Definition of residency
Two countries – the United States and Eritrea – exercise residence jurisdiction over their citizens as well as over their residents. That is, in citizenship-based tax compliance, the US asserts the right to impose income, estate and gift tax not only on the worldwide income/assets of US residents, but also on the worldwide income/assets of US nonresident citizens.
Determination of citizenship
PES does not know if he has rights to US citizenship.He was born in 1953, and does not have a social security number or a US passport.He may be what has been termed the ‘Accidental American Citizen’,and if this is the case, planning for multi-jurisdictional assets becomes more difficult.
There are many reasons for this US citizenship ambiguity. It is not uncommon to meet more senior individuals born to a US citizen abroad who have never claimed US citizenship:
• Information provided by immigration officials in earlier years, erroneously interpreted, now accepted as truth;
• Changing immigration laws; parents not understanding US immigration and tax law, unable to afford appropriate legal advice;
• US parent/foreign national divorce in short-lived relationship, family records are lost;
• Parent dying while child still young, child adopted, and so on.
Double tax treaty provisions
Determination of citizenship will determine rights under tax treaty provisions, if applicable, for both the UK and South Africa.
Treatment of controlled foreign corporations US laws regarding CFCs are complex and detailed.In general, a corporate entity that is registered and conducts business in a different jurisdiction or country than the residency of the controlling owners.Control of the foreign company is defined, in the US, according to the percentage of shares owned by US citizens.Controlled foreign corporation (CFC) laws work alongside tax treaties to dictate how taxpayers declare their foreign earnings.
Treatment of foreign trusts
Family trust may be deemed a foreign non-grantor trust for US income tax purposes, but what is it for UK purposes, if it has UK/foreign beneficiaries?
The same detailed research will be needed for South African purposes.
• What is the structural change to the family trust since the passing of the patriarch?
• What are the reporting, filing, and tax obligations for US tax purposes of the SSP and the PES, and the trustees, if any?
• How is the family trust income originated from real estate operations and various foreign mutual funds, classified for US tax purposes, i.e. long-short term capital gains, ordinary income, passive foreign investment corporation structures, etc.?
• How will the surviving spouse or the eldest son report these assets for both UK and South African tax purposes? Are these investments appropriate for beneficiaries who are US citizens, South African or UK residents?
• The eldest son, a possible accidental American citizen, is the protector of the foreign trust, thereby, possibly deemed to have the ability to exert control of the trust.
Tax neutral jurisdiction
The perception generated by the media and taxing authorities is that tax neutral jurisdictions have no taxes.Internationally reputable offshore financial centres have domestic tax, regulatory and legal infrastructures that have been effective, and in existence in some cases, for over a 100 years.
Increased fiduciary responsibilities
The ever-increasing instances of these multi-national multi-jurisdictional families have placed additional compliance responsibilities on to the trustees of these complex trusts.Trust accounting plays a larger role than previously understood.Early tax filing deadlines for prior year accounting, determination of undistributed net income, and reporting for the foreign trustee and US beneficiaries, for instance, cannot be accomplished without well prepared, timely trust financial statements.What is the ultimate fiduciary standard of due diligence when working with these complex family situations? Is it within the fiduciary guidelines to recommend that each person seek their own tax advice, or is a more supervisory role needed to ascertain implementation?
Appropriate planning for the US beneficiaries of the foreign trust may dictate distribution of all current net income each year to avoid accumulated income.How does that translate into an effective action plan when the US beneficiary cannot dictate to the trustees the order or frequency of distributions, yet by virtue of the trustees not distributing all current income each year, the US beneficiary is placed at a severe tax disadvantage?
Conversely, planning for the South African nationals might be to consider leaving all income and capital in the offshore family trust.Would distributing all income each year completely disadvantage the South African beneficiaries, in order to satisfy the tax efficiency requirements of the US citizen beneficiaries? How does one accomplish parity between all parties?
Should/can the family trust be wound up? Should separate trusts be formed with like nationalities or other planning? Will there be any assets left to distribute after three taxing authorities ‘pick the bones clean’?
4. Cross-border financial planning is accomplished on a case-by-case basis
The surviving spouse and the protector eldest son will need to have their personal circumstances assessed on an individual basis. Analysis of detailed information relevant to their entire financial profile before a comprehensive planning strategy implementation is recommended.
In general, we can note the following:
The surviving spouse is a US citizen, first and foremost, and is subject to tax on her worldwide income, from whatever source derived.Additionally, she has significant reporting, filing and compliance responsibilities based upon her permanent residence abroad in holding accounts at foreign banks, investment custodians, financial interests, foreign trusts, companies and related entities.
She may have exposure, yet undetermined, to UK domestic tax law, South African tax regimes, and possible the tax neutral foreign jurisdiction.
Managing her affairs may become problematic, when all foreign financial institutions (FFI) make the decision (or not) to implement their compliance with the United States Foreign Accounts Tax Compliance Act (FATCA).Expatriation may need to be considered as an option, if she has received South African citizenship.As reported by numerous media and professional sources, some offshore financial institutions have terminated their services to US citizens and asked US citizens to close their accounts, feeling that the risk of compliance is not cost efficient.
The eldest son–has all of the same planning issues as his mother, with more nuances.Until his personal citizenships, and residencies are completely verified, he could easily be facing a situation with various controlled foreign corporation tax regimes, for instance, that may have three or four possible tax liability outcomes, depending upon the taxing jurisdiction.Decision tree factors are one of multiple planning strategies that will need to be analysed.
In our composite scenario, we have sought to highlight a few of the more obvious planning and tax issues facing this multinational multi-jurisdictional family.It is probably patently obvious to those experienced in this field of professional practice that there are many more issues that will need to be addressed.
Tax planning is the most significant driver of the comprehensive cross-border financial planning modules needed to provide solutions in managing the affairs of globally mobile citizens.Determination of residency and citizenship are the single most important factors within the planning process.If the client(s) (and their advisers) do not understand tax positions relative to clients’ country of origin, residence, citizenship, investments, estates, retirement, risk management and relationships with the multinational family, and ownership of multi-jurisdiction assets, the pure lack of planning will generate the ultimate long-term liability, compounded. It is only a matter of time and it will be expensive.
Our world is changing, rapidly. Driven by increased pressure from organisations such as the OECD, Tax Justice, G20, internal countries’ internal legislation, and politically motivated directives along with the negative effect of the current recessionary environment, revenue taxing authorities from all domains are vigorously asserting the right to collect every tax Dollar due from their citizens and residents.Multinationals, often through no fault of their own, possess the right to more than one residency, citizenship or nationality.They are challenged as never before and will need the help of internationally experienced multi disciplinary professional planning teams to negotiate their way through the modern tax mazes of cross-border environments in order to meet all of their family objectives.
Source: By Martha Harris Myron (TaxTALK)