International Tax Solutions

Foreign investors, small businesses, and US expatriates face a unique set of international tax challenges. The Ornelas Firm is an international tax and cross-border tax attorney practice based in El Paso, serving clients in West Texas, Southern New Mexico, Mexico, and Latin America. Our tax professionals, working closely with strategic alliances at Mexican law firms, help US outbound clients understand their tax responsibilities in Mexico and Latin America, assist Mexican and Latin American clients with US inbound tax and corporate issues, and guide US expatriates and seconded employees through complex US reporting and compliance requirements. Whether you are worried about FBAR/FATCA, foreign tax credits, US–Mexico tax treaties, or US gift and estate tax on US-situs assets, we provide practical, bilingual solutions tailored to your specific situation.

• FBAR/FATCA.
• Foreign Tax Credits.
• Earned Income Exclusions.
• Totalization.
• Tax Treaty Benefits/Limitations.
• Permanent Establishment.
• USRPI Tax Withholding.
• US Gift/Estate Tax of Foreigner’s Assets.

FBAR/FATCA

The US government’s initiatives to combat money laundering, terrorist financing and funding of international crime has imposed additional reporting requirements for certain US-based taxpayers that maintain ownership or signature authority over financial and other assets outside of the US. Although intended to address similar issues, FBAR and FATCA are not identical – and their reporting mechanisms are not the same. The Foreign Bank Account Report (FBAR) requires US-based clients to report the existence of certain foreign bank accounts and similar foreign financial interests to the US Treasury Department. The Foreign Account Tax Compliance Act (FATCA), on the other hand, requires US-based clients to report to the IRS interests a set of foreign investments that is broader than the financial interests reported through FBAR. Failure to comply with either reporting program may expose a client to significant penalties. Our tax professionals understand the difference between FBAR and FATCA, when reporting under either regime is not required, and how to place clients into compliance with both laws.

Foreign Tax Credits

US taxpayers may incur income taxes on income earned outside the United States. If such income is also subject to US income tax, then there exists the possibility that such foreign income may be subject to double-taxation – a problem alleviated by allowing foreign taxes charged on foreign income to be credited against US income tax on the same income in the form of a foreign tax credit. We assist clients in planning for, qualifying for, and claiming such foreign tax credits.

Earned Income Exclusions

The United States taxes US citizens and residents on their income regardless of where in the world such income is earned – which may impose a double-tax problem to US citizens and residents who work outside the United States. To alleviate such double-tax risk, US citizens and residents may exclude a certain amount of their annual income from US tax if they meet certain requirements and only if properly claimed. We assist clients in planning for, qualifying for, and claiming such US tax benefits.

Totalization

US businesses that employ US citizens or residents outside the United States are often required by the foreign country to withhold foreign income taxes from foreign salaries, wages and benefits paid to US citizens or residents working in such foreign country – but such foreign salaries, wages and benefits may also be taxable in the United States. Under these circumstances the foreign salaries, wages and benefits paid to US citizens or residents risk being taxed twice. To reduce the tax impact on employees, US businesses may decide to advance the amount of foreign-tax withholding to employees in the form of a loan which may be recouped after the end of the current taxable year once the employees file their US income tax returns (i.e., totalization arrangement). These totalization arrangements can take various forms, each with its own reporting and recoupment mechanisms. We assist clients (particularly foreign shelter operations and maquiladoras) to determine which kind of totalization arrangement best suits their needs.

Tax Treaty Benefits/Limitations

The United States has over 60 income tax treaties in force with foreign countries, and over 70 intergovernmental agreements (IGAs) with foreign revenue departments for the implementation of tax information exchange agreements (TIEAs) that implement disclosure requirements mandated by the Foreign Account Tax Compliance Act (FATCA). Foreign investors and US-based investors and small businesses may be entitled to tax benefits available under an applicable US tax treaty. To prevent perceived abuses in obtaining tax benefits under any particular tax treaty, however, United States tax treaties contain provisions that disqualify persons from claiming protections under a tax treaty if certain conditions exist. We assist clients in determining whether they qualify for benefits under a particular US income tax treaty, as well as counsel them on if and how a particular FATCA IGA will apply to their operations in a foreign jurisdiction – as well as help clients understand the differences between FATCA IGAs and the Common Reporting Standard (CRS).

Permanent Establishment

US-based businesses that regularly operate informally in a foreign country from a fixed location (such as a hotel, factory, office or workshop) run the risk of falling within the foreign country’s taxing jurisdiction and having the profits generated by their foreign operations sourced to the fixed location used as the business’ center of operations (i.e., a “permanent establishment”). The creation of a permanent establishment in a foreign country by a US-based business may have unplanned consequences for its management team – such as requiring the US-based business to comply with currency and employment regulations, licensing requirements, and foreign investment restrictions. For businesses based outside the United States, the creation of a permanent establishment in the United States can result in the imposition of a US branch-profits tax on the profits generated by the US permanent establishment. We advise both US-based and foreign clients on the risks associated with starting or expanding operations outside or within the United States, and whether forming a business entity better suits the clients’ needs.

Foreign Subsidiary Tax Reporting and Related Issues

US-based businesses that operate in a foreign country through a corporation or partnership may have special US income tax reporting requirements. Depending on the US-based business’ percentage ownership of the foreign corporation or partnership, the US-based business must prepare and attach to its return a tax return that reports the foreign corporation’s or partnership’s net income, balance sheet and related party transactions – which requires translating the foreign corporation’s or partnership’s financial information into US Dollars, and making adjustments to foreign books and records to make foreign transactions comply with US Generally Accepted Accounting Principles and US income tax principles. A related concern in these cases is how the US-based business is repatriating earnings from its foreign corporation or partnership. If the US-based business is repatriating earnings from foreign operations in the form of dividends, interest, rent or other passive income, then the US-based business may qualify as a “US passive holding company” and be subjected to a tax in addition to its regular income tax. We advise clients with foreign operations with respect to their US reporting requirements for their foreign entities, prepare or review the required returns, and counsel them on the consequences of the US passive holding company tax and plan accordingly.

USRPI Tax Withholding

Foreign investors that purchase real estate in the United States are subject to a special withholding tax upon the sale or transfer of such real property interest (USRPI). The withholding tax is charged on the contract price or value of the USRPI – not on the gain realized by the foreign investor’s disposition of the USRPI. If the amount of income tax withholding on the USRPI exceeds the foreign investor’s gain on the disposition of the USRPI, then the foreign investor can recuperate the difference by filing a claim for refund. Under certain conditions, however, the foreign investor can either reduce or eliminate the US withholding tax on the disposition of the USRPI – a process with which we are familiar with and in which we assist foreign clients.

US Gift/Estate Tax of Foreigner’s Assets

Unlike the United States income tax regime which looks at physical presence within the US for purposes of determining whether a foreign investor falls within the United States’ taxing jurisdiction, the United States gift and estate tax (which many civil-law countries do not have) charges a tax on the fair market value of certain assets that a foreign investor leaves within the United States at the time of their death. While a certain amount of US-sourced assets is exempt from the United States gift and estate tax, this exemption is minimal compared to the exemption enjoyed by US citizens. The US gift and estate tax on a foreign investor’s US-sourced assets should be a major concern for a foreign investor and should be addressed prior to acquiring US-sourced investments. We counsel foreign investors on the potential impact of the US gift and estate tax on their US-sourced investments and assist them to plan accordingly.