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Intricacies of executives’ US tax liability

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As I was preparing to draft a speech on “International Tax and Compensation Issues Effecting International Executives” for a Bloomberg tax conference the news broke regarding the so-called Panama Papers and the thousands of politicians, millionaires and executives who had attempted to hide their income and wealth in secret foreign accounts.

The irony of my informing international companies as to how to minimise the foreign income taxes that a US executive would pay and the actions of the executive without regard to the consequences to their employer hit me. The session at which I spoke was attended by employees from the tax departments of international corporations as well as partners and manager from the Big Four accounting firms and international law firms.

Foreign Corrupt Practices Act of 1977

Few of the attendees had heard of the Foreign Corrupt Practices Act of 1977 that applies to any person who has a degree of connection to the United States and engages in foreign corrupt practices and were unaware that the Act was actively used today to combat foreign corrupt practices and to prosecute both US and foreign corporations. The more notable of successful prosecutions in the past ten years are with Biomet, BizJet, Hewlett Packard Company, KBR, Marubeni Corporation, News Corporation, Siemens AG ($450 million fine), Smith & Nephew and Wal-Mart de Mexico.

Who protects the shareholders against the actions of the executives?

The answer is likely: nobody! If that is correct then the question should be why? When I posed the question to the group as to whether their company had a written policy requiring executives to certify that they are in full compliance with; US Federal and State individual tax filings as well as all laws of the foreign country in which they are on assignment, incredulously, none had such a policy. When I posed the question as to what their company would do if their CEO's name appeared on the list of 200 Americans named in the Panama Papers and the company stock plummeted with this disclosure, the response was that nothing would be done unless the CEO was found guilty by a court.

An executive on foreign assignment can inadvertently be in violation of US and local laws

For example, would the executive on assignment in Bermuda expect that the money market account that they opened at their Bermuda bank be actually an investment in a Caymanian company that is classified as a Passive Foreign Investment Company for US tax purposes? Or that their Bermuda pension plan is a non-qualified plan for US tax purposes and that their contribution to the plan is not from pre-tax funds, that the employer contribution to the plan is taxable when vested and that the current investment earnings in the plan are taxable income? And that their Bermuda pension plan is considered a “financial account” to be reported on FinCEN Form 114, Report of Foreign Bank and Financial Accounts.

Different investment opportunities are also available to US executives on assignment in a foreign country. As an example, a year or so ago a popular investment was to buy a share in a venture whose sole purpose was to buy 1,000 cases of a French wine such as Chateau Margaux and then sell everything in five years. Historically, this should yield a 250 per cent profit, even though the wine should be aged for another ten years. If a US executive decided to make such investment what would they have likely done after doing so? Probably nothing. But a reading of the fine print by a tax adviser would have indicated that the US executive was actually purchasing a share in a Hong Kong partnership that required the US executive to immediately file Form 8865. And the question I asked is how did this Hong Kong entity manage to buy 1,000 cases when the Chateau has historically only bottled 35,000 cases a year and had likely sold those cases years ago?

Smaller Bermuda companies without a US connection typically do not provide a US tax preparation service to the few US citizens on their Bermuda payroll nor provide them with a tax preparation allowance. They do so at their peril, especially if the US citizen is a high-ranking executive. Usually, the US citizen will turn to their tax adviser in the US who is unlikely to know the nuances, such as those just mentioned, and the likelihood of the US tax return being in error, from my experience, is 95 per cent.

What should an employer do When an Executive On Assignment Makes a Bad Investment? Our fictional oil company executive has lived in 15 cities in the United States in the last 30 years for his employer and is now assigned to Bermuda on a 5 year assignment. The executive, against the advice of the human resources department, takes their life savings and buys a $5,000,000 ocean front home. Four years into the assignment a new Bermuda Government is elected, breaks its ties with the US dollar and the Bermuda dollar is now worth fifty cents. The employer cuts short the assignment and transfers the executive to Tokyo. Who should bear the $2,500,000 loss? Answer; the employee. But, it is incumbent on an employer to provide an employee with more than assistance with moving household goods and family to a new assignment. Assistance should also be given in such areas as language training, legal, business conduct, dual careers, spousal assistance, schools for children and ongoing tax preparation and consultation.

AFL Investments Ltd US Tax Seminar

On Thursday, May 26, AFL Investments Ltd will sponsor a US tax seminar at noon and 4.30pm for Bermuda nationals with investments in US stocks and securities, vacation homes and rental properties and for US citizens who are beneficiaries of Bermuda trusts. The purpose of the seminar is to inform Bermuda nationals how the US will tax these various investments and what a Bermuda national can do to minimise or eliminate their US income and estate tax. US citizens will be informed as to how the US will tax distributions from a Bermuda trust and how to minimise the US tax due. The speakers will be Stephen Ziobrowski, an international trust and estate attorney with the firm of Day Pitney in Boston, Massachusetts and me. Reservations can be made at rsvp@afl.bm.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the president of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com

Money maker: Chateau Margaux wines have traditionally been a good investment, but what are the tax implications?
James Paul Sabo

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Published May 03, 2016 at 9:00 am (Updated May 02, 2016 at 4:57 pm)

Intricacies of executives’ US tax liability

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