June 2018
Private Client Cross Border News

The following are some articles on international private client matters which we thought would be of interest to you.  
Royal Wedding Generates Excitement and...International Tax Obligations 

Millions of people across the globe followed the charming story of Meghan Markle and Prince Harry and tuned in to catch at least a glimpse of their royal wedding ceremony. Although most of the attention devoted to the couple has been focused on more romantic matters, the nuptials have also served as a spark for conversations about taxes.

Why is this so? It starts with the fact that the United States, unlike the vast majority of countries, requires all of its citizens and those with permanent resident status to file tax returns and report their global income, no matter where they live. The IRS's reach even extends to non-U.S. citizens with certain financial interests located in the U.S.

With that in mind, there are actually two related but distinct tax issues facing the new Duchess of Sussex. The first is that she will be residing outside of the U.S. and will presumably conduct most of her financial business abroad, although she has done this before when living and working in Canada. The second significant matter, from a tax perspective, is that her husband is a foreign citizen, which presents a dizzying set of choices regarding how to list him on her tax return, how much of his income he needs to report to the IRS, and what implications those choices have on the Duchess's own tax liabilities.

As noted above, the Duchess, as a U.S. citizen, will need to file annual tax returns and report her worldwide income. This "income" can include gifts, hospitality, and even loans of valuable items under certain circumstances. Examples of potentially reportable items include her residence - if she lives in lodgings provided by the Queen - and any jewelry or regalia provided for the Duchess' use.

She will also need to report the value of any benefits she receives from assets in certain types of trust, and the tax rates on these can be significant - up to 37%. And if she wants to give gifts to her husband, she needs to keep track of their value, as there is an annual cap on what she can give without lowering her lifetime estate and gift tax exemption.

On top of all of these things, she must report any and all bank accounts to which she has signing authority or financial interest that held over $10,000 in assets at any point in the year. This information should be added to her Report of Financial Bank and Financial Accounts ( FBAR), which goes to the Financial Crimes Enforcement Network at the U.S. Treasury.

All of this could persuade the former Ms. Markle to consider renouncing her U.S. citizenship - a course that more and more people are taking. But there can be significant costs and reporting burdens associated with this route as well.

One reason for the reach and complexity of U.S. tax rules is that Congress's approach to tax legislation has been to add new provisions in a piecemeal fashion, often in response to various incidents and reports of abuse. As a result, taxes are one area in which the government seems to consider you "guilty" until proven otherwise-a stance that doesn't always lead to a fairytale ending.

The best approach - for the Duchess Meghan and anyone with combined U.S. and international tax obligations - is to work with a qualified tax advisor to keep everything straight. Because while the cost of compliance can seem high, the penalties for non-compliance can be significant.

New EU Rules to Compel Reporting on 'Abusive' Tax Schemes

New rules in the European Union mean that tax professionals will soon need to report specific aggressive tax arrangements on a quarterly basis. The regulations, which apply to accountants, bankers and lawyers, were drafted in the wake of several high-profile scandals involving tax-avoidance schemes, but they have triggered concerns and confusion among tax planners.

Formal approval of the tax intermediary reporting law by EU finance ministers came in late May, clearing the final hurdle prior to implementation. Almost a year earlier, in June 2017, the European Commission followed up requests from the European Parliament and put forward the proposal, which was intended to ensure that the EU authorities gained early information on tax structures that may be considered questionable.

This action is a response to extensive reporting on several recent tax avoidance scandals, including the "Panama papers" and "Paradise papers." EU officials believe that these cases point to practices by tax advisers and professional intermediaries that were explicitly designed to facilitate tax evasion by individuals and corporations. In particular, the new legislation is intended to create greater transparency into the complicated cross-border arrangements involving offshore entities that the Panama and Paradise papers incidents uncovered.

The move has generated dismay among some tax advisors. "The legislation takes an approach that is like trying to kill a mosquito with a cannon. This is especially the case with hallmarks concerning transfer pricing," Stefaan De Baets, a PwC tax expert, told Bloomberg Tax. "Right now, there is a legal vacuum. The problem is that the hallmarks are very general and subject to significant interpretation. The situation is very worrying because there are retroactive reporting requirements."

Legal and professional privileges in line with those recognized in EU member nations are granted a measure of protection under the new rules, which extend reporting exemptions to lawyers, accountants and advisers. These exemptions are not unlimited, however, and the regulations require a client to notify tax authorities of an eligible tax arrangement if the legal professional privilege exemption is applied.

The new requirements will take effect July 2020, although preparations are likely to begin well before that to ensure the requisite capabilities are in place. Individuals with assets or tax reporting obligations within the EU should talk to their qualified tax advisors if they have questions about what implications the rules will have for their unique financial situation.

We thank you for taking the time to read our newsletter.  If we can be of service please do get in touch by e-mail or telephone.  


Jack Brister and Alicea Castellanos
Co-Founding Partners
International Wealth Tax Advisors


This e-newsletter is published by International Wealth Tax Advisors, LLC (IWTAs) and is not intended to be, nor should it be used as a substitue fo specific tax advice on any matter or set of circumstances.  It does not purport to be comprehensive or to render tax advice and is solely intended to provide general information for the clients and professional contacts.