtain an EIN.
Because a domestic single-member LLC is classified as a disregarded entity by default rather than by election and has no separate federal tax return filing requirements, there is typically no federal tax requirement for it to obtain an EIN. Other applicable federal or state laws may require an entity to obtain an EIN. For example, under federal law, financial institutions in the United States require an entity to have an EIN to open an account. See 31 CFR 1020.220(a)(1)(i)(A)(4).
When an entity, such as an LLC, is classified as a corporation or a partnership for tax purposes, general ownership and accounting information are available to the IRS through the return filing and EIN application requirements. However, a disregarded entity is not subject to a separate income or information return filing requirement. Its owner is treated as owning directly the entity’s assets and liabilities, and the information available on the disregarded entity depends on the owner’s return filings if any are required.
For a disregarded entity that is formed in the United States and wholly owned by a foreign corporation, foreign partnership, or nonresident alien individual, generally no U.S. income or information return must be filed if neither the disregarded entity nor its owner received any U.S. source income or was engaged in a U.S. trade or business during the taxable year.
Moreover, if a disregarded entity only receives certain types of U.S. source income, such as portfolio interest or U.S. source income that is fully withheld upon at source, its owner may not have a U.S. return filing requirement. Even in cases when the disregarded entity has an EIN, as well as in cases when income earned through a disregarded entity must be reported on its owner’s return (for example, income from a U.S. trade or business), it may be difficult to associate the income with the disregarded entity based solely on the owner’s return.
Although ownership and accounting information is generally available under the reporting requirements established by the U.S. federal tax system with respect to many types of domestic entities, the absence of specific return filing and associated recordkeeping requirements for foreign-owned, single-member domestic entities hinders law enforcement efforts and compliance with international standards of transparency and cooperation in the area of tax information exchange.
Author Note: Here is where the Department of Treasury lets you know that they have screwed up for half a century. Mexico has asked the America be placed on the blacklist of tax havens and bank secrecy.
These difficulties have been noted in reviews of the U.S. legal system by international organizations, including the Financial Action Task Force and the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is affiliated with the Organisation for Economic Co-operation and Development. The lack of ready access to information on ownership of, and transactions involving, these entities also make it difficult for the IRS to ascertain whether the entity or its owner is liable for any federal tax.
Explanation of Provisions- Here are the new rules.
These proposed regulations would amend section 301.7701-2(c) to treat a domestic disregarded entity that is wholly owned by one foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting and record maintenance requirements (including the associated procedural compliance requirements) under section 6038A.
As with the existing special rules on employment and excise taxes, these proposed regulations would not alter the framework of the existing entity classification regulations, including the treatment of certain entities as disregarded.
These regulations are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws. Author note: The Treasury Department is reacting to threats from European nations regarding tax treaties.
Because the proposed regulations would treat the affected domestic entities as foreign-owned domestic corporations for the specific purposes of Section 6038A under the proposed regulations, and because such entities are foreign-owned, they would be reporting corporations within the meaning of section 6038A.
Consequently, they would be required to file the Form 5472 information return with respect to reportable transactions between the entity and its foreign owner or other foreign related parties (transactions that would have been regarded under general U.S. tax principles if the entity had been, in fact, a corporation for U.S. tax purposes) and would also be required to maintain records sufficient to establish the accuracy of the information return and the correct U.S. tax treatment of such transactions
. Also, because these entities would have a filing obligation, they would be required to obtain an EIN by filing a Form SS-4 that includes responsible party information. (Author note: Yes, our Government believes that people evading taxes are going to give the IRS a real name of a “responsible party.” it is like trusting the Iranians not to build a bomb).
To ensure that such entities are required to report all transactions with foreign related parties, these regulations would specify as an additional reportable category of transaction for these purposes any transaction within the meaning of section 1.482-1(i)(7) (with such entities being treated as separate taxpayers for the purpose of identifying transactions and being subject to requirements under section 6038A) to the extent not already covered by another reportable category.
(Author note: for the legitimate foreign business, they will spend more money on a U.S. tax accountant. )
The term “transaction” is defined in section 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer. For example, under these proposed regulations, contributions and distributions would be considered reportable transactions on such entities.
Accordingly, a transaction between such an entity and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the section 6038A reporting and record maintenance requirements, even though, because it involves a disregarded entity, it generally would not be considered a transaction for other purposes, such as making an adjustment under section 482. The penalty provisions associated with failure to file the Form 5472 and failure to maintain records would apply to these entities as well.
The proposed regulations would also provide that the exceptions to the record maintenance requirements in Section 1.6038A-1(h) and (i) for small corporations and de minimis transactions will not apply to these entities.
Consistent with the changes contemplated by these proposed regulations, the IRS is also considering modifications to corporate, partnership, and other tax or information returns (or their instructions) to require the filer of these returns to identify all the foreign and domestic disregarded entities it owns.
The proposed regulations would impose a filing obligation on a foreign-owned disregarded entity for reportable transactions it engages in even if its foreign owner already has a duty to report the income resulting from those transactions — for example, transactions resulting in income effectively connected with the conduct of a U.S. trade or business. The Treasury Department and the IRS request comments on possible alternative methods for reporting the disregarded entity’s transactions in such cases.