A Guide to Foreign Investment in California Real Estate
by Jacob Stein
California CPA Magazine, September 2013
While a non-resident alien (NRA) desiring to invest in US. real estate property typically has many goals, such as liability protection and privacy,the main concern is to minimize worldwide income and estate tax liability.
The information giant was reported to avoid over $2billion in worldwide income taxes in 2012. The words ‘Tax Evasion’ have been bandied around by several countries, but the multinational company firmly disagrees.
The tech bigwig, among other multinationals, has managed to stir countries like the United Kingdom, France and Italy as well as their home base, the United States, into a frenzy that has resulted in severe changes in corporate taxation.
Google was accused of avoiding taxes on advertising sold in Italy, France and the United Kingdom, by channeling payments through subsidiaries in Ireland, then Bermuda, thereby avoiding the corporate tax in the country where the sale originated. Eric Schmidt, Google’s chairman, maintains that Google’s international tax strategy is legal.
In an Interview with BBC Radio 4, Schmidt stated, “I think the most important thing to say about our taxes is that we fully comply with the law and we’ll obviously, should the law change, we’ll comply with that as well.”
However, Italy has instituted a new measure to cut down on tax-avoidance strategies by multinational tech companies. The first of its kind in Europe, the new law is intended to prevent tax-avoidance by companies who use intermediaries in countries and jurisdictions with lower or no international taxes. The Italian media has nicknamed this new law, the ‘Google Tax’, which was scheduled to go into effect on January 1, 2014.
South Africa’s largest online publisher, 24.Com, a division of the digital media giant, Nasper, is the most recent to launch an attack on Google’s tax practices. The company estimates that Google generates approximately one billion South African Rand each year ($92million). However, they claim that because Google uses offshore subsidiaries, the country loses approximately R140 million ($13million) in taxes. They believe that Google’s strategy makes it impossible for local companies to compete. Google maintains that it complies with tax laws in South Africa and every country in which it operates.
The United States, Europe, and even South Africa are implementing major changes in their tax legislation which are meant to protect the respective nations from losing revenue. However, there are many opponents to the changes who believe that sovereign states are simply trying to reach deeper into corporate pockets.
International Taxation is complex, often without a ‘right’ or a ‘wrong’. It is driven largely by a long established tax policy that all income should be taxed.
We have represented many clients in positions similar to Google, and agree that Google is firmly within the bounds of the law. Google owes a judiciary duty to its shareholders to pay as little tax as possible, and to do so legally.
Unfortunately for Google, what is legal is in the eye of the legislator and can be changed by any sovereign state to accommodate its needs.
In international tax, the ongoing news has been the sweeping impact of the Foreign Account Tax Compliance Act (FATCA). FATCA is a law that was passed to curb illegal tax evasion by United States citizens (and green card holders), and businesses. However, critics propose that the revenue brought in by FATCA is trivial compared to the damage the legislation will cause to foreign investment to the U.S. and law-abiding Americans living and doing business overseas.
FATCA requires foreign financial institutions to report all account activity of U.S. persons and businesses in an effort to target those who are non-compliant with U.S. tax law.
Although FATCA was signed into law in 2010, it will go into effect this year. Following two 6-month delays, many institutions, businesses and individuals have hoped for a rumored third postponement. However, according to a statement made on January 28th, 2014, by the Internal Revenue Service’s Deputy Commissioner, Michael Danilack, to the New York Bar Association’s Tax Section, FATCA will go into effect on July 1, 2014 as planned. There will be no more delays.
The news buzz generated by FATCA’s fast approaching certainty is eclipsed only by the negative backlash the legislation is receiving. According to critics of FATCA, the legislation has already begun to have some very negative repercussions for U.S. businesses and individuals operating and residing on foreign land.
Many countries have voluntary signed up to report their U.S. account holders, most likely in an effort to avoid the 30% withholding tax penalty on U.S. accounts, enforced by the US Treasury.
As of January 2014, more than 20 countries and jurisdictions have signed a FATCA agreement with the United States, including Germany, France, Switzerland and the Cayman Islands, previously thought of as a tax haven.
However, Russia and China have been adamant in their refusal to divulge U.S. account holders’ information unless U.S. financial institutions report the banking activities of Russian and Chinese account holders. This addresses the hesitancy felt by many about how FATCA may put the privacy of individuals and businesses at risk.
The burden of cost associated with determining, and reporting all U.S. account holders to the IRS falls directly on the foreign financial institutions that have entered the FATCA agreement with the United States. Experts predict that foreign banks will refuse service to Americans in an effort to avoid the costs of complying with FATCA. It has been reported that major European banks, including HSBC, are already dropping U.S. clients. We have certainly experienced this with many of our clients. As banks bar their doors to U.S. account holders, individuals are left without any financial security, and businesses are taking their capital elsewhere.
The overall financial health of the nation can be greatly impacted if FATCA critics are right. The loss of foreign investment to the U.S. may be a potential disaster to our economy due to our dependence on foreign investment as capital.
As the July 1, FATCA deadline approaches, we continue to counsel our clients through the complex changes involved in staying compliant with FATCA while making sure that our clients’ foreign interests are protected.
