Tax Strategies

Corporate Transparency Act Beneficial Ownership Reporting

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA” or “the Act”). The Financial Crimes Enforcement Network (“FinCEN”) estimates that in the first year, approximately 32.6 million businesses will need to comply with the Act and report information related to the business owners, officers, and controlling persons.

Background 

Regime
Enacted as part of the 2021 National Defense Authorization Act and amending the Bank Secrecy Act, CTA (31 U.S.C. 5336), the CTA is intended to close a perceived information gap related to money laundering and other illicit acts. Specifically, CTA establishes “a database of beneficial ownership information (“BOI”) that will be highly useful in combatting illicit finance and the abuse of shell and front companies by criminals, corrupt officials, and other bad actors” and aids efforts “to protect U.S. national security and safeguard the U.S. financial system from such illicit use.” Although passed in 2020, reporting under CTA was initially delayed. A “Final Rule” was issued in September 2022, making compliance with the Act mandatory for reporting companies as of January 1, 2024.

The definition of a “reporting company” under the Act is complex and may include many small businesses, middle-market businesses, and sole practitioners. There are several categories of exemptions, and most exemptions are for entities that are already subject to substantial federal or state regulation.

Timing
In general, reporting companies created before or registered to do business as of December 31, 2023, have until January 1, 2025, to file an initial BOI report with FinCEN. Reporting companies created or registered to do business on or after January 1, 2024, have ninety (90) days from the date of their registration to file an initial BOI report. Reporting companies created or registered on or after January 1, 2025, have thirty (30) days from the date of their registration to file an initial BOI report. After filing an initial BOI report, reporting companies have thirty (30) days to file updated reports detailing statutorily required changes about the reporting company and/or its beneficial owners.

Penalties
Failure to comply with CTA or missing filing deadlines can result in criminal (fines and/or imprisonment) or civil (monetary) penalties. There is a $500 per day penalty, up to $10,000, and imprisonment of up to two years for failure to timely file initial or updated reports. Additionally, any person who, without authorization, knowingly discloses or uses BOI is liable for $500 per day, up to $250,000, and up to five years of imprisonment.

GTF Recommendation:

It is important for anyone who created or registered a reporting company both on or before December 31, 2023 and on or after January 1, 2024, to seek advice from legal counsel to ascertain both their reporting requirements and to complete the reporting promptly.

GTF works with several attorneys throughout the country who can assist you with CTA. We are glad to provide a list of attorneys for you to choose from.

 Please contact James W. Dawson at (305) 510-0050 if you have any questions. 

Currently Active International Tax Campaigns

The IRS’ List of Currently Active International Tax Campaigns

On April 21st, the Large Business & International (LB&I) published a list of its active tax campaigns to enhance the selection of returns for audit, more ardently identify risk issues associated with noncompliance and assist the IRS in deploying limited resources.

The IRS’ actions on these campaigns generally focus on one or more undertakings, including revising forms and instructions, providing additional guidance, and communicating with taxpayers, practitioners, and software companies. Lastly, the IRS regularly issues Soft Letters to taxpayers. A Soft Letter is essentially a reminder to the taxpayer that something about their prior-year tax return was incorrect or incomplete.
The following is a list of “Active International Tax Campaigns” that both taxpayers and their advisors should be aware of:

Cross-Border Activities:

• Foreign Tax Credit (IRC Sec. 901)
• Financial Service Entities Engaged in a U.S. Trade or Business
• Foreign Base Company Sales Income – Manufacturing Branch Rules
• Form 1120-F Delinquent Returns
• Form 1102-F Non-Filer and Protective Return U.S. Business Activity
• Treatment of Deferred Foreign Income Upon Transition to

Participation Exemption System (IRC Sec. 965)

Treaty and Transfer Pricing:

• Captive Services Provider

Withholding and International Individual Compliance:

• Expatriation of Individuals
• FATCA Filing Accuracy
• Financial Service Entities Engaged in a U.S. Trade or Business
• FIRPTA Reporting Compliance for Nonresident Aliens (NRAs)
• Foreign Earned Income Exclusion
• Forms 1042/1042-S Compliance
• Form 1120-F Chapters 3 and 4 Withholding
• Individuals Employed by Foreign Governments & International

Organizations

• Individual Foreign Tax Credit Phase II
• IRC Sec. 965 for Individuals
• Loose filed Forms 5471
• Nonresident Alien Individual Tax Credits
• Nonresident Alien Rental Income from U.S. Real Property
• Nonresident Alien Schedule A and Other Deductions
• Nonresident Alien Tax Treaty Exemptions
• Offshore Private Banking
• Offshore Service Providers
• Post Offshore Voluntary Disclosure Program Compliance
• Puerto Rico Act 22, Individual Investors Act
• Swiss Bank Program Campaign
• U.S. Territories – Erroneous Refundable Credits
• U.S. Territories Self-Employment Tax
• Verification of Form 1042-S Credit Claimed on Form 1040-NR
• Virtual Currency

Observation –Taxpayers can resolve the issues identified above by understanding the potential tax issues, adhering to the relevant tax laws, and accurately reporting transactions. I recommend reviewing this list with your tax advisor and taking the appropriate action.

Until next time,

James Dawson, CPA

A “Nudge” for UK Individuals Selling on Online Marketplaces to Pay Taxes

The Covid pandemic and subsequent cost of living crisis in the UK has seen a significant increase in individuals supplementing their income by selling items online. Some have built successful micro-businesses by buying and selling goods through online platforms.

HM Revenue and Customs (HMRC) is aware of this activity and has recently ramped up a campaign to collect taxes it believes have not been paid from individuals selling goods on online marketplaces such as eBay, Etsy, and Facebook Marketplace. HMRC is thought to have collected sales data from popular online marketplaces to support issuing a “nudge letter.”
The nudge letters come with individual case reference numbers and detailed information on sales activity. They ask individuals to respond within 30 days summarizing their tax position and make a voluntary disclosure of their undeclared income within 90 days.
The letters state that HMRC knows it has “information that shows you’ve earned money (income) from Online Marketplace sales” and that it “shows you have not told us (HMRC) about some or all of this income”. They request individuals to complete a “certificate of tax position” with the option to bring tax affairs up to date, that they have correctly declared all income, or that they have not declared their income. Individuals are given 30 days to respond with their certificate.

The letters seem to suggest that HMRC has accessed sales data from these online platforms, and while it is not clear which third party has provided this information to HMRC, these platforms often include detailed sales history of its sellers in the public domain. The letters have been specifically sent out to individuals in which HMRC holds information that it can use to open an investigation if individuals do not respond.
Anyone can sell goods up to the value of £1,000 a year without having to pay tax. However, when a UK individual has reached that £1,000 a year threshold HMRC wants to collect tax on the activity. They have access to technology that allows for the tracking of unpaid taxes. In addition, if an individual has set up a business, HMRC will expect all compliance and tax obligations to be timely met.

Observation –Technology has enhanced HMRC’s ability to collect sales data and pursue individuals who have not disclosed and paid taxes on online marketing platform activities. Taking a proactive approach by contacting a UK tax advisor to advise on the best approach for addressing any unreported income or taxes due can avoid much consternation and financial penalties.

Brazilian Tax Reform – Is This Time for Real?

The Brazilian tax system is largely considered one of the most cumbersome and complex systems in the world.  While there have been rumors of reforming the system over the years it appears the latest effort may have some momentum.  On July 21st, Paulo Guedes, Brazilian Minister of Economy, presented a draft bill (Bill No. 3,8877/220) encompassing the unification of federal taxes by creating a federal VAT, known as “Social Contribution on Goods and Services – CBS.  CBS will effectively eliminate both PIS and COFINS, which are Social Security Contribution assessed on gross revenues.  The proposed bill will be discussed and voted on by both legislative houses and if approved will be effective within six months of approval.

This bill is the first, in a phased approach to introducing wider tax reforms.  Other bill under consideration by the federal government include income tax reform, adjustments to the Excise Tax (IPI), reduction of social security taxes due on payroll and introduction of a new tax on digital payments. 

This article will take a brief look at CBS. 

What is CBS?

CBS is levied on imports and local sales of both goods and services, while export transactions would be exempt.  The bill proposes to treat the assignment and licensing of rights, including intangibles, as falling within the definition of imported services, thus subject to CBS.  As opposed to PIS and COFINS, which applies to non-operating revenue, CBS will only apply to revenues from operations.

It is intended to simplify tax on consumption and eliminate the different taxes and special tax regimes for various sectors of the economy, while promoting tax equity and savings to taxpayers.  The biggest benefit may be a reduction in the time companies spend on tax compliance and reduce never ending legal discussions currently taking place regarding the PIS/COFINS system.

Under the proposed bill, some notable special tax regimes will remain in place, including SIMPLES NACIONAL (for micro and small businesses), the Manaus Free Trade Zone exemption, and the exemption for basic food items.

What Is the CBS Tax Rate?

The Brazilian tax rate under the Tax Reform Bill will increase to 12% from the current regular tax rates for PIS and COFINS of 9.25%.  The calculation of the tax base is computed as follows: Gross Revenues excluding amount of ICMS (State VAT), ISS (Municipal Tax) and unconditional discounts.  The gross-up calculation would no longer be available.

Are Tax Credits Available in Calculating CBS?

In calculating CBS taxpayers will be allowed credits, comparable to the noncumulative system of PIS and COFINS, however without the restrictions currently applicable in the PIS/COFINS law.  Under the proposed methodology of calculating CBS, each part of the supply chain may consider credits over the amount paid by the supplier and detailed on an invoice, thus CBS effectively applies to the value added to a product or service provided by the taxpayer.

Other credits such as depreciation and rent expense, among other expense items are not permitted.  Any depreciation of assets placed in service prior to CBS coming into force will be allowed.

The Tax Reform Bill will permit taxpayers to accumulate credits during the quarter in an effort to compensate them with other federal taxes at the end of the quarter.  The five year Statute of Limitations would remain in effect and the value of the credits will not be subject to monetary restatement.

Credits made available by product purchases from companies subject to SIMPLES NACIONAL and from the Manaus Free Trade Zone will be available for use.  However, some products subject to a single level of taxation would not be creditable.  Items such as fuel, natural gas and cigarettes would be required to follow specific CBS calculation methods.

Relief for Tax Professionals?

In what can only be considered good news for tax professionals, the bill aims to significantly reduce the complexity currently involved in preparing tax returns.

What is the Impact on Digital Platforms?

Those digital platforms, acting as intermediaries will be responsible for the collection of CBS levied on the transactions completed through them in the event the seller does not issue an electronic invoice.

The impact will be felt by both digital platforms located abroad and the importer of the goods and services performed by individuals into Brazil.  The parties to the import transaction will be responsible for the payment of CBS.  In addition, the owner of the digital platform will need to register with the Brazilian federal tax administration to fulfill the related tax obligations.

Closing Thoughts

is this effort of tax reform in Brazil real?  The answer will become clearer over the next couple of months.  For U.S. companies with operations in Brazil, it is prudent to closely monitor these developments and plan accordingly.

Implementing a Tax Efficient Supply Chain Management Platform to Address Global Business and Tax Disrupters Impact on Operational Structures and Supply Chains

Global business and tax disrupters, such as COVID-19, Trade Wars, and changes to global tax laws are requiring MNEs to evaluate the impact of such disrupters on both their organizational structures and supply chains.

The main objective of global supply chain management is to achieve the greatest value possible at the lowest cost possible.  It is important to remember tax represents 20% of the costs incurred in the global supply chain.  Tax, in some form, is imbedded in virtually every transaction.   To fully appreciate the planning opportunities available by implementing a Tax Efficient Supply Chaim Management Platform (TESCMP), one must first appreciate the components of a globally integrated supply chain.  The globally integrated supply chain starts with Global Suppliers and ends with Global Customers, in between is the processes of Global Logistics, Purchasing, Operations and Market Channels. 

Global Logistics –  Is the part of global supply chain management that plans, implements and controls the efficient and effective forward and reverse flow and storage of goods, services, and related information between the worldwide point of origin and the worldwide point of consumption to meet global customer’s requirements.

Global Purchasing –  Tales place in the inbound or upstream portion of the global supply chain, it involves buying something (such as raw materials, component parts, work in process, products or services), and it should be strategically and tactically integrated with the elements of the production cycle for MNEs.

Global Operations – is the mechanism utilized by an enterprise to implement the MNE’s corporate strategy and facilitate the enterprise being market driven.  It involves the worldwide management of make-or-by decisions in global supply chains, global production and manufacturing, competitive priorities in such supply chains, total cost analyses in global supply chains, process-based quality standards, guidelines within the supply chain operations reference model, and decisions on the usage of operational providers within the realm of global operations across the supply chain.

Global Market Channels – involves the part of the global supply chain management that includes all activities related to sales, service, and the development of relationships, preferably long-term relationships with customers.  A critical component of market channels is the last mile of the supply chain.

Organizations face increasing pressure to avoid future disruption while reducing costs within the supply chain.  These pressures permeate though out each part of the supply chain.  Some of the more common items include:

  • Jurisdictional selection and physical location of the MNE’s logistics, purchasing, and operations;
  • Choice of suppliers and their physical location, focusing on manufacturing and distribution locations;
  • Examine when, within the supply chain, goods are branded and therefore value is added.  This exercise determines the situs of taxability and the value of goods for both income and property tax purposes.
  • The ability to attach value to certain intellectual property may impact customs and duties charged on the importation of goods.

Implementing TESCMP

TESCMP is an approach of overlaying tax strategies, transfer pricing, global mobility, indirect taxes and trade and customs to a company’s business processes.  The first step in implementing TESCMP is to map transactions flows and sort the activities within each process as high value versus routine functions. High-value functions drive companies’ strategic decisions; they determine what products to produce, which markets to enter and how best to execute the corporate strategy. High-value functions entail risk and should concomitantly earn higher returns.

It is people, however, who execute functions and manage risks. By redeploying decision-makers — and the functions and risks that they manage – to centralized and possibly tax-favored jurisdictions, companies may realize material operational and tax benefits through efficiencies and by earning a greater proportion of their profits in a tax-efficient location. Routine activities, deriving a smaller amount of taxable profits, might remain in higher-tax jurisdictions or re-locate elsewhere as business needs dictate. In an environment of hyper change where supply chains need to be nimble in order to avoid disruption, it is important to remember tax represents 20% of the costs incurred, thus planning for this cost is important to drive both operational and financial success.

USMCA and the Automobile Parts Industry

USMCA and the Automobile Parts Industry

In a recent study of census data, WorldCity reported trade between the U.S. and Mexico totaled $615 billion during 2019, and $612 billion between the U.S. and Canada.  Two-way trade between Canada and Mexico totaled $44 billion in 2019. 

For the period January to April, Mexico ranked No. 1 in total trade value with the U.S. at $176.13 billion. Mexico had exports of $72.81 billion and imports $103.33 billion in imports.  Canada ranked No. 2, with a total trade value of $173.84 billion.  Canada had exports of $84.01 billion and imports of $89.83 billion

This trend is expected to grow as Canada, Mexico, and the U.S. recently enacted USMCA.  The USMCA significantly rewrites the rules for trade in agriculture, manufacturing and services amongst Canada, Mexico, and the U.S.

The USMCA will directly benefit the automotive industry as one of the key components is a requirement 75% of a vehicle’s components are to be made in Canada, Mexico, and the U.S., to receive tariff free access to the three countries.  Another significant rule change is requiring that 40-45% of an automobile’s content must be made by workers earning at least $16 per hour.

USMCA is having a direct influence on discussions automobile parts manufacturers are having regarding nearshoring operations back to North America.  As mentioned in our article titled, “Repositioning of Auto Parts Operations from China to Mexico,” there are many reasons to nearshore the manufacturing from China.  Many companies point to being closer to their customer base, reduce tariff liabilities and security requirements.  It is not surprising to see Canadian, American, and other foreign companies look to take advantage of operating in Mexico and benefitting from the USMCA.

The Mexican benefactors to the repositioning of auto parts operations includes those regions along the U.S.- Mexico border, such as Tamaulipas, Nuevo Leon, Coahuila, Chihuahua, Baja California Norte.  These regions are home to hundreds of maquiladoras owned by U.S., foreign, and Mexican companies.  Maquiladoras provide jobs to thousands of workers and vital supplies to automobile assemblers.  On the U.S. side of the border, Texas, New Mexico, Arizona. and California benefit from increased maquiladora activity as these states are closely tied to Mexico and its economy.

In normal times, Mexican, Canadian, and American companies could expect a huge boost in business activity from the positive impact of the USMCA.   The COVID-19 pandemic is a major disruptor to business operations in all industries.  However, the combination of the pandemic and the USMCA may greatly enhance the prospect of more automobile part manufacturers looking to nearshore back to the North America.  Mexico, through the maquiladora program is open for business!

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